ITEM 1. Financial Statements.
Lockheed Martin Corporation
Consolidated Statements of Earnings
(unaudited; in millions, except per share data)
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Quarters Ended
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Six Months Ended
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June 26,
2016
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June 28,
2015
|
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June 26,
2016
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June 28,
2015
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Net sales
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Products
|
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$
|
10,045
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$
|
9,157
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|
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$
|
18,989
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|
|
$
|
17,010
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Services
|
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|
2,869
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|
2,486
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|
5,627
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|
4,744
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Total net sales
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12,914
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11,643
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24,616
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21,754
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Cost of sales
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Products
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(9,086)
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(8,102)
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(17,178)
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(15,053)
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Services
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(2,548)
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(2,216)
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(5,011)
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(4,167)
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Severance charges
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(99)
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Other unallocated, net
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144
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|
|
46
|
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|
331
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|
100
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|
Total cost of sales
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(11,490)
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(10,272)
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(21,957)
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(19,120)
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Gross profit
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1,424
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|
1,371
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|
2,659
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|
2,634
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Other income, net
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|
142
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|
74
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|
204
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|
167
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Operating profit
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1,566
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|
|
|
1,445
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|
2,863
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|
2,801
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Interest expense
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(166)
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(104)
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(330)
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(197)
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Other non-operating income, net
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2
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1
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|
5
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Earnings before income taxes
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1,400
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|
1,343
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|
2,534
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|
2,609
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Income tax expense
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(379)
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(414)
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(615)
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(802)
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Net earnings
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$
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1,021
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$
|
929
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$
|
1,919
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$
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1,807
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Earnings per common share
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Basic
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$
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3.37
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$
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2.98
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$
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6.32
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$
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5.76
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Diluted
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3.32
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2.94
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6.23
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5.68
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Cash dividends paid per common share
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$
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1.65
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$
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1.50
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$
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3.30
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$
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3.00
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Lockheed Martin Corporation
Consolidated Statements of Comprehensive Income
(unaudited; in millions)
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Quarters Ended
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Six Months Ended
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June 26,
2016
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June 28,
2015
|
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June 26,
2016
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June 28,
2015
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Net earnings
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$
|
1,021
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$
|
929
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$
|
1,919
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$
|
1,807
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Other comprehensive income (loss), net of tax
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Postretirement benefit plans
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Recognition of previously deferred postretirement benefit plan amounts
|
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173
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|
213
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346
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|
425
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Other, net
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(23)
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46
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(6)
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(11)
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Other comprehensive income, net of
tax
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150
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|
259
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340
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|
414
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Comprehensive income
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$
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1,171
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$
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1,188
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$
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2,259
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$
|
2,221
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Lockheed Martin Corporation
Consolidated Balance Sheets
(in millions, except par value)
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June 26,
2016
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December 31,
2015
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(unaudited)
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Assets
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Current assets
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Cash and cash equivalents
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$
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1,269
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$
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1,090
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Receivables, net
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9,275
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8,061
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Inventories, net
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5,136
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4,962
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Other current assets
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393
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460
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Total current assets
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16,073
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14,573
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Property, plant and equipment, net
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5,438
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5,490
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Goodwill
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13,621
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13,576
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Intangible assets, net
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4,051
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|
4,147
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Deferred income taxes
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|
5,830
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5,931
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|
Other noncurrent assets
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5,395
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|
5,411
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Total assets
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$
|
50,408
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$
|
49,128
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Liabilities and stockholders equity
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Current liabilities
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Accounts payable
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$
|
2,778
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$
|
1,974
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|
Customer advances and amounts in excess of costs incurred
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7,236
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|
6,988
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|
Salaries, benefits and payroll taxes
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|
2,012
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|
1,916
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|
Current maturities of long-term debt
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|
502
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|
956
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Other current liabilities
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|
3,067
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|
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|
2,085
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|
Total current liabilities
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|
15,595
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|
13,919
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|
Long-term debt, net
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14,307
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|
|
14,305
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|
Accrued pension liabilities
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|
11,816
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|
11,807
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|
Other postretirement benefit liabilities
|
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|
1,073
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|
|
|
1,070
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Other noncurrent liabilities
|
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|
4,620
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|
4,930
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Total liabilities
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47,411
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|
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|
46,031
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|
Stockholders equity
|
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Common stock, $1 par value per share
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301
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|
303
|
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Additional paid-in capital
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Retained earnings
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13,800
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|
14,238
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Accumulated other comprehensive loss
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(11,104)
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(11,444)
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|
Total stockholders equity
|
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|
2,997
|
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|
|
3,097
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|
Total liabilities and stockholders equity
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|
$
|
50,408
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|
$
|
49,128
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|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
Lockheed Martin Corporation
Consolidated Statements of Cash Flows
(unaudited; in millions)
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Six Months Ended
|
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|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,919
|
|
|
$
|
1,807
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities
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|
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Depreciation and amortization
|
|
|
593
|
|
|
|
490
|
|
Stock-based compensation
|
|
|
97
|
|
|
|
89
|
|
Severance charges
|
|
|
99
|
|
|
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
(1,214)
|
|
|
|
(1,183)
|
|
Inventories, net
|
|
|
(233)
|
|
|
|
(154)
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|
Accounts payable
|
|
|
806
|
|
|
|
453
|
|
Customer advances and amounts in excess of costs incurred
|
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|
239
|
|
|
|
(211)
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|
Postretirement benefit plans
|
|
|
515
|
|
|
|
580
|
|
Income taxes
|
|
|
237
|
|
|
|
471
|
|
Other, net
|
|
|
82
|
|
|
|
(122)
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|
Net cash provided by operating activities
|
|
|
3,140
|
|
|
|
2,220
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(386)
|
|
|
|
(309)
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|
Other, net
|
|
|
59
|
|
|
|
91
|
|
Net cash used for investing activities
|
|
|
(327)
|
|
|
|
(218)
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|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Issuance of long-term debt, net of related costs
|
|
|
|
|
|
|
2,213
|
|
Repayments of long-term debt
|
|
|
(452)
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(1,002)
|
|
|
|
(1,541)
|
|
Dividends paid
|
|
|
(1,034)
|
|
|
|
(965)
|
|
Proceeds from stock option exercises
|
|
|
53
|
|
|
|
84
|
|
Other, net
|
|
|
(199)
|
|
|
|
(37)
|
|
Net cash used for financing activities
|
|
|
(2,634)
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|
|
|
(246)
|
|
Net change in cash and cash equivalents
|
|
|
179
|
|
|
|
1,756
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,090
|
|
|
|
1,446
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,269
|
|
|
$
|
3,202
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
Lockheed Martin Corporation
Consolidated Statements of Stockholders Equity
(unaudited; in millions)
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|
|
|
|
|
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Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Total
Stockholders
Equity
|
|
Balance at December 31, 2015
|
|
$
|
303
|
|
|
$
|
|
|
|
$
|
14,238
|
|
|
$
|
(11,444)
|
|
|
$
|
3,097
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
1,919
|
|
|
|
|
|
|
|
1,919
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340
|
|
|
|
340
|
|
Repurchases of common stock
|
|
|
(5)
|
|
|
|
(159)
|
|
|
|
(838)
|
|
|
|
|
|
|
|
(1,002)
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
(1,519)
|
|
|
|
|
|
|
|
(1,519)
|
|
Stock-based awards and ESOP activity
|
|
|
3
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
Balance at June 26, 2016
|
|
$
|
301
|
|
|
$
|
|
|
|
$
|
13,800
|
|
|
$
|
(11,104)
|
|
|
$
|
2,997
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
314
|
|
|
$
|
|
|
|
$
|
14,956
|
|
|
$
|
(11,870)
|
|
|
$
|
3,400
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
1,807
|
|
|
|
|
|
|
|
1,807
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414
|
|
|
|
414
|
|
Repurchases of common stock
|
|
|
(8)
|
|
|
|
(318)
|
|
|
|
(1,215)
|
|
|
|
|
|
|
|
(1,541)
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
(1,419)
|
|
|
|
|
|
|
|
(1,419)
|
|
Stock-based awards and ESOP activity
|
|
|
3
|
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
|
321
|
|
Balance at June 28, 2015
|
|
$
|
309
|
|
|
$
|
|
|
|
$
|
14,129
|
|
|
$
|
(11,456)
|
|
|
$
|
2,982
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
Lockheed Martin Corporation
Notes to Consolidated Financial Statements
NOTE 1 BASIS OF PRESENTATION
We prepared these consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) for
interim financial information, the instructions to Form 10-Q and Article 10 of U.S. Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete
financial statements. We followed the accounting policies disclosed in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Form 10-K) filed with the SEC.
In the opinion of management, these consolidated financial statements reflect all adjustments that are of a normal recurring nature necessary for a fair
presentation of our results of operations, financial condition and cash flows for the interim periods presented. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates. Significant estimates inherent in the
preparation of our consolidated financial statements include, but are not limited to, accounting for sales and cost recognition, postretirement benefit plans, environmental receivables and liabilities, evaluation of goodwill and other assets for
impairment, income taxes including deferred tax assets, fair value measurements and contingencies. The consolidated financial statements include the accounts of subsidiaries we control and variable interest entities if we are the primary
beneficiary. We eliminate intercompany balances and transactions in consolidation.
We close our books and records on the last Sunday of the
calendar quarter, which was on June 26 for the second quarter of 2016 and June 28 for the second quarter of 2015, to align our financial closing with our business processes. The consolidated financial statements and tables of
financial information included herein are labeled based on that convention. This practice only affects interim periods as our fiscal year ends on December 31.
On November 6, 2015, we completed the acquisition of Sikorsky Aircraft Corporation (Sikorsky) for $9.0 billion, net of cash acquired, which has been
aligned under our Mission Systems and Training (MST) business segment. The financial results of Sikorsky have been included in our consolidated financial results since the November 6, 2015 acquisition date. Accordingly, the results of
Sikorskys operations are included in our consolidated financial results for the quarter and six months ended June 26, 2016 but not for the quarter and six months ended June 28, 2015. See Note 3 Acquisitions and Divestitures
for additional information about the acquisition of Sikorsky and related purchase accounting.
On January 26, 2016, we entered into definitive
agreements to separate and combine our Information Systems & Global Solutions (IS&GS) business segment with Leidos Holdings, Inc. (Leidos) in a Reverse Morris Trust transaction. The transaction is expected to close in the third quarter of
2016. Until closing, IS&GS will continue to operate as a business segment and the financial results for the IS&GS business segment will be reported in our continuing operations. See Note 3 Acquisitions and Divestitures for
additional information about the planned divestiture of our IS&GS business segment.
During the fourth quarter of 2015, we realigned certain
programs among our business segments. The amounts, discussion and presentation of our business segments for all periods presented in these consolidated financial statements reflect the program realignment. The realignment did not impact
our previously reported consolidated financial statements for 2015.
The results of operations for the interim periods presented are not necessarily
indicative of results to be expected for the full year or future periods. Unless otherwise noted, we present all per share amounts cited in these consolidated financial statements on a per diluted share basis. These consolidated
financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2015 Form 10-K.
8
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
NOTE 2 EARNINGS PER COMMON SHARE
The weighted average number of shares outstanding used to compute earnings per common share were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Weighted average common shares outstanding for basic computations
|
|
|
303.1
|
|
|
|
312.0
|
|
|
|
303.8
|
|
|
|
313.7
|
|
Weighted average dilutive effect of equity awards
|
|
|
4.0
|
|
|
|
4.1
|
|
|
|
4.1
|
|
|
|
4.5
|
|
Weighted average common shares outstanding for diluted
computations
|
|
|
307.1
|
|
|
|
316.1
|
|
|
|
307.9
|
|
|
|
318.2
|
|
We compute basic and diluted earnings per common share by dividing net earnings by the respective weighted average
number of common shares outstanding for the periods presented. Our calculation of diluted earnings per common share also includes the dilutive effects for the assumed vesting of outstanding restricted stock units and performance share units and
exercise of outstanding stock options based on the treasury stock method. There were no significant anti-dilutive equity awards during the quarters and six months ended June 26, 2016 or June 28, 2015.
NOTE 3 ACQUISITIONS AND DIVESTITURES
Acquisition of Sikorsky Aircraft Corporation
On November 6, 2015, we completed the acquisition of Sikorsky from United Technologies Corporation (UTC) for $9.0 billion, net of cash acquired.
Sikorsky is a global company primarily engaged in the research, design, development, manufacture and support of military and commercial helicopters. Sikorskys products include military helicopters such as the H-60 Black Hawk, MH-60R Seahawk,
CH-53K, H-92, and commercial helicopters such as the S-76 and S-92. The acquisition enables us to extend our core business into the military and commercial rotary wing markets, allowing us to strengthen our position in the aerospace and defense
industry. Further, this acquisition will expand our presence in commercial and international markets. Sikorsky has been aligned under our MST business segment.
To fund the $9.0 billion acquisition price, we utilized $6.0 billion of proceeds borrowed under our 364-day revolving credit facility (the 364-day
Facility), $2.0 billion of cash on hand and $1.0 billion from the issuance of commercial paper. In the fourth quarter of 2015, we repaid all outstanding borrowings under the 364-day Facility with the proceeds from the issuance of $7.0 billion
of fixed interest-rate long-term notes in a public offering (the November 2015 Notes). In the fourth quarter of 2015, we also repaid the $1.0 billion in commercial paper borrowings.
9
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Preliminary Allocation of Purchase Price to Assets Acquired and Liabilities Assumed
We accounted for the acquisition of Sikorsky as a business combination, which requires us to record the assets acquired and liabilities assumed at fair
value. The amount by which the purchase price exceeds the fair value of the net assets acquired is recorded as goodwill. We commenced the appraisals necessary to assess the fair values of the tangible and intangible assets acquired and
liabilities assumed and the amount of goodwill to be recognized as of the acquisition date. The amounts recorded for certain assets and liabilities are preliminary in nature and are subject to adjustment as additional information is obtained
about the facts and circumstances that existed as of the acquisition date. The final determination of the fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the acquisition date,
as permitted under GAAP. The size and breadth of the Sikorsky acquisition could necessitate the need to use the full one year measurement period to adequately analyze and assess a number of the factors used in establishing the asset and
liability fair values as of the acquisition date including contractual and operational factors underlying the customer programs intangible assets, the trademarks intangible asset, customer contractual obligations, inventories, receivables and
customer advances, and the assumptions underpinning certain program and legal reserves. The final values may also result in changes to amortization expense related to intangible assets. Any potential adjustments made could be material in
relation to the values presented in the table below.
