LOCKHEED MARTIN CORP annual report, FY2009

Lockheed Martin Corporation — 2009 Form 10-K

Reporting period: Fiscal year ended December 31, 2009; filed February 25, 2010. This is an annual report, not a standalone fourth-quarter filing. The company is a defense, aerospace and government-services contractor operating in Aeronautics, Electronic Systems, Information Systems & Global Services, and Space Systems. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.

Key financial results

Metric	2009	2008
Net sales	$45.189 billion	$42.731 billion
Operating profit	$4.466 billion	$5.131 billion
Net earnings	$3.024 billion	$3.217 billion
Diluted earnings per share	$7.78	$7.86
Cash provided by operating activities	$3.173 billion	$4.421 billion
Capital expenditures	$852 million	$926 million
Cash and cash equivalents at year-end	$2.391 billion	$2.168 billion
Long-term debt, net	$5.052 billion	$3.563 billion

• Operating margin was approximately 9.9%, down from 12.0%; net margin was approximately 6.7%, versus 7.5%.
• Operating cash flow less capital expenditures was approximately $2.321 billion, compared with $3.495 billion in 2008.
• Current assets were $12.477 billion and current liabilities $10.703 billion (current ratio approximately 1.17). The company cautions that many current balances relate to long-term contracts and operating cycles exceeding one year.
• Debt-to-total-capital was 55%, down from 57%. Cash and short-term investments totaled approximately $2.737 billion. The $1.5 billion revolving credit facility was undrawn at year-end.
• Dividend per share rose to $2.34 from $1.83. The company repurchased 24.9 million shares for $1.851 billion during the year.

Material changes and segment performance

• Sales grew 6% year over year, with increases in all four segments. Segment sales were Aeronautics $12.201 billion, Electronic Systems $12.204 billion, IS&GS $12.130 billion, and Space Systems $8.654 billion.
• Operating profit declined 13%, despite higher profit in Aeronautics, Electronic Systems, and Space Systems. IS&GS profit fell 6% to $1.011 billion. Unallocated corporate expense swung to $689 million from $161 million of income, principally reflecting a $456 million adverse FAS/CAS pension adjustment versus $128 million of income in 2008.
• Net earnings and diluted EPS declined modestly. Lower operating profit and other income outweighed revenue growth; share repurchases supported per-share results.
• Operating cash flow fell $1.248 billion, primarily because defined-benefit pension contributions rose to $1.482 billion from $109 million, alongside lower earnings and weaker working-capital cash generation.
• Negotiated backlog was $78.0 billion at year-end, down from $80.9 billion; funded backlog was $49.0 billion. Approximately $46.0 billion of backlog was not expected to be filled within one year.

Outlook, commentary, risks and unusual items

• Management expected 2010 Aeronautics sales to increase, primarily from F-35 activity, with C-130J production and deliveries also expected to rise. F-16 sales were projected to decline. Management said defense revenue growth in fiscal 2011 should match or exceed expected DoD budget growth.
• The filing discusses the President’s fiscal 2011 budget proposal, including proposed cancellation of NASA’s Constellation program affecting Orion and a proposed freeze on certain civil-agency spending. These proposals remained subject to Congressional action; actual funding and program outcomes were uncertain.
• The DoD terminated the VH-71 helicopter and TSAT Mission Operations System contracts for convenience in 2009, reducing negotiated backlog by approximately $2.6 billion. Production of the F-22 was expected to end after 187 aircraft, with deliveries anticipated by early 2012. Space Shuttle-related launch and processing work was expected to end after its planned final 2010 flight.
• 2010 pension expense was forecast at approximately $1.4 billion, versus $1.0 billion in 2009. Management expected about $1.0 billion in 2010 CAS pension funding and anticipated a discretionary $1.4 billion pension contribution; it also expected capital expenditures of at least $1.0 billion annually over the next three years.
• 2009 net earnings included a $69 million tax benefit from resolution of IRS examinations and other tax matters. Pension assumptions are consequential: a 25-basis-point change in the discount rate would change the qualified pension obligation by about $1.0 billion and projected 2010 pension expense by about $95 million.
• Environmental liabilities were $877 million, with $740 million of related expected-recovery assets recorded. Management states exposure at some sites cannot be reasonably estimated. Notable disputed matters include the U.K. Soothsayer contract and the New York MTA security-system contract; the company disputes the claims. It considers a material adverse outcome from its legal matters remote, but outcomes are uncertain.
• Principal risks include dependence on U.S. Government appropriations (85% of 2009 sales), contract cost and schedule performance, government audits and termination rights, pension funding and assumptions, environmental remediation, and international/export-control requirements. Some key materials rely on single or limited sources.

Investor verification priorities

1. Reconcile the operating-profit decline to the pension adjustment, corporate costs, and changes in segment performance.
2. Assess cash-flow sustainability after the unusually large pension contribution, working-capital movements, dividends, and repurchases; verify management’s planned pension funding and capital spending.
3. Review funded versus unfunded backlog and the potential impact of budget decisions, contract cancellations, and F-35 program execution.
4. Examine pension actuarial assumptions, plan funding status, and sensitivity to discount rates and investment returns.
5. Track environmental and contract litigation contingencies, including the Soothsayer and MTA disputes, and any changes to recorded reserves or recoveries.