Lockheed Martin Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; the filing separately reports fourth-quarter results.
Business context
Lockheed Martin is a global defense and aerospace contractor operating in Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. The U.S. Government generated 71% of 2019 sales, including 61% from the Department of Defense; international customers contributed 28%. The F-35 was the largest program, representing 27% of consolidated sales.
Financial results and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $59.812 billion | $53.762 billion | +11% |
| Operating profit | $8.545 billion | $7.334 billion | +17% |
| Operating margin | 14.3% | 13.6% | +0.7 percentage points |
| Net earnings | $6.230 billion | $5.046 billion | +23% |
| Diluted EPS | $21.95 | $17.59 | +25% |
| Cash from operations | $7.311 billion | $3.138 billion | +$4.173 billion |
| Capital expenditures | $1.484 billion | $1.278 billion | +$206 million |
| Cash and equivalents, year-end | $1.514 billion | $772 million | +$742 million |
| Total debt, net | $12.654 billion | $14.104 billion | -$1.450 billion |
| Backlog | $143.981 billion | $130.468 billion | +10% |
Gross profit was $8.367 billion, or a 14.0% gross margin. Operating cash flow less capital expenditures was approximately $5.827 billion. Current assets were $17.095 billion versus current liabilities of $13.972 billion. Funded backlog was $94.5 billion; management expected to recognize about 39% of total backlog as revenue within 12 months and 65% within 24 months.
Segment sales and operating profit were: Aeronautics $23.693 billion and $2.521 billion; MFC $10.131 billion and $1.441 billion; RMS $15.128 billion and $1.421 billion; Space $10.860 billion and $1.191 billion. Sales and operating profit increased across all four segments. MFC had the fastest sales growth (+20%); RMS margin improved to 9.4%, while Aeronautics margin eased to 10.6% and MFC margin to 14.2%.
Dividends paid were $2.556 billion ($9.00 per share); share repurchases totaled $1.2 billion. The company repaid $900 million of notes at maturity and had no commercial paper outstanding at year-end. A $2.5 billion revolving credit facility was undrawn, and the company reported compliance with debt covenants.
Material changes and unusual items
- Operating cash flow more than doubled, primarily because pension contributions fell to $1.0 billion from $5.0 billion in 2018, with working-capital timing also improving cash flow. Net tax payments were about $940 million, versus net refunds of $41 million in 2018.
- Revenue growth reflected higher F-35 production, missile and air-defense activity, government satellite programs, and hypersonics development. The company delivered 134 F-35 aircraft in 2019 and ended the year with 374 in production backlog.
- 2019 earnings included a $51 million deferred property-sale gain, a $34 million gain on the sale of Distributed Energy Solutions, and $127 million of prior-year tax benefits. The effective tax rate was 14.0%, versus 13.6% in 2018.
- Unfavorable program items included an approximately $60 million charge on an RMS ground-based radar program. Cumulative losses were about $205 million on that program, $260 million on EADGE-T, $410 million on two commercial satellite programs, and $140 million on the Warrior turret program. Management did not expect further material losses on several of these programs based on its then-current estimates; satellite anomalies could still prompt additional reserves.
- The qualified defined-benefit pension obligation was $48.674 billion against plan assets of $35.442 billion, a $13.232 billion unfunded amount. A lower discount rate and updated longevity assumptions increased obligations; strong 2019 asset returns partly offset the impact. The salaried defined-benefit plans became fully frozen on January 1, 2020.
- The company sold its Distributed Energy Solutions business for $225 million in cash. The divestiture was not treated as discontinued operations.
Outlook, commentary and risks
For 2020, management forecast mid-single-digit sales growth, a total business-segment operating margin of approximately 10.8%, and operating cash flow of at least $7.6 billion, assuming continued U.S. Government support and funding of key programs. It expected a net FAS/CAS pension benefit of approximately $2.1 billion and no qualified-plan contributions. Segment outlook varied: Aeronautics sales and profit expected to rise at high-single-digit rates; MFC sales at a low-double-digit rate and profit at a mid-single-digit rate; RMS sales and profit at mid-single-digit rates; and Space sales at a mid-single-digit rate but profit to decline at a mid-single-digit rate.
- F-35 execution and concentration: Full-rate production remained subject to completion of operational testing, expected by year-end 2020. Software, supplier performance, cost targets, sustainment and funding remain program challenges.
- Turkey: The U.S. suspended Turkey’s F-35 participation and began its removal from the program. Replacing Turkish single-source suppliers remained in progress; remaining component transitions could affect deliveries and costs. Potential sanctions and impacts on other Turkey-related programs were uncertain.
- Government dependence: Appropriations, continuing resolutions, budget changes, contract audits, termination rights and unilateral contract definitization can affect awards, reimbursement, margins and cash flows.
- Execution and supply-chain exposure: Fixed-price contract overruns, subcontractor disruptions, international offsets, technical problems and competitive pressure may reduce profitability or delay deliveries.
- Pensions and impairment sensitivity: Pension obligations are sensitive to discount rates and asset returns. Sikorsky goodwill and intangible assets were identified as vulnerable to impairment if business performance, orders or market conditions deteriorate.
- Other exposures: Cybersecurity, export controls and geopolitical developments, environmental remediation, litigation, skilled-labor availability, and the AMMROC investment (carrying value $435 million, with business substantially dependent on one contract up for recompetition) are relevant risks. The company stated that it could not estimate some legal and environmental exposures clearly.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The filing identifies revenue recognition estimates, Sikorsky impairment testing, and pension obligations as critical audit matters.
Important facts for investors to verify
- Progress on F-35 operational testing, full-rate production approval, supplier transition, deliveries and program economics.
- Whether 2020 sales, segment-margin and operating-cash-flow guidance was achieved, including the underlying pension and working-capital effects.
- Updates to the loss estimates and completion schedules for the ground-based radar, EADGE-T, commercial satellite and Warrior programs.
- Changes in pension assumptions, funded status, contributions and the expected timing of pension-cost recovery.
- Developments in Turkey-related sanctions and supply-chain replacement, AMMROC’s contract recompetition, and material legal or environmental contingencies.