During the quarter ended June 26, 2016 we continued to obtain information to refine estimated
fair values. As a result of the additional information the significant adjustments to the carrying amounts were as follows; deferred income tax assets and inventories were decreased by about $30 million and $10 million and goodwill was
increased by about $45 million. As a result of the additional information obtained during the first six months of 2016, the significant adjustments to the carrying amounts were as follows; inventories, customer programs intangible
assets and deferred income tax assets were reduced by about $60 million, $30 million, and $20 million, while the carrying amounts of the trademarks intangible asset, goodwill and customer advances and amounts in excess of costs incurred increased by
about $70 million, $45 million and $10 million, respectively. The measurement period adjustments did not result in a significant adjustment to amortization expense for intangible assets during the quarter or the six months ended June 26,
2016.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date,
including the refinements described in the previous paragraph (in millions):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
75
|
|
Receivables
|
|
|
1,921
|
|
Inventories
|
|
|
1,758
|
|
Other current assets
|
|
|
25
|
|
Property, plant and equipment
|
|
|
653
|
|
Goodwill
|
|
|
2,807
|
|
Intangible assets:
|
|
|
|
|
Customer programs
|
|
|
3,099
|
|
Trademarks
|
|
|
887
|
|
Other noncurrent assets
|
|
|
507
|
|
Deferred income tax assets
|
|
|
265
|
|
Total identifiable assets
and goodwill
|
|
|
11,997
|
|
Accounts payable
|
|
|
(565
|
)
|
Customer advances and amounts in excess of costs incurred
|
|
|
(1,229
|
)
|
Salaries, benefits and payroll taxes
|
|
|
(105
|
)
|
Other current liabilities
|
|
|
(344
|
)
|
Customer contractual obligations
(a)
|
|
|
(480
|
)
|
Other noncurrent liabilities
|
|
|
(158
|
)
|
Deferred income tax liabilities
(a)
|
|
|
(38
|
)
|
Total liabilities
assumed
|
|
|
(2,919
|
)
|
Total purchase price
|
|
$
|
9,078
|
|
(a)
|
Recorded in Other noncurrent liabilities on the consolidated balance sheets.
|
10
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Intangible assets related to customer programs were recognized for each major helicopter and
aftermarket program and represent the aggregate value associated with the customer relationships, contracts, technology and tradenames underlying the associated program. These intangible assets are being amortized on a straight-line basis over
a weighted-average useful life of approximately 15 years. The useful life is based on the period of expected cash flows used to measure the fair value of each of the intangible assets.
Customer contractual obligations represent liabilities on certain development programs where the expected costs exceed the expected sales under
contract. We measured these liabilities based on the price to transfer the obligation to a market participant at the measurement date, assuming that the liability will remain outstanding in the marketplace. Based on the estimated net cash
outflows of the developmental programs plus a reasonable contracting profit margin required to transfer the contracts to market participants, we recorded assumed liabilities of approximately $480 million. These liabilities will be liquidated in
accordance with the underlying economic pattern of the contractual obligations, as reflected by the estimated future net cash outflows incurred on the associated contracts. From the acquisition date through the period ended June 26, 2016, we
recognized approximately $50 million in sales related to customer contractual obligations. Estimated liquidation of the customer contractual obligations is approximated as follows: $40 million remaining in 2016, $90 million in 2017, $70 million
in 2018, $70 million in 2019, $70 million in 2020, $50 million in 2021 and $40 million thereafter.
The fair values of the assets acquired and
liabilities assumed were preliminarily determined using income, market and cost valuation methodologies. The fair value measurements were estimated using significant inputs that are not observable in the market and thus represent a Level 3
measurement as defined in Accounting Standards Codification (ASC) 820,
Fair Value Measurement
. The income approach was primarily used to value the customer programs and trademarks intangible assets. The income approach indicates
value for an asset or liability based on the present value of cash flows projected to be generated over the remaining economic life of the asset or liability being measured. Both the amount and the duration of the cash flows are considered from
a market participant perspective. Our estimates of market participant net cash flows considered historical and projected pricing, remaining developmental effort, operational performance including company-specific synergies, aftermarket
retention, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. Where appropriate, the net cash flows are adjusted to reflect the uncertainties associated with the underlying assumptions,
as well as the risk profile of the net cash flows utilized in the valuation. The adjusted future cash flows are then discounted to present value using an appropriate discount rate. Projected cash flow is discounted at a required rate of
return that reflects the relative risk of achieving the cash flows and the time value of money. The market approach is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or
comparable assets, liabilities, or a group of assets and liabilities. Valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. The cost approach, which estimates value by
determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for property, plant and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement
cost, less an allowance for loss in value due to depreciation.
The preliminary purchase price allocation resulted in the recognition of $2.8
billion of goodwill, all of which is expected to be amortizable for tax purposes. All of the goodwill was assigned to our MST business segment. The goodwill recognized is attributable to expected revenue synergies generated by the
integration of our products and technologies with those of Sikorsky, cost synergies resulting from the consolidation or elimination of certain functions, and intangible assets that do not qualify for separate recognition, such as the assembled
workforce of Sikorsky.
Determining the fair value of assets acquired and liabilities assumed requires the exercise of significant judgments,
including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The cash flows employed in the discounted cash flow analyses are based on our best estimate of future sales, earnings and cash flows after
considering factors such as general market conditions, customer budgets, existing firm orders, expected future orders, contracts with suppliers, labor agreements, changes in working capital, long term business plans and recent operating
performance. Use of different estimates and judgments could yield different results.
11
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Supplemental Pro Forma Financial Information (unaudited)
Sikorskys financial results have been included in our consolidated financial results for the periods subsequent to the November 6, 2015
acquisition date. The following table presents summarized unaudited pro forma financial information as if Sikorsky had been included in our financial results for the quarter and six months ended June 28, 2015 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
June 28, 2015
|
|
|
Six Months Ended
June 28, 2015
|
|
Net sales
|
|
|
$ 13,309
|
|
|
|
$ 24,653
|
|
Net earnings
|
|
|
935
|
|
|
|
1,777
|
|
Basic earnings per common share
|
|
|
3.00
|
|
|
|
5.66
|
|
Diluted earnings per common share
|
|
|
2.96
|
|
|
|
5.58
|
|
The unaudited supplemental pro forma financial data above have been calculated after applying our accounting policies
and adjusting the historical results of Sikorsky with pro forma adjustments, net of tax, that assume the acquisition occurred on January 1, 2014. Significant pro forma adjustments include the recognition of additional amortization expense
related to acquired intangible assets (based on our preliminary purchase accounting estimates) and additional interest expense related to the debt used to finance the majority of the Sikorsky purchase price. These adjustments assume the
Sikorsky acquisition and debt issued to finance most of the purchase price occurred on January 1, 2014. The adjustments include amortization expense of about $40 million and about $80 million and interest expense of about $45 million and
about $90 million for the quarter and six months ended June 28, 2015, respectively.
The unaudited supplemental pro forma financial information does
not reflect the realization of any expected ongoing revenue or cost synergies relating to the integration of the two companies. Further, the pro forma data should not be considered indicative of the results that would have occurred if the
acquisition, related financing and the associated notes issuance and repayment of the 364-day credit facility had been consummated on
January 1, 2014, nor are they
indicative of future results.
Planned Divestiture of the Information Systems & Global Solutions Business
On January 26, 2016, we entered into definitive agreements to separate and combine our IS&GS business with Leidos in a Reverse Morris Trust
transaction. The transaction will be structured such that initially the IS&GS business segment will be contributed to a newly formed wholly owned subsidiary, Abacus Innovations Corporation (Abacus), and the common stock of Abacus will be
distributed to Lockheed Martin stockholders either through a pro rata dividend in a spin-off transaction, an exchange offer pursuant to which Lockheed Martin shareholders will elect whether to exchange shares of Lockheed Martin common stock for
shares of Abacus common stock in a split-off transaction, or a combination split-off and spin-off transaction. Following the distribution, Abacus will merge with a subsidiary of Leidos and each share of Abacus common stock held by Lockheed Martin
stockholders will automatically convert into one share of Leidos common stock upon completing the merger. Immediately after the completion of the transactions, approximately 50.5% of the outstanding shares of Leidos common stock (approximately 77
million shares) are expected to be held by pre-merger Abacus (former Lockheed Martin) stockholders on a fully-diluted basis. Pre-merger Leidos stockholders are expected to hold approximately 49.5% of the outstanding shares of Leidos common
stock on a fully diluted basis. Lockheed Martin will not receive or hold any shares of Leidos common stock. As part of the transaction, we will also receive a one-time special cash payment of $1.8 billion.
On July 11, 2016 we announced that we had commenced an exchange offer in which Lockheed Martin stockholders have the opportunity, but are not required,
to exchange shares of Lockheed Martin common stock for shares of Abacus common stock, which will automatically convert into shares of Leidos common stock upon completion of the merger. Only those stockholders that elect to participate in the
exchange offer will receive shares of Leidos common stock in the merger transaction, provided that, if the exchange offer is not fully subscribed, we will distribute the remaining shares pro rata to all shares not tendered, and the shares
distributed will also be converted into Leidos common stock in the merger.
12
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
We retain the right to distribute the shares of Abacus common stock by means of a spin-off or split-off transaction until the exchange offer is completed. Both the exchange and merger are
expected to qualify as tax-free transactions to Lockheed Martin and its stockholders, except to the extent that cash is paid to Lockheed Martin stockholders in lieu of fractional shares.
The transactions remain subject to customary closing conditions, including approval by Leidos stockholders of the issuance of the Leidos shares in
the merger, regulatory approvals, the absence of a material adverse change with respect to each of IS&GS and Leidos, and the receipt of solvency opinions and opinions of tax counsel. The antitrust and competition reviews in the U.S. and the
U.K., which were each conditions to closing, have been completed. The transaction is expected to close in the third quarter of 2016.
Upon
completing the separation of the IS&GS business, we will classify the financial results of the IS&GS business as discontinued operations in our historical financial statements. We anticipate that the number of Lockheed Martins
outstanding shares of common stock will be reduced as a result of the exchange offer and also expect to recognize a significant gain on the transaction. The gain would represent the difference between the fair value of the shares of Lockheed Martin
common stock tendered by our stockholders over the carrying value of the net assets of the IS&GS business. Additionally, the gain will include the acceleration of deferred pension service credits. Any such gain will be included in the results of
discontinued operations. However, the value of the shares of Leidos stock to be received and the number of any shares of our stock retired in the exchange offer and the amount of any book gain will depend on the average trading price of Leidos and
Lockheed Martin common stock during an averaging period prior to the closing of the transaction (in the case of Leidos common stock, adjusted for the special dividend of $13.64 per share to be paid to Leidos stockholders in connection with the
transaction). However, there is no guarantee that the transaction will be structured as a split-off transaction or that it will result in a reduction in our shares or a gain at closing.
Other Divestitures
During the second quarter of 2016, we
completed the sale of Lockheed Martin Commercial Flight Training (LMCFT), which was classified as held for sale in the fourth quarter of 2015. LMCFTs financial results are not material and there was no significant impact on our consolidated
financial results as a result of completing the sale of LMCFT. Accordingly, LMCFTs financial results are not classified in discontinued operations.
NOTE 4 GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
|
IS&GS
|
|
|
MFC
|
|
|
MST
|
|
|
Space
Systems
|
|
|
Total
|
|
Balance at December 31, 2015
|
|
|
$ 171
|
|
|
|
$ 2,881
|
|
|
|
$ 2,198
|
|
|
|
$ 6,738
|
|
|
|
$ 1,588
|
|
|
|
$ 13,576
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
43
|
|
Divestitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
(13
|
)
|
|
|
(5
|
)
|
|
|
28
|
|
|
|
(1
|
)
|
|
|
9
|
|
Balance at June 26, 2016
|
|
|
$ 171
|
|
|
|
$ 2,868
|
|
|
|
$ 2,193
|
|
|
|
$ 6,802
|
|
|
|
$ 1,587
|
|
|
|
$ 13,621
|
|
13
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Acquired intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Finite-Lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer programs
|
|
|
$ 3,099
|
|
|
|
$ (145)
|
|
|
|
$ 2,954
|
|
|
|
$ 3,127
|
|
|
|
$ (38)
|
|
|
|
$ 3,089
|
|
Customer relationships
|
|
|
309
|
|
|
|
(167)
|
|
|
|
142
|
|
|
|
309
|
|
|
|
(166)
|
|
|
|
143
|
|
Other
|
|
|
171
|
|
|
|
(121)
|
|
|
|
50
|
|
|
|
171
|
|
|
|
(90)
|
|
|
|
81
|
|
Total finite-lived intangibles
|
|
|
3,579
|
|
|
|
(433)
|
|
|
|
3,146
|
|
|
|
3,607
|
|
|
|
(294)
|
|
|
|
3,313
|
|
Indefinite Lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
905
|
|
|
|
|
|
|
|
905
|
|
|
|
834
|
|
|
|
|
|
|
|
834
|
|
Total acquired intangibles
|
|
|
$ 4,484
|
|
|
|
$ (433)
|
|
|
|
$ 4,051
|
|
|
|
$ 4,441
|
|
|
|
$ (294)
|
|
|
|
$ 4,147
|
|
Acquired finite-lived intangible assets are amortized to expense over the following estimated useful lives: customer
programs from nine to 20 years, customer relationships from four to 10 years, other finite-lived intangible assets from two to 10 years. During the quarter and six months ended June 26, 2016, we continued to obtain information and refine the
appraisals of the fair values of intangible assets related to the Sikorsky acquisition. For further details on changes in intangible asset values (See Note 3).
Amortization expense for acquired finite-lived intangible assets was $70 million and $139 million for the quarter and six months ended June 26, 2016 and
$20 million and $41 million for the quarter and six months ended
June 28, 2015. Estimated future amortization expense is as follows: $139 million
remaining in 2016; $262 million in 2017; $248 million in 2018; $243 million in 2019; $236 million in 2020; $231 million in 2021 and $1.8 billion thereafter. Our estimates of amortization expense for finite-lived intangible assets are subject to
change, pending the final determination of the fair value of intangible assets acquired in connection with the Sikorsky acquisition (See Note 3).
NOTE 5 BUSINESS SEGMENTS INFORMATION
We operate in five business segments: Aeronautics, IS&GS, Missiles and Fire Control (MFC), MST and Space Systems. We
organize our business segments based on the nature of the products and services offered. The results of our MST business segment include the operations of Sikorsky since its November 6, 2015 acquisition date. Accordingly, the financial
results of Sikorsky operations are included in the financial results of our MST business segment for the quarter and six months ended June 26, 2016 but not for the quarter and six months ended June 28, 2015.
Net sales of our business segments exclude intersegment sales as these activities are eliminated in consolidation. Operating profit of our business
segments includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments. United Launch Alliance (ULA), which is
part of our Space Systems business segment, is our primary equity method investee. Operating profit of our business segments excludes the FAS/CAS pension adjustment described below; expense for stock-based compensation; the effects of items not
considered part of managements evaluation of segment operating performance, such as charges related to goodwill impairments and significant severance actions; gains or losses from divestitures; the effects of certain legal settlements;
corporate costs not allocated to our business segments; and other miscellaneous corporate activities. These items are included in the reconciling item Unallocated items between operating profit from our business segments and our
consolidated operating profit. See Note 10 (under the caption Changes in Estimates) for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.
