Lockheed Martin Reports Fourth Quarter and Full Year 2019 Results

BETHESDA, Md., Jan. 28, 2020 /PRNewswire/ -- Lockheed Martin Corporation (NYSE: LMT) today reported fourth quarter 2019 net sales of $15.9 billion, compared to $14.4 billion in the fourth quarter of 2018. Net earnings in the fourth quarter of 2019 was $1.5 billion, or $5.29 per share, compared to $1.3 billion, or $4.39 per share, in the fourth quarter of 2018. Cash from operations in the fourth quarter of 2019 was $1.5 billion, after discretionary pension contributions of $1.0 billion, compared to cash from operations of $2.2 billion in the fourth quarter of 2018.

Net sales in 2019 was $59.8 billion, compared to $53.8 billion in 2018. Net earnings in 2019 was $6.2 billion, or $21.95 per share, compared to $5.0 billion, or $17.59 per share, in 2018. Cash from operations in 2019 was $7.3 billion, after discretionary pension contributions of $1.0 billion, compared to cash from operations of $3.1 billion in 2018, after annual pension contributions of $5.0 billion.

"The corporation delivered outstanding performance throughout 2019, achieving exceptional sales growth, strong earnings, cash from operations, and a record backlog," said Lockheed Martin Chairman, President and CEO Marillyn Hewson. "As we look ahead to 2020, we remain focused on providing innovative global solutions for our customers, investing for growth across our portfolio, and generating long-term value for our shareholders."

Summary Financial Results

The following table presents the corporation's summary financial results.

2020 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 typical practice not to incorporate adjustments into its financial outlook for proposed acquisitions, divestitures, joint ventures, changes in law, or new accounting standards until such items have been consummated, enacted or adopted. For additional factors that may impact the corporation's actual results, refer to the "Forward-Looking Statements" section in this news release.

The corporation expects the 2020 net FAS/CAS pension benefit to be approximately $2.1 billion based on a 3.25 percent discount rate (a 100 basis point decrease from the end of 2018), an approximate 21 percent return on plan assets in 2019, a 7.0 percent expected long-term rate of return on plan assets in future years (unchanged from the end of 2018), and the revised longevity assumptions released during the fourth quarter of 2019 by the Society of Actuaries. As a result of the $1.0 billion in contributions to its qualified defined benefit pension plans in 2019, the corporation does not expect to make contributions to its qualified defined benefit pension plans in 2020.

The corporation projects FAS pension income in 2020, compared to FAS pension expense in 2019, as a result of completing the planned freeze of its salaried pension plans effective Jan. 1, 2020 that was previously announced on July 1, 2014. The corporation's FAS pension expense is comprised of service cost, interest cost, expected return on plan assets, amortization of prior service credit, and amortization of actuarial losses. The service cost and amortization of actuarial losses components of FAS pension expense are significantly lower due to the freeze. As a result, the expected return on plan assets and amortization of prior service credit exceed all other FAS pension expense components in 2020. For additional information regarding the corporation's FAS pension expense or income and CAS pension cost, see the corporation's Annual Report on Form 10-K for the year ended Dec. 31, 2018.

Cash Activities

The corporation's cash activities in the quarter and year ended Dec. 31, 2019 consisted of the following:

• repurchasing 1.3 million shares for $490 million and 3.5 million shares for $1.2 billion during the quarter and year ended Dec. 31, 2019, compared to 2.2 million shares for $666 million and 4.7 million shares for $1.5 billion during the quarter and year ended Dec. 31, 2018;
• paying cash dividends of $675 million and $2.6 billion during the quarter and year ended Dec. 31, 2019, compared to $622 million and $2.3 billion during the quarter and year ended Dec. 31, 2018;
• making discretionary pension contributions of $1.0 billion during the quarter and year ended Dec. 31, 2019, compared to making no pension contributions for the quarter ended Dec. 31, 2018 and $5.0 billion in pension contributions during the year ended Dec. 31, 2018;
• repayments of $900 million of long-term debt upon scheduled maturity during the quarter and year ended Dec. 31, 2019; compared to repayments of $750 million of long-term debt during the quarter and year ended Dec. 31, 2018; and
• making capital expenditures of $643 million and $1.5 billion during the quarter and year ended Dec. 31, 2019, compared to $459 million and $1.3 billion during the quarter and year ended Dec. 31, 2018.

