Lockheed Martin Reports Second Quarter 2015 Results
“Solid operational and program execution in the second quarter allowed us to increase our financial guidance for profit and earnings per share,” said Lockheed Martin chairman, president and CEO Marillyn Hewson. "Separately, we announced two portfolio shaping initiatives today, the acquisition of Sikorsky Aircraft and a strategic review of our IT services business in IS&GS and our technical services business in MFC. We look forward to welcoming Sikorsky to the Lockheed Martin team and determining the best path to long-term growth for the business under review.”
Strategic Actions
Acquisition of Sikorsky Aircraft
On July 20, 2015, the Corporation announced that it entered into a definitive agreement to acquire Sikorsky Aircraft (Sikorsky), a global company engaged in the design, manufacture and support of military and commercial helicopters, for $9.0 billion of cash, subject to certain adjustments. The Corporation expects to fund the acquisition with a combination of new debt issuances and available cash. The Corporation and United Technologies Corporation have agreed to make a joint election under Section 338(h)(10) of the Internal Revenue Code, which treats the transaction as an asset purchase for tax purposes. This election generates a cash tax benefit with an estimated net present value of $1.9 billion for the Corporation and its shareholders. The acquisition is subject to customary closing conditions, including regulatory approval, and is expected to close in the fourth quarter of 2015 or the first quarter of 2016. Once the acquisition is complete, the Corporation plans to align Sikorsky under its Mission Systems and Training business segment. The Corporation’s financial results will not include Sikorsky’s results until the acquisition is closed.
Strategic Review of Government IT and Technical Services Businesses
On July 20, 2015, the Corporation also announced that it will conduct a strategic review of the government IT infrastructure services business within its IS&GS business segment and the technical services business within its MFC business segment. The programs to be reviewed represent approximately $6.0 billion in estimated 2015 annual sales and approximately 17,000 employees. The Corporation expects the strategic review will result in a spin-off to its shareholders or sale of these businesses. The IS&GS programs that are not included in the strategic review are mostly focused on defense and intelligence customers and will be realigned into the Corporation’s other business segments following completion of the review. The Corporation expects to complete the strategic review in 2015. While the Corporation performs its strategic review, it will maintain the current operating and reporting structure and will continue to report the financial results of the government IT infrastructure services and technical services businesses in its continuing operations.
Summary Financial Results
The following table presents the Corporation’s summary financial results.
|
(in millions, except per share data) |
Quarters Ended |
Six Months Ended |
||||||||||||||||
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|||||||
|
|
Net sales |
$ |
11,643 |
|
$ |
11,306 |
$ |
21,754 |
|
$ |
21,956 |
|||||||
|
|
|
|
|
|
|
|||||||||||||
|
|
Business segment operating profit |
$ |
1,400 |
|
$ |
1,406 |
$ |
2,706 |
|
$ |
2,835 |
|||||||
|
Unallocated items |
|
|
|
|
||||||||||||||
|
FAS/CAS pension adjustment |
120 |
85 |
239 |
|
171 |
|||||||||||||
|
Other, net |
(75) |
(65) |
(144) |
(148) |
||||||||||||||
|
Total unallocated items |
45 |
20 |
95 |
|
23 |
|||||||||||||
|
|
Consolidated operating profit |
$ |
1,445 |
|
$ |
1,426 |
$ |
2,801 |
|
$ |
2,858 |
|||||||
|
|
|
|
|
|
|
|||||||||||||
|
|
Net earnings |
$ |
929 |
|
$ |
889 |
$ |
1,807 |
|
$ |
1,822 |
|||||||
|
|
|
|
|
|
|
|||||||||||||
|
|
Diluted earnings per share |
$ |
2.94 |
|
$ |
2.76 |
$ |
5.68 |
|
$ |
5.63 |
|||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
Cash from operations1 |
$ |
1,263 |
|
$ |
977 |
$ |
2,220 |
|
$ |
3,077 |
|||||||
|
|
1 The Corporation made no contributions to its defined benefit pension trust during the second quarter of 2015 compared to $515 million during the second quarter of 2014. Additionally, the Corporation made net income tax payments of $460 million during the second quarter of 2015 compared to $760 million during the second quarter of 2014. |
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2015 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.