14
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Our business segments results of operations include pension expense only as calculated under U.S.
Government Cost Accounting Standards (CAS), which we refer to as CAS pension cost. We recover CAS pension cost through the pricing of our products and services on U.S. Government contracts and, therefore, the CAS pension cost is recognized in each
of our business segments net sales and cost of sales. Since our consolidated financial statements must present pension expense calculated in accordance with the financial accounting standards (FAS) requirements under GAAP, which we refer to as
FAS pension expense, the FAS/CAS pension adjustment increases or decreases the CAS pension cost recorded in our business segments results of operations to equal the FAS pension expense.
Summary operating results for each of our business segments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
4,375
|
|
|
$
|
4,131
|
|
|
$
|
8,174
|
|
|
$
|
7,265
|
|
Information Systems & Global Solutions
|
|
|
1,337
|
|
|
|
1,408
|
|
|
|
2,671
|
|
|
|
2,798
|
|
Missiles and Fire Control
|
|
|
1,680
|
|
|
|
1,649
|
|
|
|
3,114
|
|
|
|
3,032
|
|
Mission Systems and Training
|
|
|
3,303
|
|
|
|
2,165
|
|
|
|
6,307
|
|
|
|
4,144
|
|
Space Systems
|
|
|
2,219
|
|
|
|
2,290
|
|
|
|
4,350
|
|
|
|
4,515
|
|
Total net sales
|
|
$
|
12,914
|
|
|
$
|
11,643
|
|
|
$
|
24,616
|
|
|
$
|
21,754
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
478
|
|
|
$
|
444
|
|
|
$
|
898
|
|
|
$
|
815
|
|
Information Systems & Global Solutions
|
|
|
151
|
|
|
|
107
|
|
|
|
260
|
|
|
|
252
|
|
Missiles and Fire Control
|
|
|
253
|
|
|
|
293
|
|
|
|
474
|
|
|
|
579
|
|
Mission Systems and Training
|
|
|
202
|
|
|
|
262
|
|
|
|
431
|
|
|
|
442
|
|
Space Systems
|
|
|
340
|
|
|
|
294
|
|
|
|
584
|
|
|
|
618
|
|
Total business segment operating profit
|
|
|
1,424
|
|
|
|
1,400
|
|
|
|
2,647
|
|
|
|
2,706
|
|
Unallocated items
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS/CAS pension adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS pension expense
|
|
|
(254)
|
|
|
|
(284)
|
|
|
|
(508)
|
|
|
|
(568)
|
|
Less: CAS pension cost
|
|
|
497
|
|
|
|
404
|
|
|
|
997
|
|
|
|
807
|
|
FAS/CAS pension adjustment
|
|
|
243
|
|
|
|
120
|
|
|
|
489
|
|
|
|
239
|
|
Stock-based compensation
|
|
|
(53)
|
|
|
|
(49)
|
|
|
|
(97)
|
|
|
|
(89)
|
|
Severance charges
|
|
|
|
|
|
|
|
|
|
|
(99)
|
|
|
|
|
|
Other, net
|
|
|
(48)
|
|
|
|
(26)
|
|
|
|
(77)
|
|
|
|
(55)
|
|
Total unallocated items
|
|
|
142
|
|
|
|
45
|
|
|
|
216
|
|
|
|
95
|
|
Total consolidated operating profit
|
|
$
|
1,566
|
|
|
$
|
1,445
|
|
|
$
|
2,863
|
|
|
$
|
2,801
|
|
|
|
|
|
Intersegment sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
39
|
|
|
$
|
26
|
|
|
$
|
74
|
|
|
$
|
46
|
|
Information Systems & Global Solutions
|
|
|
29
|
|
|
|
3
|
|
|
|
53
|
|
|
|
5
|
|
Missiles and Fire Control
|
|
|
69
|
|
|
|
81
|
|
|
|
144
|
|
|
|
155
|
|
Mission Systems and Training
|
|
|
462
|
|
|
|
384
|
|
|
|
907
|
|
|
|
703
|
|
Space Systems
|
|
|
36
|
|
|
|
35
|
|
|
|
69
|
|
|
|
68
|
|
Total intersegment sales
|
|
$
|
635
|
|
|
$
|
529
|
|
|
$
|
1,247
|
|
|
$
|
977
|
|
15
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Total assets for each of our business segments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 26,
2016
|
|
|
December 31,
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
$
|
7,768
|
|
|
$
|
6,618
|
|
Information Systems & Global Solutions
|
|
|
4,103
|
|
|
|
4,206
|
|
Missiles and Fire Control
|
|
|
4,003
|
|
|
|
4,027
|
|
Mission Systems and Training
|
|
|
19,008
|
|
|
|
19,187
|
|
Space Systems
|
|
|
5,056
|
|
|
|
4,861
|
|
Total business segment assets
|
|
|
39,938
|
|
|
|
38,899
|
|
Corporate assets
(a)
|
|
|
10,470
|
|
|
|
10,229
|
|
Total assets
|
|
$
|
50,408
|
|
|
$
|
49,128
|
|
(a)
|
Corporate assets primarily include cash and cash equivalents, deferred income taxes, environmental receivables and investments held in a separate trust to fund
certain of our non-qualified deferred compensation plans.
|
Our Aeronautics business segment includes our largest program, the F-35
Lightning II Joint Strike Fighter, an international multi-role, multi-variant, stealth fighter aircraft. Net sales for the F-35 program represented approximately 21% and 20% of our total consolidated net sales for the quarter and six months
ended June 26, 2016 and 20% and 19% of our total consolidated net sales for the quarter and six months ended June 28, 2015.
NOTE 6 INVENTORIES, NET
Inventories, net consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 26,
2016
|
|
|
December 31,
2015
|
|
Work-in-process, primarily related to long-term contracts and programs in progress
|
|
$
|
8,996
|
|
|
$
|
8,199
|
|
Less: customer advances and progress payments
|
|
|
(5,345)
|
|
|
|
(5,035)
|
|
|
|
|
3,651
|
|
|
|
3,164
|
|
Other inventories
|
|
|
1,485
|
|
|
|
1,798
|
|
Total inventories, net
|
|
$
|
5,136
|
|
|
$
|
4,962
|
|
16
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
NOTE 7 POSTRETIREMENT BENEFIT PLANS
Our pretax net periodic benefit cost related to our qualified defined benefit pension plans and retiree medical and life insurance
plans consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Qualified defined benefit pension plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
$ 212
|
|
|
|
$ 218
|
|
|
|
$ 424
|
|
|
|
$ 435
|
|
Interest cost
|
|
|
466
|
|
|
|
447
|
|
|
|
931
|
|
|
|
895
|
|
Expected return on plan assets
|
|
|
(666)
|
|
|
|
(683)
|
|
|
|
(1,333)
|
|
|
|
(1,367)
|
|
Recognized net actuarial losses
|
|
|
339
|
|
|
|
400
|
|
|
|
679
|
|
|
|
800
|
|
Amortization of prior service (credits) costs
|
|
|
(97)
|
|
|
|
(98)
|
|
|
|
(193)
|
|
|
|
(195)
|
|
Total net periodic benefit cost
|
|
|
$ 254
|
|
|
|
$ 284
|
|
|
|
$ 508
|
|
|
|
$ 568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree medical and life insurance plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
$ 6
|
|
|
|
$ 5
|
|
|
|
$ 12
|
|
|
|
$ 10
|
|
Interest cost
|
|
|
29
|
|
|
|
27
|
|
|
|
59
|
|
|
|
55
|
|
Expected return on plan assets
|
|
|
(35)
|
|
|
|
(37)
|
|
|
|
(69)
|
|
|
|
(74)
|
|
Recognized net actuarial losses
|
|
|
9
|
|
|
|
11
|
|
|
|
17
|
|
|
|
22
|
|
Amortization of prior service costs
|
|
|
6
|
|
|
|
1
|
|
|
|
11
|
|
|
|
2
|
|
Total net periodic benefit cost
|
|
|
$ 15
|
|
|
|
$ 7
|
|
|
|
$ 30
|
|
|
|
$ 15
|
|
The recognized net actuarial losses and the amortization of net prior service (credits) costs in the table above, as
well as similar amounts related to our other postretirement benefit plans ($10 million and $21 million during the quarter and six months ended June 26, 2016 and $15 million and $28 million for the quarter and six months ended June 28, 2015), include
amounts that were reclassified from accumulated other comprehensive loss (AOCL) and recorded as a component of net periodic benefit cost for the periods presented. These costs totaled $173 million (net of $94 million of tax expense) and $346
million (net of $189 million of tax expense) for the quarter and six months ended June 26, 2016 and $213 million (net of $116 million of tax expense) and $425 million (net of $232 million of tax expense) for the quarter and six months ended June 28,
2015, which were recorded on our Statements of Comprehensive Income as an increase to other comprehensive income.
The funding of our qualified
defined benefit pension plans is determined in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection Act of 2006 (PPA), and in a manner consistent with CAS and Internal Revenue Code
rules. There were no contributions to our qualified defined benefit pension plans during the quarters and six months ended June 26, 2016 and June 28, 2015, other than insignificant contributions to the pension plans we assumed in the Sikorsky
acquisition. We do not plan to make contributions to our pension plans in 2016 or 2017, other than insignificant contributions to the pension plans we assumed in the Sikorsky acquisition, because none are required using current assumptions,
including anticipated investment returns on plan assets.
17
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
NOTE 8 LEGAL PROCEEDINGS AND CONTINGENCIES
We are a party to or have property subject to litigation and other proceedings that arise in the ordinary course of our business,
including matters arising under provisions relating to the protection of the environment and are subject to contingencies related to certain businesses we previously owned. These types of matters could result in fines, penalties, compensatory
or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal proceedings described below, will have a material adverse effect on the Corporation as a
whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular interim reporting period. Among the factors that we consider in this assessment are the nature of existing
legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and
the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim. Our assessment of these factors may change as individual proceedings or claims progress.
Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may
have been incurred, GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We follow a thorough process in which we seek to estimate the reasonably
possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion of legal proceedings, a reasonably
possible loss or range of loss associated with any individual legal proceeding cannot be estimated.
Legal Proceedings
As a result of our acquisition of Sikorsky, we assumed the defense of and any potential liability for the following civil False Claims Act lawsuit. In
October 2014, the U.S. Government filed a complaint in the U.S. District Court for the Eastern District of Wisconsin alleging that Sikorsky and two of its wholly-owned subsidiaries, Derco Aerospace (Derco) and Sikorsky Support Services, Inc. (SSSI),
violated the civil False Claims Act in connection with a contract that the U.S. Navy awarded to SSSI in June 2006 to support the Navys T-34 and T-44 fixed-wing turboprop training aircraft. SSSI subcontracted with Derco primarily to
procure and manage the spare parts for the training aircraft. The Government alleges that SSSI overbilled the Navy on the contract because Derco added profit and overhead costs to the price of the spare parts that Derco procured and then sold to
SSSI. The Government also claims that SSSI submitted false Certificates of Final Indirect Costs in the years 2006 through 2012.
The
Governments complaint asserts numerous claims for violations of the False Claims Act, breach of contract and unjust enrichment. In a late April 2015 court filing, the Government disclosed that it seeks damages of approximately
$45 million, subject to trebling, plus statutory penalties of approximately $13 million, all totaling approximately $148 million. We believe that we have legal and factual defenses to the governments claims. Although we continue to
evaluate our liability and exposure, we do not currently believe that it is probable that we will incur a material loss. If, contrary to our expectations, the Government prevails in this matter and proves damages at the high end of the range sought
and is successful in having these trebled, the outcome could have an adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
18
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
On April 24, 2009, we filed a declaratory judgment action against the New York Metropolitan
Transportation Authority and its Capital Construction Company (collectively, the MTA) asking the U.S. District Court for the Southern District of New York to find that the MTA is in material breach of our agreement based on the MTAs failure to
provide access to sites where work must be performed and the customer-furnished equipment necessary to complete the contract. The MTA filed an answer and counterclaim alleging that we breached the contract and subsequently terminated the contract
for alleged default. The primary damages sought by the MTA are the cost to complete the contract and potential re-procurement costs. While we are unable to estimate the cost of another contractor completing the contract and the costs of
re-procurement, we note that our contract with the MTA had a total value of $323 million, of which $241 million was paid to us, and that the MTA is seeking damages of approximately $190 million. We dispute the MTAs allegations and are
defending against them. Additionally, following an investigation, our sureties on a performance bond related to this matter, who were represented by independent counsel, concluded that the MTAs termination of the contract was improper.
Finally, our declaratory judgment action was later amended to include claims for monetary damages against the MTA of approximately $95 million. This matter was taken under submission by the District Court in December 2014, after a five-week bench
trial and the filing of post-trial pleadings by the parties. We expect a decision in 2016.
Environmental Matters
We are involved in environmental proceedings and potential proceedings relating to soil, sediment and groundwater contamination, disposal of hazardous
waste and other environmental matters at several of our current or former facilities or at third-party sites where we have been designated as a potentially responsible party (PRP). A substantial portion of environmental costs will be included
in our net sales and cost of sales in future periods pursuant to U.S. Government regulations. At the time a liability is recorded for future environmental costs, we record a receivable for estimated future recovery considered probable through
the pricing of products and services to agencies of the U.S. Government, regardless of the contract form (e.g., cost-reimbursable, fixed-price). We continuously evaluate the recoverability of our environmental receivables by assessing,
among other factors, U.S. Government regulations, our U.S. Government business base and contract mix and our history of receiving reimbursement of such costs. We include the portion of those environmental costs expected to be allocated to our
non-U.S. Government contracts, or that is determined to not be recoverable under U.S. Government contracts, in our cost of sales at the time the liability is established.
At both June 26, 2016 and December 31, 2015, the aggregate amount of liabilities recorded relative to environmental matters was $1.0 billion, most of
which are recorded in other noncurrent liabilities on our Balance Sheets. We have recorded receivables totaling $897 million and $858 million at June 26, 2016 and December 31, 2015, most of which are recorded in other noncurrent assets on our
Balance Sheets, for the estimated future recovery of these costs, as we consider the recovery probable based on the factors previously mentioned. We project costs and recovery of costs over approximately 20 years.
We also are pursuing claims for recovery of costs incurred or contribution to site cleanup costs against other PRPs, including the U.S. Government, and
are conducting remediation activities under various consent decrees and orders relating to soil, groundwater, sediment or surface water contamination at certain sites of former or current operations. Under an agreement related to our Burbank and
Glendale, California, sites, the U.S. Government reimburses us an amount equal to approximately 50% of expenditures for certain remediation activities in its capacity as a PRP under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA).