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. The following table presents summary operating results of the corporation's business segments and reconciles these amounts to the corporation's consolidated financial results.

Net sales and operating profit of the corporation's business segments exclude intersegment sales, cost of sales, and profit as these activities are eliminated in consolidation. Operating profit of the corporation's business segments includes the corporation's share of earnings or losses from equity method investees as the operating activities of the investees are closely aligned with the operations of its business segments.

Operating profit of the corporation's business segments also excludes the FAS/CAS operating adjustment described below, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. Government under the applicable U.S. Government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management's evaluation of segment operating performance such as a portion of management and administration costs, legal fees and settlements, environmental costs, stock-based compensation expense, retiree benefits, significant severance actions, significant asset impairments, gains or losses from significant divestitures, and other miscellaneous corporate activities.

The corporation recovers CAS pension cost through the pricing of its products and services on U.S. Government contracts and, therefore, recognizes CAS pension cost in each of its business segments' net sales and cost of sales. The corporation's consolidated financial statements must present pension and other postretirement benefit plan expense calculated in accordance with U.S. generally accepted accounting principles (referred to as FAS expense). The operating portion of the net FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension expense and CAS pension cost. The non-service FAS pension expense component is included in other non‑operating expense on the corporation's consolidated statements of earnings. The net FAS/CAS pension adjustment increases or decreases CAS pension cost to equal total FAS pension expense (both service and non-service).

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 for which it recognizes revenue over time using the percentage-of-completion cost-to-cost method to measure progress towards completion. Increases in profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs to fulfill the performance obligations 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 fulfill the performance obligations 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, which may or may not impact sales. Favorable items may include the positive resolution of contractual matters, cost recoveries on severance and 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 25 percent and 28 percent of total segment operating profit in the quarter and year ended Dec. 31, 2019 as compared to 29 percent and 32 percent in the quarter and year ended Dec. 31, 2018.

Aeronautics

Aeronautics' net sales in the fourth quarter of 2019 increased $500 million, or 9 percent, compared to the same period in 2018. The increase was primarily attributable to higher net sales of approximately $390 million for the F-35 program due to increased volume on sustainment and development contracts; and about $100 million for higher volume on classified programs.

Aeronautics' operating profit in the fourth quarter of 2019 increased $53 million, or 8 percent, compared to the same period in 2018. Operating profit increased approximately $70 million for the F-35 program due to higher volume and risk retirements on sustainment and development contracts and higher risk retirements on production contracts. Adjustments not related to volume, including net profit booking rate adjustments, were comparable in the fourth quarter of 2019 compared to the same period in 2018.

Aeronautics' net sales in 2019 increased $2.5 billion, or 12 percent, compared to 2018. The increase was primarily attributable to higher net sales of approximately $2.0 billion for the F-35 program due to increased volume on production, sustainment and development contracts; and about $350 million for higher volume on classified programs.

Aeronautics' operating profit in 2019 increased $249 million, or 11 percent, compared to 2018. Operating profit increased approximately $210 million for the F-35 program due to increased volume on production, sustainment and development contracts; and about $50 million for the F-16 program due to higher risk retirements on sustainment contracts. These increases were partially offset by a decrease of $20 million on the F-22 program due to lower risk retirements.  Adjustments not related to volume, including net profit booking rate adjustments, were $25 million lower in 2019 compared to 2018.

