Lockheed Martin (NYSE: LMT) today reported second quarter 2017 net sales of $12.7 billion, compared to $11.6 billion in the second quarter of 2016. Net earnings from continuing operations in the second quarter of 2017 were $942 million, or $3.23 per share, compared to $899 million, or $2.93 per share, in the second quarter of 2016. Cash from operations in both the second quarter of 2017 and 2016 was $1.5 billion.
"Based on the corporation's strong results this quarter we increased our 2017 financial guidance for sales, profit, and earnings," said Chairman, President, and CEO Marillyn Hewson. "Our team remains focused on performing with excellence for our customers and continuing to deliver growth and outstanding value to shareholders."
Summary Financial Results
2017 Financial Outlook
The following table and other sections of this news release contain forward-looking statements, which are based on the corporation's current expectations. Actual results may differ materially from those projected. It is the corporation's practice not to incorporate adjustments into its financial outlook for proposed acquisitions, divestitures, ventures, changes in law and restructuring activities until such items have been consummated or enacted. For additional factors that may impact the corporation's actual results, refer to the "Forward-Looking Statements" section in this news release.
Cash Deployment Activities
The corporation's cash deployment activities in the second quarter of 2017 consisted of the following:
- repurchasing 1.9 million shares for $500 million, compared to 2.1 million shares for $501 millionin the second quarter of 2016;
- paying cash dividends of $525 million, compared to $501 million in the second quarter of 2016; and
- making capital expenditures of $278 million, compared to $235 million in the second quarter of 2016.
Segment Results
The corporation operates in four business segments organized based on the nature of products and services offered: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space Systems.
The following table presents summary operating results of the corporation's business segments and reconciles these amounts to the corporation's consolidated financial results.
Operating profit of the business segments includes the corporation's share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of the corporation's business segments. United Launch Alliance (ULA), which is part of the Space Systems business segment, is the corporation's primary equity method investee. Operating profit of the corporation's business segments excludes the FAS/CAS pension adjustment, which represents the difference between total pension expense recorded in accordance with U.S. generally accepted accounting principles (FAS) and pension costs recoverable on U.S. Government contracts as determined in accordance with U.S. Government Cost Accounting Standards (CAS); expense for stock-based compensation; the effects of items not considered part of management's evaluation of segment operating performance, such as charges related to significant severance actions and certain asset impairments; gains or losses from significant divestitures; the effects of certain legal settlements; corporate costs not allocated to the corporation's business segments; and other miscellaneous corporate activities.
Changes in net sales and operating profit generally are expressed in terms of volume. Changes in volume refer to increases or decreases in sales or operating profit resulting from varying production activity levels, deliveries or service levels on individual contracts. Volume changes in segment operating profit are typically based on the current profit booking rate for a particular contract.
In addition, comparability of the corporation's segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on the corporation's contracts accounted for using the percentage-of-completion method of accounting. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate, resulting in an increase in the estimated total costs to complete and a reduction in the profit booking rate. Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other items. Favorable items may include the positive resolution of contractual matters, cost recoveries on restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring charges, except for significant severance actions which are excluded from segment operating results; reserves for disputes; certain asset impairments; and losses on sales of certain assets.
The corporation's consolidated net adjustments not related to volume, including net profit booking rate adjustments, represented approximately 37 percent of total segment operating profit in the second quarter of 2017, compared to approximately 28 percent in the second quarter of 2016.
Aeronautics
Aeronautics' net sales in the second quarter of 2017 increased $850 million, or 19 percent, compared to the same period in 2016. The increase was primarily attributable to higher net sales of approximately $525 million for the F-35 program due to increased volume on aircraft production and sustainment activities; and about $120 million for the C-130 program due to aircraft configuration mix; and about $110 million for the C-5 program primarily due to increased deliveries (three aircraft delivered in 2017 compared to two in 2016) and higher sustainment activities.
Aeronautics' operating profit in the second quarter of 2017 increased $72 million, or 15 percent, compared to the same period in 2016. Operating profit increased approximately $90 million for the F-35 program due to increased volume on aircraft production and sustainment activities and higher risk retirements; and about $35 million for the C-5 program due to higher risk retirements and increased deliveries. These increases were partially offset by a decrease of about $30 million for the C-130 program due to the timing of expenses for sustainment programs. Adjustments not related to volume, including net profit booking rate adjustments, were about $55 million higher in the second quarter of 2017 compared to the same period in 2016.
Missiles and Fire Control
MFC's net sales in the second quarter of 2017 decreased $43 million, or 3 percent, compared to the same period in 2016. The decrease was attributable to lower net sales of approximately $120 million for air and missile defense programs due to lower deliveries on certain programs (primarily Patriot Advanced Capability (PAC-3)). This decrease was partially offset by an increase of approximately $100 million for tactical missile programs due to product configuration mix (primarily Joint Air-to-Surface Standoff Missile (JASSM)) and due to higher deliveries (primarily Hellfire).
MFC's operating profit in the second quarter of 2017 increased $15 million, or 6 percent, compared to the same period in 2016. Operating profit increased approximately $25 million for air and missile defense programs due to the achievement of contract milestones on an international program and a reserve recorded in the second quarter of 2016 for a contractual matter that did not recur in 2017. This increase was partially offset by a decrease of approximately $10 million for tactical missiles programs primarily due to performance matters on certain programs. Adjustments not related to volume, including net profit booking rate adjustments, in the second quarter of 2017 were comparable to the same period in 2016.