On July 1, 2014, a regulation became effective in California setting the maximum level of the contaminant hexavalent
chromium in drinking water at 10 parts per billion (ppb). In May 2014, the California Manufacturers and Technology Association filed a suit alleging the 10 ppb threshold is lower than is required to protect public health and thus imposes
unjustified costs on the regulated community. We cannot predict the outcome of this suit or whether other challenges may be advanced by the regulated community or environmental groups which had sought a significantly higher and lower standard,
respectively. If the new standard remains at 10 ppb, it will not have a material impact on our existing remediation costs in California.
19
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
In addition, California is reevaluating its existing drinking water standard with respect to a second
contaminant, perchlorate, and the U.S. Environmental Protection Agency (U.S. EPA) is also considering whether to regulate perchlorate and hexavalent chromium in drinking water. In February 2016, the Natural Resources Defense Council filed suit
in federal court in New York against the U.S. EPA to compel the U.S. EPA to set an enforceable drinking water standard for perchlorate. If a substantially lower standard is adopted, in either California or at the federal level, for perchlorate,
or if the U.S. EPA were to adopt a standard for hexavalent chromium lower than 10 ppb, we expect a material increase in our estimates for environmental liabilities and the related assets for the portion of the increased costs that are probable of
future recovery in the pricing of our products and services for the U.S. Government. The amount that would be allocable to our non-U.S. Government contracts or that is determined to not be recoverable under U.S. Government contracts would be
expensed, which may have a material effect on our earnings in any particular interim reporting period.
Letters of Credit, Surety Bonds and Third-Party
Guarantees
We have entered into standby letters of credit, surety bonds and third-party guarantees with financial institutions and other third
parties primarily relating to advances received from customers and the guarantee of future performance on certain contracts. Letters of credit and surety bonds generally are available for draw down in the event we do not perform. In some
cases, we may guarantee the contractual performance of third parties such as ventures in which we participate or venture partners. We had total outstanding letters of credit, surety bonds and third-party guarantees aggregating $3.9 billion and
$3.8 billion at June 26, 2016 and December 31, 2015. We do not consider guarantees of subsidiaries and other consolidated entities to be third-party guarantees and they are not included in this figure.
At June 26, 2016 and December 31, 2015, third-party guarantees totaled $679 million and $678 million, of which approximately 78% and 79% related to
guarantees of contractual performance of ventures to which we currently are or previously were a party. This amount represents our estimate of the maximum amount we would expect to incur upon the contractual non-performance of the venture or
the venture partners. In addition, we generally have cross-indemnities in place that may enable us to recover amounts that may be paid on behalf of a venture partner. We believe our current and former venture partners will be
able to perform their obligations, as they have done through June 26, 2016, and that it will not be necessary to make significant payments under the third-party guarantees with respect to the non-performance of the venture partners. In
determining our exposures, we evaluate the reputation, performance on contractual obligations, technical capabilities and credit quality of our current and former venture partners. There were no material amounts recorded in our financial
statements related to third-party guarantees.
United Launch Alliance
In connection with our 50% ownership interest of ULA, we and The Boeing Company (Boeing) are required to provide ULA an additional capital contribution
if ULA is unable to make required payments under its inventory supply agreement with Boeing. As of June 26, 2016, ULAs total remaining obligation to Boeing under the inventory supply agreement was $120 million. The parties have agreed to defer
the remaining payment obligation, as it is more than offset by other commitments to ULA. Accordingly, we do not expect to be required to make a capital contribution to ULA under this agreement.
In addition, both we and Boeing have cross-indemnified each other for guarantees by us and Boeing of the performance and financial obligations of ULA
under certain launch service contracts. We believe ULA will be able to fully perform its obligations, as it has done through June 26, 2016, and that it will not be necessary to make payments under the cross-indemnities or guarantees.
20
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
NOTE 9 FAIR VALUE MEASUREMENTS
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2016
|
|
|
December 31, 2015
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
74
|
|
|
$
|
74
|
|
|
$
|
|
|
|
$
|
89
|
|
|
$
|
89
|
|
|
$
|
|
|
Mutual funds
|
|
|
712
|
|
|
|
712
|
|
|
|
|
|
|
|
745
|
|
|
|
745
|
|
|
|
|
|
U.S. Government securities
|
|
|
131
|
|
|
|
|
|
|
|
131
|
|
|
|
119
|
|
|
|
|
|
|
|
119
|
|
Other securities
|
|
|
155
|
|
|
|
|
|
|
|
155
|
|
|
|
147
|
|
|
|
|
|
|
|
147
|
|
Derivatives
|
|
|
73
|
|
|
|
|
|
|
|
73
|
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
58
|
|
|
|
|
|
|
|
58
|
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
Substantially all assets measured at fair value, other than derivatives, represent investments classified as trading
securities held in a separate trust to fund certain of our non-qualified deferred compensation plans and are recorded in other noncurrent assets on our Balance Sheets. The fair values of equity securities and mutual funds are determined by
reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs. The fair values of U.S. Government and other securities are determined using pricing models that
use observable inputs (e.g., interest rates and yield curves observable at commonly quoted intervals), bids provided by brokers or dealers or quoted prices of securities with similar characteristics. The fair values of derivative instruments,
which consist of foreign currency exchange forward and interest rate swap contracts, primarily are determined based on the present value of future cash flows using model-derived valuations that use observable inputs such as interest rates, credit
spreads and foreign currency exchange rates. We did not have any transfers of assets or liabilities between levels of the fair value hierarchy during the six months ended June 26, 2016.
We use derivative instruments principally to reduce our exposure to market risks from changes in foreign currency exchange rates and interest
rates. We do not enter into or hold derivative instruments for speculative trading purposes. We transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into foreign currency
hedges such as forward and option contracts that change in value as foreign currency exchange rates change. These contracts hedge forecasted foreign currency transactions in order to mitigate fluctuations in our earnings and cash flows
associated with changes in foreign currency exchange rates. We designate foreign currency hedges as cash flow hedges. We also are exposed to the impact of interest rate changes primarily through our borrowing activities. For fixed
rate borrowings, we may use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings in order to reduce the amount of interest paid. These swaps are designated as fair value hedges. For
variable rate borrowings, we may use fixed interest rate swaps, effectively converting variable rate borrowings to fixed rate borrowings in order to mitigate the impact of interest rate changes on earnings. These swaps are designated as cash
flow hedges. We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are intended to mitigate certain economic exposures.
The aggregate notional amount of our outstanding interest rate swaps at June 26, 2016 and December 31, 2015 was $1.0 billion and $1.5 billion. The
aggregate notional amount of our outstanding foreign currency hedges at June 26, 2016 and December 31, 2015 was $4.6 billion and $4.1 billion. Derivative instruments did not have a material impact on net earnings and comprehensive
income during the quarters and six months periods ended June 26, 2016 and June 28, 2015. Substantially all of our derivatives are designated for hedge accounting.
21
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
In addition to the financial instruments listed in the table above, we hold other financial
instruments, including cash and cash equivalents, receivables, accounts payable and debt. The carrying amounts for cash and cash equivalents, receivables and accounts payable approximated their fair values. The estimated fair value of our
outstanding debt was $17.4 billion and $16.5 billion at June 26, 2016 and December 31, 2015 and the outstanding principal amount was $15.8 billion and $16.2 billion at June 26, 2016 and December 31, 2015, excluding unamortized discounts and
deferred financing costs of $1.0 billion at both June 26, 2016 and December 31, 2015. The estimated fair values of our outstanding debt were determined based on quoted prices for similar instruments in active markets (Level 2).
NOTE 10 OTHER
Changes in Estimates
Accounting for
contracts using the percentage-of-completion method requires judgment relative to assessing risks, estimating contract sales and costs (including estimating award and incentive fees and penalties related to performance) and making assumptions for
schedule and technical issues. Due to the number of years it may take to complete many of our contracts and the scope and nature of the work required to be performed on those contracts, the estimation of total sales and costs at completion is
complicated and subject to many variables and, accordingly is subject to change. When adjustments in estimated total contract sales or estimated total costs are required, any changes from prior estimates are recognized in the current period for
the inception-to-date effect of such changes. When estimates of total costs to be incurred on a contract exceed estimates of total sales to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss
is determined.
Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract, we identify
and monitor risks to the achievement of the technical, schedule and cost aspects of the contract and assess the effects of those risks on our estimates of total costs to complete the contract. The estimates consider the technical requirements (e.g.,
a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead and the estimated costs to fulfill our industrial
cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical
requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost
aspects of the contract which decreases the estimated total costs to complete the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase. All of the estimates are subject to change
during the performance of the contract and may affect the profit booking rate.
Comparability of our segment sales, operating profit and operating
margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts accounted for using the percentage-of-completion method of accounting. Increases in the profit booking rates, typically referred to as risk
retirements, usually relate to revisions in the estimated total costs that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate resulting in an increase in the estimated total costs to
complete and a reduction in the profit booking rate. Segment operating profit and margins may also be impacted favorably or unfavorably by other items. Favorable items may include the positive resolution of contractual matters, cost recoveries on
restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring charges, except for significant severance actions which are excluded from segment
operating results; reserves for disputes; asset impairments; and losses on sales of assets.
22
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments
and other matters, increased segment operating profit by approximately $435 million and $840 million in the quarter and six months ended June 26, 2016 and $550 million and $1.0 billion in the quarter and six months ended June 28, 2015. These
adjustments increased net earnings by approximately $280 million ($0.91 per share) and $545 million ($1.77 per share) in the quarter and six months ended June 26, 2016 and $355 million ($1.12 per share) and $675 million ($2.12 per share) in the
quarter and six months ended June 28, 2015.
Long-Term Debt Repayment
In May 2016, we repaid $452 million of long-term notes with a fixed interest rate of 7.65% according to their scheduled maturities. We also had related
variable interest rate swaps with a notional amount of $450 million mature, which did not have a significant impact on net earnings or comprehensive income.
February 2015 Debt Issuance
On February 20, 2015, we issued
$2.25 billion of notes (the February 2015 Notes) in a registered public offering. The February 2015 Notes consist of $750 million maturing in 2025 with a fixed interest rate of 2.90%, $500 million maturing in 2035 with a fixed interest rate of
3.60% and $1.0 billion maturing in 2045 with a fixed interest rate of 3.80%.
Restructuring Charges
2016 Actions
During the first quarter of 2016, we recorded
severance charges totaling approximately $99 million, of which $80 million related to our Aeronautics business segment and $19 million related to our IS&GS business segment. The charges consisted of severance costs associated with the
planned elimination of certain positions through either voluntary or involuntary actions. Upon separation, terminated employees will receive lump-sum severance payments primarily based on years of service, the majority of which are expected to
be paid by the end of 2016. As of June 26, 2016, we have paid approximately $34 million in severance payments associated with these actions, substantially all of which was paid during the quarter ended June 26, 2016.
2015 Actions
During the third and fourth quarters of 2015,
we recorded severance charges totaling $102 million, of which $67 million related to our MST business segment and $35 million related to our IS&GS business segment (prior to our fourth quarter 2015 program realignment). The charges
consisted of severance costs associated with the planned elimination of certain positions through either voluntary or involuntary actions. Upon separation, terminated employees will receive lump-sum severance payments primarily based on years
of service, the majority of which are expected to be paid over the next several quarters. As of June 26, 2016, we have paid approximately $49 million in severance payments associated with these actions, of which approximately $17 million was
paid in the quarter ended June 26, 2016.
In connection with the Sikorsky acquisition, we assumed obligations related to certain restructuring
actions committed to by Sikorsky in June 2015. Net of amounts we anticipate to recover through the pricing of our products and services to our customers, we also expect to incur an additional $40 million of costs in 2016 related to these
actions. During the six months ended June 26, 2016 we incurred about $15 million of costs and the remaining $25 million are expected to be incurred during the second half of 2016.
We expect to recover a substantial amount of the restructuring charges through the pricing of our products and services to the U.S. Government and other
customers in future periods, with the impact included in the respective business segments results of operations.
23
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Income Taxes
Our effective income tax rates were 27.1% and 24.3% for the quarter and six months ended June 26, 2016 and 30.8% and 30.7% for the quarter and six
months ended June 28, 2015. The rates for both periods benefited from tax deductions for U.S. manufacturing activities and for dividends paid to our defined contribution plans with an employee stock ownership plan feature. The rates in the quarter
and six months ended June 26, 2016 also benefited from the research and development tax credit, which was permanently extended and reinstated in the fourth quarter of 2015, and from additional tax benefits related to employee share-based payment
awards which are now recorded as income tax benefit or expense in earnings effective with the adoption of an accounting standard update during the quarter ended June 26, 2016. We early adopted the accounting standard update during the second quarter
of 2016 and are therefore required to report the impacts as though the accounting standard update had been adopted on January 1, 2016. Accordingly, we recognized additional income tax benefits of $11 million and $115 million during the quarter and
six months ended June 26, 2016. The adjustments for the second quarter included only the quarterly impacts, whereas the adjustments for the first six months of 2016 include the second quarter impacts and the reclassification of income tax benefits
of $104 million originally recognized in additional paid-in capital and cash flows from financing activities in the first quarter of 2016.
Stockholders
Equity
Repurchases of Common Stock
During the six
months ended June 26, 2016, we repurchased 4.5 million shares of our common stock for $1.0 billion. The total remaining authorization for future common share repurchases under our share repurchase program was $2.6 billion as of June 26, 2016.
As we repurchase our common shares, we reduce common stock for the $1 of par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in capital. If additional paid-in capital is
reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings.
Dividends
We declared cash dividends totaling $1.0 billion ($3.30 per share) and $1.5 billion ($4.95 per share) during the quarter and six months ended June 26,
2016. The 2016 dividend amounts include the declaration of our 2016 third quarter dividend of $1.65 per share, which totaled $503 million. We declared cash dividends totaling $942 million ($3.00 per share) and $1.4 billion ($4.50 per
share) during the quarter and six months ended June 28, 2015. The 2015 dividend amounts include the declaration of our 2015 third quarter dividend of ($1.50 per share), which totaled $471 million.
Restricted Stock Unit Grants
During the three months ended
June 26, 2016, there were no significant grants of restricted stock units (RSUs). During the six months ended June 26, 2016, we granted certain employees approximately 0.7 million RSUs with a grant-date fair value of $206.69 per RSU. The grant-date
fair value of these RSUs is equal to the closing market price of our common stock on the grant date less a discount to reflect the delay in payment of dividend-equivalent cash payments that are made only upon vesting, which is generally three years
from the grant date. We recognize the grant-date fair value of RSUs, less estimated forfeitures, as compensation expense ratably over the requisite service period, which is shorter than the vesting period if the employee is retirement eligible on
the date of grant or will become retirement eligible before the end of the vesting period.