Missiles and Fire Control

MFC's net sales in the fourth quarter of 2019 increased $342 million, or 14 percent, compared to the same period in 2018. The increase was primarily attributable to higher net sales of approximately $250 million for tactical and strike missile programs due to increased volume (primarily precision fires and new hypersonic development programs); about $85 million for integrated air and missile defense programs due to increased volume (primarily Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD)); and about $50 million for sensors and global sustainment programs due to higher volume (primarily Special Operations Forces Global Logistics Support Services (SOF GLSS)). These increases were partially offset by a decrease of $35 million as a result of lower volume on energy programs and the divestiture of the Distributed Energy Solutions business in November 2019.

MFC's operating profit in the fourth quarter of 2019 decreased $28 million, or 7 percent, compared to the same period in 2018. Operating profit decreased approximately $25 million for sensors and global sustainment programs due to lower risk retirements (primarily Low Altitude Navigation and Targeting Infrared for Night (LANTIRN®) and Sniper Advanced Targeting Pod (SNIPER®)).  Operating profit on tactical and strike missile programs was comparable as higher volume (primarily precision fires) was offset by lower risk retirements (primarily Javelin). Adjustments not related to volume, including net profit booking rate adjustments, were $55 million lower in the fourth quarter of 2019 compared to the same period in 2018.

MFC's net sales in 2019 increased $1.7 billion, or 20 percent, compared to 2018. The increase was primarily attributable to higher net sales of approximately $940 million for tactical and strike missile programs due to increased volume (primarily precision fires, new hypersonic development programs, and classified development programs); about $465 million for integrated air and missile defense programs due to increased volume (primarily PAC-3 and THAAD); and about $300 million for sensors and global sustainment programs due to increased volume (primarily SOF GLSS and Apache).

MFC's operating profit in 2019 increased $193 million, or 15 percent, compared to 2018. Operating profit increased approximately $100 million for integrated air and missile defense programs due to higher volume and higher risk retirements (primarily PAC-3 and THAAD); and about $60 million for tactical and strike missile programs due to higher volume (primarily precision fires), partially offset by lower risk retirements (primarily Hellfire and Javelin). Operating profit on sensors and global sustainment programs was comparable as higher volume (primarily Apache and SOF GLSS) was offset by lower risk retirements (primarily LANTIRN and SNIPER), after a net decrease in charges of $55 million on international military programs. Adjustments not related to volume, including net profit booking rate adjustments, were $30 million lower in 2019 compared to 2018.

Rotary and Mission Systems

RMS' net sales in the fourth quarter of 2019 increased $276 million, or 8 percent, compared to the same period in 2018. The increase was primarily attributable to higher net sales of approximately $160 million for training and logistics (TLS) programs due to higher volume (primarily an army sustainment program); about $110 million for C6ISR (command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance) programs due to higher volume (primarily undersea combat systems programs); and about $45 million for integrated warfare systems and sensors (IWSS) programs due to higher volume (primarily Littoral Combat Ship (LCS) and Aegis). These increases were partially offset by a decrease of approximately $40 million for Sikorsky helicopter programs due to lower volume (primarily mission systems programs).

RMS' operating profit in the fourth quarter of 2019 increased $64 million, or 22 percent, compared to the same period in 2018. Operating profit increased approximately $70 million for Sikorsky helicopter programs due to better cost performance across the portfolio, customer mix, and higher risk retirements; and about $20 million for IWSS primarily due to reserves recorded for performance matters on two programs in the fourth quarter of 2018.  These increases were partially offset by a $20 million decrease for C6ISR due to lower risk retirements (primarily undersea combat systems programs).  Operating profit on TLS programs was comparable as increased volume was offset by lower risk retirements.  Adjustments not related to volume, including net profit booking rate adjustments, were $20 million lower during the fourth quarter of 2019 compared to the same period in 2018.

