01—Abstract
Summary
Summary of the 10-K filed February 25, 2010. Cited figures are marked; the original filing is the authoritative source.
Lockheed Martin's 2009 Form 10-K shows a company with record-scale revenue but a sharp year-over-year decline in profitability and cash generation.
Net sales rose 6% to $45.2 billiona, driven by growth in all four segments, with the U.S. Government accounting for 85% of sales. However, operating profit fell 13% to $4.5 billion, and diluted EPS slipped to $7.78 from $7.86, pressured by a $456 million unfavorable FAS/CAS pension adjustment, lower other income, and higher unallocated corporate costs. Operating cash flow dropped about 28% to $3.2 billion, largely because of $1.5 billion in discretionary pension contributions, which the company expects to continue with roughly $1.4 billion more planned for 2010.
Balance sheet and capital allocation were the other major themes. Stockholders' equity rose to $4.1 billionb from $2.9 billion, mainly because a $495 million favorable remeasurement of pension liabilities offset the prior year's large charge. Debt-to-total capital improved to 55% from 57%.
The company repurchased $1.85 billionc of stock and paid $908 million in dividends, raising the quarterly dividend to $0.63 in Q4. Funded backlog stood at $49.0 billion against total negotiated backlog of $78.0 billion, down from $80.9 billion, reflecting the termination of the VH-71 Presidential Helicopter and TSAT ground-support programs.
For investors, the key issues are the sustainability of program concentration and government funding, the large unfunded pension obligation (accrued pension liabilities of $10.8 billiond), and the outlook for the F-35 and F-22 programs, including the F-22 production wind-down after 187 aircraft. Management guided to growth in Aeronautics and Space Systems in 2010, but the company faces ongoing budget uncertainty from the Administration's fiscal 2011 proposals, including the cancellation of the Orion/Constellation program.
02—Key points
Key Highlights
- Net sales rose 6% to $45.2 billion, with growth in all four segments; the U.S. Government accounted for 85% of sales.
- Operating profit fell 13% to $4.5 billion, reflecting a $456 million unfavorable FAS/CAS pension adjustment and lower other income versus 2008.
- Diluted EPS was $7.78 versus $7.86 in 2008, while net earnings were $3.0 billion.
- Operating cash flow fell to $3.2 billion from $4.4 billion, mainly due to $1.48 billion in discretionary pension contributions; about $1.4 billion more is planned for 2010.
- Total negotiated backlog declined to $78.0 billion from $80.9 billion after termination of the VH-71 and TSAT programs (about $2.6 billion of backlog reduction).
- Returned capital through $1.85 billion of share repurchases and $908 million of dividends; the annual dividend rose to $2.34 per share from $1.83.
- Accrued pension liabilities remain large at $10.8 billion, and the company issued $1.5 billion of new notes in November 2009 while debt-to-total capital improved to 55%.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Lockheed Martin kept $0.07.
- Revenue$43.87B100.0%
- Cost of revenue−$39.72B90.5%
- Gross profit$4.15B9.5%
- Operating costs$220.0M0.5%
- Operating income$4.37B10.0%
- Interest, other & tax−$1.39B3.2%
- Net income$2.97B6.8%
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 25, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $43.87B$41.37B | +6.0% |
| Cost of Revenue | $39.72B$36.80B | +7.9% |
| Gross Profit | $4.15B$4.57B | −9.3% |
| R&D Expenses | $717.00M$698.00M | +2.7% |
| Operating Income | $4.37B$5.05B | −13.5% |
| Interest Expense | $308.00M$332.00M | −7.2% |
| Net Income | $2.97B$3.22B | −7.6% |
| EPS (Basic) | $7.73$8.05 | −4.0% |
| EPS (Diluted) | $7.64$7.86 | −2.8% |
| Shares Outstanding (Basic) | 384.80M399.70M | −3.7% |
| Shares Outstanding (Diluted) | 388.90M409.40M | −5.0% |
05—Questions
Frequently Asked Questions
Why did Lockheed Martin's operating profit decline in 2009 despite higher sales?
Operating profit fell 13% to $4.5 billion mainly because the FAS/CAS pension adjustment swung to a $456 million expense (from $128 million income in 2008), unallocated corporate costs rose, and other income dropped from $482 million to $242 million, which included a 2008 one-time deferred gain and land reserve reversal. Segment operating profit actually grew 4%, to $5.2 billion.
How concentrated is Lockheed Martin's revenue in the U.S. Government?
Highly concentrated. In 2009, 85% of net sales came from U.S. Government customers, 13% from foreign governments (including foreign military sales), and 2% from commercial and other customers. The company states that each of its segments depends heavily on U.S. Government sales, so budget and appropriations decisions are a central risk.
What happened to the program backlog and why does it matter?
Negotiated backlog fell to $78.0 billion from $80.9 billion. The DoD terminated the VH-71 Presidential Helicopter program and the TSAT Mission Operations System in 2009, cutting backlog by about $2.6 billion. Funded backlog was $49.0 billion, and about 59% of total backlog is not expected to be filled within a year. The Raptor (F-22) line is scheduled to end after 187 aircraft, with production expected to finish in early 2012, so backlog depends on continued funding of programs such as the F-35.
Why did operating cash flow drop, and will pension funding continue to weigh on it?
Operating cash flow fell to $3.2 billion from $4.4 billion, primarily because discretionary pension contributions rose to $1.48 billion from $109 million. Management expects to make about $1.4 billion of further discretionary contributions in 2010, as funding requirements under the Pension Protection Act are expected to rise from 2011. Pension expense is also projected to increase to about $1.4 billion in 2010 from $1.0 billion in 2009, due to a lower discount rate and amortization of 2008 investment losses.
What is the outlook for the key Aeronautics and Space programs?
Management expects Aeronautics sales to grow in 2010 as F-35 low-rate initial production deliveries begin and C-130J deliveries ramp up, though F-16 sales are expected to decline. Space Systems faces the scheduled end of Space Shuttle processing in 2010, and the President's fiscal 2011 budget proposes canceling the NASA Constellation program, which affects the Orion crew vehicle. The company says its other key priorities appear well supported in the proposed budget, but Congress has not yet acted.
06—Continue