Business context and reporting period
Lockheed Martin Corporation’s Form 10-K covers the fiscal year ended December 31, 2020; quarterly figures below identify the fourth quarter. The company is a global defense and aerospace contractor operating Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. The U.S. Government generated 74% of 2020 sales, including 64% from the Department of Defense; international customers generated 25%.
Financial results and liquidity
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Net sales | $65.398 billion | $59.812 billion | +9.3% |
| Operating profit | $8.644 billion | $8.545 billion | +1.2% |
| Net earnings | $6.833 billion | $6.230 billion | +9.7% |
| Diluted EPS | $24.30 | $21.95 | +10.7% |
| Operating cash flow | $8.183 billion | $7.311 billion | +11.9% |
| Capital expenditures | $1.766 billion | $1.484 billion | +19.0% |
| Cash and cash equivalents | $3.160 billion | $1.514 billion | +$1.646 billion |
| Net debt | $9.009 billion | $11.140 billion | Lower by $2.131 billion |
Gross margin was 13.2%, operating margin 13.2%, and net margin 10.4% in 2020. Operating cash flow less capital expenditures was approximately $6.417 billion. Current assets were $19.378 billion versus current liabilities of $13.933 billion (current ratio approximately 1.39). Total debt, net of discounts and issuance costs, was $12.169 billion; $500 million was current. The company had no commercial paper outstanding, an undrawn $2.5 billion revolving facility, and was in compliance with debt covenants.
Fourth-quarter 2020 net sales were $17.032 billion, operating profit $2.289 billion, net earnings $1.792 billion, and diluted EPS $6.38.
Material changes versus the prior comparable period
- Sales increased across all four segments: Aeronautics $26.266 billion (+11%), MFC $11.257 billion (+11%), RMS $15.995 billion (+6%), and Space $11.880 billion (+9%). Aeronautics, MFC, and RMS operating profit increased; Space operating profit declined 4% to $1.149 billion, with margin falling from 11.0% to 9.7%.
- Consolidated operating profit grew more slowly than sales. The 2020 total included a $128 million noncash AMMROC impairment and $27 million of severance charges. 2019 included a $51 million property-sale gain and a $34 million business-sale gain.
- Net earnings benefited from lower non-service pension expense: other non-operating income was $182 million versus expense of $651 million in 2019. The effective tax rate rose to 16.4% from 14.0%.
- Backlog increased to $147.1 billion from $144.0 billion; funded backlog rose to $102.3 billion from $94.5 billion. The 2020 backlog reflects a $1.0 billion reduction related to the planned UK AWE program transition.
- Cash generation included approximately $1.2 billion of net accelerated U.S. Government progress payments and $460 million of deferred employer payroll taxes. The company used the accelerated payments and cash on hand to advance $2.1 billion of supplier payments due in future periods.
Outlook, commentary, risks, and unusual items
Management’s preliminary 2021 outlook called for sales growth of approximately 4%, business-segment operating margin of approximately 11.0%, and operating cash flow of at least $8.3 billion after $1.0 billion of planned pension contributions. The outlook assumes continued program funding, known COVID-19 impacts, a 21% statutory tax rate, and no significant budget reductions or prolonged continuing resolution. It excludes the proposed Aerojet Rocketdyne acquisition.
The company agreed to acquire Aerojet Rocketdyne for an estimated $4.4 billion transaction value, expected to be financed with cash and new debt and to close in the second half of 2021, subject to approvals. Separately, the UK Ministry of Defense intended to re-nationalize AWE on June 30, 2021; management expected lower AWE sales and profit thereafter.
- COVID-19 disrupted suppliers and reduced F-35 production; deliveries were 120 aircraft in 2020, 18 fewer than originally planned, versus 134 in 2019. Management expected the production rate to remain affected in 2021, with a pre-pandemic rate anticipated to resume during the year.
- F-35 concentration is significant: the program represented 28% of consolidated sales, with 356 production aircraft in backlog. Risks include supplier and partner performance, software development, testing, cost targets, sustainment and timely funding.
- Cash flow benefited from temporary government payment and tax-deferral measures; the payroll-tax deferral shifts cash outlays into 2021 and 2022. Reimbursement of COVID-related costs is not assured and may not fully cover costs.
- The Tax Cuts and Jobs Act provision requiring five-year amortization of R&D costs beginning in 2022 could, under current assumptions, reduce 2022 operating cash flow by approximately $2.0 billion; the company noted the law or its interpretation could change.
- Pension estimates are sensitive to discount rates and asset returns. Qualified pension obligations were $51.3 billion against plan assets of $38.5 billion; the discount-rate decline increased the obligation by approximately $4.9 billion. Pension-related actuarial assumptions materially affect reported equity and future expense.
- Environmental liabilities were $789 million, with $685 million of probable recoveries recorded as assets. Changes to drinking-water standards or regulation of PFAS could increase remediation estimates. The filing also describes litigation and contract-performance exposures; management generally did not consider material losses probable, but outcomes remain uncertain.
- Other notable program losses accumulated to approximately $250 million on a ground-based radar program, $260 million on EADGE-T, and $140 million on the Warrior turret program. Management did not anticipate additional material losses based on its then-current estimates.
Important facts for investors to verify
- Whether 2021 sales, segment margin, and cash-flow guidance was achieved, especially after the effects of COVID-19 and the AWE transition.
- Whether F-35 supplier recovery, production ramp-up, deliveries, testing, and program cost targets proceeded as expected.
- Whether Aerojet Rocketdyne received regulatory and shareholder approvals, closed on expected terms, and generated the anticipated benefits without materially increasing financing risk.
- How much 2020 operating cash flow was timing-related, including progress payments, deferred payroll taxes, and supplier-payment acceleration, and the resulting cash-flow pattern in subsequent periods.
- Developments in pension funding and assumptions, environmental remediation and litigation, and the potential 2022 R&D tax amortization cash impact.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2020.