RMS' net sales in 2019 increased $878 million, or 6 percent, compared to 2018. The increase was primarily attributable to higher net sales of approximately $535 million for IWSS programs due to higher volume (primarily LCS, radar surveillance systems programs, Multi Mission Surface Combatant (MMSC), and Aegis); about $290 million for various TLS programs due to higher volume (primarily an army sustainment program); and about $200 million for various C6ISR programs due to higher volume (primarily undersea combat systems and cyber solutions programs). These increases were partially offset by a decrease of approximately $145 million for Sikorsky helicopter programs due to lower volume (primarily Black Hawk production, mission systems programs, and commercial aircraft).

RMS' operating profit in 2019 increased $119 million, or 9 percent, compared to 2018. Operating profit increased approximately $105 million for Sikorsky helicopter programs primarily due to better cost performance across the portfolio, customer mix, and higher risk retirements; and about $55 million for IWSS programs due to higher volume (primarily radar surveillance systems programs, LCS, and Aegis), after $50 million in charges in the first quarter of 2019 for a ground-based radar program. These increases were partially offset by a decrease of $50 million for TLS programs due to $80 million in charges primarily recorded in the second quarter of 2019 for an army sustainment program partially offset by lower charges on various other programs. Adjustments not related to volume, including net profit booking rate adjustments, were $65 million lower in 2019 compared to 2018.

Space

Space's net sales in the fourth quarter of 2019 increased $349 million, or 14 percent, compared to the same period in 2018. The increase was primarily attributable to higher net sales of approximately $190 million for strategic and missile defense programs due to higher volume (primarily new hypersonic development programs); and about $160 million for government satellite programs due to higher volume (primarily Next Generation Overhead Persistent Infrared (Next Gen OPIR), Global Positioning System (GPS) III and government satellite services).

Space's operating profit in the fourth quarter of 2019 increased $36 million, or 16 percent, compared to the same period in 2018. Operating profit increased approximately $40 million for government satellite programs due to higher risk retirements (primarily Advanced Extremely High Frequency (AEHF)) and higher volume (primarily Next Gen OPIR and GPS III); and about $25 million for strategic and missile defense programs due to higher volume and risk retirements (primarily fleet ballistic missile programs).  These increases were partially offset by a decrease of $25 million due to lower equity earnings at United Launch Alliance (ULA). Adjustments not related to volume, including net profit booking rate adjustments, were $35 million higher in the fourth quarter of 2019 compared to the same period in 2018.

Space's net sales in 2019 increased $1.1 billion, or 11 percent, compared to 2018. The increase was primarily attributable to higher net sales of approximately $690 million for government satellite programs due to higher volume (primarily Next Gen OPIR, GPS III and government satellite services); and about $355 million for strategic and missile defense programs due to higher volume (primarily new hypersonic development programs).

Space's operating profit in 2019 increased $136 million, or 13 percent, compared to 2018. Operating profit increased approximately $125 million for government satellite programs due to higher risk retirements (primarily AEHF) and higher volume (primarily GPS III and government satellite services); and about $45 million for commercial satellite programs, which reflect a lower amount of charges recorded for performance matters. These increases were partially offset by a decrease of approximately $65 million due to lower equity earnings for ULA.  Operating profit on strategic and missile defense programs was comparable as higher volume (primarily hypersonic development programs) was offset by lower risk retirements (primarily missile defense programs). Adjustments not related to volume, including net profit booking rate adjustments, were $120 million higher in 2019 compared to 2018.

Total equity earnings recognized by Space (primarily ULA) represented approximately $5 million, or 2 percent, and approximately $145 million, or 12 percent, of this business segment's operating profit during the quarter and year ended Dec. 31, 2019, compared to approximately $30 million, or 13 percent and approximately $210 million, or 20 percent, during the quarter and year ended Dec. 31, 2018.