|
(in millions, except per share data) |
Current Outlook |
|
April Outlook |
|||
|
|
|
|
||||
|
Orders |
|
No Change |
|
$43,500 – $45,000 |
||
|
|
|
|
||||
|
Net sales |
|
No Change |
|
$43,500 – $45,000 |
||
|
|
|
|||||
|
Business segment operating profit |
|
$5,225 – $5,375 |
|
$5,150 – $5,300 |
||
|
FAS/CAS pension adjustment |
No Change |
|
~475 |
|||
|
Other, net |
No Change |
|
~(275) |
|||
|
Consolidated operating profit |
|
$5,425 – $5,575 |
|
$5,350 – $5,500 |
||
|
|
|
|||||
|
Diluted earnings per share |
|
$11.00 – $11.30 |
|
$10.85 – $11.15 |
||
|
|
|
|||||
|
Cash from operations |
|
No Change |
|
? $5,000 |
||
Cash Deployment Activities
The Corporation’s cash deployment activities in the second quarter of 2015 consisted of the following:
- repurchasing 4.9 million shares for $937 million, compared to 0.8 million shares for $124 million in the second quarter of 2014;
- paying cash dividends of $467 million, compared to $421 million in the second quarter of 2014;
- making capital expenditures of $191 million, compared to $150 million in the second quarter of 2014; and
- no contributions to the Corporation’s pension trust, compared to $515 million during the second quarter of 2014.
Segment Results
The Corporation operates in five business segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and Fire Control (MFC), Mission Systems and Training (MST) and Space Systems. The Corporation organizes its business segments based on the nature of the products and services offered.
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 GAAP (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 goodwill 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. Changes in volume also include the effect of fluctuations in contract profit booking rates that have occurred in reporting periods other than those presented in the comparative segment results. 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 margins 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 margins 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; asset impairments; and losses on sales of assets. Segment operating profit and items such as risk retirements, reductions of profit booking rates or other matters are presented net of state income taxes.
The following table presents summary operating results of the Corporation’s five business segments and reconciles these amounts to the Corporation’s consolidated financial results.
|
(in millions) |
Quarters Ended |
Six Months Ended |
||||||||||||||||
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|||||||
|
|
Net sales |
|
|
|
|
|
|
|||||||||||
|
Aeronautics |
$ |
4,131 |
|
$ |
3,855 |
$ |
7,265 |
|
$ |
7,241 |
||||||||
|
|
Information Systems & Global Solutions |
|
1,898 |
|
1,941 |
|
3,767 |
|
3,851 |
|||||||||
|
Missiles and Fire Control |
1,777 |
1,891 |
3,280 |
3,758 |
||||||||||||||
|
|
Mission Systems and Training |
|
1,808 |
|
1,771 |
|
3,459 |
|
3,399 |
|||||||||
|
Space Systems |
|
2,029 |
|
1,848 |
|
3,983 |
|
3,707 |
||||||||||
|
|
Total net sales |
$ |
11,643 |
|
$ |
11,306 |
$ |
21,754 |
|
$ |
21,956 |
|||||||
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
Operating profit |
|
|
|
|
|
|
|
||||||||||
|
|
Aeronautics |
$ |
444 |
|
$ |
453 |
$ |
815 |
|
$ |
846 |
|||||||
|
Information Systems & Global Solutions |
|
160 |
|
175 |
|
296 |
|
349 |
||||||||||
|
|
Missiles and Fire Control |
|
303 |
|
345 |
|
595 |
|
703 |
|||||||||
|
|
Mission Systems and Training |
|
234 |
|
185 |
|
453 |
|
435 |
|||||||||
|
|
Space Systems |
|
259 |
|
248 |
|
547 |
|
502 |
|||||||||
|
|
Total business segment operating profit |
|
1,400 |
|
1,406 |
|
2,706 |
|
2,835 |
|||||||||
|
|
Unallocated items |
|
|
|
|
|
|
|||||||||||
|
|
FAS/CAS pension adjustment |
|
120 |
|
85 |
|
239 |
|
171 |
|||||||||
|
|
Other, net |
|
(75) |
(65) |
|
(144) |
(148) |
|||||||||||
|
|
Total unallocated items |
|
45 |
|
20 |
|
95 |
|
23 |
|||||||||
|
|
Total consolidated operating profit |
|
$ |
1,445 |
|
|
$ |
1,426 |
|
|
$ |
2,801 |
|
|
$ |
2,858 |
|
|
The Corporation’s consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, represented approximately 39 percent of total segment operating profit for the second quarter of 2015, compared to approximately 31 percent in the second quarter of 2014.
