War is Good Business at Lockheed Martin Corporation (NYSE:LMT)

War is Good Business at Lockheed Martin Corporation (NYSE:LMT)

War is Good Business at Lockheed Martin Corporation (NYSE:LMT)

– Net sales of $11.1 billion

– Net earnings from continuing operations of $763 million, or $2.61 per share

– Generated cash from operations of $1.7 billion

– Returned $1.0 billion to stockholders, inclusive of $500 million in share repurchases

The Corporation’s cash deployment activities in the first quarter of 2017 consisted of the following:

repurchasing 1.9 million shares for $500 million, compared to 2.4 million shares for $501 million in the first quarter of 2016;
paying cash dividends of $544 million, compared to $533 million in the first quarter of 2016; and
making capital expenditures of $170 million, compared to $151 million in the first quarter of 2016

Lockheed Martin (NYSE: LMT) today reported first quarter 2017 net sales of $11.1 billion, compared to $10.4 billion in the first quarter of 2016. Net earnings from continuing operations in the first quarter of 2017 were $763 million, or $2.61 per share, compared to $806 million, or $2.61 per share, in the first quarter of 2016. Cash from operations was $1.7 billion in both the first quarter of 2017 and 2016.

First quarter 2017 net earnings from continuing operations includes a $120 million charge, recorded at Rotary and Mission Systems (RMS), for a loss program to design, integrate, and install an integrated air missile defense C4I system for an international customer and a $64 million charge, which represents the Corporation’s portion of a noncash asset impairment charge recorded by an international equity method investee. These charges had the effect of reducing net earnings by $114 million, or $0.39 per share. Net earnings from continuing operations for the first quarter of 2016 included a special charge of $80 million for workforce reductions at the Corporation’s Aeronautics business segment, which decreased net earnings $49 million, or $0.16 per share.

“Our team delivered strong performance for our customers in the first quarter that resulted in sales growth in every business segment,” said Chairman, President, and CEO Marillyn Hewson. “While our net earnings were impacted by certain adjustments, we increased our outlook for full year cash from operations by $300 million to at least $6.0 billion and we continue to position the company to deliver outstanding value to customers and shareholders.”

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.

During the third quarter of 2016, the Corporation increased its ownership interest in the AWE Management Limited (AWE) venture from 33 percent to 51 percent and began consolidating AWE. Consequently, the Corporation’s operating results for the first quarter of 2017 include 100 percent of AWE’s sales and 51 percent of AWE’s 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 of accounting, the Corporation only recognized its share, or 33 percent, of AWE’s earnings or losses. Accordingly, the Corporation’s operating results for the first quarter of 2016 do not include any sales generated by AWE and only 33 percent of AWE’s net earnings. AWE has been aligned under the Corporation’s Space Systems business segment.

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 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 assets.

lockheed photo
Photo by San Diego Air & Space Museum Archives

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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