Defense giant Lockheed Martin (NYSE:LMT) hit its high water mark at the end of 2017.

True, the company reported a GAAP loss in the fourth quarter last year, but that was primarily because Uncle Sam pulled a fast one on Lockheed, passing tax reform and forcing Lockheed to take a $1.9 billion one-time non-cash charge to earnings as a result. Charge or no charge, though, Lockheed ended last year with cash profits of $5.3 billion -- $6.5 billion in cash from operations, minus $1.2 billion in capital spending -- its best-ever result according to data from S&P Global Market Intelligence.

Sadly for its investors, it doesn't look likely that Lockheed will be able to repeat this result in 2018.

F-16 frontal close up view

Lockheed Martin gave investors a close-up view of its results on Tuesday. The image wasn't pretty. Image source: Getty Images.

A swing and a hit...and also a miss

Mind you, on the surface, Lockheed Martin's GAAP profit in Q1 2018 looked just as dramatic as Q4 2017's GAAP number looked dismal. Quarterly profits surged 49% year over year to $4.02 per share -- no easy trick for a company as big as Lockheed. Sales for the quarter were $11.6 billion, up only 4% year over year, but still ahead of what Wall Street had been expecting.

The problem was, Lockheed's cash profits didn't come close to tracking that result.

As Lockheed explained in its report, the company generated $632 million in cash from operations "after pension contributions of $1.5 billion." In other words, but for those pension contributions, cash generation would have been nearly four times higher. With them, though, cash generation was cut by 70%.

It gets worse. Calculating actual free cash flow at Lockheed requires deducting not just pension contributions from cash flow, but capital expenditures as well. Lockheed spent $216 million on capital investment in the quarter though. As a result, its free cash flow for the first quarter (its "cash profits," which ideally should track GAAP accounting profits pretty closely) was only $416 million -- only one-third of the reported GAAP profit of $1.2 billion.

Guidance improved...and also not

Of course, this is only one quarter's earnings. Will things get better as the year improves?

Yes and no, says Lockheed. Updating guidance from what it told us back in January, Lockheed added about $350 million to its sales expectations for this full fiscal year (now ranging from $50.35 billion to $51.85 billion), and $0.60 to its GAAP earnings guidance (now ranging from $15.80 to $16.10 per share).

Balancing those brighter expectations, though, Lockheed made no improvement at all to its cash flow expectations, which sit steady at about $3 billion for the year. (Minus capital expenditures similar to the $1.2 billion Lockheed spent last year, this suggests full-year free cash flow of perhaps $1.8 billion -- or roughly one-third the cash profit that Lockheed Martin generated in its high water mark year of 2017.)

And things could look even worse in the near term. On a conference call with analysts after earnings were released, CFO Bruce Tanner warned that the pension contributions that weighed down cash production in the first quarter could actually push Lockheed's cash flow (and free cash flow as well) into negative territory in the second quarter, while in the third quarter the company is planning to make $3.5 billion in pension contributions. With back-to-back (to back) weak cash quarters to start off the year, it's little wonder expectations for the full year aren't very bright. True, this should all settle down by 2020, at which point Lockheed says its pension programs will be in "full freeze." But in the meantime, 2018 is looking kind of rough.

And with Lockheed Martin stock still looking very expensive after Q4 2017's charge -- 23 times free cash flow, and 40 times earnings, no less -- it's little wonder investors decided to sell off the stock after earnings were announced.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.