Aeronautics
|
(in millions) |
Quarters Ended |
Six Months Ended |
||||||||||||||||
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|||||||
|
|
Net sales |
$ |
4,131 |
|
$ |
3,855 |
$ |
7,265 |
|
$ |
7,241 |
|||||||
|
Operating profit |
$ |
444 |
|
$ |
453 |
$ |
815 |
|
$ |
846 |
||||||||
|
|
Operating margins |
|
10.7% |
11.8% |
|
11.2% |
11.7% |
|||||||||||
Aeronautics’ net sales for the second quarter of 2015 increased $276 million, or 7 percent, compared to the same period in 2014. The increase was attributable to higher net sales of about $280 million for F-35 production contracts due to increased volume on aircraft production and sustainment activities; and approximately $150 million for the C-5 program due to increased aircraft deliveries (four aircraft delivered during the second quarter of 2015 compared to two delivered during the same period in 2014). The increases were partially offset by lower net sales of approximately $90 million for the C-130 program due to lower sustainment activities and aircraft contract mix; and about $45 million for the F-22 program due to decreased sustainment activities. Net sales for F-35 development contracts were comparable.
Aeronautics’ operating profit for the second quarter of 2015 decreased $9 million, or 2 percent, compared to the same period in 2014. Operating profit decreased by approximately $55 million for the C-130 program due to lower risk retirements and aircraft contract mix; and approximately $15 million for the F-22 program due to decreased risk retirements and lower sustainment activities. These decreases were partially offset by higher operating profit of approximately $30 million for the F-16 program due to increased risk retirements; and about $30 million for F-35 production contracts due to higher risk retirements and volume. Adjustments not related to volume, including net profit booking rate adjustments, were $30 million higher for the second quarter of 2015 compared to the same period in 2014.
The decline in operating margin for the second quarter of 2015 reflects the change in Aeronautics’ program mix, as sales for programs that yield lower operating profit margins were a larger portion of total net sales (primarily F-35 and C-5 programs).
Information Systems & Global Solutions
|
(in millions) |
Quarters Ended |
Six Months Ended |
||||||||||||||||
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|||||||
|
|
Net sales |
$ |
1,898 |
|
$ |
1,941 |
$ |
3,767 |
|
$ |
3,851 |
|||||||
|
Operating profit |
$ |
160 |
|
$ |
175 |
$ |
296 |
|
$ |
349 |
||||||||
|
|
Operating margins |
|
8.4% |
9.0% |
|
7.9% |
9.1% |
|||||||||||
IS&GS’ net sales decreased $43 million, or 2 percent, for the second quarter of 2015 compared to the same period in 2014. The decrease was attributable to lower net sales of approximately $160 million due to decreased volume as a result of in-theater force reductions (including Persistent Threat Detection System), lower customer funding levels (primarily command and control programs), and increased competition coupled with the fragmentation of existing large contracts into multiple smaller contracts that are awarded primarily on the basis of price when re-competed (including CMS-CITIC). The decreases were partially offset by higher net sales of approximately $60 million for businesses acquired in the second half of 2014; and about $55 million due to increased volume on recently awarded programs.
IS&GS’ operating profit for the second quarter of 2015 decreased $15 million, or 9 percent, compared to the same period in 2014. The decrease was primarily attributable to the activities mentioned above for net sales. Adjustments not related to volume, including net profit booking rate adjustments, for the second quarter of 2015 were comparable to the same period in 2014.
Missiles and Fire Control
|
(in millions) |
Quarters Ended |
Six Months Ended |
||||||||||||||||
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|||||||
|
|
Net sales |
$ |
1,777 |
|
$ |
1,891 |
$ |
3,280 |
|
$ |
3,758 |
|||||||
|
Operating profit |
$ |
303 |
|
$ |
345 |
$ |
595 |
|
$ |
703 |
||||||||
|
|
Operating margins |
|
17.1% |
18.2% |
|
18.1% |
18.7% |
|||||||||||
MFC’s net sales for the second quarter of 2015 decreased $114 million, or 6 percent, compared to the same period in 2014. The decrease was attributable to lower net sales of approximately $115 million for air and missile defense programs due to fewer deliveries (including Patriot Advanced Capability-3 (PAC-3)) and reduced development activities (primarily Medium Extended Air Defense System (MEADS)).
