Lockheed Martin Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter ended June 28, 2020; year-to-date figures cover six months ended June 28, 2020. Comparatives are the quarter and six months ended June 30, 2019. Amounts are U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Lockheed Martin is a global aerospace and defense company operating Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. For the first six months of 2020, 76% of sales were to the U.S. Government, 23% to international customers, and 1% to U.S. commercial and other customers. The F-35 represented approximately 28% of sales in both Q2 and the first half of 2020.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $16.22 billion | $14.43 billion | $31.87 billion | $28.76 billion |
| Gross profit | $2.21 billion | $1.99 billion | $4.30 billion | $4.18 billion |
| Operating profit | $2.09 billion | $2.01 billion | $4.21 billion | $4.29 billion |
| Net earnings | $1.63 billion | $1.42 billion | $3.34 billion | $3.12 billion |
| Diluted EPS | $5.79 | $5.00 | $11.87 | $11.00 |
| Operating margin | 12.9% | 13.9% | 13.2% | 14.9% |
Sales growth was led by higher product volume, notably F-35 and classified programs at Aeronautics, missile-defense and tactical-missile programs at MFC, and Sikorsky helicopters at RMS. Space sales also rose, but Space operating profit declined. Q2 net earnings included a $128 million noncash AMMROC investment impairment ($96 million after tax, or $0.34 per share). First-half operating profit was lower despite higher sales, partly reflecting lower pension-related adjustments and other unallocated items. Contract estimate adjustments and other non-volume matters increased segment operating profit by approximately $480 million in Q2 and $945 million year to date.
Cash flow, liquidity and debt
- Operating cash flow was $4.50 billion for the first half, versus $3.33 billion a year earlier. It included about $930 million of net accelerated U.S. Government progress payments, $400 million of deferred estimated tax payments, and $160 million of deferred employer payroll taxes. The company accelerated $1.3 billion of supplier payments.
- Capital expenditures were $636 million; cash dividends paid were $1.36 billion; share repurchases were $1.02 billion. Cash increased to $2.86 billion from $1.51 billion at year-end 2019.
- At June 28, cash was $2.9 billion, with no commercial-paper or revolving-credit borrowings outstanding. The $2.5 billion revolving credit facility expires in August 2024.
- Balance-sheet debt, net of discounts and issuance costs, was $12.67 billion, including $500 million of current maturities; principal debt was $13.8 billion. The company issued $1.15 billion principal of notes in May and used proceeds plus cash to redeem $1.15 billion of notes due in 2020 and 2021. It reported compliance with debt covenants.
- Current assets were $19.57 billion and current liabilities $14.89 billion. Contract assets were $9.82 billion and contract liabilities $7.48 billion. Total equity was $3.79 billion.
Material changes by segment
- Aeronautics: Q2 sales rose 17% to $6.50 billion and operating profit rose 25% to $739 million, mainly from F-35 volume and risk retirements. First-half sales increased 16% to $12.87 billion.
- MFC: Q2 sales rose 16% to $2.80 billion and operating profit rose 13% to $370 million. First-half sales increased 14%, while operating profit rose 3%; margins were lower year over year.
- RMS: Q2 sales rose 7% to $4.04 billion and operating profit rose 24% to $429 million. First-half sales rose 3% and operating profit rose 11%.
- Space: Q2 sales rose 7% to $2.88 billion, but operating profit fell 13% to $252 million. First-half operating profit declined 14%, reflecting lower risk retirements and lower equity earnings, principally from ULA.
Outlook, risks and unusual items
- Management expected 2020 sales growth in the high-single-digit range, a business-segment operating margin of approximately 10.9%, and operating cash flow of at least $8.0 billion. Guidance assumed continued facility operations, manageable supply disruption, recovery of costs under government contracts, and no material change in funding priorities.
- Segment outlook: Aeronautics sales and profit expected to rise at high-single-digit rates; MFC sales at high-single-digit to low-double-digit rates and profit at mid-to-high-single-digit rates; RMS sales at a mid-single-digit rate and profit at a high-single-digit rate; Space sales at a high-single-digit rate but profit expected to decline at a mid-single-digit rate.
- COVID-19 had caused supplier delays, increased costs, travel and site-access restrictions, and delivery and production impacts. F-35 production was temporarily tapered; the company estimated delays of approximately 18–24 aircraft and expected to return to pre-pandemic production levels in the fall. The duration and financial effects remained uncertain. CARES Act leave-cost reimbursement could raise sales without profit and lower margins; some costs, particularly on fixed-price contracts, might not be recoverable.
- Backlog was $150.3 billion; management expected to recognize about 37% within 12 months and 61% within 24 months. Backlog and timing remain subject to contract performance, awards, and estimates.
- Four programs with previously disclosed performance issues had cumulative losses of approximately $240 million for a ground-based radar, $260 million for EADGE-T, $410 million for two commercial satellite programs, and $140 million for the Warrior turret program. Management did not expect further losses, if any, to be material, but noted additional charges remained possible on some programs.
- AMMROC lost a major customer contract; Lockheed Martin agreed in July to sell its investment for $307 million, subject to closing conditions, with cash installments through September 2021. Environmental liabilities were $805 million, with $698 million of related assets for probable government-cost recovery. Potential changes to chromium or perchlorate standards and regulation of PFAS could increase remediation costs.
- Legal exposures include a False Claims Act matter seeking approximately $52 million, subject to trebling and penalties; a separate DOJ False Claims Act case with unspecified damages and possible indemnity obligations; and an MTA dispute seeking approximately $190 million, while Lockheed Martin asserts approximately $95 million in claims. The company said it did not consider a material loss probable in the cited matters; some loss estimates could not be made.
- Other risks include U.S. and international defense-budget changes, F-35 technical and schedule execution, potential Turkey-related sanctions and supply-chain transition, possible China sanctions, supplier performance, pension-asset returns, and potential Sikorsky goodwill or intangible impairment.
Most important facts for investors to verify
- Whether 2020 guidance was achieved, especially operating cash flow of at least $8.0 billion and the 10.9% segment operating-margin outlook.
- How COVID-19 supplier constraints affected F-35 production, deliveries, cost recovery, and margins after the forecast return to pre-pandemic production levels.
- Whether the AMMROC sale closed on expected terms and whether the $307 million purchase price was collected as scheduled.
- Changes in program estimates, risk-retirement contributions, and potential further charges on the four disclosed troubled programs.
- Developments in significant litigation and environmental contingencies, along with U.S. Government funding and international sanctions risks.