Lockheed Martin Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. Lockheed Martin is a global aerospace and security company operating in Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and Fire Control (MFC), Mission Systems and Training (MST), and Space Systems. In 2015, 78% of sales were to the U.S. Government, including 58% to the Department of Defense; 21% were international and 1% U.S. commercial and other.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $46.132 billion | $45.600 billion |
| Operating profit | $5.436 billion | $5.592 billion |
| Net earnings | $3.605 billion | $3.614 billion |
| Diluted EPS | $11.46 | $11.21 |
| Operating cash flow | $5.101 billion | $3.866 billion |
| Capital expenditures | $939 million | $845 million |
| Cash and cash equivalents, year-end | $1.090 billion | $1.446 billion |
| Total debt, net | $15.261 billion | $6.142 billion |
| Backlog | $99.6 billion | $80.5 billion |
Sales increased 1.2%, while operating profit declined 2.8% and net earnings were nearly flat. Diluted EPS rose 2.2%, helped by fewer shares outstanding following repurchases. Gross margin was approximately 11.3% and operating margin approximately 11.8%, calculated from reported totals. Operating cash flow less capital expenditures was approximately $4.162 billion. Cash generation benefited substantially from the absence of heritage pension contributions in 2015; the company contributed $2.0 billion in 2014.
At year-end, current assets were $16.198 billion and current liabilities $14.057 billion, a current ratio of approximately 1.15. Debt rose primarily to finance the $9.0 billion Sikorsky acquisition. Stockholders’ equity was $3.097 billion. The company reported compliance with debt covenants and had a $2.5 billion revolving credit facility with no year-end borrowings.
Fourth-quarter results
Fourth-quarter 2015 sales were $12.917 billion, versus $12.530 billion in fourth-quarter 2014. Operating profit was $1.281 billion versus $1.342 billion; net earnings were $933 million versus $904 million; diluted EPS was $3.01 versus $2.82. Fourth-quarter 2015 included Sikorsky results from its November 6 acquisition date, approximately $400 million in sales and a $45 million operating loss, as well as severance charges and the retroactive R&D tax-credit benefit.
Business segments
| Segment | 2015 sales | 2015 operating profit | Change and context |
|---|---|---|---|
| Aeronautics | $15.570 billion | $1.681 billion | Sales +4%; driven mainly by F-35 production and sustainment. F-35 represented 20% of company sales. |
| IS&GS | $5.596 billion | $508 million | Sales -1%; lower funding, contract completions and price-focused recompetition pressures. |
| MFC | $6.770 billion | $1.282 billion | Sales -5%; lower PAC-3 and other program deliveries; operating profit -5%. |
| MST | $9.091 billion | $844 million | Sales +4%, including Sikorsky; operating profit -10%, including international-program performance issues and acquisition-related costs. |
| Space Systems | $9.105 billion | $1.171 billion | Sales -1% and operating profit -1%; lower satellite activity partly offset by acquisitions and Orion. |
Material changes and significant events
- Completed the Sikorsky acquisition on November 6, 2015 for $9.0 billion net of cash acquired. It was aligned under MST; 2015 includes less than two months of operations. Financing included $7.0 billion of long-term notes. A tax election is expected to provide an estimated $1.9 billion net-present-value cash tax benefit.
- Backlog grew to $99.6 billion, including $15.6 billion attributed to Sikorsky and $4.8 billion to IS&GS, which Lockheed Martin planned to divest. Funded backlog was $70.7 billion; approximately $43.0 billion was expected to convert to sales in 2016.
- Sales mix shifted toward services: product sales declined 1%, while service sales increased 8%. International sales rose to $9.531 billion from $9.015 billion.
- Dividends paid rose to $1.9 billion ($6.15 per share), and $3.1 billion was spent repurchasing 15.2 million shares. The board increased the repurchase authorization by $3.0 billion; $3.6 billion remained available at year-end.
Outlook, commentary, and risks
- Management forecast 2016 net sales growth in the high-single-digit range, primarily from a full year of Sikorsky and higher F-35 volume, partly offset by declines in IS&GS and Space Systems. Segment operating profit was expected to decline in the high-single-digit range, with margin around 10%, reflecting lower expected results in several segments and Sikorsky acquisition, integration, purchase-accounting and inherited restructuring costs.
- Management expected 2016 Aeronautics sales to rise mid-single digits and operating profit low-single digits; IS&GS sales to fall high-single digits, with a steeper profit decline; MFC sales flat to slightly down and profit down about 20%; MST sales up mid-double digits, with profit roughly level; and Space Systems sales down mid-single digits and profit down about 10%.
- Lockheed Martin planned to combine IS&GS with Leidos in a tax-efficient Reverse Morris Trust transaction, expected in the third or fourth quarter of 2016. The announced terms included a $1.8 billion special cash payment and approximately 50.5% of Leidos equity for Lockheed Martin shareholders. Completion, timing, value and tax treatment were subject to approvals and other conditions. Proceeds were intended for debt repayment, dividends or repurchases.
- Management said it intended to return substantially all free cash flow to investors through dividends and repurchases over the next two years, subject to circumstances and fiduciary obligations.
- Key exposures include U.S. Government funding and appropriations, competition and price pressure in services, contract cost/schedule execution and estimates under percentage-of-completion accounting, and reliance on the F-35, which generated 20% of 2015 sales. Management cited continuing F-35 oversight and challenges including software, suppliers, testing, sustainment costs and timely funding.
- Pension accounting and funding are significant: qualified pension plans were about 73% funded under GAAP and 90% under ERISA at year-end. Management’s estimates are sensitive to discount rates and investment returns. The company expected approximately $975 million of FAS/CAS pension income in 2016.
- Environmental liabilities were $1.0 billion, partly offset by $858 million of expected recoveries. The company disclosed potential cost sensitivity to future environmental standards. Other contingencies include a Sikorsky-related False Claims Act civil case in which the government sought approximately $147 million including treble damages and penalties; the company said a material loss was not probable, and DOJ closed its criminal investigation in February 2016. A separate MTA dispute included approximately $190 million in damages sought by the MTA and approximately $95 million sought by Lockheed Martin.
- Unusual items included $102 million of 2015 severance charges, approximately $45 million of non-recoverable transaction costs, and a $90 million impairment related to the planned divestiture of Lockheed Martin Commercial Flight Training, partly offset by an approximately $80 million deferred tax benefit. The annual goodwill test found no impairment.
Important facts for investors to verify
- Progress and final economics of the Sikorsky integration, including purchase-price allocation, acquisition-related costs, synergies and the estimated tax benefit.
- Closing conditions, timing, final structure and shareholder value of the proposed Leidos transaction, including the use of proceeds and the treatment of IS&GS in reported results.
- F-35 production, funding, technical and cost performance, and whether 2016 guidance assumptions are being met.
- Conversion and quality of the reported backlog, particularly the funded portion and the Sikorsky and planned-to-be-divested IS&GS components.
- Operating cash flow sustainability apart from pension contribution timing, pension assumptions and funding, and the company’s ability to balance higher debt with dividends and repurchases.
- Developments in material litigation and environmental exposures; the filing does not provide a clear estimable loss range for many proceedings.