24
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Accumulated Other Comprehensive Loss
Changes in the balance of AOCL, net of tax, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Benefit Plans
|
|
|
Other, net
|
|
|
AOCL
|
|
Balance at December 31, 2015
|
|
$
|
(11,314)
|
|
|
$
|
(130)
|
|
|
$
|
(11,444)
|
|
Other comprehensive loss before reclassifications
|
|
|
|
|
|
|
(7)
|
|
|
|
(7)
|
|
Amounts reclassified from AOCL
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of net actuarial losses
(a)
|
|
|
469
|
|
|
|
|
|
|
|
469
|
|
Amortization of net prior service credits
(a)
|
|
|
(123)
|
|
|
|
|
|
|
|
(123)
|
|
Other
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Total reclassified from AOCL
|
|
|
346
|
|
|
|
(6)
|
|
|
|
340
|
|
Total other comprehensive income (loss)
|
|
|
346
|
|
|
|
(6)
|
|
|
|
340
|
|
Balance at June 26, 2016
|
|
$
|
(10,968)
|
|
|
$
|
(136)
|
|
|
$
|
(11,104)
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
(11,813)
|
|
|
$
|
(57)
|
|
|
$
|
(11,870)
|
|
Other comprehensive loss before reclassifications
|
|
|
|
|
|
|
(11)
|
|
|
|
(11)
|
|
Amounts reclassified from AOCL
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of net actuarial losses
(a)
|
|
|
554
|
|
|
|
|
|
|
|
554
|
|
Amortization of net prior service credits
(a)
|
|
|
(129)
|
|
|
|
|
|
|
|
(129)
|
|
Total reclassified from AOCL
|
|
|
425
|
|
|
|
|
|
|
|
425
|
|
Total other comprehensive income (loss)
|
|
|
425
|
|
|
|
(11)
|
|
|
|
414
|
|
Balance at June 28, 2015
|
|
$
|
(11,388)
|
|
|
$
|
(68)
|
|
|
$
|
(11,456)
|
|
(a)
|
Reclassifications from AOCL, net of tax, related to our postretirement benefit plans were recorded as a component of net periodic benefit cost for each period presented (Note 7). These amounts include $173 million
and $213 million for the quarters ended June 26, 2016 and June 28, 2015, which are comprised of the recognition of net actuarial losses of $235 million and $277 million for the quarters ended June 26, 2016 and June 28, 2015 and the amortization
of net prior service (credits) costs of $(62) million and $(64) million for the quarters ended June 26, 2016 and June 28, 2015.
|
25
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with
Customers
, as amended (
Topic
606
): that will change the way we recognize revenue and significantly expand the disclosure requirements for revenue arrangements. In July 2015, the FASB approved a one-year deferral of the effective
date of the ASU to 2018 for public companies, with an option that would permit companies to adopt the ASU in 2017. Early adoption prior to 2017 is not permitted. This ASU may be adopted either retrospectively or on a modified retrospective basis
whereby the ASU would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment recorded to beginning retained earnings at the effective date for
existing contracts with remaining performance obligations. We are currently evaluating the methods of adoption allowed by the ASU and the effect the ASU is expected to have on our consolidated financial statements and related disclosures. As the ASU
will supersede substantially all existing revenue guidance affecting us under GAAP, it could impact revenue and cost recognition on thousands of contracts across all our business segments, in addition to our business processes and our information
technology systems. As a result, our evaluation of the effect of the ASU will extend over future periods.
In February 2016, the FASB issued ASU No.
2016-02,
Leases
(
Topic 842
): that increases transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing
arrangements for both lessees and lessors. The ASU is effective January 1, 2019 for public companies, with early adoption permitted. The ASU will be applied using a modified retrospective approach to the beginning of the earliest period presented in
the financial statements. We are currently evaluating when we will adopt the ASU and the expected impact to our consolidated financial statements and related disclosures.
On March 30, 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting
, which changed the accounting for certain aspects of employee share-based payments. The ASU requires companies to recognize additional tax benefits or expenses related to the vesting or settlement of employee share-based awards (the
difference between the actual benefit for tax purposes and the tax benefit initially recognized for financial reporting purposes) as income tax benefit or expense in earnings, rather than in additional paid-in capital, in the reporting period in
which they occur. The ASU also requires companies to classify cash flows resulting from employee share-based payments, including the additional tax benefits or expenses related to the vesting or settlement of share-based awards, as cash flows from
operating activities rather than financing activities. Although this change will reduce some of the administrative complexities of tracking share-based awards, it will increase the volatility of our income tax expense and cash flows from operations.
The new standard is effective for annual reporting periods beginning after December 15, 2016, with early adoption permitted. We early adopted the ASU during the second quarter of 2016 and are therefore required to report the impacts as though the
ASU had been adopted on January 1, 2016. Accordingly, we recognized additional income tax benefits as an increase to earnings of $11 million ($0.04 per share) and $115 million ($0.37 per share) during the quarter and six months ended June 26, 2016.
Additionally, we recognized additional income tax benefits as an increase to operating cash flows of $11 million and $115 million during the quarter and six months ended June 26, 2016. The adjustments for the second quarter included only the
quarterly impacts, whereas the adjustments for the first six months of 2016 include the second quarter impacts and the reclassification of income tax benefits of $104 million originally recognized in additional paid-in capital and cash flows from
financing activities in the first quarter of 2016. The new accounting standard did not impact any periods prior to January 1, 2016, as we applied the changes in the ASU on a prospective basis.
26
Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)
In September 2015, the FASB issued ASU No. 2015-16
, Business Combinations
(
Topic 805
): that simplifies the accounting for adjustments made to preliminary amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. Instead, adjustments will be
recognized in the period in which the adjustments are determined, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. We adopted the ASU
on January 1, 2016 and are prospectively applying the ASU to business combination adjustments identified after the date of adoption.
In November
2015, the FASB issued ASU No. 2015-17,
Income Taxes
(
Topic 740
); that simplifies the presentation of deferred income taxes and requires that deferred tax assets and liabilities, as well as any related valuation allowance, be classified
as noncurrent in our consolidated balance sheets. We applied the provisions of the ASU retrospectively and reclassified approximately $1.6 billion from current to noncurrent assets and approximately $140 million from current to noncurrent
liabilities in our consolidated balance sheet as of December 31, 2015.
27
R
eview Report of Ernst & Young LLP,
Independent Registered Public Accounting Firm
Board of
Directors
Lockheed Martin Corporation
We have reviewed the consolidated
balance sheet of Lockheed Martin Corporation as of June 26, 2016, and the related consolidated statements of earnings and comprehensive income for the quarters and six months ended June 26, 2016 and June 28, 2015, and the consolidated statements of
cash flows and stockholders equity for the six months ended June 26, 2016 and June 28, 2015. These financial statements are the responsibility of the Corporations management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information
consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in
conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Lockheed Martin Corporation as of December 31, 2015, and the related consolidated statements of earnings, comprehensive income, cash flows, and stockholders equity for the year
then ended (not presented herein), and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated February 24, 2016. In our opinion, the accompanying consolidated balance sheet as of December 31, 2015,
is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
McLean, Virginia
July 20, 2016
28
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
BUSINESS OVERVIEW
We are a global
security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We also provide a broad range of management, engineering,
technical, scientific, logistics and information services. We serve both U.S. and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S.
Government. In 2015, 78% of our $46.1 billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 58% from the Department of Defense (DoD)), 21% were from international customers (including
foreign military sales (FMS) contracted through the U.S. Government) and 1% were from U.S. commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security and information technology, including
cybersecurity.
On January 26, 2016, we entered into definitive agreements to separate and combine our Information Systems & Global Solutions
(IS&GS) business segment with Leidos Holdings, Inc. (Leidos) in a Reverse Morris Trust transaction. The transaction is expected to close in the third quarter of 2016. Until closing, IS&GS will continue to operate as a business segment and
financial results for the IS&GS business segment will be reported in our continuing operations. See Note 3 under the caption Planned Divestiture of the Information Systems & Global Solutions Business for an update regarding the
state of the transaction.
Our 2016 outlook currently includes amounts for the government IT infrastructure services and technical services
businesses we expect to divest. The 2016 outlook will not be adjusted to exclude these business until a divestiture is completed. We expect 2016 net sales will increase in the high single to low-double digit range from 2015 levels. The projected
growth is driven by the addition of Sikorsky Aircraft and increased volume expected on the F-35 program, partially offset by volume declines in three of our five business segments. We expect our 2016 segment operating profit will decline in
mid-single digit range from 2015 levels due to an expected decrease in segment operating profit at three of the five business segments. Accordingly, we expect 2016 segment operating profit margin will be below the 2015 levels, in the 10% to 10.5%
range.
The following discussion is a supplement to and should be read in conjunction with the accompanying consolidated financial statements and
notes thereto and with our Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Form 10-K).
29
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
CONSOLIDATED RESULTS OF OPERATIONS
Since our operating cycle is primarily long-term and involves many types of contracts for the design, development and manufacture of products and
related activities with varying delivery schedules, the results of operations of a particular period, or period-to-period comparisons of sales and profits, may not be indicative of future operating results. The following discussions of comparative
results among periods should be reviewed in this context. All per share amounts cited in these discussions are presented on a per diluted share basis, unless otherwise noted. Our consolidated results of operations were as follows (in
millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Net sales
|
|
$
|
12,914
|
|
|
$
|
11,643
|
|
|
$
|
24,616
|
|
|
$
|
21,754
|
|
Cost of sales
|
|
|
(11,490)
|
|
|
|
(10,272)
|
|
|
|
(21,957)
|
|
|
|
(19,120)
|
|
Gross profit
|
|
|
1,424
|
|
|
|
1,371
|
|
|
|
2,659
|
|
|
|
2,634
|
|
Other income, net
|
|
|
142
|
|
|
|
74
|
|
|
|
204
|
|
|
|
167
|
|
Operating profit
|
|
|
1,566
|
|
|
|
1,445
|
|
|
|
2,863
|
|
|
|
2,801
|
|
Interest expense
|
|
|
(166)
|
|
|
|
(104)
|
|
|
|
(330)
|
|
|
|
(197)
|
|
Other non-operating income, net
|
|
|
|
|
|
|
2
|
|
|
|
1
|
|
|
|
5
|
|
Earnings before income taxes
|
|
|
1,400
|
|
|
|
1,343
|
|
|
|
2,534
|
|
|
|
2,609
|
|
Income tax expense
|
|
|
(379)
|
|
|
|
(414)
|
|
|
|
(615)
|
|
|
|
(802)
|
|
Net earnings
|
|
|
1,021
|
|
|
|
929
|
|
|
|
1,919
|
|
|
|
1,807
|
|
Diluted earnings per common share
|
|
$
|
3.32
|
|
|
$
|
2.94
|
|
|
$
|
6.23
|
|
|
$
|
5.68
|
|
Certain amounts reported in other income, net, primarily our share of earnings or losses from equity method investees,
are included in the operating profit of our business segments. Accordingly, such amounts are included in the discussion of our business segment results of operations.
Net Sales
We generate sales from the delivery of products
and services to our customers. Product sales are predominantly generated in our Aeronautics, MFC, MST and Space Systems business segments and most of our service sales are generated in our Aeronautics, IS&GS and MST business
segments. Our consolidated net sales were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Products
|
|
$
|
10,045
|
|
|
$
|
9,157
|
|
|
$
|
18,989
|
|
|
$
|
17,010
|
|
Services
|
|
|
2,869
|
|
|
|
2,486
|
|
|
|
5,627
|
|
|
|
4,744
|
|
Total net sales
|
|
$
|
12,914
|
|
|
$
|
11,643
|
|
|
$
|
24,616
|
|
|
$
|
21,754
|
|
Substantially all of our contracts are accounted for using the percentage-of-completion method. Under the
percentage-of-completion method, we record net sales on contracts based upon our progress towards completion on a particular contract, as well as our estimate of the profit to be earned at completion. The following discussion of material
changes in our consolidated net sales should be read in tandem with the subsequent discussion of changes in our consolidated cost of sales and our business segment results of operations because changes in our sales are typically accompanied by a
corresponding change in our cost of sales due to the nature of the percentage-of-completion method.
30
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Product Sales
Our product sales represented 78% of our total net sales during the quarter ended June 26, 2016 and 79% of total net sales during the quarter ended June
28, 2015. Product sales increased $888 million, or 9.7%, in the quarter ended June 26, 2016 compared to the same period in 2015, primarily due to increased product sales of about $890 million at MST and about $165 million at Aeronautics,
partially offset by decreased products sales of about $95 million at Space Systems and $75 million at IS&GS. The increase in product sales at MST was attributable to sales from Sikorsky which was acquired in the fourth quarter of
2015. The increase at Aeronautics was primarily attributable to the F-35 program due to increased volume partially offset by decreased aircraft deliveries (C-5 program). The decrease in product sales at Space Systems was primarily
attributable to decreased volume for government satellite programs (Space Based Infrared System (SBIRS) and Advanced Extremely High Frequency (AEHF) programs), partially offset by increased volume for strategic missile systems programs. The
decrease in product sales at IS&GS was primarily attributable to lower net sales as a result of completion of certain programs and lower volume.
Our product sales represented 77% of our total net sales during the six months ended June 26, 2016 and 78% of total net sales during the six months
ended June 28, 2015. Product sales increased $2.0 billion, or 11.6%, in the six months ended June 26, 2016 compared to the same period in 2015, primarily due to increased product sales of about $1.6 billion at MST and about $630 million at
Aeronautics, partially offset by decreased products sales of about $180 million at Space Systems and about $120 million at IS&GS. The increase in product sales at MST is primarily attributable to sales from Sikorsky which was acquired in
the fourth quarter of 2015. The increase at Aeronautics was primarily attributable to the
F-35
program due to increased volume and increased aircraft deliveries (C-130). The decrease in product sales
at Space Systems was primarily attributable to decreased volume for government satellite programs (primarily SBIRS, AEHF and MUOS), partially offset by increased volume for the Orion and strategic missile systems programs. The decrease in
product sales at IS&GS was primarily attributable to lower net sales as a result of completion of certain programs and lower volume.
Service Sales
Our service sales represented 22% of our total net sales during the quarter ended June 26, 2016 and 21% of total net sales during the quarter ended June
28, 2015. Service sales increased $383 million, or 15.4%, in the quarter ended June 26, 2016 compared to the same period in 2015. The increase in service sales is primarily due to increased sales of about $250 million at MST
attributable to sales from Sikorsky and increased sales of about $80 million at Aeronautics, primarily attributable to increased sustainment activities for the F-35 program and higher volume for the F-22 program.
Our service sales represented 23% of our total net sales during the six months ended June 26, 2016 and 22% of total net sales during the six months
ended June 28, 2015. Service sales increased $883 million, or 18.6%, in the six months ended June 26, 2016 compared to the same period in 2015. The increase in service sales is primarily due to increased sales of about $540 million at MST
attributable to sales from Sikorsky and increased sales of $280 million at Aeronautics, primarily attributable to increased sustainment activities for the F-35 program and higher volume for the F-22 program.
