Lockheed Martin Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 26, 2011; comparisons are to the periods ended June 27, 2010. Unaudited interim statements were reviewed by Ernst & Young. Lockheed Martin is a defense, aerospace and government-services contractor operating through Aeronautics, Electronic Systems, Information Systems & Global Solutions (IS&GS), and Space Systems. About 84% of Q2 sales were to the U.S. Government.
Financial highlights
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|
| Net sales | $11.551B | $11.280B | $22.184B | $21.617B |
| Operating profit | $984M | $1.115B | $1.836B | $2.053B |
| Net earnings from continuing operations | $742M | $714M | $1.290B | $1.233B |
| Total net earnings | $742M | $824M | $1.272B | $1.357B |
| Diluted EPS, continuing operations | $2.14 | $1.92 | $3.69 | $3.29 |
| Diluted EPS, total | $2.14 | $2.22 | $3.64 | $3.62 |
| Operating cash flow | Not separately reported for the quarter | $2.527B | $2.874B |
- Q2 sales rose 2%; first-half sales rose 3%. Services sales grew faster than product sales.
- Operating profit fell 12% in Q2 and 11% year to date. The filing attributes the decline mainly to higher FAS/CAS pension expense and $97M of severance charges.
- Continuing-operations diluted EPS increased, aided by an $89M tax benefit from resolution of tax matters and fewer weighted-average shares following repurchases. Total net earnings and total EPS declined, in part because prior-year results included discontinued-operation earnings.
- Q2 cost of sales included $97M of severance charges. The filing reports gross profit of $897M in Q2 and $1.699B for the six months.
Balance sheet, liquidity and capital allocation
- At June 26, cash and cash equivalents were $3.268B, short-term investments $254M, total current assets $13.954B and current liabilities $12.056B.
- Long-term debt, net, was $5.031B, compared with $5.019B at year-end 2010. Total liabilities were $32.430B; stockholders’ equity was $3.288B.
- First-half operating cash flow was $2.527B; investing activities provided $254M, including proceeds from short-term investment transactions and PAE sale-related proceeds; financing used $1.784B. Capital expenditures were $242M.
- Cash increased by $1.007B from year-end. First-half share repurchases totaled $1.299B and dividends paid were $524M. The quarterly dividend was $0.75 per share; $926M remained under the $3B repurchase authorization.
- The company had a $1.5B revolving credit facility expiring June 2012, with no borrowings under it or commercial paper outstanding during the first half. It reported compliance with debt covenants.
Segment performance and changes
| Segment | Q2 sales / operating profit | Q2 year-over-year trend |
|---|
| Aeronautics | $3.423B / $400M | Sales +9%; profit +8% |
| Electronic Systems | $3.755B / $466M | Sales +6%; profit +6% |
| IS&GS | $2.361B / $213M | Sales −6%; profit essentially flat |
| Space Systems | $2.012B / $263M | Sales −3%; profit +7% |
- Aeronautics growth reflected F-35 low-rate initial production, C-5 work and C-130J deliveries; F-22 production continued to wind down, with final deliveries expected in 2012.
- Electronic Systems benefited from air-defense, tactical-missile and logistics-support activity. IS&GS sales declined mainly because the 2010 census-related DRIS program had substantially ended. Space Systems sales were pressured by lower NASA Orion and shuttle-related activity, while ULA earnings and satellite work supported profit.
- Unallocated corporate expense increased to $358M in Q2 from $152M, principally reflecting a larger FAS/CAS pension adjustment. Segment profits increased overall, but this corporate burden more than offset the improvement.
- PAE was sold in April 2011; EIG was sold in November 2010. Their results are reported as discontinued operations. PAE post-closing adjustments and collection of certain receivables could affect later periods.
Outlook, commentary and risks
- Segment outlook: Aeronautics expected 2011 sales growth in the upper-single-digit range and operating-profit growth in the mid-single digits, with lower margins; Electronic Systems expected sales, profit and margins comparable to 2010; IS&GS expected sales down mid-single digits but profit up high-single digits; Space Systems expected sales down low-single digits, with profit and margin comparable to 2010. No consolidated full-year guidance is stated in the supplied filing text.
- Management expected operating cash flow to fund operations and planned capital spending. It expected approximately $1.0B of required pension contributions in 2011 and planned total qualified-plan contributions of $1.3B, including $325M already contributed.
- Contract estimate changes materially affect reported results: net profit-booking adjustments increased operating profit by about $425M in Q2 and $750M for the first half, adding approximately $0.80 and $1.45 per diluted share, respectively. These estimates can change with contract cost, schedule and technical performance.
- The F-35 faced schedule, cost, testing, supplier, partner and software-development challenges. The DoD had extended development through 2016; about $575M of SDD fee remained, subject to performance milestones. The DCMA had withdrawn its prior validation of the Fort Worth earned-value management system and could re-audit it.
- Management warned that federal deficit reduction, defense-budget choices and uncertainty over raising the U.S. debt ceiling could disrupt discretionary programs; the effect on individual programs was not predictable. The company did not expect fiscal 2011 budget reductions to materially affect 2011 operations.
- Environmental liabilities were $921M, with $797M of estimated recoveries recorded. Potentially lower standards for perchlorate and hexavalent chromium could increase estimates and could materially affect earnings in a particular quarter. The filing also discloses contested litigation, including the U.K. Soothsayer contract, an MTA contract dispute, False Claims Act allegations and environmental matters; management considered a material adverse effect on the company as a whole remote, but outcomes are uncertain.
- Other notable items: severance charges reduced earnings by $63M, or $0.18 per share; the $89M tax resolution benefit increased Q2 EPS by $0.26; and pension expense rose. The company stated that previously disclosed risk factors had not materially changed.
Important facts for investors to verify
- Whether contract estimate and profit-booking adjustments remain favorable, and how much they contribute to earnings in subsequent periods.
- F-35 cost, schedule, fee and production developments, including the status of the Fort Worth earned-value management system.
- Federal budget and debt-ceiling outcomes and their effects on contract funding, awards and customer payment timing.
- Pension assumptions, required contributions and the effect of FAS/CAS pension expense on corporate costs and cash flow.
- Environmental estimate changes, legal-case developments, and any post-sale PAE adjustments or receivable collections.
