Business context and reporting period
Lockheed Martin Corporation’s Form 10-K covers the fiscal year ended December 31, 2022, compared with 2021. The company develops, manufactures and sustains defense, aerospace, space and technology systems through Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. The U.S. Government generated 73% of 2022 sales, including 64% from the Department of Defense; international customers generated 26%.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $66.0 billion | $67.0 billion |
| Operating profit | $8.35 billion | $9.12 billion |
| Net earnings | $5.73 billion | $6.32 billion |
| Diluted EPS | $21.66 | $22.76 |
| Operating cash flow | $7.80 billion | $9.22 billion |
| Free cash flow (non-GAAP) | $6.13 billion | $7.70 billion |
| Cash and cash equivalents | $2.55 billion | $3.60 billion |
| Total debt, net | $15.55 billion | $11.68 billion |
| Backlog | $150.0 billion | $135.4 billion |
Sales fell approximately 1.6%, operating profit 8.5%, net earnings 9.2%, and operating cash flow 15.4%. Gross margin was approximately 12.6% versus 13.5%; operating margin was 12.7% versus 13.6%. Current assets of $21.0 billion exceeded current liabilities of $15.9 billion. The company reported access to a $3.0 billion revolving credit facility, no year-end borrowings under it, and compliance with debt covenants.
Operating cash flow declined chiefly due to contract-asset and billing timing at Aeronautics, slower receivables collections at MFC, and the nonrecurrence of prior-year inventory liquidation at RMS. Capital expenditures were $1.67 billion. The company paid $3.0 billion in dividends and repurchased $7.9 billion of shares in 2022.
Segments and material changes
- Aeronautics: Sales of $27.0 billion, up 1%; operating profit of $2.87 billion, up 2%. Higher classified-program and F-22 activity offset lower F-35 sales and profit. Segment backlog increased to $56.6 billion.
- MFC: Sales of $11.3 billion, down 3%; operating profit of $1.64 billion, down 1%. Lower SOF GLSS, SNIPER and THAAD activity weighed on results; backlog rose to $28.7 billion.
- RMS: Sales of $16.1 billion, down 4%; operating profit of $1.67 billion, down 7%. Lower Black Hawk production, C6ISR activity and comparison with a prior-year training-system delivery contributed; backlog was $34.9 billion.
- Space: Sales of $11.5 billion, down 2%; operating profit of $1.05 billion, down 8%. The year-over-year comparison included the UK AWE program, which was renationalized in 2021; higher NGI and classified development activity partly offset the decline. Backlog increased to $29.7 billion.
Consolidated backlog increased about 11% to $150.0 billion, of which $95.5 billion was funded. Management expects to recognize approximately 37% of backlog as revenue in the next 12 months and 61% within 24 months. Backlog includes unfunded firm orders and excludes unexercised options.
Outlook, risks and unusual items
- F-35: The largest program generated 27% of consolidated sales. A late-2022 government-furnished engine issue led to suspended engine deliveries and a pause in flight operations and aircraft deliveries. As of January 2023, planned production was 147–153 aircraft in each of 2023 and 2024; 2023 deliveries remained dependent on resumption of engine deliveries and other factors. The company anticipated 156 annual deliveries in 2025 and thereafter.
- Growth and demand: Management identified current programs, classified programs, hypersonics and new awards as growth priorities. Multiple hypersonic programs could enter early production between 2023 and 2026, subject to successful testing and evaluation. Management noted that Ukraine-related interest and stockpile-replenishment demand were not expected to materially increase near-term sales, given long contract cycles and capacity constraints.
- Operating pressures: COVID-19 effects, labor challenges and supplier shortages delayed work and increased costs; some supply-chain impacts were expected to continue in 2023. Inflation could pressure margins and cash flow, especially on fixed-price contracts. The company accelerated $1.5 billion of supplier payments due in future periods.
- Contract and program exposure: Fixed-price development work, technical and schedule challenges, changing requirements, supplier performance and government funding or contract termination decisions could cause cost overruns or reach-forward losses. Net profit-booking adjustments added approximately $1.8 billion to segment operating profit in 2022, including approximately $780 million of unfavorable items. Cumulative losses were approximately $270 million on a classified Aeronautics program and $280 million on an RMS ground-based radar program.
- Other unusual items: 2022 earnings included a $1.5 billion noncash pension settlement charge ($1.2 billion after tax; $4.33 per diluted share) related to transferring $4.3 billion of pension obligations and assets to an insurer, plus $100 million of RMS severance and asset-impairment charges. Fair-value investment losses and lower segment profit adjustments also affected comparisons. The 2022 effective tax rate was 14.2%, and R&D tax amortization increased 2023 cash taxes by an estimated approximately $575 million.
- Capital structure and commitments: Debt rose following 2022 note issuances, including $4.0 billion used to fund an accelerated share repurchase. Remaining share-repurchase authorization was $10.0 billion. Contractual cash obligations totaled $96.5 billion, including $59.1 billion of operating purchase obligations. Remaining notional offset obligations were $16.1 billion, with estimated potential penalties of $1.8 billion.
- Pensions, contingencies and controls: Qualified pension plan assets returned approximately negative 18% in 2022; the reported net unfunded qualified pension obligation was $5.5 billion. Environmental liabilities were $696 million, partly offset by $618 million of expected recoveries. Management said the outcomes of legal matters were not expected to materially harm the company overall, but could affect individual periods; certain exposures could not be estimated clearly. The auditor issued unqualified opinions on the financial statements and internal controls.
The filing does not provide a clear consolidated 2023 revenue, earnings or cash-flow forecast.
Investor verification priorities
- Track resolution of the F-35 engine and delivery pause, actual deliveries, contract funding and the program’s cost and schedule performance.
- Assess conversion and funding of the $150.0 billion backlog, particularly the unfunded portion and expected timing of revenue recognition.
- Monitor operating cash flow, contract assets and receivables, including the effect of supplier-payment acceleration and billing-cycle timing.
- Review debt growth, interest expense and the pace and funding of planned share repurchases and dividends.
- Follow fixed-price and development-program estimates, profit adjustments, and potential additional losses on classified and radar programs.
- Evaluate pension asset performance, future contributions or risk-transfer transactions, and tax cash-flow effects from R&D amortization.
- Check developments in the FVL protest, environmental remediation, offset obligations and other legal or contractual contingencies.