31
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Cost of Sales
Cost of sales, for both products and services, consist of materials, labor, subcontracting costs, an allocation of indirect costs (overhead and general
and administrative), as well as the costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers. For each of our contracts, we monitor the
nature and amount of costs at the contract level, which form the basis for estimating our total costs to complete the contract. Our consolidated cost of sales were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Cost of sales - products
|
|
|
$ (9,086)
|
|
|
|
$ (8,102)
|
|
|
|
$ (17,178)
|
|
|
|
$ (15,053)
|
|
% of product sales
|
|
|
90.5%
|
|
|
|
88.5%
|
|
|
|
90.5%
|
|
|
|
88.5%
|
|
Cost of sales - services
|
|
|
(2,548)
|
|
|
|
(2,216)
|
|
|
|
(5,011)
|
|
|
|
(4,167)
|
|
% of service sales
|
|
|
88.8%
|
|
|
|
89.1%
|
|
|
|
89.1%
|
|
|
|
87.8%
|
|
Severance charges
|
|
|
|
|
|
|
|
|
|
|
(99)
|
|
|
|
|
|
Other unallocated, net
|
|
|
144
|
|
|
|
46
|
|
|
|
331
|
|
|
|
100
|
|
Total cost of sales
|
|
|
$ (11,490)
|
|
|
|
$ (10,272)
|
|
|
|
$ (21,957)
|
|
|
|
$ (19,120)
|
|
The following discussion of material changes in our consolidated cost of sales for products and services should be read
in tandem with the preceding discussion of changes in our consolidated net sales and our business segment results of operations. We have not identified any developing trends in cost of sales for products and services that would have a material
impact on our future operations.
Product Costs
Product
costs increased $984 million, or 12.1%, during the quarter ended June 26, 2016 compared to the same period in 2015, primarily due to increased product costs of about $980 million at MST and about $130 million at Aeronautics partially offset by
decreased product costs of about $95 million at IS&GS and about $70 million at Space Systems. The increase at MST is primarily attributable to operating costs generated by Sikorsky, which was acquired in the fourth quarter of 2015. The
increase at Aeronautics is primarily attributable to increased volume for the F-35 program partially offset by decreased aircraft deliveries (C-5 program). The decrease at IS&GS is primarily attributable to lower costs due to close-out
activities on the completion of various programs. The decrease at Space Systems is primarily attributable to decreased volume for government satellite programs (SBIRS and AEHF), partially offset by increased volume for strategic missile systems
programs.
Product costs increased $2.1 billion, or 14.1%, during the six months ended June 26, 2016 compared to the same period in 2015, primarily
due to increased product costs of about $1.7 billion at MST and about $565 million at Aeronautics partially offset by decreased products costs of about $125 million at IS&GS and about $110 million at Space Systems. The increase at MST is
primarily attributable to operating costs generated by Sikorsky, which was acquired in the fourth quarter of 2015. The increase at Aeronautics is primarily attributable to increased volume for the F-35 program and increased aircraft deliveries
(C-130 program). The decrease at IS&GS is primarily attributable to lower costs as a result of completion of certain programs and lower volume. The decrease at Space Systems is primarily attributable to decreased volume for government
satellite programs (SBIRS, AEHF and MUOS), partially offset by increased volume for the Orion program as well as strategic missile systems programs.
32
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Service Costs
Service costs increased $332 million, or 15.0%, during the quarter ended June 26, 2016 compared to the same period in 2015, primarily due to increased
service costs of about $225 million at MST and $85 million at Aeronautics. The increase at MST is primarily attributable to operating costs generated by Sikorsky, which was acquired in the fourth quarter of 2015. The increase at Aeronautics is
primarily attributable to increased sustainment activities for the
F-35 program
and higher volume for the F-22 program.
Service costs increased $844 million, or 20.3%, during the six months ended June 26, 2016 compared to the same period in 2015, primarily due to
increased service costs of about $495 million at MST and about $270 million at Aeronautics. The increase at MST is primarily attributable to operating costs generated by Sikorsky, which was acquired in the fourth quarter of 2015. The increase at
Aeronautics is primarily attributable to increased sustainment activities for the F-35 program and higher volume for the F-22 program.
Severance Charges
During the first quarter of 2016, we recorded severance charges totaling approximately $99 million, of which $80 million related to our
Aeronautics business segment and $19 million related to our IS&GS business segment. The charges consisted of severance costs associated with the planned elimination of certain positions through either voluntary or involuntary actions. Upon
separation, terminated employees will receive lump-sum severance payments primarily based on years of service, the majority of which are expected to be paid by the end of 2016. As of June 26, 2016, we have paid approximately $34
million in severance payments associated with these actions, substantially all of which was paid in the quarter ended June 26, 2016.
We expect to
recover a substantial amount of these charges through the pricing of our products and services to the U.S. Government and other customers. During the quarter and six months ended June 26, 2016, we recovered about $50 million and $75
million related to severance actions initiated in periods prior to the quarter ended June 26, 2016.
Other Unallocated, Net
Other unallocated, net primarily includes the FAS/CAS pension adjustment as described in the Business Segment Results of Operations section
below, stock-based compensation and other corporate costs. These items are not allocated to the business segments and, therefore, are excluded from the cost of sales for products and services. Other unallocated, net was $144 million and $331 million
of income during the quarter and six months ended June 26, 2016 compared to $46 million and $100 million of income during the quarter and six months ended June 28, 2015.
The increase was primarily attributable to the increase in the FAS/CAS pension adjustment, partially offset by fluctuations in other costs associated
with various corporate items, none of which were individually significant. The increase in the FAS/CAS pension adjustment was primarily attributable to higher CAS pension costs during the six months ended June 26, 2016 resulting from the phase
in of CAS harmonization rules, as disclosed in our 2015
Form 10-K.
Other Income, Net
Other income, net primarily includes our share of earnings or losses from equity method investees. During the quarter and six months ended June 26,
2016, other income, net was $142 million and $204 million, compared to $74 million and $167 million for the quarter and six month ended June 28, 2015. The increase was primarily attributable to increased earnings generated by equity method
investees, as discussed in the Business Segment Results of Operations section below.
33
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Interest Expense
Interest expense was $166 million and $330 million during the quarter and six months ended June 26, 2016, compared to $104 million and $197 million
during the quarter and six months ended June 28, 2015. The increase was primarily due to interest from the issuance of $7.0 billion of long-term debt in the fourth quarter of 2015, used to fund the acquisition of Sikorsky, and $2.25 billion of
long-term debt in February of 2015 (See Financial Condition Capital Resources) below.
Other Non-Operating Income, Net
There was no other non-operating income during the quarter ended June 26, 2016. Other non-operating income, net was $1 million during six months
ended June 26, 2016. Other non-operating income, net was $2 million and $5 million during the quarter and six months ended June 28, 2015.
Income Tax Expense
Our effective income tax rates were 27.1% and 24.3% for the quarter and six months ended June 26, 2016 and 30.8% and 30.7% for the quarter and
six months ended June 28, 2015. The rates for both periods benefited from tax deductions for U.S. manufacturing activities and for dividends paid to our defined contribution plans with an employee stock ownership plan feature. The rates in
the quarter and six months ended June 26, 2016 also benefited from the research and development tax credit, which was permanently extended and reinstated in the fourth quarter of 2015, and from additional tax benefits related to employee share-based
payment awards which are now recorded as income tax benefit or expense in earnings effective with the adoption of an accounting standard update during the quarter ended June 26, 2016. See Note 10 (under the caption Recent Accounting
Pronouncements). We early adopted the accounting standard update during the second quarter of 2016 and are therefore required to report the impacts as though the accounting standard update had been adopted on January 1, 2016. Accordingly,
we recognized additional income tax benefits of $11 million and $115 million during the quarter and six months ended June 26, 2016. The adjustments for the second quarter included only the quarterly impacts, whereas the adjustments for the
first six months of 2016 include the second quarter impacts and the reclassification of income tax benefits of $104 million originally recognized in additional paid-in capital and cash flows from financing activities in the first quarter of 2016.
Future changes in tax law could significantly impact our provision for income taxes, the amount of taxes payable, and our deferred tax asset and
liability balances. Recent proposals to lower the U.S. corporate income tax rate would require us to reduce our net deferred tax assets upon enactment of new tax legislation, with a corresponding material, one-time, non-cash increase in income
tax expense, but our income tax expense and payments would be materially reduced in subsequent years. Our net deferred tax assets were $5.8 billion at June 26, 2016 and $5.9 billion at December 31, 2015, based on a 35% Federal statutory income
tax rate, and primarily relate to our postretirement benefit plans. If legislation reducing the Federal statutory income tax rate to 25% had been enacted at June 26, 2016, our net deferred tax assets would have been reduced by $1.7 billion and
we would have recorded a corresponding one-time, non-cash increase in income tax expense of $1.7 billion. This additional expense would be less if the legislation phased in the tax rate reduction or if the final rate was higher than
25%. The amount of net deferred tax assets will change periodically based on several factors, including the measurement of our postretirement benefit plan obligations and actual cash contributions to our postretirement benefit plans.
34
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Net Earnings
Net earnings for the quarter and six months ended June 26, 2016 were $1.0 billion ($3.32 per share) and $1.9 billion ($6.23 per share) compared to $929
million ($2.94 per share) and $1.8 billion ($5.68 per share) for the quarter and six months ended June 28, 2015. Both net earnings and earnings per share were affected by the factors mentioned above.
BUSINESS SEGMENT RESULTS OF OPERATIONS
We operate in five
business segments: Aeronautics, IS&GS, MFC, MST and Space Systems. We organize our business segments based on the nature of the products and services offered. During the fourth quarter of 2015, we realigned certain programs among our
business segments. The amounts, discussion and presentation of our business segments for all periods presented in these consolidated financial statements reflect the program realignment. Additionally, the results of our MST business segment
include the operations of Sikorsky since its November 6, 2015 acquisition date. Accordingly, the results of Sikorsky operations are included in our business segment results of operations for the quarter and six months ended June 26, 2016 but
not for the quarter and six months ended June 28, 2015.
Net sales of our business segments exclude intersegment sales as these activities
are eliminated in consolidation. Operating profit of our business segments includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of
our business segments. United Launch Alliance (ULA), which is part of our Space Systems business segment, is our primary equity method investee. Operating profit of our business segments excludes the FAS/CAS pension adjustment described below;
expense for stock-based compensation; the effects of items not considered part of managements evaluation of segment operating performance, such as charges related to significant severance actions and certain asset impairments; gains or losses
from divestitures; the effects of certain legal settlements; corporate costs not allocated to our business segments; and other miscellaneous corporate activities. These items are included in the reconciling item Unallocated items between
operating profit from our business segments and our consolidated operating profit. See Note 10 (under the caption Changes in Estimates) for a discussion related to certain factors that may impact the comparability of net sales and
operating profit of our business segments.
Our business segments results of operations include pension expense only as calculated under U.S.
Government Cost Accounting Standards (CAS), which we refer to as CAS pension cost. We recover CAS pension cost through the pricing of our products and services on U.S. Government contracts and, therefore, the CAS pension cost is recognized in each
of our business segments net sales and cost of sales. Since our consolidated financial statements must present pension expense calculated in accordance with the financial accounting standards (FAS) requirements under U.S. generally accepted
accounting principles (GAAP), which we refer to as FAS pension expense, the FAS/CAS pension adjustment increases or decreases the CAS pension cost recorded in our business segments results of operations to equal the FAS pension expense.
35
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Summary operating results for each of our business segments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
|
$ 4,375
|
|
|
|
$ 4,131
|
|
|
|
$ 8,174
|
|
|
|
$ 7,265
|
|
Information Systems & Global Solutions
|
|
|
1,337
|
|
|
|
1,408
|
|
|
|
2,671
|
|
|
|
2,798
|
|
Missiles and Fire Control
|
|
|
1,680
|
|
|
|
1,649
|
|
|
|
3,114
|
|
|
|
3,032
|
|
Mission Systems and Training
|
|
|
3,303
|
|
|
|
2,165
|
|
|
|
6,307
|
|
|
|
4,144
|
|
Space Systems
|
|
|
2,219
|
|
|
|
2,290
|
|
|
|
4,350
|
|
|
|
4,515
|
|
Total net sales
|
|
|
$ 12,914
|
|
|
|
$ 11,643
|
|
|
|
$ 24,616
|
|
|
|
$ 21,754
|
|
|
|
|
|
Operating profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeronautics
|
|
|
$ 478
|
|
|
|
$ 444
|
|
|
|
$ 898
|
|
|
|
$ 815
|
|
Information Systems & Global Solutions
|
|
|
151
|
|
|
|
107
|
|
|
|
260
|
|
|
|
252
|
|
Missiles and Fire Control
|
|
|
253
|
|
|
|
293
|
|
|
|
474
|
|
|
|
579
|
|
Mission Systems and Training
|
|
|
202
|
|
|
|
262
|
|
|
|
431
|
|
|
|
442
|
|
Space Systems
|
|
|
340
|
|
|
|
294
|
|
|
|
584
|
|
|
|
618
|
|
Total business segment operating profit
|
|
|
1,424
|
|
|
|
1,400
|
|
|
|
2,647
|
|
|
|
2,706
|
|
Unallocated items
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS/CAS pension adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS pension expense
|
|
|
(254)
|
|
|
|
(284)
|
|
|
|
(508)
|
|
|
|
(568)
|
|
Less: CAS pension cost
|
|
|
497
|
|
|
|
404
|
|
|
|
997
|
|
|
|
807
|
|
FAS/CAS pension adjustment
|
|
|
243
|
|
|
|
120
|
|
|
|
489
|
|
|
|
239
|
|
Stock-based compensation
|
|
|
(53)
|
|
|
|
(49)
|
|
|
|
(97)
|
|
|
|
(89)
|
|
Severance charges
|
|
|
|
|
|
|
|
|
|
|
(99)
|
|
|
|
|
|
Other, net
|
|
|
(48)
|
|
|
|
(26)
|
|
|
|
(77)
|
|
|
|
(55)
|
|
Total unallocated items
|
|
|
142
|
|
|
|
45
|
|
|
|
216
|
|
|
|
95
|
|
Total consolidated operating profit
|
|
|
$ 1,566
|
|
|
|
$ 1,445
|
|
|
|
$ 2,863
|
|
|
|
$ 2,801
|
|
Management evaluates performance on our contracts by focusing on net sales and operating profit and not by type or
amount of operating expense. Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing the business. This approach is consistent throughout the life
cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance on our contracts in a similar manner through their completion.
