Lockheed Martin Corporation — FY 2010 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2010; it is an annual report, not a stand-alone fourth-quarter filing. Lockheed Martin is a global aerospace, defense, and security contractor operating through Aeronautics, Electronic Systems, Information Systems & Global Solutions (IS&GS), and Space Systems. U.S. Government customers accounted for 84% of 2010 sales, foreign governments 15%, and commercial and other customers the remainder.
Key financial metrics
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net sales | $45.803 billion | $43.995 billion |
| Operating profit | $4.097 billion | $4.415 billion |
| Operating margin | 8.9% | 10.0% |
| Earnings from continuing operations | $2.645 billion; diluted EPS $7.18 | $2.999 billion; diluted EPS $7.71 |
| Net earnings | $2.926 billion; diluted EPS $7.94 | $3.024 billion; diluted EPS $7.78 |
| Cash from operating activities | $3.547 billion | $3.173 billion |
| Capital expenditures | $820 million | $852 million |
| Cash, cash equivalents, and short-term investments | $2.777 billion | $2.737 billion |
| Long-term debt, net | $5.019 billion | $5.052 billion |
| Negotiated backlog | $78.2 billion; funded backlog $49.7 billion | $77.2 billion |
Management-defined free cash flow, calculated as operating cash flow less property, plant, and equipment spending, was approximately $2.727 billion. The current ratio was approximately 1.15, based on reported current assets and liabilities. Debt less cash and short-term investments was approximately $2.242 billion.
Changes versus the prior comparable period
- Sales increased 4%, while operating profit fell 7% and continuing-operations earnings fell 12%. Lower operating profit reflected $220 million of separation and facilities charges, higher unallocated Corporate costs, and segment-level changes.
- Net earnings declined modestly despite higher total EPS, partly because discontinued operations contributed $281 million in 2010 versus $25 million in 2009. The 2010 discontinued-operations result included a $184 million after-tax gain on the EIG sale and a net $73 million benefit from PAE-sale-related adjustments.
- Sales rose in Aeronautics, Electronic Systems, and IS&GS, but declined in Space Systems. IS&GS backlog fell to $9.7 billion from $10.6 billion; Space Systems backlog rose to $17.8 billion from $16.8 billion.
- Operating cash flow increased $374 million, aided by working-capital improvement and lower net tax payments, partly offset by increased pension contributions. The company contributed $2.240 billion to qualified defined-benefit pension plans in 2010.
Outlook, commentary, risks, and unusual items
- Management expected 2011 sales growth in the low single digits and segment operating profit broadly consistent with 2010, with margin pressure. It expected strong operating cash flow and intended to return at least 50% of free cash flow to investors through dividends and repurchases.
- Segment outlook varied: Aeronautics sales were expected to grow in the upper single digits; Electronic Systems and IS&GS sales were expected to decline in the low single digits; Space Systems sales were expected to be comparable with 2010. Management anticipated pressure on segment margins in parts of the portfolio.
- The F-35 program had schedule delays, scope changes, and cost increases. DoD restructuring extended development through 2016; testing challenges affected the STOVL variant. The DCMA had withdrawn validation of the earned value management system at the Fort Worth site, requiring corrective actions and later reassessment. The F-35 represented 12% of 2010 sales.
- Government budget and appropriation decisions are a major exposure: U.S. Government business represented 84% of sales, and the 2011 continuing resolution could delay procurement awards. Other material risks include contract cost overruns or termination, competition and bid protests, pension funding and expense volatility, environmental remediation, cybersecurity and operational disruption, and supplier or joint-venture performance.
- Environmental liabilities were $935 million, with $810 million of estimated recovery assets recorded. Management warned that proposed stricter perchlorate and hexavalent chromium standards could materially increase remediation estimates. Recorded environmental estimates do not capture all potential exposure.
- Other notable items: EIG was sold in November 2010; PAE was classified as held for sale, with a sale agreement announced in February 2011. The company recorded $178 million for its voluntary executive separation program and $42 million for MS2 facilities consolidation. Pension expense was expected to rise to $1.825 billion in 2011, while planned qualified-plan contributions were $1.3 billion.
- Effective January 1, 2011, the company changed revenue recognition for U.S. Government service contracts to percentage-of-completion accounting; management expected the impact to be less than 1% of 2011 sales and segment operating profit. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- F-35 revised cost, schedule, testing, production, and earned-value-system milestones, including implications for fees and future sales concentration.
- 2011 U.S. defense and civil agency appropriations, procurement timing, and the effect of budget restraint on backlog conversion and margins.
- Pension assumptions, required contributions, and the timing and recoverability of pension costs under government contracts.
- Environmental remediation exposure, especially outcomes of proposed chemical standards and the extent of recoveries from the U.S. Government or other responsible parties.
- Whether forecast cash generation supports the stated shareholder-return policy alongside debt service, pension funding, and other contractual commitments.