Edgar Filing: LOCKHEED MARTIN CORP

Document

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2019

Commission file number: 1-11437

LOCKHEED MARTIN CORPORATION

(Exact name of registrant as specified in its charter)



Maryland		52-1893632
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6801 Rockledge Drive, Bethesda, Maryland		20817
(Address of principal executive offices)		(Zip Code)

(301) 897-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non–accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

There were 282,538,809 shares of our common stock, $1 par value per share, outstanding as of March 31, 2019.

Table of Contents

Lockheed Martin Corporation

Form 10-Q

For the Quarterly Period Ended March 31, 2019

Table of Contents



			Page

PART I. FINANCIAL INFORMATION

	ITEM 1.	Financial Statements

		Consolidated Statements of Earnings for the Quarters Ended March 31, 2019 and March 25, 2018	3

		Consolidated Statements of Comprehensive Income for the Quarters Ended March 31, 2019 and March 25, 2018	4

		Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	5

		Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2019 and March 25, 2018	6

		Consolidated Statements of Equity for the Quarters Ended March 31, 2019 and March 25, 2018	7

		Notes to Consolidated Financial Statements	8

		Report of Independent Registered Public Accounting Firm	24

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	37

	ITEM 4.	Controls and Procedures	37

PART II. OTHER INFORMATION

	ITEM 1.	Legal Proceedings	39

	ITEM 1A.	Risk Factors	39

	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

	ITEM 6.	Exhibits	41

SIGNATURE			42

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Lockheed Martin Corporation

Consolidated Statements of Earnings

(unaudited; in millions, except per share data)



	Quarters Ended
	March 31, 2019			March 25, 2018
Net sales
Products	$	11,970		$	9,762
Services	2,366			1,873
Total net sales	14,336			11,635
Cost of sales
Products	(10,625		)	(8,697		)
Services	(2,047		)	(1,689		)
Other unallocated, net	524			409
Total cost of sales	(12,148		)	(9,977		)
Gross profit	2,188			1,658
Other income, net	95			67
Operating profit	2,283			1,725
Interest expense	(171		)	(155		)
Other non-operating expense, net	(167		)	(210		)
Earnings before income taxes	1,945			1,360
Income tax expense	(241		)	(203		)
Net earnings	$	1,704		$	1,157

Earnings per common share
Basic	$	6.03		$	4.05
Diluted	$	5.99		$	4.02

Cash dividends paid per common share	$	2.20		$	2.00

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

Lockheed Martin Corporation

Consolidated Statements of Comprehensive Income

(unaudited; in millions)



	Quarters Ended
	March 31, 2019		March 25, 2018
Net earnings	$	1,704	$	1,157
Other comprehensive income, net of tax
Recognition of previously deferred postretirement benefit plan amounts	227		300
Other, net	—		58
Other comprehensive income, net of tax	227		358
Comprehensive income	$	1,931	$	1,515

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

Lockheed Martin Corporation

Consolidated Balance Sheets

(in millions, except par value)



	March 31, 2019			December 31, 2018
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	991		$	772
Receivables, net	2,833			2,444
Contract assets	10,497			9,472
Inventories	3,285			2,997
Other current assets	425			418
Total current assets	18,031			16,103
Property, plant and equipment, net	6,140			6,124
Goodwill	10,769			10,769
Intangible assets, net	3,425			3,494
Deferred income taxes	3,169			3,208
Other noncurrent assets	6,150			5,178
Total assets	$	47,684		$	44,876
Liabilities and equity
Current liabilities
Accounts payable	$	3,097		$	2,402
Contract liabilities	6,796			6,491
Salaries, benefits and payroll taxes	1,861			2,122
Current maturities of long-term debt and commercial paper	1,300			1,500
Other current liabilities	2,349			1,883
Total current liabilities	15,403			14,398
Long-term debt, net	12,621			12,604
Accrued pension liabilities	11,418			11,410
Other postretirement benefit liabilities	698			704
Other noncurrent liabilities	5,022			4,311
Total liabilities	45,162			43,427
Stockholders’ equity
Common stock, $1 par value per share	281			281
Additional paid-in capital	—			—
Retained earnings	16,278			15,434
Accumulated other comprehensive loss	(14,094		)	(14,321		)
Total stockholders’ equity	2,465			1,394
Noncontrolling interests in subsidiary	57			55
Total equity	2,522			1,449
Total liabilities and equity	$	47,684		$	44,876

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

Lockheed Martin Corporation

Consolidated Statements of Cash Flows

(unaudited; in millions)



