Lockheed Martin Corporation (NYSE: LMT) today reported second quarter 2020 net sales of $16.2 billion, compared to $14.4 billion in the second quarter of 2019. Net earnings in the second quarter of 2020 were $1.6 billion, or $5.79 per share, compared to $1.4 billion, or $5.00 per share, in the second quarter of 2019. Cash from operations in the second quarter of 2020 was $2.2 billion, compared to cash from operations of $1.7 billion in the second quarter of 2019.

"I'm pleased to see continued strong operational and financial results this quarter as we remain focused on performing with excellence for our customers while protecting the well-being of our employees and keeping our supply chain strong during this global pandemic," said James Taiclet, Lockheed Martin president and CEO. "Our dedicated Lockheed Martin team, and strong portfolio, coupled with supportive governmental actions have positioned us to deliver vital national security solutions for our country and international partners, and long-term value for our shareholders."

Second quarter 2020 net earnings include a non-cash impairment charge of $128 million ($96 million, or $0.34 per share, after tax) for an investment in a joint venture that the corporation has entered into an agreement to sell.

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, 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.

COVID-19

The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has negatively affected the U.S. and global economies, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to "shelter-in-place" and quarantine restrictions, and created significant disruption of the financial markets. Lockheed Martin has taken measures to protect the health and safety of its employees, work with its customers and suppliers to minimize disruptions and support its community in addressing the challenges posed by this ongoing global pandemic. The pandemic has presented unprecedented business challenges, and the corporation has experienced impacts in each business area related to COVID-19, primarily in increased coronavirus-related costs, delays in supplier deliveries, impacts of travel restrictions, access to some locations, and the impacts of remote work and adjusted work schedules. Despite these challenges, the corporation and U.S. Government's proactive efforts, especially with regard to the supply chain, helped to partially mitigate the disruptions caused by COVID-19 on the corporation's operations in the second quarter. In addition, favorable contract award timing and strong performance more than offset the impacts of COVID-19 on the corporation's financial results in the first half of 2020. Given the results year-to-date and expectations for the remainder of 2020, the corporation is updating its 2020 guidance for net sales, segment operating profit, earnings per share and cash from operations to reflect the recent performance across all four business areas. However, the ultimate impact of COVID-19 on the corporation's financial outlook in 2020 and future periods remains uncertain. The corporation's 2020 outlook assumes, among other things, that its production facilities continue to operate and it does not experience significant work stoppages or closures, it is able to mitigate any supply chain disruptions and these do not worsen, and it is able to recover its costs under U.S. Government contracts and government funding priorities do not change. While these are the corporation's current assumptions for its 2020 outlook, they could change because the future impact of COVID-19 on the corporation's operations and financial performance, including the corporation's ability to execute programs in the expected timeframe, remains uncertain and will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent and manage disease spread, all of which are uncertain and cannot be predicted.

Cash Activities

The corporation's cash activities in the second quarter of 2020 included the following:

• paying cash dividends of $671 million, compared to $622 million in the second quarter of 2019;
• repurchasing 0.7 million shares for $259 million; compared to repurchasing 0.6 million shares for $219 million in the second quarter of 2019. In the second quarter of 2020 the corporation also received and retired an additional 0.4 million shares upon settlement of the accelerated share repurchase agreement entered into in the first quarter of 2020 for no additional consideration;
• making capital expenditures of $343 million, compared to $249 million in the second quarter of 2019;
• no net proceeds from or repayments of commercial paper, compared to making net repayments of $400 million in the second quarter of 2019.

In May 2020, the corporation received net proceeds of $1.13 billion from a $1.15 billion debt issuance of senior unsecured notes, consisting of $400 million aggregate principal amount of 1.85% Notes due 2030 and $750 million aggregate principal amount of 2.80% Notes due 2050. In June 2020, the corporation used the net proceeds from the May 2020 debt offering plus cash on hand to redeem $750 million of the outstanding $1.25 billion in aggregate principal amount of the 2.50% Notes due 2020, and $400 million of the outstanding $900 million in aggregate principal amount of the 3.35% Notes due 2021. As a result of these transactions, as of June 28, 2020, the corporation's debt balance remained unchanged.

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, 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 27 percent of total segment operating profit for both second quarter of 2020 and second quarter of 2019.

