Lockheed Martin Corporation — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Lockheed Martin is a global aerospace and security contractor operating in Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and Fire Control (MFC), Mission Systems and Training (MST), and Space Systems. The U.S. Government accounted for 82% of 2013 sales, including 61% from the Department of Defense; international customers accounted for 17%.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $45.36 billion | $47.18 billion |
| Operating profit | $4.51 billion | $4.43 billion |
| Operating margin | 9.9% | 9.4% |
| Net earnings | $2.98 billion | $2.75 billion |
| Diluted EPS | $9.13 | $8.36 |
| Cash from operations | $4.55 billion | $1.56 billion |
| Capital expenditures | $836 million | $942 million |
| Free cash flow, as defined by company | $3.71 billion | $619 million |
| Cash and cash equivalents at year-end | $2.62 billion | $1.90 billion |
| Long-term debt, net of discounts | $6.15 billion | $6.16 billion |
| Backlog | $82.6 billion | $82.3 billion |
Sales declined 3.9%, mainly from lower product volume and deliveries; operating profit rose 1.6% and net earnings rose 8.6%. Improved product and service cost ratios and lower pension adjustment expense supported results. The effective tax rate was 29.0%, versus 32.6%. Cash from operations increased substantially, mainly reflecting $1.35 billion lower pension contributions, better working-capital performance, an IRS refund, and improved earnings. The company paid $1.54 billion in dividends and repurchased $1.76 billion of shares. The declared dividend was $4.78 per share, up from $4.15.
Current assets were $13.33 billion and current liabilities $11.12 billion at year-end. Debt was principally fixed-rate; the company reported a $1.5 billion revolving credit facility with no borrowings outstanding and compliance with debt covenants. Approximately $450 million of cash was held by foreign subsidiaries and was not immediately available for U.S. operations without repatriation.
Fourth quarter: Sales were $11.53 billion, operating profit $834 million, continuing-operations earnings $488 million, and diluted EPS $1.50. Compared with fourth-quarter 2012, sales fell from $12.10 billion, operating profit from $1.06 billion, and net earnings from $569 million. The 2013 quarter included a $195 million goodwill impairment and $171 million of severance charges.
Segments and material changes
| Segment | 2013 sales | 2013 operating profit | Key year-over-year development |
|---|---|---|---|
| Aeronautics | $14.12 billion | $1.61 billion | Sales down 6%; fewer F-16 and C-130 deliveries partly offset by F-35 production growth. F-35 generated 16% of company sales. |
| IS&GS | $8.37 billion | $759 million | Sales down 5%; federal IT budget pressure and completed programs outweighed new program start-ups. |
| MFC | $7.76 billion | $1.43 billion | Sales up 4%; profit up 14%, led by THAAD, PAC-3, and fire-control programs. |
| MST | $7.15 billion | $905 million | Sales down 6%; profit up 23%, including favorable contract-cost settlements and risk retirements. |
| Space Systems | $7.96 billion | $1.05 billion | Sales down 5%; fewer commercial satellite deliveries and lower Orion volume, partly offset by government satellite activity. |
Funded backlog was $55.0 billion; the company expected approximately $35.4 billion, or 43% of total backlog, to convert to sales in 2014. Backlog includes funded and unfunded firm orders, but excludes unexercised options and potential task orders.
Outlook, commentary, risks and unusual items
- 2014 outlook: Management expected sales to decline slightly overall. Aeronautics sales were forecast to grow in the mid-single digits, primarily on F-35 production; IS&GS sales were expected to decline in the high-single digits; MFC sales were forecast flat to slightly down; MST sales approximately flat; and Space Systems sales down in the mid-single digits. Segment operating profit and margins were expected to decline overall, with Aeronautics the exception to the segment-profit decline. Management nevertheless expected 2014 EPS to exceed 2013, primarily because it forecast approximately $345 million of FAS/CAS pension income, versus $482 million of expense in 2013.
- Restructuring: The November 2013 plan targets approximately 4,000 workforce reductions and closure or consolidation of about 2.5 million square feet of facilities, substantially complete by mid-2015. 2013 severance charges were $201 million; management expected about $150 million of cash-flow reduction in 2014 from restructuring actions and further facility-related costs through 2015.
- Goodwill impairment: A non-cash $195 million charge, net of state tax benefits, was recorded in the MFC Technical Services reporting unit amid defense budget reductions and competitive pressure. It reduced net earnings by $176 million, or $0.54 per diluted share.
- F-35: Development and production are being performed concurrently. The development portion was expected to be substantially complete in 2017, with lesser work continuing into 2019. A 2013 reduction in the development contract profit booking rate reduced profit by $85 million. Risks cited include software, testing, supplier and partner performance, schedule, sustainment costs, and timely production funding.
- Government spending: Sequestration and constrained federal budgets remain significant risks despite the Bipartisan Budget Act and enacted GFY 2014 budget. Management said impacts to date were minimal, but future cuts could delay, reduce, or terminate programs and disrupt suppliers. Short-cycle services and IS&GS were viewed as more exposed than longer-cycle production businesses.
- Pensions: Defined-benefit plan measurements are sensitive to interest rates, investment returns, and actuarial assumptions. The GAAP pension funded ratio improved to approximately 78% from 67%; management cited potential future effects from updated mortality assumptions. Expected pension funding and accounting costs can materially affect cash flow and earnings.
- Other exposures: Environmental liabilities were $997 million, with $863 million of related receivables recorded for probable government-cost recovery. Future regulation of hexavalent chromium or perchlorate could increase estimated liabilities. Outstanding letters of credit, surety bonds, and third-party guarantees totaled $2.37 billion; foreign offset obligations were $9.9 billion, with estimated potential penalties of approximately $1.0 billion. The filing describes litigation, including the MTA contract dispute and DOE-related environmental and False Claims Act allegations; management said outcomes could not be predicted and certain losses could not be estimated.
- Reporting assurance: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether F-35 production growth, costs, contract estimates, and development milestones track management’s assumptions, including the effects of concurrent development and production.
- How much of the sharp 2013 operating-cash-flow improvement is repeatable after accounting for pension contributions, tax refunds, and working-capital timing.
- Whether segment outlook and backlog conversion offset continued federal IT and defense-budget pressure, particularly in IS&GS and technical-services businesses.
- Whether restructuring delivers expected savings on schedule and within the disclosed severance, facility, and cash-flow estimates.
- How pension discount rates, actual asset returns, CAS recoveries, and revised mortality assumptions affect future earnings, funding needs, and cash generation.
- Whether environmental, litigation, offset-agreement, and venture-guarantee exposures change materially from the estimates and assessments disclosed.