Rotary and Mission Systems
RMS' net sales in the second quarter of 2017 increased $107 million, or 3 percent, compared to the same period in 2016. The increase was primarily attributable to higher net sales of approximately $105 million due to certain adjustments recorded in 2016 required to account for the November 6, 2015acquisition of Sikorsky; about $55 million for C4ISR & undersea systems & sensors (C4USS) programs due to higher volume; and about $35 million for Sikorsky helicopter programs due to higher commercial aircraft deliveries (three aircraft delivered in 2017 compared to none in 2016). These increases were partially offset by a decrease of approximately $90 million for cyber, ships, and advanced technologies (CSAT) programs (primarily Littoral Combat Ship) due to lower volume.
RMS' operating profit in the second quarter of 2017 increased $52 million, or 26 percent, compared to the same period in 2016. Operating profit increased approximately $40 million for Sikorsky helicopter programs primarily due to higher risk retirements; about $25 million for C4USS programs primarily due to a charge for performance matters on the EADGE-T contract recorded in the second quarter of 2016; and approximately $10 million due to certain adjustments recorded in 2016 required to account for the November 6, 2015 acquisition of Sikorsky. These increases were partially offset by a decrease in operating profit of approximately $20 million for CSAT programs primarily due to performance matters on certain programs and lower volume. Adjustments not related to volume, including net profit booking rate adjustments, were about $70 million higher in the second quarter of 2017 compared to the same period in 2016.
Space Systems
Space Systems' net sales in the second quarter of 2017 increased $194 million, or 9 percent, compared to the same period in 2016. The increase was attributable to approximately $275 million due to net sales from AWE Management Limited (AWE), which the corporation began consolidating in the third quarter of 2016. This increase was partially offset by decreases of approximately $45 million for other programs in strategic missile and defense systems and a decrease of $30 million for government satellite programs (primarily Advanced Extremely High Frequency (AEHF) and Mobile User Objective Systems (MUOS)) both due to lower volume.
Space Systems' operating profit in the second quarter of 2017 decreased $84 million, or 25 percent, compared to the same period in 2016. Operating profit decreased about $70 million due to lower equity earnings from ULA; and a net $40 million increase in charges due to performance matters on certain commercial satellite programs. These decreases were partially offset by an increase of approximately $20 million for government satellite programs due to increased risk retirements, partially offset by a decrease due to contract mix (primarily ground solutions) and lower volume (primarily AEHF and MUOS). Adjustments not related to volume, including net profit booking rate adjustments, were about $10 million higher in the second quarter of 2017 compared to the same period in 2016.
Total equity earnings recognized by Space Systems (primarily ULA) represented approximately $45 million or 18 percent, of this business segment's operating profit in the second quarter of 2017 compared to approximately $120 million, or 35 percent in the second quarter of 2016.
Unallocated items
Consistent with the manner in which the corporation's business segment operating performance is evaluated by senior management, certain items are excluded from the business segment results and are included in "Unallocated items." For a description of the items excluded from business segment results, refer to the "Segment Results" section in this news release.
On Aug. 16, 2016, the corporation completed the divestiture of its former IS&GS business. Accordingly, the operating results of IS&GS have been classified as discontinued operations in the quarter and six months ended June 26, 2016. Certain corporate overhead costs that were historically allocated to and included in the operating results of IS&GS in the quarter ended June 26, 2016 have been reclassified into "Unallocated items" and included in the results of the corporation's continuing operations because they were not directly attributable to IS&GS and the corporation continues to incur these costs subsequent to the divestiture. The amount of corporate overhead costs previously included in the operating results of IS&GS that have been reclassified to and included in the results of the corporation's continuing operations were $30 million in the quarter ended June 26, 2016. These costs are included in the "Other, net" line.
Additionally, the corporation retained all assets and obligations related to the pension benefits earned by former IS&GS business salaried employees through the date of divestiture. Therefore, the non-service portion of net pension costs (e.g., interest cost, actuarial gains and losses and expected return on plan assets) for these plans in the quarter ended June 26, 2016 have been reclassified from the operating results of the IS&GS business segment and reported as a reduction of the FAS/CAS pension adjustment. These net costs totaled $21 million in the quarter ended June 26, 2016. These costs are included in the "FAS/CAS pension adjustment" line.
Income Taxes
The corporation's effective income tax rate was 28.8 percent in the second quarter of 2017, compared to 25.7 percent in the second quarter of 2016. The rates for both periods benefited from tax deductions for U.S. manufacturing activities, dividends paid to the corporation's defined contribution plans with an employee stock ownership plan feature, tax deductions for employee equity awards, and the research and development tax credit.
Acquisition and Divestiture
On Aug. 16, 2016, the corporation divested its IS&GS business. Accordingly, the operating results of the IS&GS business have been classified as discontinued operations in the quarter and six months ended June 26, 2016. However, cash from operations reported in the quarter and six months ended June 26, 2016 includes the cash generated by IS&GS of approximately $125 million and $295 million, respectively, as the corporation retained this cash as part of the divestiture. Certain items have been reclassified between "Unallocated items" in continuing operations and net earnings from discontinued operations as a result of the divestiture of IS&GS. See the "Unallocated items" section in this news release for additional information related to these reclassifications. Amounts in this news release reflect continuing operations unless otherwise noted.
On Aug. 24, 2016, the corporation increased its ownership interest in the AWE venture from 33 percent to 51 percent at which time it began consolidating AWE. Consequently, the corporation's operating results for the quarter ended June 25, 2017 include 100 percent of AWE's sales and 51 percent of its operating profit. Prior to increasing its ownership interest, the corporation accounted for its investment in AWE using the equity method of accounting. Under the equity method, the corporation recognized only 33 percent of AWE's earnings or losses and no sales. Accordingly, the corporation's operating results for the quarter ended June 26, 2016 do not include any sales generated by AWE and only 33 percent of AWE's net earnings.
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About Lockheed Martin
Headquartered in Bethesda, Maryland, Lockheed Martin is a global security and aerospace company that employs approximately 97,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services.