We regularly provide customers with reports of our costs as the contract progresses. The cost information in the reports is accumulated in a manner
specified by the requirements of each contract. For example, cost data provided to a customer for a product would typically align to the subcomponents of that product (such as a wing-box on an aircraft) and for services would align to the type
of work being performed (such as help-desk support). Our contracts generally are cost-based, which allows for the recovery of costs in the pricing of our products and services. Most of our contracts are bid and negotiated with our
customers under circumstances in which we are required to disclose our estimated total costs to provide the product or service. This approach for negotiating contracts with our U.S. Government customers generally allows for the recovery of our
costs. We also may enter into long-term supply contracts for certain materials or components to coincide with the production schedule of certain products and to ensure their availability at known unit prices.
36
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Many of our contracts span several years and include highly complex technical requirements. At the
outset of a contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract and assess the effects of those risks on our estimates of total costs to complete the contract. The estimates
consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead and the
estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks
surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire
risks surrounding the technical, schedule and cost aspects of the contract which decreases the estimated total costs to complete the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the
contract increase. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate.
Changes in net sales and operating profit generally are expressed in terms of volume. Changes in volume refer to increases or decreases in sales or
operating profit resulting from varying production activity levels, deliveries or service levels on individual contracts. Volume changes in segment operating profit are typically based on the current profit booking rate for a particular
contract.
Comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit
booking rates on our contracts accounted for using the percentage-of-completion method of accounting. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs
that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate resulting in an increase in the estimated total costs to complete and a reduction in the profit booking
rate. Increases or decreases in profit booking rates are recognized in the current period and reflect the
inception-to-date
effect of such changes. Segment operating profit and margin may also be
impacted favorably or unfavorably by other items. Favorable items may include the positive resolution of contractual matters, cost recoveries on restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items
may include the adverse resolution of contractual matters; restructuring charges, except for significant severance actions which are excluded from segment operating results; reserves for disputes; certain asset impairments; and losses on sales of
assets.
We have a contract to provide an integrated air and missile defense system to an international customer. In the quarter ended March 29,
2015, we revised our estimated costs to complete the program as a consequence of performance issues and recorded a reserve of $70 million. Since that time, we have continued to experience issues related to customer requirements and the
implementation of this contract and have periodically accrued additional reserves. Consequently, we are re-evaluating the scope, estimated costs, and viability of the program and the possibility of additional customer
funding. Depending on the outcome of this re-evaluation, it is possible that we may have to record additional loss reserves in future periods, which could be material to our operating results. However, as this re-evaluation is in
process and will include ongoing discussions with our customer, we cannot make an estimate of the total expected costs at this time due to uncertainties inherent in the estimation process.
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters increased segment operating
profit by approximately $435 million and $840 million during the quarter and six months ended June 26, 2016 and $550 million and $1.0 billion for the quarter and six months ended June 28, 2015.
37
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Aeronautics
Summary operating results for our Aeronautics business segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Net sales
|
|
$
|
4,375
|
|
|
$
|
4,131
|
|
|
$
|
8,174
|
|
|
$
|
7,265
|
|
Operating profit
|
|
|
478
|
|
|
|
444
|
|
|
|
898
|
|
|
|
815
|
|
Operating margin
|
|
|
10.9%
|
|
|
|
10.7%
|
|
|
|
11.0%
|
|
|
|
11.2%
|
|
Aeronautics net sales during the quarter ended June 26, 2016 increased $244 million, or 6 percent, compared to the
same period in 2015. The increase was primarily attributable to higher net sales of approximately $390 million for the
F-35
program due to increased volume on aircraft production and sustainment activities.
This increase was partially offset by lower net sales of approximately $180 million for the C-5 program due to decreased deliveries (two aircraft delivered in the second quarter of 2016 compared to four delivered in the same period in 2015) and
sustainment activities.
Aeronautics operating profit during the quarter ended June 26, 2016 increased $34 million, or 8 percent, compared to
the same period in 2015. Operating profit increased approximately $60 million for the F-35 program due to increased volume and sustainment activities and higher risk retirements. This increase was partially offset by lower operating profit of
approximately $25 million on various programs, primarily due to lower risk retirements and decreased volume. Adjustments not related to volume, including net profit booking rate adjustments, were approximately $25 million lower during the quarter
ended June 26, 2016 compared to the quarter ended June 28, 2015.
Aeronautics net sales during the six months ended June 26, 2016 increased
$909 million, or 13 percent, compared to the same period in 2015. The increase was primarily attributable to higher net sales of approximately $790 million for the F-35 program due to increased volume on aircraft production and sustainment
activities; and approximately $200 million for the C-130 program due to increased deliveries (12 aircraft delivered in the second quarter of 2016 compared to 10 delivered in the same period in 2015), contract mix and sustainment activities. These
increases were partially offset by lower net sales of approximately $100 million for the C-5 program due primarily to decreased deliveries (four aircraft delivered in the second quarter of 2016 compared to five delivered in the same period in 2015)
and sustainment activities.
Aeronautics operating profit during the six months ended June 26, 2016 increased $83 million, or 10 percent,
compared to the same period in 2015. Operating profit increased approximately $90 million for the F-35 program due to increased volume and sustainment activities and higher risk retirements. This increase was partially offset by lower operating
profit on various programs, primarily due to lower risk retirements. Adjustments not related to volume, including net profit booking rate adjustments, were approximately $30 million lower during the six months ended June 26, 2016 compared to the six
months ended June 28, 2015.
We expect Aeronautics 2016 net sales to increase in the high-single digit percentage range as compared to 2015
due to increased volume on the F-35 and C-130 programs, partially offset by decreased volume on other aircraft programs. Operating profit is expected to increase in the mid-single digit percentage range, driven by increased volume and risk
retirements on the F-35 program, partially offset by contract mix and lower risk retirements on C-130 and other aircraft programs, resulting in a slight decrease in operating margin between years.
38
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Information Systems & Global Solutions
Summary operating results for our IS&GS business segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Net sales
|
|
$
|
1,337
|
|
|
$
|
1,408
|
|
|
$
|
2,671
|
|
|
$
|
2,798
|
|
Operating profit
|
|
|
151
|
|
|
|
107
|
|
|
|
260
|
|
|
|
252
|
|
Operating margin
|
|
|
11.3%
|
|
|
|
7.6%
|
|
|
|
9.7%
|
|
|
|
9.0%
|
|
IS&GS net sales during the quarter ended June 26, 2016 decreased $71 million, or 5 percent, compared to the
same period in 2015. The decrease was attributable to lower net sales of approximately $50 million as a result of the completion of certain programs to provide IT solutions to U.S. defense and intelligence agencies (including the U.S. Army Corps of
Engineers (ACE) IT program) and increased competition, coupled with the fragmentation of existing large contracts into multiple smaller contracts that are awarded primarily on the basis of price when re-competed; and approximately $20 million
due to lower volume, primarily as a result of schedule delays caused by development issues on a large international data center migration and consolidation program due to unanticipated challenges in application remediation and data center migration
activities.
IS&GS operating profit during the quarter ended June 26, 2016 increased $44 million, or 41 percent, compared to the same
period in 2015. The increase was primarily attributable to higher operating profit of approximately $40 million due to contract close-out activities and completion of various programs and, to a lesser extent, improved program performance; and
approximately $20 million due to reserves recorded in the second quarter of 2015 that were not repeated in the second quarter of 2016. These increases were partially offset by lower operating profit of approximately $15 million as a result of the
development issues on the international data center migration and consolidation program described above. Adjustments not related to volume, including net profit booking rate adjustments were approximately $55 million higher in the second quarter of
2016 compared to the same period in 2015.
IS&GS net sales during the six months ended June 26, 2016 decreased $127 million, or 5 percent,
compared to the same period in 2015. The decrease was primarily attributable to lower net sales of approximately $115 million as a result of the completion of certain programs to provide IT solutions to U.S. defense and intelligence agencies
(including the ACE IT program) and increased competition, coupled with the fragmentation of existing large contracts into multiple smaller contracts that are awarded primarily on the basis of price when re-competed; and approximately $10 million due
to lower volume.
IS&GS operating profit during the six months ended June 26, 2016 increased $8 million, or 3 percent, compared to the
same period in 2015. The increase was primarily attributable to higher operating profit of approximately $30 million due to contract close-out activities and the completion of various programs and, to a lesser extent, improved program performance;
and approximately $20 million due to reserves recorded in the six months ended June 28, 2015 that were not repeated in the six months ended June 26, 2016. These increases were partially offset by lower operating profit of approximately $40 million
as a result of the development issues on the international data center migration and consolidation program described above. Adjustments not related to volume, including net profit booking rate adjustments, were approximately $25 million higher in
the six months ended June 26, 2016 compared to the six months ended June 28, 2015.
39
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
We expect IS&GS 2016 net sales to decline in the high-single digit percentage range as
compared to 2015, primarily driven by a loss of key contracts in an increasingly competitive environment, along with volume contraction on the segments major contracts. Operating profit is expected to decline at a higher percentage range in
2016, as compared to net sales percentage declines, driven by higher margin program losses and re-compete programs awarded at lower margins. The declines in operating profit are expected to be partially offset by increased operating profit from
contract closeout activities and completion of various programs, resulting in 2016 margins that are slightly lower than 2015 results.
Missiles and Fire Control
Summary operating results for our MFC business segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Net sales
|
|
$ 1,680
|
|
$
|
1,649
|
|
|
$
|
3,114
|
|
|
$
|
3,032
|
|
Operating profit
|
|
253
|
|
|
293
|
|
|
|
474
|
|
|
|
579
|
|
Operating margin
|
|
15.1%
|
|
|
17.8%
|
|
|
|
15.2%
|
|
|
|
19.1%
|
|
MFCs net sales during the quarter ended June 26, 2016 increased $31 million, or 2 percent, compared to the same
period in 2015. The increase was attributable to higher net sales of approximately $60 million for fire control programs due to increased deliveries (including SNIPER® and Special Operations Forces Contractor Logistics Support Services
(SOF CLSS)); and approximately $35 million for air and missile defense programs (primarily Patriot Advanced Capability-3 (PAC-3) due to increased deliveries). This increase was partially offset by lower net sales of approximately $45 million
for tactical missiles programs due to fewer deliveries (primarily Guided Multiple Launch Rocket Systems (GMLRS)); and approximately $20 million for various other programs due to lower volume.
MFCs operating profit during the quarter ended June 26, 2016 decreased $40 million, or 14 percent, compared to the same period in 2015. The
decrease was attributable to lower operating profit of approximately $15 million for air and missile defense programs primarily due to a reserve for contractual matters, lower risk retirements and contract mix; approximately $15 million for tactical
missile programs, primarily due to lower risk retirements on various programs and fewer deliveries (primarily GMLRS); and approximately $10 million for fire control programs, primarily due to lower risk retirements (Apache) and program mix.
Adjustments not related to volume, including net profit booking rate adjustments, were approximately $35 million lower in the second quarter of 2016 compared to the same period in 2015.
MFCs net sales during the six months ended June 26, 2016 increased $82 million, or 3 percent, compared to the same period in 2015. The increase
was primarily attributable to higher net sales of approximately $140 million for fire control programs due to increased deliveries (including SNIPER, SOF CLSS and LANTIRN®). This increase was partially offset by lower net sales of approximately
$55 million for air and missile defense programs (primarily Terminal High Altitude Area Defense due to lower volume, partially offset by increased deliveries for PAC-3).
MFCs operating profit during the six months ended June 26, 2016 decreased $105 million, or 18 percent, compared to the same period in 2015.
Operating profit decreased approximately $60 million for air and missile defense programs, primarily as a result of lower risk retirements (PAC-3), a reserve for contractual matters, and contract mix; approximately $25 million for fire control
programs, primarily due to lower risk retirements (Apache) and program mix; and approximately $15 million for tactical missile programs, primarily due to lower risk retirements. Adjustments not related to volume, including net profit booking
rate adjustments, were approximately $115 million lower in the six months ended June 26, 2016, compared to the six months ended June 28, 2015.
40
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
We expect MFCs net sales to be flat or experience a slight decline in 2016 as compared to 2015.
Operating profit is expected to decrease by approximately 20 percent, driven by contract mix and fewer risk retirements in 2016 compared to 2015. Accordingly, operating profit margin is expected to decline from 2015 levels.
Mission Systems and Training
Summary operating results for
our MST business segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Net sales
|
|
$ 3,303
|
|
$
|
2,165
|
|
|
$
|
6,307
|
|
|
$
|
4,144
|
|
Operating profit
|
|
202
|
|
|
262
|
|
|
|
431
|
|
|
|
442
|
|
Operating margin
|
|
6.1%
|
|
|
12.1%
|
|
|
|
6.8%
|
|
|
|
10.7%
|
|
MSTs net sales during the quarter ended June 26, 2016 increased $1.1 billion, or 53 percent, compared to the same
period in 2015. The increase was primarily attributable to net sales of approximately $1.2 billion from Sikorsky, net of adjustments required to account for the acquisition of this business which occurred in the fourth quarter of 2015. This increase
was partially offset by lower net sales of approximately $60 million for various programs, primarily due to decreased volume.
MSTs operating
profit during the quarter ended June 26, 2016 decreased $60 million, or 23 percent, compared to the same period in 2015. The decrease was primarily attributable to lower operating profit of approximately $30 million from undersea systems programs,
which includes a reserve for performance matters on an international program and lower risk retirements; and due to an operating loss of approximately $30 million from Sikorsky due primarily to intangible amortization and adjustments required to
account for the acquisition of this business. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $35 million lower in the second quarter of 2016 compared to the same period in 2015.
MSTs net sales during the six months ended June 26, 2016 increased $2.2 billion, or 52 percent, compared to the same period in 2015. The
increase was primarily attributable to net sales of approximately $2.2 billion from Sikorsky, net of adjustments required to account for the acquisition of this business.
MSTs operating profit during the six months ended June 26, 2016 decreased $11 million, or 2 percent, compared to the same period in 2015. The
decrease was primarily attributable to an operating loss of approximately $90 million from Sikorsky due primarily to intangible amortization and adjustments required to account for the acquisition of this business. This decrease was partially offset
by higher operating profit of approximately $55 million for training and logistics programs due primarily to higher risk retirements, including the favorable resolution of contract matters; and approximately $30 million for undersea systems
programs due primarily to higher reserves for performance matters on an international program in the first six months of 2015 compared to the first six months of 2016. Adjustments not related to volume, including net profit booking rate adjustments,
were approximately $55 million higher in the six months ended June 26, 2016, compared to the six months ended June 28, 2015.
41
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
We expect MSTs 2016 net sales to increase in the mid-double digit percentage range compared to
2015, due to the inclusion of Sikorsky programs for a full year, partially offset by a decline in volume due to the completion of certain programs. Operating profit is expected to increase in the low single-digit percentage range on higher volume,
and operating margin is expected to decline due to costs associated with the Sikorsky acquisition, including the impact of purchase accounting adjustments, integration costs and inherited restructuring costs associated with actions committed to by
Sikorsky prior to acquisition.
