Lockheed Martin Corporation — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing, not a quarterly 10-Q; the figures below compare full-year 2023 with 2022 unless noted. Amounts are in U.S. dollars.
Business context
Lockheed Martin is a defense and aerospace contractor with four segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. The U.S. Government generated 73% of 2023 sales, including 64% from the Department of Defense; international customers generated 26%. The F-35 was the largest program, contributing 26% of consolidated sales.
Financial performance and liquidity
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $67.571 billion | $65.984 billion | Up 2.4% |
| Operating profit | $8.507 billion | $8.348 billion | Up 1.9% |
| Net earnings | $6.920 billion | $5.732 billion | Up 20.7% |
| Diluted EPS | $27.55 | $21.66 | Up 27.2% |
| Cash from operations | $7.920 billion | $7.802 billion | Up $118 million |
| Free cash flow (company-defined, non-GAAP) | $6.229 billion | $6.132 billion | Up $97 million |
Gross profit was $8.479 billion, or approximately 12.6% of sales; operating profit was approximately 12.6% of sales and net earnings approximately 10.2%. Product sales rose 1%, while service sales grew 7%. Segment sales/profit were: Aeronautics $27.474 billion/$2.825 billion; MFC $11.253 billion/$1.541 billion; RMS $16.239 billion/$1.865 billion; and Space $12.605 billion/$1.158 billion.
Cash and cash equivalents were $1.442 billion at year-end, down from $2.547 billion. Debt, net of discounts and issuance costs, was $17.459 billion, versus $15.547 billion; gross debt was $18.723 billion. The company reported a $3.584 billion excess of current assets over current liabilities. It had a $3.0 billion undrawn revolving credit facility and reported compliance with debt covenants. Capital expenditures were $1.691 billion. Dividends paid totaled $3.056 billion ($12.15 per share), and $6.0 billion was used to repurchase 13.4 million shares.
Total backlog increased to $160.6 billion from $150.0 billion, including funded backlog of $107.4 billion versus $95.5 billion. Management expected to recognize about 36% of backlog as revenue within 12 months and 62% within 24 months.
Material changes versus 2022
- Sales growth was led by Space, up about $1.1 billion (9%), mainly from NGI development and higher Fleet Ballistic Missile volume. Aeronautics sales rose 2%; MFC sales declined 1%; RMS sales rose 1%.
- Segment operating profit declined in Aeronautics, MFC, and RMS, while Space profit increased 10%. Consolidated operating profit rose modestly.
- Net earnings and EPS increased partly because 2022 included a $1.5 billion noncash pension settlement charge ($1.2 billion after tax). In 2023, non-service pension income was $443 million, compared with a $971 million expense in 2022.
- Interest expense rose to $916 million from $623 million, primarily reflecting debt issued in 2023 and 2022. Debt increased, while buybacks declined from $7.9 billion in 2022 to $6.0 billion in 2023.
- Operating cash flow and free cash flow improved slightly. Cash fell by $1.105 billion after investing and financing outflows.
Outlook, risks and unusual items
- Outlook: The filing does not provide clear numerical full-year 2024 revenue, earnings, or cash-flow guidance. Management cited potential growth from current programs, classified work, hypersonics, and new awards. It expects some hypersonics programs to enter early production through 2026, subject to testing and evaluation; classified programs could transition from development to production over the next few years.
- F-35: The company delivered 98 aircraft in 2023 and had a 373-aircraft backlog. TR-3 software acceptance was targeted for Q2 2024, though Q3 2024 was described as more likely. Supplier hardware availability, software maturity, testing, schedule, cost, and affordability remain risks.
- Funding and execution: Continuing resolutions, budget limits, shutdowns, funding delays, contract termination, and procurement changes could affect awards and cash receipts. Supply shortages, supplier performance, inflation, and fixed-price contract cost overruns have already delayed deliveries and pressured performance; management expected supply challenges to continue in 2024.
- Program losses: Cumulative losses remained approximately $270 million on a classified Aeronautics fixed-price program and $280 million on an RMS ground-based radar program. The Canadian Maritime Helicopter Program recorded a $100 million loss in 2023; further losses are possible depending on performance, flight hours, and contract discussions. Management also identified potential losses on future phases of an MFC classified program.
- Other unusual items: 2023 included $92 million of severance and asset impairment charges. Net profit-booking adjustments increased segment operating profit by about $1.6 billion, making contract cost estimates and revisions important to reported results. The company recorded a $560 million cash tax liability associated with R&D capitalization in 2023.
- Contingencies: Environmental liabilities were $680 million, partly offset by $613 million of expected recoveries. The company disclosed a False Claims Act case seeking about $52 million in damages, subject to trebling and statutory penalties, with trial scheduled for May 2024; it did not consider a material loss probable. A separate MTA case includes approximately $190 million in claimed damages and a $95 million company claim; the court decision remained pending. Legal outcomes are uncertain.
- Additional risks include dependence on U.S. Government contracts and the F-35, cybersecurity and classified-information threats, international export controls and geopolitical actions, workforce and clearance availability, pension assumptions, and long-term environmental obligations. The company reported China sanctions but did not expect a material business impact at the time of filing.
Important facts for investors to verify
- Monitor F-35 TR-3 software and hardware acceptance, aircraft delivery timing, and sustainment performance.
- Track whether backlog converts to funded orders, sales, and cash on expected schedules, particularly under continuing resolutions and budget constraints.
- Review cost-to-complete estimates, reach-forward losses, and profit adjustments on fixed-price and development programs, including the identified classified, radar, and helicopter programs.
- Assess whether supply-chain constraints and inflation continue to affect delivery schedules, margins, and cash conversion.
- Evaluate debt growth and capital returns alongside liquidity needs, pension funding exposure, and the legal and environmental contingencies.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Revenue recognition based on contract cost estimates and the defined-benefit pension obligation were identified as critical audit matters.