Income Taxes

The corporation's effective income tax rate was 18.2 percent and 14.0 percent in the quarter and year ended Dec. 31, 2019, compared to 15.5 percent and 13.6 percent in the quarter and year ended Dec. 31, 2018. The rate for the quarter ended Dec. 31, 2019 is higher than the rate for the quarter ended Dec. 31, 2018 primarily due to less tax deductions for foreign derived intangible income and research and development tax credits. The rate for the year ended Dec. 31, 2019 benefited from additional tax deductions for the prior year, primarily attributable to foreign derived intangible income treatment based on proposed tax regulations released on March 4, 2019. The rate for the year ended Dec. 31, 2018 benefited from additional tax deductions for the prior year, primarily attributable to true-ups to the net one-time charges related to the Tax Cuts and Jobs Act enacted on Dec. 22, 2017.  The rates for the years ended Dec. 31, 2019 and Dec. 31, 2018 benefited from the corporation's changes in tax accounting method, recorded discretely in the third quarter of each year, reflecting a 2012 Court of Federal Claims decision, which held that the tax basis in certain assets should be increased and realized upon the assets' disposition. The rates for all periods also benefited from tax deductions for foreign derived intangible income, the research and development tax credit, tax deductions for employee equity awards, and tax deductions for dividends paid to the corporation's defined contribution plans with an employee stock ownership plan feature.

Pension Transaction

In December 2019, certain of the corporation's pension plans used pension trust assets to purchase a group annuity contract from an insurance company for $1.9 billion. This contract transferred $1.9 billion of outstanding defined benefit pension obligations related to approximately 20,000 U.S. retirees and beneficiaries to an insurance company. As a result of this transaction, the insurance company is now required to pay and administer the retirement benefits owed to these retirees and beneficiaries. This transaction has no impact on the amount, timing, or form of the monthly retirement benefit payments to the covered retirees and beneficiaries. Additionally, this transaction did not impact the corporation's earnings or cash flows in 2019.

Use of Non-GAAP Financial Measures

This news release contains the following non-generally accepted accounting principles (non-GAAP) financial measures (as defined by U.S. Securities and Exchange Commission (SEC) Regulation G). While management believes that these non-GAAP financial measures may be useful in evaluating the financial performance of the corporation, this information should be considered supplemental and is not a substitute for financial information prepared in accordance with GAAP. In addition, the corporation's definitions for non-GAAP financial measures may differ from similarly titled measures used by other companies or analysts.

Business segment operating profit represents operating profit from the corporation's business segments before unallocated income and expense. This measure is used by the corporation's senior management in evaluating the performance of its business segments and is a performance goal in the corporation's annual incentive plan. Business segment operating margin is calculated by dividing business segment operating profit by sales. The table below reconciles the non-GAAP measure business segment operating profit with the most directly comparable GAAP financial measure, consolidated operating profit, included in the corporation's 2020 financial outlook.

Conference Call Information

Lockheed Martin Corporation will webcast live the earnings results conference call (listen-only mode) on Tuesday, Jan. 28, 2020, at 11:00 a.m. ET. The live webcast and relevant financial charts will be available for download on the Lockheed Martin Investor Relations website at www.lockheedmartin.com/investor.

For additional information, visit our website: www.lockheedmartin.com.

About Lockheed Martin

Headquartered in Bethesda, Maryland, Lockheed Martin Corporation is a global security and aerospace company that employs approximately 110,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services.

Forward-Looking Statements

This news release contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the federal securities laws, and are based on Lockheed Martin's current expectations and assumptions. The words "believe," "estimate," "anticipate," "project," "intend," "expect," "plan," "outlook," "scheduled," "forecast" and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties. Actual results may differ materially due to factors such as:

