Lockheed Martin Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a quarterly filing; the filing also presents unaudited fourth-quarter results. Amounts are U.S. dollars.
Business context
Lockheed Martin is a global aerospace and defense contractor operating five segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and Fire Control (MFC), Mission Systems and Training (MST), and Space Systems. U.S. Government customers generated 82% of 2012 sales, including 61% from the Department of Defense; international customers contributed 17%. The F-35 was the largest program, representing 14% of consolidated sales.
Financial performance and position
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net sales | $47.182 billion | $46.499 billion | +1.5% |
| Operating profit | $4.434 billion | $4.020 billion | +10.3% |
| Net earnings | $2.745 billion | $2.655 billion | +3.4% |
| Diluted EPS | $8.36 | $7.81 | +7.0% |
| Cash from operations | $1.561 billion | $4.253 billion | Down $2.692 billion |
| Capital expenditures | $942 million | $987 million | Down $45 million |
| Cash and cash equivalents | $1.898 billion | $3.582 billion | Down $1.684 billion |
| Long-term debt, net of discounts | $6.308 billion, including $150 million current | $6.460 billion | Down $152 million |
| Backlog | $82.3 billion | $80.7 billion | +2.0% |
Operating margin was approximately 9.4% and net margin approximately 5.8%, calculated from reported results. Operating cash flow less capital expenditures was approximately $619 million, versus $3.266 billion in 2011. Management attributed the cash-flow decline principally to working-capital changes and higher pension contributions. Current assets were $13.855 billion and current liabilities $12.155 billion at year-end.
Stockholders’ equity fell to $39 million from $1.001 billion, primarily reflecting a $3.2 billion year-end postretirement-plan remeasurement loss recorded in other comprehensive loss, partly offset by earnings and employee stock activity. Accrued pension liabilities were $15.278 billion. The company contributed $3.6 billion to qualified defined-benefit pension plans in 2012; GAAP funding was about 67%, while ERISA funding was about 90%.
Segment results were mixed: Aeronautics sales were $14.953 billion and operating profit $1.699 billion; IS&GS $8.846 billion and $808 million; MFC $7.457 billion and $1.256 billion; MST $7.579 billion and $737 million; Space Systems $8.347 billion and $1.083 billion. MFC’s operating margin rose to 16.8% from 14.3%; IS&GS sales and profit declined. Segment presentation was reorganized into five segments effective year-end, with prior periods recast.
Material changes and unusual items
- Fourth-quarter 2012 sales were $12.099 billion, operating profit $1.061 billion, net earnings $569 million, and diluted EPS $1.73. Compared with fourth-quarter 2011, sales fell from $12.211 billion, operating profit from $1.106 billion, and net earnings from $683 million.
- F-35 development performance was ahead of flight-test goals, and 30 aircraft were delivered in 2012. The company lowered its estimated profit booking rate on development, reducing 2012 profit by about $85 million; it expected to have the opportunity to earn approximately $350 million of the $530 million in remaining incentive fees.
- Consolidated net adjustments unrelated to volume, including contract profit-rate changes and contractual matters, increased segment operating profit by approximately $1.9 billion in 2012, compared with $1.6 billion in 2011. The filing notes about $500 million of unfavorable items in 2012.
- 2012 severance charges were $48 million, or $31 million after tax. The company paid $1.4 billion in dividends ($4.15 per share) and repurchased approximately $1.0 billion of shares. It stated a policy of returning at least 50% of free cash flow to investors.
- The company issued $1.3 billion of 4.07% notes due 2042 in a debt exchange, paying a $393 million premium through cash and new notes. Year-end debt principal was $7.2 billion. It reported compliance with debt covenants and no borrowings under its $1.5 billion revolving credit facility.
Outlook, commentary, and risks
For 2013, management expected sales to decline at a mid-single-digit rate from the 2012 record, assuming sequestration did not occur, the continuing resolution ended March 27, and defense funding was approved at the assumed level. Segment operating profit was expected to fall at a slightly greater percentage rate, with a modestly lower segment margin. If sequestration or substitute budget cuts occurred, management expected a greater sales decline and a material adverse effect; the specific impact could not then be determined.
- Segment outlook: Aeronautics sales down mid-single digits and profit down high-single digits; IS&GS sales and profit down mid-single digits; MFC sales, profit, and margin roughly comparable; MST sales down low-single digits but profit and margin expected to improve slightly; Space Systems sales down mid-single digits and profit down low-double digits.
- Major exposure is dependence on U.S. Government funding, budget uncertainty, continuing resolutions, and potential sequestration. Management warned of possible contract delays, reductions or terminations, supply-chain effects, restructuring, and workforce reductions.
- Contract performance, cost estimates, and profit booking rates are significant uncertainties: substantially all sales use percentage-of-completion accounting, requiring estimates of contract costs, schedules, fees, and technical performance. F-35 risks included software, suppliers, funding timing, contractual withholds, and test results.
- Government withholds on receivables were approximately $200 million at year-end, primarily associated with business-system audits and certain F-35 aircraft. The company reported corrective actions were still needed for full Earned Value Management System compliance at its Fort Worth location.
- Pension expense and funded status are sensitive to discount rates and other assumptions. Management expected 2013 pension expense of $1.9 billion and pension contributions of $1.5 billion. Environmental liabilities were $950 million, with $821 million of probable future recoveries recorded; changing standards for perchlorate and hexavalent chromium could increase estimates.
- Other risks include government contract compliance and audits, competitive pricing and bid protests, international and offset obligations, cyber threats, supply availability, litigation, and goodwill valuation. Goodwill was $10.370 billion; no impairment was identified in the 2012 annual test.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether U.S. defense and agency appropriations, sequestration outcomes, and contract awards matched the assumptions underpinning the 2013 outlook.
- F-35 delivery pace, contract funding and withholds, development costs, and realized incentive fees versus management’s estimates.
- Whether operating cash flow recovers from 2012’s decline, particularly as working capital, pension contributions, and customer billing timing change.
- Pension discount-rate movements, funded status, actual contributions, and the expected phase-in of revised CAS pension-cost rules.
- Progress on government business-system corrective actions and resolution of environmental, legal, and contract contingencies.