Lockheed Martin [LMT] on Tuesday posted sharp declines in earnings and sales as second quarter results were hit by a previously announced pension charge, delays in finalizing the next production contract for the F-35 fighter, and lower production volumes for the fighter.
Negotiations with the Defense Department to finalize F-35 production for lots 15, 16 and 17 appear to be nearing conclusion as Lockheed Martin said the parties “recently reached an agreement in principle” for the low-rate initial production contract, the company said. The contract authorization and funding are expected in the third quarter, Lockheed Martin said.
Even though work on Lots 15-17 is ongoing under an initial contract in December 2019, costs are now exceeding that funding, preventing Lockheed Martin from recognizing about $325 million in sales and related operating profit during the second quarter. Moreover, the company during the quarter had about $1 billion in potential liabilities on the program related to terminations with suppliers on the three production lots.
Under the pending contract, F-35 deliveries in 2023 and 2024 will be around 147 to 153 per year, reaching 156 in 2025 and holding at that rate “for the foreseeable future,” Lockheed Martin said.
The contract delays also prevented the company from receiving about $465 million in cash related to F-35 program costs.
F-35 sales in the second quarter were down $945 million versus a year ago due to the contract delays and supply chain performance delays that have hindered production. Operating profit on the fighter program, which is the company’s largest contract and accounts for about 25 percent of its overall sales, were down about $145 million on the lower volume.
The supply chain impacts, which are expected to impact the F-35 and other programs for the rest of 2022, have been due to a more difficult than expected recovery from the COVID-19 pandemic, Jay Malave, Lockheed Martin’s chief financial officer, said on the company’s earnings call.
Lockheed Martin has seen improvements in its operations but also “broken commitments” from some suppliers, Malave said. Longer term impacts from the pandemic will have to be assessed again in 2023, he said.
In June, Lockheed Martin announced it would take a $1.5 billion non-cash pre-tax charge due to its purchase of group annuity contracts to transfer $4.3 billion of pension obligations and related plan assets to an insurance company for 13,600 of its U.S. retirees and beneficiaries. That charge lopped $1.2 billion, $4.33 earnings per share (EPS), from the bottom-line in the second quarter.
In addition to the pension-related charge, Lockheed Martin incurred $143 million in pre-tax charges related to its ventures business that invests in start-ups and technology companies.
Sales in the second quarter fell 9 percent to $15.4 billion from $17 billion a year ago while net income tumbled to $309 million ($1.16 EPS) from $1.8 billion ($6.52 EPS) a year ago, well below consensus estimates of $1.88 per share.
Sales across the company’s operating segments were lower while operating profits were down at the Space, and Rotary and Mission System segments, more than offsetting gains at Aeronautics, and Mission and Fire Control. Segment operating margin was 11 percent, up 60 basis points from a year ago.
The expected decline in F-35 sales this year coupled with supply chain impacts elsewhere and program schedule shifts led Lockheed Martin to reduce revenue guidance for 2022 to around $6.25 billion from the prior outlook of $66 billion put forth in April. Earnings guidance was reduced by $5.15 EPS to around $20.55 per share to reflect the various one-time charges and other items in the second quarter.
Free cash flow is still expected to be at least $6 billion. Free cash flow in the quarter was $1 billion and backlog stood at $134.6 billion, down less than a percent from$135.4 billion at the end of 2021.