Lockheed Martin Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context
Lockheed Martin is a global defense, aerospace, space, and information-technology contractor operating through Aeronautics, Electronic Systems, Information Systems & Global Solutions (IS&GS), and Space Systems. U.S. Government customers represented 82% of 2011 sales, including 61% from the Department of Defense; international customers accounted for 17% and U.S. commercial and other customers 1%. The F-35 generated 13% of consolidated sales.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $46,499 | $45,671 | +2% |
| Operating profit | $3,980 | $4,049 | -2% |
| Net earnings from continuing operations | $2,667 | $2,614 | +2% |
| Net earnings | $2,655 | $2,878 | -8% |
| Diluted EPS, continuing operations | $7.85 | $7.10 | +11% |
| Operating cash flow | $4,253 | $3,801 | +12% |
| Negotiated backlog | $80,700 | $78,400 | +3% |
Consolidated operating margin was approximately 8.6% (down from approximately 8.9%); product and services gross margins were approximately 10.7% and 11.1%, respectively. Segment operating margins were Aeronautics 11.3%, Electronic Systems 12.2%, IS&GS 9.3%, and Space Systems 12.2%. About $31.0 billion, or 38%, of year-end backlog was expected to convert to sales in 2012; funded backlog was $55.1 billion.
Cash and cash equivalents were $3,582; long-term debt, net, was $6,460. The company reported $14,094 of current assets and $12,130 of current liabilities. Operating cash flow less property, plant and equipment and capitalized software expenditures was approximately $3,266. The company paid $2,465 for share repurchases and $1,095 in dividends. Long-term debt increased from 2010, chiefly following a $2.0 billion note issuance; the company had no revolving-credit or commercial-paper borrowings at year-end.
Changes and fourth-quarter results
- Annual sales growth was led by Aeronautics, particularly F-35 LRIP, C-130, and F-16 activities. IS&GS sales fell 5%, primarily after completion of the 2010 U.S. census work and lower JTRS activity; Space Systems sales declined 1%.
- Operating profit was nearly flat as higher segment profits and lower severance charges were offset in part by a $468 million increase in the non-cash FAS/CAS pension adjustment. That adjustment totaled $922 million in 2011.
- Continuing-operations EPS increased despite lower operating profit, supported in part by share repurchases that reduced average diluted shares. Total net earnings declined partly because 2010 included a $184 million after-tax gain on the sale of EIG.
- Fourth-quarter 2011 sales were $12,211 versus $12,761 a year earlier; operating profit was $1,082 versus $1,115; continuing-operations earnings were $698 versus $821; and net earnings were $683 versus $961.
Outlook, risks, and unusual items
- Management expected a slight decline in 2012 consolidated sales and segment operating profit, with segment operating margin remaining above 11%. Operating cash flow was expected to be lower than in 2011. Management targeted returning at least 50% of free cash flow to investors through repurchases and dividends.
- Segment outlook: Aeronautics sales approximately flat and operating profit down at a low-single-digit rate; Electronic Systems sales, profit, and margin approximately comparable; IS&GS sales down mid- to high-single digits and operating profit down high-single digits; Space Systems sales down mid-single digits and operating profit down mid- to high-single digits.
- Federal budget reductions and possible 2013 sequestration were major risks. The filing cited a potential $52 billion reduction in government fiscal 2013 spending under sequestration, on top of planned defense reductions. Budget pressure, contract competition, program delays or termination, and affordability demands could affect sales, margins, and cash flows.
- F-35 execution risks included flight testing, software development, supplier and partner performance, concurrency between development and production, and timely LRIP funding. The Defense Contract Management Agency had withdrawn validation of the Fort Worth earned-value management system and planned a 2012 re-audit. Remaining SDD award fees were subject to customer assessment.
- 2011 included $136 million of severance charges, an $89 million tax benefit from resolution of tax matters, and a $12 million loss from discontinued operations. Profit estimates under percentage-of-completion accounting were materially affected by favorable net contract profit-rate adjustments, which increased operating profit by approximately $1.6 billion and net earnings by approximately $1.0 billion.
- Pension obligations and funding remain material: the company contributed $2.3 billion to qualified pension plans in 2011, and reported $13.5 billion of accrued pension liabilities. Lower discount rates increased obligations and reduced equity; management expected 2012 pension expense of about $1.9 billion and pension contributions of approximately $1.1 billion.
- Environmental liabilities were $932 million, with $808 million of related receivables recorded for probable recovery. Potential tighter standards for perchlorate and hexavalent chromium could raise remediation estimates. The company also disclosed pending securities, shareholder, contract, ERISA, and environmental matters; it assessed a material adverse effect on the company overall as remote, while noting individual matters could affect a quarter.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective. The company changed accounting for U.S. Government services contracts to percentage-of-completion in 2011; prior periods were adjusted and the effect was not material.
Most important facts to verify
- Whether 2012 budget actions, including sequestration, changed funding, schedules, or quantities on major programs, especially F-35.
- Whether contract estimates and favorable profit-rate adjustments remain supportable, given their significant contribution to 2011 earnings.
- Whether pension assumptions, funding requirements, and the expected 2012 cash contribution evolved as management projected.
- Whether backlog converts as expected and the forecast declines in IS&GS and Space Systems are offset by other program demand.
- Whether environmental estimates, legal proceedings, or the Fort Worth earned-value system re-audit resulted in material changes after year-end.