Aeronautics

Aeronautics' net sales in the second quarter of 2020 increased $953 million, or 17 percent, compared to the same period in 2019. The increase was primarily attributable to higher net sales of approximately $700 million for the F-35 program due to increased volume on production, development, and sustainment contracts; and about $125 million for higher volume on classified development contracts.

Aeronautics' operating profit in the second quarter of 2020 increased $147 million, or 25 percent, compared to the same period in 2019. Operating profit increased approximately $130 million for the F-35 program due to higher volume and risk retirements on production, sustainment, and development contracts. Adjustments not related to volume, including net profit booking rate adjustments, were $75 million higher in the second quarter of 2020 compared to the same period in 2019.

Missiles and Fire Control

MFC's net sales in the second quarter of 2020 increased $390 million, or 16 percent, compared to the same period in 2019. The increase was primarily attributable to higher net sales of approximately $295 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 $150 million for tactical and strike missile programs due to increased volume (primarily Guided Multiple Launch Rocket Systems (GMLRS) and High-Mobility Artillery Rocket Systems (HIMARS)). These increases were partially offset by a decrease of $25 million as a result of lower volume on energy programs due to the divestiture of the Distributed Energy Solutions business in November 2019.

MFC's operating profit in the second quarter of 2020 increased $43 million, or 13 percent, compared to the same period in 2019. Operating profit increased approximately $30 million for integrated air and missile defense programs due to increased volume on international contracts (primarily PAC-3 and THAAD); about $20 million for tactical and strike missile programs due to higher risk retirements on classified programs; and about $10 million for energy programs due to higher risk retirements. These increases were partially offset by a decrease of $15 million for sensors and global sustainment programs due to lower risk retirements across the portfolio partially offset by net lower current period charges of $10 million for performance matters on an international military program. Adjustments not related to volume, including net profit booking rate adjustments, in the second quarter of 2020 were comparable to the same period in 2019.

Rotary and Mission Systems

RMS' net sales in the second quarter of 2020 increased $271 million, or 7 percent, compared to the same period in 2019. Net sales increased approximately $240 million for Sikorsky helicopter programs due to higher volume primarily on Seahawk production programs and VH-92A production contracts.

RMS' operating profit in the second quarter of 2020 increased $82 million, or 24 percent, compared to the same period in 2019. Operating profit increased approximately $80 million for training and logistics solutions (TLS) programs due to a $60 million charge for an army sustainment program in 2019 not repeated in 2020 and $45 million for Sikorsky helicopter programs due to higher volume and risk retirements on VH-92A production contracts. These increases were offset by a $25 million decrease for integrated warfare systems and sensors (IWSS) programs due to lower risk retirements (primarily Radar Surveillance Systems and Aegis) and a $15 million decrease for C6ISR (command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance) programs due to lower risk retirements (primarily undersea combat systems programs). Adjustments not related to volume, including net profit booking rate adjustments, were $35 million higher in the second quarter of 2020 compared to the same period in 2019.

Space

Space's net sales in the second quarter of 2020 increased $179 million, or 7 percent, compared to the same period in 2019. The increase was primarily attributable to higher net sales of approximately $90 million for government satellite programs due to higher volume (primarily Next Generation Overhead Persistent Infrared (Next Gen OPIR)); and about $85 million for strategic and missile defense programs due to higher volume (primarily hypersonic development programs).

Space's operating profit in the second quarter of 2020 decreased $36 million, or 13 percent, compared to the same period in 2019. Operating profit decreased approximately $35 million for government satellite programs due to lower risk retirements (primarily Advanced Extremely High Frequency (AEHF)). Adjustments not related to volume, including net profit booking rate adjustments, were $45 million lower in the second quarter of 2020, compared to the same period in 2019.

Total equity earnings recognized by Space from equity method investments (primarily ULA) represented approximately $10 million, or 4 percent of Space's operating profit in the second quarter of 2020, compared to approximately $15 million, or 5 percent in the second quarter of 2019.

Income Taxes

The corporation's effective income tax rate was 17.1 percent in the second quarter of 2020, compared to 15.6 percent in the second quarter of 2019. The higher rate for the second quarter of 2020 is primarily due to a decrease in tax deductions for foreign derived intangible income. The rates for both periods benefited from the research and development tax credit, tax deductions for foreign derived intangible income, dividends paid to the corporation's defined contribution plans with an employee stock ownership plan feature, and tax deductions for employee equity awards.

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.

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.