	Quarters Ended
	March 31, 2019			March 25, 2018
Operating activities
Net earnings	$	1,704		$	1,157
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization	277			279
Stock-based compensation	37			38
Gain on property sale	(51		)	—
Changes in assets and liabilities
Receivables, net	(389		)	(108		)
Contract assets	(1,025		)	(1,413		)
Inventories	(288		)	(318		)
Accounts payable	744			1,290
Contract liabilities	305			(478		)
Postretirement benefit plans	278			(1,145		)
Income taxes	243			1,064
Other, net	(172		)	266
Net cash provided by operating activities	1,663			632
Investing activities
Capital expenditures	(284		)	(216		)
Other, net	27			130
Net cash used for investing activities	(257		)	(86		)
Financing activities
Dividends paid	(638		)	(586		)
Repurchases of common stock	(281		)	(300		)
Repayments of commercial paper, net	(200		)	—
Other, net	(68		)	(128		)
Net cash used for financing activities	(1,187		)	(1,014		)
Net change in cash and cash equivalents	219			(468		)
Cash and cash equivalents at beginning of period	772			2,861
Cash and cash equivalents at end of period	$	991		$	2,393

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

Lockheed Martin Corporation

Consolidated Statements of Equity

(unaudited; in millions)



	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Noncontrolling Interests in Subsidiary			Total Equity
Balance at December 31, 2018	$	281		$	—		$	15,434		$	(14,321	)	$	1,394		$	55		$	1,449
Net earnings	—			—			1,704			—			1,704			—			1,704
Other comprehensive income, net of tax	—			—			—			227			227			—			227
Repurchases of common stock	(1		)	(46		)	(237		)	—			(284		)	—			(284		)
Dividends declared	—			—			(623		)	—			(623		)	—			(623		)
Stock-based awards, ESOP activity and other	1			46			—			—			47			—			47
Net increase in noncontrolling interests in subsidiary	—			—			—			—			—			2			2
Balance at March 31, 2019	$	281		$	—		$	16,278		$	(14,094	)	$	2,465		$	57		$	2,522

Balance at December 31, 2017	$	284		$	—		$	11,405		$	(12,539	)	$	(850	)	$	74		$	(776	)
Net earnings	—			—			1,157			—			1,157			—			1,157
Other comprehensive income, net of tax	—			—			—			358			358			—			358
Repurchases of common stock	(1		)	(25		)	(274		)	—			(300		)	—			(300		)
Dividends declared	—			—			(573		)	—			(573		)	—			(573		)
Stock-based awards, ESOP activity and other	1			25			—			—			26			—			26
Reclassification of income tax effects from tax reform	—			—			2,408			(2,408		)	—			—			—
Net decrease in noncontrolling interests in subsidiary	—			—						—			—			(3		)	(3		)
Balance at March 25, 2018	$	284		$	—		$	14,123		$	(14,589	)	$	(182	)	$	71		$	(111	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

Lockheed Martin Corporation

Notes to Consolidated Financial Statements (unaudited)

NOTE 1 – BASIS OF PRESENTATION

We prepared these consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of U.S. Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.

In the opinion of management, these consolidated financial statements reflect all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations, financial condition, and cash flows for the interim periods presented. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates. Significant estimates inherent in the preparation of our consolidated financial statements include, but are not limited to, accounting for sales and cost recognition, postretirement benefit plans, environmental receivables and liabilities, evaluation of goodwill and other assets for impairment, income taxes including deferred tax assets, fair value measurements and contingencies. The consolidated financial statements include the accounts of subsidiaries we control and variable interest entities if we are the primary beneficiary. We eliminate intercompany balances and transactions in consolidation.

We close our books and records on the last Sunday of the calendar quarter, which was on March 31 for the first quarter of 2019 and March 25 for the first quarter of 2018, to align our financial closing with our business processes. The consolidated financial statements and tables of financial information included herein are labeled based on that convention. This practice only affects interim periods as our fiscal year ends on December 31.

We adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), effective January 1, 2019, using a modified retrospective transition method. Consequently, periods prior to January 1, 2019 are not restated for the adoption of ASU 2016-02. See “Note 6 – Leases” and “Note 12 – Recent Accounting Pronouncements” for more information regarding our adoption of this standard. Other than the changes in our accounting policies related to adoption of ASU 2016-02, we followed the accounting policies disclosed in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 Form 10-K) filed with the SEC.

The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the full year or future periods. Unless otherwise noted, we present all per share amounts cited in these consolidated financial statements on a “per diluted share” basis. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2018 Form 10-K.

