Lockheed Martin Corporation — Q1 2011 Form 10-Q
Reporting period: Quarter ended March 27, 2011; comparisons are with the quarter ended March 28, 2010. Dollar amounts are in millions unless stated otherwise. The interim financial statements were reviewed by Ernst & Young, not audited.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|
| Net sales | $10,633 | $10,337 | +3% |
| Operating profit | $852 | $938 | -9% |
| Operating margin | 8.0% | 9.1% | Down 1.1 percentage points |
| Continuing-operations earnings | $548 | $519 | +6% |
| Net earnings | $530 | $533 | -1% |
| Diluted EPS | $1.50 | $1.41 | +6% |
| Operating cash flow | $1,684 | $1,649 | +$35 |
- Sales growth reflected products up 2% and services up 6%. Higher volume in Aeronautics and Electronic Systems more than offset declines in IS&GS and Space Systems.
- Gross profit was $802 versus $896; gross margin was approximately 7.5% versus 8.7%. Operating profit fell mainly because the unfavorable FAS/CAS pension adjustment increased by $121, partly offset by stronger Electronic Systems and Space Systems results.
- Continuing-operations diluted EPS was $1.55 versus $1.38. Lower effective tax expense helped: the continuing-operations tax rate was 30.3% versus 41.0%. Q1 2010 included a $96 tax charge related to retiree prescription-drug tax treatment; Q1 2011 benefited from the R&D tax credit.
- Cash from operations exceeded net earnings; investing used $63 and financing used $537. Capital spending was $95. Cash and equivalents were $3,357 at quarter-end, with short-term investments of $504.
- At March 27, current assets were $14,743 and current liabilities $12,430 (current ratio approximately 1.19). Long-term debt, net, was $5,023; stockholders’ equity was $3,791. Accrued pension liabilities were $10,826.
- Dividends paid were $0.75 per share, up from $0.63. The company repurchased 3.5 million shares for $281 during the quarter; $1,943 remained authorized under the $3 billion program.
Segments and material changes
| Segment | Sales | Sales change | Operating profit | Profit change |
|---|
| Aeronautics | $3,182 | +8% | $331 | Flat |
| Electronic Systems | $3,459 | +6% | $417 | +10% |
| IS&GS | $2,149 | -4% | $194 | -$3 |
| Space Systems | $1,843 | -4% | $217 | +5% |
- Aeronautics sales benefited from C-130 deliveries and F-35 low-rate initial production, offset by F-22 production wind-down and reduced F-35 development work. Its margin declined as development and early production work generally earn less than mature production.
- Electronic Systems growth came from radar, air defense, and logistics activities. IS&GS sales were lower primarily because the 2010 census program was substantially completed. Space Systems sales declined with lower Orion and External Tank activity, partly offset by government satellite work.
- Unallocated corporate expense rose to $307 from $176, primarily reflecting the larger FAS/CAS pension adjustment. Segment operating profit in aggregate increased to $1,159 from $1,114.
Outlook, accounting, risks and contingencies
- Outlook: Management expected IS&GS 2011 sales to decline at a low percentage rate, while operating profit was expected to increase in the mid-single-digit percentage range and margins to improve. Management did not expect the fiscal 2011 federal appropriation reductions—$38 billion below the President’s request—to materially affect 2011 operations. The filing does not provide a clear consolidated full-year earnings or sales forecast in the supplied text.
- Pensions: Management planned $1.3 billion of 2011 contributions to qualified pension plans, including approximately $1.0 billion expected to be required; none had been made in Q1. It anticipated approximately $900 million of CAS cost recovery during 2011, with the balance recoverable in future years.
- Accounting change: Beginning January 1, 2011, U.S. Government services contracts moved to the percentage-of-completion method. Prior periods were adjusted; the cumulative adoption adjustment reduced retained earnings by $211. Management said the change was not material to reported results or cash flow and expected less than a 1% effect on 2011 sales and segment operating profit.
- Tax item after quarter-end: Following an April 2011 tax review, management expected to reduce unrecognized tax benefits by about $140 and record an approximately $90 reduction in income tax expense in Q2 2011.
- F-35: The program faced schedule, cost, testing, supplier, and software-development challenges. DoD recommendations extended development through 2016; approximately $575 of SDD fee remained, with about $50 tied to near-term milestones. The company also reported the withdrawal of DCMA validation of its Fort Worth earned-value management system, with possible re-audit after a performance history on the new baseline is established.
- Disposals: PAE was sold on April 4, 2011, after quarter-end; EIG was sold in November 2010. Q1 discontinued operations recorded a loss of $18, versus income of $14 a year earlier. Post-closing adjustments may affect later-period discontinued operations.
- Environmental exposure: Recorded environmental liabilities were $928, with $803 of assets recorded for probable future recovery, primarily through U.S. Government contract pricing. Proposed tighter perchlorate and hexavalent chromium standards could materially increase estimated costs; unrecoverable amounts could affect earnings.
- Legal and guarantees: Management considered a material adverse outcome from the disclosed legal matters remote, but said individual matters could materially affect a quarter and certain losses could not be reasonably estimated. Matters include ERISA, U.K. MoD and New York MTA contract disputes, False Claims Act cases, and environmental litigation. Letters of credit, surety bonds, and third-party guarantees totaled $4.2 billion; management did not expect payment under the disclosed joint-venture guarantees.
- Management cited risks from government funding and procurement changes, F-35 execution, pension assumptions and asset returns, suppliers, contract performance, litigation, and environmental remediation. It reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether F-35 milestones, costs, schedule, fee recovery, and earned-value-system validation develop as expected.
- Whether pension contributions, pension expense, and government cost recovery match management’s expectations.
- Whether proposed environmental standards change liabilities, recoverable amounts, or quarterly earnings.
- Whether the expected Q2 tax benefit is recognized and whether PAE sale adjustments affect discontinued operations.
- Whether sales, margins, and cash flow hold up as federal budgets and major programs change; also monitor the ongoing share repurchases and dividend cash burden.