MFC’s operating profit for the second quarter of 2015 decreased $42 million, or 12 percent, compared to the same period in 2014. The decrease was attributable to lower operating profit of approximately $30 million for fire control programs due to lower risk retirements and volume (including Apache), and about $25 million for air and missile defense programs due to lower risk retirements (primarily PAC-3). Adjustments not related to volume, including net profit booking rate adjustments, were approximately $40 million lower for the second quarter of 2015 compared to the same period in 2014.
Mission Systems and Training
|
(in millions) |
Quarters Ended |
Six Months Ended |
|||||||||||||||
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
||||||
|
Net sales |
$ |
1,808 |
|
$ |
1,771 |
$ |
3,459 |
|
$ |
3,399 |
|||||||
|
Operating profit |
$ |
234 |
|
$ |
185 |
$ |
453 |
|
$ |
435 |
|||||||
|
Operating margins |
|
12.9% |
10.4% |
|
13.1% |
12.8% |
|||||||||||
MST’s net sales for the second quarter of 2015 increased $37 million, or 2 percent, compared to the same period in 2014. Net sales increased by approximately $90 million for integrated warfare systems and sensors programs due to the start of new programs (primarily Space Fence) and higher volume (including Aegis). These increases were partially offset by lower net sales of approximately $75 million for ship and aviation systems programs primarily due to decreased volume (including Merlin Capability Sustainment Program).
MST’s operating profit for the second quarter of 2015 increased $49 million, or 26 percent, compared to the same period in 2014. The increase was primarily attributable to higher operating profit of approximately $50 million due to reserves recorded in 2014 on certain training and logistics solutions programs that were not repeated in 2015; about $20 million for integrated warfare systems and sensors programs due to increased risk retirements (primarily Halifax Class Modernization); partially offset by lower operating profit of approximately $20 million for ship and aviation systems programs due to lower risk retirements and volume (including naval launchers). Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $50 million higher for the second quarter of 2015 compared to the same period in 2014.
Space Systems
|
(in millions) |
Quarters Ended |
Six Months Ended |
||||||||||||||||
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|
June 28, 2015 |
|
|
June 29, 2014 |
|
|||||||
|
|
Net sales |
$ |
2,029 |
|
$ |
1,848 |
$ |
3,983 |
|
$ |
3,707 |
|||||||
|
Operating profit |
$ |
259 |
|
$ |
248 |
$ |
547 |
|
$ |
502 |
||||||||
|
|
Operating margins |
|
12.8% |
13.4% |
|
13.7% |
13.5% |
|||||||||||
Space Systems’ net sales for the second quarter of 2015 increased $181 million, or 10 percent, compared to the same period in 2014. The increase was attributable to higher net sales of approximately $105 million for the Orion program due to increased volume; and about $80 million for businesses acquired in the second half of 2014.
Space Systems’ operating profit for the second quarter of 2015 increased $11 million, or 4 percent, compared to the same period in 2014. The increase was attributable to higher operating profit of approximately $55 million for government satellite programs due to increased risk retirements (primarily Mobile User Objective System) and Space Based Infrared System). The increases were partially offset by lower operating profit of approximately $40 million primarily due to lower equity earnings for joint ventures. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $75 million higher for the second quarter of 2015 compared to the same period in 2014.
Total equity earnings recognized by Space Systems (primarily ULA) represented approximately $40 million, or 15 percent, of this business segment’s operating profit for the second quarter of 2015, compared to approximately $80 million, or 32 percent, in the second quarter of 2014.
Income Taxes
The Corporation’s effective income tax rate was 30.8 percent for the second quarter of 2015, compared to 33.7 percent for the second quarter of 2014. The rates for both periods benefited from tax deductions for U.S. manufacturing activities and for dividends paid to the Corporation’s defined contribution plans with an employee stock ownership plan feature. The effective rate for the second quarter of 2015 was lower primarily due to tax reserve adjustments recorded in the second quarter of 2014. The effective rates during both periods did not include a benefit from the U.S. research and development tax credit because the credit had expired.
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