NOTE 2 – EARNINGS PER COMMON SHARE

The weighted average number of shares outstanding used to compute earnings per common share were as follows (in millions):



	Quarters Ended
	March 31, 2019	March 25, 2018
Weighted average common shares outstanding for basic computations	282.5	285.5
Weighted average dilutive effect of equity awards	1.8	2.4
Weighted average common shares outstanding for diluted computations	284.3	287.9

We compute basic and diluted earnings per common share by dividing net earnings by the respective weighted average number of common shares outstanding for the periods presented. Our calculation of diluted earnings per common share also includes the dilutive effects for the assumed vesting of outstanding restricted stock units (RSUs) and performance stock units (PSUs) and exercise of outstanding stock options based on the treasury stock method. There were no significant anti-dilutive equity awards during the quarters ended March 31, 2019 or March 25, 2018.

Table of Contents

Lockheed Martin Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

NOTE 3 – INFORMATION ON BUSINESS SEGMENTS

We operate in four business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space. We organize our business segments based on the nature of the products and services offered.

Net sales and operating profit of our business segments exclude intersegment sales and cost of sales as these activities are eliminated in consolidation. Business segment operating profit includes our 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 our business segments.

Business segment operating profit also includes total pension and other postretirement benefit plan costs recoverable on U.S. Government contracts as determined in accordance with U.S. Government cost accounting standards (CAS). However, our financial statements must present total costs calculated in accordance with Financial Accounting Standards (FAS) under U.S. GAAP. Accordingly, the adjustment from CAS cost to FAS service cost for our postretirement benefit plans is excluded from business segment operating profit (see additional discussion below). Business segment operating profit also excludes expense for stock-based compensation, corporate costs not considered allocable under FAR, and the effects of items not considered part of management’s evaluation of segment operating performance.

Excluded items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See “Note 11 – Other” for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments. Summary operating results for each of our business segments were as follows (in millions):



	Quarters Ended
	March 31, 2019			March 25, 2018
Net sales
Aeronautics	$	5,584		$	4,398
Missiles and Fire Control	2,350			1,677
Rotary and Mission Systems	3,762			3,223
Space	2,640			2,337
Total net sales	$	14,336		$	11,635
Operating profit
Aeronautics	$	585		$	474
Missiles and Fire Control	417			261
Rotary and Mission Systems	379			311
Space	334			264
Total business segment operating profit	1,715			1,310
Unallocated items
FAS/CAS operating adjustment ^(a)	512			451
Stock-based compensation	(37		)	(38		)
Other, net	93			2
Total unallocated items	568			415
Total consolidated operating profit	$	2,283		$	1,725
Intersegment sales
Aeronautics	$	42		$	25
Missiles and Fire Control	121			95
Rotary and Mission Systems	580			461
Space	68			45
Total intersegment sales	$	811		$	626


^(a)	The FAS/CAS operating adjustment represents the difference between the service cost component of FAS pension expense and total pension costs recoverable on U.S. Government contracts as determined in accordance with CAS.

Table of Contents

Lockheed Martin Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

Our total net FAS/CAS pension adjustment for the quarters ended March 31, 2019 and March 25, 2018, including the service and non-service cost components of FAS pension expense for our qualified defined benefit pension plans, were as follows (in millions):



	Quarters Ended
	March 31, 2019			March 25, 2018
Total FAS expense and CAS costs
FAS pension expense	$	(273	)	$	(356	)
Less: CAS pension cost	641			608
Net FAS/CAS pension adjustment	$	368		$	252

Service and non-service cost reconciliation
FAS pension service cost	$	(129	)	$	(157	)
Less: CAS pension cost	641			608
FAS/CAS operating adjustment	512			451
Non-operating FAS pension cost^(a)	(144		)	(199		)
Net FAS/CAS pension adjustment	$	368		$	252


^(a)	The non-service cost components of net periodic benefit cost relate only to our qualified defined benefit pension plans. In addition to the non service cost components in the table above, we incurred similar costs for our other postretirement benefit plans of $30 million and $17 million for the quarters ended March 31, 2019 and March 25, 2018.

We recover CAS pension and other postretirement benefit plan cost through the pricing of our products and services on U.S. Government contracts and, therefore, recognize CAS cost in each of our business segment’s net sales and cost of sales. Our consolidated financial statements must present FAS pension and other postretirement benefit plan expense calculated in accordance with FAS requirements under U.S. GAAP. The operating portion of the net FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension expense and total CAS pension cost. The non-service FAS pension cost component is included in other non-operating expense, net in our consolidated statements of earnings. The net FAS/CAS pension adjustment increases or decreases CAS pension cost to equal total FAS pension cost (both service and non-service).

