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F-35 Lightning ll. Photo: Lockheed Martin

Lockheed Martin (NYSE:LMT) reported its first-quarter 2014 earnings results on Tuesday. The good news is that net earnings increased 23% to $933 million, and Lockheed increased its total consolidated operating margin to 13.4%. The bad news is that Lockheed saw a 4% decrease in total net sales, as well as a slight decrease in operating margin for its aeronautics division -- by far the most profitable of Lockheed's five business segments. Here's what investors should watch going forward.

The F-35 and Lockheed's future
For the quarter ending March 30, the aeronautics unit reported net sales of almost $3.39 billion. The next highest business segment, information systems and global solutions, reported net sales of a little over $1.9 billion.

While Lockheed makes a number of planes, in 2013 the F-35 accounted for 16% of the company's total consolidated net sales. It looks like the fighter jet will continue this trend this year. In its first-quarter report, Lockheed said: "Aeronautics' net sales for the first quarter of 2014 increased $200 million, or 6 percent, compared to the same period in 2013. The increase was primarily attributable to higher net sales of about $190 million for F-35 production contracts due to increased volume." 

The problem with the F-35
At first glance, strong F-35 sales don't seem like a problem for Lockheed. However, investors should keep in mind that the F-35 is a much-maligned program, with significant cost overruns and delays. Additionally, Boeing (NYSE:BA) has criticized the F-35 for not being able to keep up with evolving threats across the electromagnetic spectrum, and for not being able to survive attack missions at the start of a war.

Lockheed dismissed the assertions, but that hasn't stopped Boeing's critique, which highlights doubts about the F-35 program's stability.

Additionally, as Reuters reported, Lockheed CFO Bruce Tanner on Tuesday told analysts that the F-35 program generates a narrow profit margin -- given the effect of the F-35 program on Lockheed's profit, this could negatively impact overall profit margins.

What to watch
Lockheed is a multibillion-dollar company that generates significant sales. But it has also seen a decrease in net sales across every sector except aeronautics. This trend is likely the result of defense spending cuts in the current budget environment, which investors should not ignore. That said, Lockheed is still in a healthy position, with an order backlog of $79.6 billion as of March 30, and almost $10.7 billion in total net sales for its first quarter. Consequently, while Lockheed's investors should continue to monitor certain segments -- the F-35 program is especially important -- the company overall is pretty stable. Moreover, if the F-35 generates more good news than bad, it will likely continue to positively affect Lockheed's profits.

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Katie Spence has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.