• our reliance on contracts with the U.S. Government, which are conditioned upon the availability of funding and can be terminated by the U.S. Government for convenience, and our ability to negotiate favorable contract terms;
• budget uncertainty, affordability initiatives or the risk of future budget cuts;
• risks related to the development, production, sustainment, performance, schedule, cost and requirements of complex and technologically advanced programs including our largest, the F-35 program;
• planned production rates for significant programs; compliance with stringent performance and reliability standards; materials availability;
• the performance and financial viability of key suppliers, teammates, joint ventures, joint venture partners, subcontractors and customers;
• economic, industry, business and political conditions including their effects on governmental policy and government actions that disrupt our supply chain or prevent the sale or delivery of our products (such as delays in obtaining Congressional approvals for exports requiring Congressional notification);
• trade policies or sanctions (including Turkey's removal from the F-35 program, the impact of U.S. Government sanctions on Turkey and potential sanctions on the Kingdom of Saudi Arabia);
• our success expanding into and doing business in adjacent markets and internationally and the differing risks posed by international sales;
• changes in foreign national priorities and foreign government budgets;
• the competitive environment for our products and services, including increased pricing pressures, aggressive pricing in the absence of cost realism evaluation criteria, competition from outside the aerospace and defense industry, and bid protests;
• the timing and customer acceptance of product deliveries;
• our ability to continue to innovate and develop new products and to attract and retain key personnel and transfer knowledge to new personnel; the impact of work stoppages or other labor disruptions;
• the impact of cyber or other security threats or other disruptions to our businesses;
• our ability to implement and continue, and the timing and impact of, capitalization changes such as share repurchases and dividend payments;
• our ability to recover costs under U.S. Government contracts and changes in contract mix;
• the accuracy of our estimates and projections;
• timing and estimates regarding pension funding and movements in interest rates and other changes that may affect pension plan assumptions, stockholders' equity, the level of the FAS/CAS adjustment and actual returns on pension plan assets;
• the successful operation of joint ventures that we do not control and our ability to recover our investments;
• realizing the anticipated benefits of acquisitions or divestitures, joint ventures, teaming arrangements or internal reorganizations;
• our efforts to increase the efficiency of our operations and improve the affordability of our products and services;
• risk of an impairment of our assets, including the potential impairment of goodwill, intangible assets and inventory recorded as a result of the acquisition of the Sikorsky business and the potential further impairment of our equity investment in Advanced Military Maintenance, Repair and Overhaul Center LLC (AMMROC);
• the availability and adequacy of our insurance and indemnities;
• the effect of changes in (or in the interpretation of) procurement and other regulations and policies affecting our industry, including export of our products, cost allowability or recovery and potential changes to the U.S. Department of Defense's acquisition regulations relating to progress payments and performance-based payments and a preference for fixed-price contracts;
• our ability to benefit fully from or adequately protect our intellectual property rights;
• the effect of changes in accounting, taxation, or export laws, regulations, and policies and their interpretation or application; and
• the outcome of legal proceedings, bid protests, environmental remediation efforts, audits, government investigations or government allegations that we have failed to comply with law, other contingencies and U.S. Government identification of deficiencies in our business systems.

These are only some of the factors that may affect the forward-looking statements contained in this news release. For a discussion identifying additional important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, see the corporation's filings with the U.S. Securities and Exchange Commission including, but not limited to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" in the corporation's Annual Report on Form 10-K for the year ended Dec. 31, 2018 and subsequent quarterly reports on Form 10-Q. The corporation's filings may be accessed through the Investor Relations page of its website, www.lockheedmartin.com/investor, or through the website maintained by the SEC at www.sec.gov.

The corporation's actual financial results likely will be different from those projected due to the inherent nature of projections. Given these uncertainties, forward-looking statements should not be relied on in making investment decisions. The forward-looking statements contained in this news release speak only as of the date of its filing. Except where required by applicable law, the corporation expressly disclaims a duty to provide updates to forward-looking statements after the date of this news release to reflect subsequent events, changed circumstances, changes in expectations, or the estimates and assumptions associated with them. The forward-looking statements in this news release are intended to be subject to the safe harbor protection provided by the federal securities laws.

SOURCE Lockheed Martin