Table of Contents

Lockheed Martin Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

Net sales by products and services, contract type, customer, and geographic region were as follows (in millions):



	Quarter Ended March 31, 2019
	Aeronautics		MFC		RMS		Space		Total
Net sales
Products	$	4,796	$	1,916	$	3,059	$	2,199	$	11,970
Services	788		434		703		441		2,366
Total net sales	$	5,584	$	2,350	$	3,762	$	2,640	$	14,336
Net sales by contract type
Fixed-price	$	4,170	$	1,535	$	2,619	$	523	$	8,847
Cost-reimbursable	1,414		815		1,143		2,117		5,489
Total net sales	$	5,584	$	2,350	$	3,762	$	2,640	$	14,336
Net sales by customer
U.S. Government	$	3,435	$	1,633	$	2,675	$	2,236	$	9,979
International ^(a)	2,095		670		995		395		4,155
U.S. commercial and other	54		47		92		9		202
Total net sales	$	5,584	$	2,350	$	3,762	$	2,640	$	14,336
Net sales by geographic region
United States	$	3,489	$	1,680	$	2,767	$	2,245	$	10,181
Asia Pacific	906		122		330		8		1,366
Europe	798		122		198		381		1,499
Middle East	337		413		285		6		1,041
Other	54		13		182		—		249
Total net sales	$	5,584	$	2,350	$	3,762	$	2,640	$	14,336



	Quarter Ended March 25, 2018
	Aeronautics		MFC		RMS		Space		Total
Net sales
Products	$	3,770	$	1,353	$	2,717	$	1,922	$	9,762
Services	628		324		506		415		1,873
Total net sales	$	4,398	$	1,677	$	3,223	$	2,337	$	11,635
Net sales by contract type
Fixed-price	$	3,215	$	1,112	$	2,208	$	400	$	6,935
Cost-reimbursable	1,183		565		1,015		1,937		4,700
Total net sales	$	4,398	$	1,677	$	3,223	$	2,337	$	11,635
Net sales by customer
U.S. Government	$	2,765	$	1,088	$	2,356	$	1,870	$	8,079
International ^(a)	1,577		554		781		456		3,368
U.S. commercial and other	56		35		86		11		188
Total net sales	$	4,398	$	1,677	$	3,223	$	2,337	$	11,635
Net sales by geographic region
United States	$	2,821	$	1,123	$	2,442	$	1,881	$	8,267
Asia Pacific	754		98		324		23		1,199
Europe	508		69		155		426		1,158
Middle East	257		380		171		7		815
Other	58		7		131		—		196
Total net sales	$	4,398	$	1,677	$	3,223	$	2,337	$	11,635


^(a)	International sales include foreign military sales (FMS) contracted through the U.S. Government and direct commercial sales to international governments and other international customers.

Table of Contents

Lockheed Martin Corporation

Notes to Consolidated Financial Statements (unaudited) (continued)

Total assets for each of our business segments were as follows (in millions):



	March 31, 2019		December 31, 2018
Assets
Aeronautics	$	9,469	$	8,435
Missiles and Fire Control	5,678		5,017
Rotary and Mission Systems	18,914		18,333
Space	5,792		5,445
Total business segment assets	39,853		37,230
Corporate assets ^(a)	7,831		7,646
Total assets	$	47,684	$	44,876


^(a)	Corporate assets primarily include cash and cash equivalents, deferred income taxes, environmental receivables, and investments held in a separate trust to fund certain of our non-qualified deferred compensation plans.

Our Aeronautics business segment includes our largest program, the F-35 Lightning II Joint Strike Fighter, an international multi-role, multi-variant, stealth fighter aircraft. Net sales for the F-35 program represented approximately 26% of our total consolidated net sales for the quarter ended March 31, 2019 and 24% of our total consolidated net sales for the quarter ended March 25, 2018.

NOTE 4 – CONTRACT ASSETS AND LIABILITIES

Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract liabilities include advance payments and billings in excess of revenue recognized. Contract assets and contract liabilities were as follows (in millions):



	March 31, 2019		December 31, 2018
Contract assets	$	10,497	$	9,472
Contract liabilities	6,796		6,491

Contract assets increased $1.0 billion during the quarter ended March 31, 2019, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the quarter ended March 31, 2019 for which we have not yet billed our customers. There were no significant impairment losses related to our contract assets during the quarters ended March 31, 2019 and March 25, 2018.

Contract liabilities increased