Space Systems
Summary
operating results for our Space Systems business segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
June 26,
2016
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Net sales
|
|
$ 2,219
|
|
$
|
2,290
|
|
|
$
|
4,350
|
|
|
$
|
4,515
|
|
Operating profit
|
|
340
|
|
|
294
|
|
|
|
584
|
|
|
|
618
|
|
Operating margin
|
|
15.3%
|
|
|
12.8%
|
|
|
|
13.4%
|
|
|
|
13.7%
|
|
Space Systems net sales during the quarter ended June 26, 2016 decreased $71 million, or 3 percent, compared to
the same period in 2015. The decrease was primarily attributable to lower net sales of approximately $115 million for government satellite programs due to decreased volume (primarily Space Based Infrared System (SBIRS), Advanced Extremely High
Frequency (AEHF) and Mobile User Objective System (MUOS)). This decrease was partially offset by higher net sales of approximately $40 million for strategic and defensive missile systems due to increased volume.
Space Systems operating profit in the second quarter of 2016 increased $46 million, or 16 percent, compared to the same period in 2015. The
increase was primarily attributable to approximately $80 million of increased equity earnings in joint ventures (primarily ULA). This increase was partially offset by lower operating profit of approximately $20 million for government satellite
programs due primarily to lower risk retirements (SBIRS and MUOS); and approximately $20 million for commercial satellite programs due primarily to performance matters on certain programs. Adjustments not related to volume, including net profit
booking rate adjustments and other matters, were approximately $75 million lower in the second quarter of 2016 compared to the same period in 2015.
Space Systems net sales during the six months ended June 26, 2016 decreased $165 million, or 4 percent, compared to the same period in 2015. The
decrease was attributable to lower net sales of approximately $245 million for government satellite programs due to decreased volume (primarily SBIRS, AEHF and MUOS). This decrease was partially offset by higher net sales of approximately
$40 million for the Orion program due to increased volume; and approximately $30 million for strategic and defensive missile systems due to increased volume.
Space Systems operating profit during the six months ended June 26, 2016 decreased $34 million, or 6 percent, compared to the same period in
2015. The decrease was primarily attributable to lower operating profit of approximately $55 million for government satellite programs due to lower risk retirements (SBIRS and MUOS) and decreased volume; and approximately $25 million for
commercial satellite programs due to performance matters on certain programs. These decreases were partially offset by approximately $55 million of increased equity earnings in joint ventures (primarily ULA). Adjustments not related to
volume, including net profit booking rate adjustments, were approximately $135 million lower in the six months ended June 26, 2016, compared to the six months ended June 28, 2015.
42
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Total equity earnings recognized by Space Systems (primarily ULA) represented approximately $120
million, or 35 percent, and approximately $170 million, or 29 percent, of this business segments operating profit for the quarter and six months ended June 26, 2016, compared to approximately $40 million, or 14 percent, and $115 million,
or 19 percent, for the quarter and six months ended June 28, 2015.
We expect Space Systems net sales to decline in the mid-single digit
percentage range in 2016 as compared to 2015, primarily driven by program lifecycles and volume on government satellite programs. Operating profit is expected to decline in the mid-single digit percentage range on lower sales volume, partially
offset by increased equity earnings in joint ventures. As a result, operating margin is expected to decline slightly between the years.
FINANCIAL CONDITION
Liquidity and Cash Flows
We have a balanced cash
deployment strategy to enhance stockholder value and position ourselves to take advantage of new business opportunities when they arise. Consistent with that strategy, we have continued to invest in our business, including capital expenditures,
independent research and development and have made selective business acquisitions, while returning cash to stockholders through dividends and share repurchases, and managing our debt levels, maturities and interest rates.
We have generated strong operating cash flows, which have been the primary source of funding for our operations, capital expenditures, debt service and
repayments, dividends, share repurchases and postretirement benefit plan contributions. Based on a cash deployment initiative we announced in October 2014, we plan to reduce our total outstanding share count to below 300 million shares by the
end of 2017, market conditions and our fiduciary obligations permitting. The total remaining authorization for future common share repurchases under our share repurchase program was $2.6 billion as of June 26, 2016. Additionally, if the
transaction to separate and combine the IS&GS business segment with Leidos is structured as a split-off, as currently contemplated, our outstanding share count will be reduced by the number of shares our stockholders elect to exchange for shares
of Leidos.
We have accessed the capital markets opportunistically as we did in February 2015 when we issued $2.25 billion of long-term debt and as
needed as we did in November 2015 when we issued $7.0 billion of long-term debt in connection with our acquisition of Sikorsky. We expect our cash from operations will continue to be sufficient to support our operations and anticipated capital
expenditures for the foreseeable future. However, we expect to continue to issue commercial paper backed by our revolving credit facility to manage the timing of our cash flows. We expect to receive a tax-free special cash payment of
approximately $1.8 billion as a result of the anticipated divestiture of our IS&GS business segment in the third quarter of 2016 that we intend to use to repay debt, pay dividends or repurchase stock, although the timing and closing of the
transaction are uncertain and subject to approval by Leidos stockholders of the issuance of the Leidos shares in the merger and the satisfaction of customary closing conditions, including regulatory approvals, the absence of a material adverse
change with respect to each of IS&GS and Leidos, the receipt of solvency opinions and opinions of tax counsel. As mentioned in the Capital Resources section below, we have financial resources available to fund potential cash outflows
that are less predictable or more discretionary, should they occur. We also have access to credit markets, if needed, for liquidity or general corporate purposes, including, but not limited to, our revolving credit facility or the ability to issue
commercial paper, and letters of credit to support customer advance payments and for other trade finance purposes such as guaranteeing our performance on particular contracts.
43
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The following table provides a summary of our cash flow information followed by a discussion of the key
elements (in millions):
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 26,
2016
|
|
June 28,
2015
|
Cash and cash equivalents at beginning of year
|
|
$ 1,090
|
|
$ 1,446
|
|
|
|
Operating activities
|
|
|
|
|
Net earnings
|
|
1,919
|
|
1,807
|
Non-cash adjustments
|
|
789
|
|
579
|
Changes in working capital
|
|
(402)
|
|
(1,095)
|
Other, net
|
|
834
|
|
929
|
Net cash provided by operating activities
|
|
3,140
|
|
2,220
|
Net cash used for investing activities
|
|
(327)
|
|
(218)
|
Net cash used for financing activities
|
|
(2,634)
|
|
(246)
|
Net change in cash and cash equivalents
|
|
179
|
|
1,756
|
Cash and cash equivalents at end of period
|
|
$ 1,269
|
|
$ 3,202
|
Operating Activities
Net
cash provided by operating activities increased $920 million during the six months ended June 26, 2016, compared to the same period in 2015, primarily due to a decrease in cash used for changes in working capital of $693 million from the
comparable period in 2015 and recording $115 million of additional tax benefits related to the vesting or settlement of share based awards as operating cash flows upon adoption of the accounting standards update for stock compensation. The
change in working capital is defined as receivables and inventories less accounts payable and customer advances and amounts in excess of costs incurred. The change in working capital was largely driven by timing of payments for accounts payable
and timing of cash receipts for customer advances and amounts in excess of cost incurred. We made net income tax payments of $485 million during the six months ended June 26, 2016, compared to $500 million during the six months ended June 28,
2015. We made interest payments of $281 million during the six months ended June 26, 2016, compared to $162 million during the six months ended June 28, 2015.
We may determine to fund customer programs ourselves pending government appropriations. If we incur costs in excess of funds obligated on a contract, we
may be at risk for reimbursement of the excess costs. In 2014 and 2015, we received customer authorization and initial funding to begin producing F-35 aircraft to be acquired under low-rate initial production (LRIP) 9 and 10 contracts, respectively.
We continue to negotiate these contracts with our customer. Throughout the negotiation process, we have incurred costs in excess of funds obligated and have provided multiple notifications to our customer that current funding is insufficient to
cover the production process. Despite not yet receiving additional funding, we continued work in an effort to meet our customers desired aircraft delivery dates. As a result, as of June 26, 2016, we have about $900 million of potential cash
exposure and $3.0 billion in termination liability exposure related to the F-35 LRIP 9 and 10 contracts. We are currently negotiating final contract terms with our customer and expect to receive additional funding by the end of 2016.
Investing Activities
Net cash used for investing activities
increased $109 million during the six months ended June 26, 2016, compared to the same period in 2015 primarily due to an increase of $77 million in capital expenditures. Capital expenditures amounted to $386 million and $309 million during the
six months ended June 26, 2016 and June 28, 2015.
44
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The majority of our capital expenditures were for equipment and facilities infrastructure that generally are incurred to support new and existing programs across all of our business
segments. We also incur capital expenditures for information technology to support programs and general enterprise information technology infrastructure, inclusive of costs for the development or purchase of internal-use software.
Financing Activities
Net cash used for financing activities
was $2.6 billion during the six months ended June 26, 2016, as compared to $246 million the same period in 2015. Net cash used for financing activities during the six months ended June 26, 2016 was primarily driven by dividend payments, share
repurchases and repayments of long-term debt according to their scheduled maturities. Net cash used for financing activities during the six months ended June 28, 2015 was primarily driven by share repurchases and dividend payments partially
offset by, proceeds from the February 2015 debt issuance. We paid $1.0 billion and $1.5 billion to repurchase 4.5 million and 7.9 million shares of our common stock during the six months ended June 26, 2016 and June 28, 2015,
respectively. During the six months ended June 26, 2016, we paid dividends totaling $1.0 billion ($3.30 per share), which included our 2016 second quarter dividend ($1.65 per share). During the six months ended June 28, 2015, we paid
dividends totaling $965 million.
In May 2016, we repaid $452 million of long-term notes with a fixed interest rate of 7.65% according to their
scheduled maturities. We also had related variable interest rate swaps with a notional amount of $450 million mature, which did not have a significant impact on net earnings or comprehensive income.
On February 20, 2015, we received proceeds of $2.21 billion for the issuance of $2.25 billion of fixed interest rate long-term notes.
Cash received from the issuance of our common stock in connection with employee stock option exercises during the six month ended June 26, 2016 and June
28, 2015 totaled $53 million and $84 million, respectively. Those exercises resulted in the issuance of 0.6 million and 1.1 million shares of our common stock.
Capital Resources
At June 26, 2016, we held cash and cash
equivalents of $1.3 billion. As of June 26, 2016, approximately $435 million of our cash and cash equivalents was held outside of the U.S. by our international subsidiaries. Although those balances are generally available to fund ordinary
business operations without legal or other restrictions, a significant portion is not immediately available to fund U.S. operations unless repatriated. Our intention is to permanently reinvest earnings from our international subsidiaries, with
the exception of any subsidiaries being transferred with the IS&GS divestiture. While we do not intend to do so, if this cash had been repatriated at June 26, 2016, the amount of additional U.S. federal income tax that would be due after
considering foreign tax credits would not be significant.
Our outstanding debt, net of unamortized discounts and deferred financing costs, was
$14.8 billion as of June 26, 2016 and mainly is in the form of publicly-issued notes that bear interest at fixed rates. In the quarter ended June 26, 2016, we repaid $452 million of long-term notes with a fixed interest rate of
7.65% according to their scheduled maturities. We have scheduled debt maturities of approximately $500 million in the third quarter of 2016 that we plan to repay with available cash. As of June 26, 2016, we were in compliance with all covenants
contained in our debt and credit agreements. There were no material changes during the quarter or six months ended June 26, 2016 to our contractual commitments as presented in Managements Discussion and Analysis of Financial Condition
and Results of Operations of our 2015 Form 10-K that were outside the ordinary course of our business.
45
Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
At June 26, 2016, we had a $2.5 billion revolving credit facility (the 5-year Facility) with various
banks which expires on October 9, 2020 and is available for general corporate purposes. The undrawn portion of the 5-year Facility is also available to serve as a backup facility for the issuance of commercial paper. We may request and the
banks may grant, at their discretion, an increase in the borrowing capacity under the 5-year Facility of up to an additional $500 million. There were no borrowings outstanding under the 5-year Facility as of June 26, 2016.
We have agreements in place with financial institutions to provide for the issuance of commercial paper. In the quarter ended June 26, 2016 we borrowed
and fully repaid amounts under our commercial paper programs. At June 26, 2016 no borrowings were outstanding.
Our stockholders equity
was $3.0 billion at June 26, 2016, a decrease of $100 million from December 31, 2015. The decrease was primarily attributable to dividends declared of $1.5 billion and the repurchase of 4.5 million shares for $1.0 billion, partially offset
by net earnings of $1.9 billion, amortization of $346 million in postretirement benefit plan expense and $162 million in stock-based awards and employee stock ownership plan (ESOP) activity. As we repurchase our common shares, we reduce common
stock for the $1 of par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in capital. If additional paid-in capital is reduced to zero, we record the remainder of the
excess purchase price over par value as a reduction of retained earnings.
OTHER MATTERS
Status of the F-35 Program
The F-35 program consists of
development contracts, multiple production contracts and sustainment activities. The development contracts are being performed concurrent with the production contracts. Concurrent performance of development and production contracts is used for
complex programs to test aircraft, shorten the time to field systems, and achieve overall cost savings. We expect the System Development and Demonstration portion of the development contracts will be substantially complete in 2017, with less
significant efforts continuing into 2019. Production of the aircraft is expected to continue for many years given the U.S. Governments current inventory objective of 2,443 aircraft for the Air Force, Marine Corps, and Navy; commitments
from our eight international partners and three international customers; as well as expressions of interest from other countries.
The U.S.
Government continues to complete various operational tests, including ship trials, mission system evaluations, and weapons testing, with the F-35 aircraft fleet recently surpassing 63,000 flight hours. Progress continues to be made on the production
of aircraft. In current production, multiple aircraft for our partner countries and international customers continue to advance. Progress continues in our pursuit of helping the U.S. Air Force declare initial operating capability of the F-35A in
2016. We have seen international progress as the first F-35 international non-partner customer roll out ceremony was held for the Israeli Adir in the second quarter of 2016. In addition, the F-35 was selected by the Denmark Parliament as
their next generation fighter aircraft. During the second quarter of 2016 two F-35 aircraft also arrived at an airshow in the Netherlands. As of June 26, 2016, we have delivered 174 production aircraft to our U.S. and international partners, and
have 107 production aircraft in backlog, including orders from our international partners.
Given the size and complexity of the F-35 program, we
anticipate that there will be continual reviews related to aircraft performance, program schedule, cost, and requirements as part of the DoD, Congressional, and international partners oversight and budgeting processes. Current program
challenges include, but are not limited to, supplier and partner performance, software development, level of cost associated with life cycle operations and sustainment and warranties, receiving funding for production contracts on a timely basis,
executing future flight tests, and findings resulting from testing and operating the aircraft.
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Lockheed Martin Corporation
Managements Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Contingencies
See Note 8 for information regarding our contingent obligations, including off-balance sheet arrangements
.
Critical Accounting Policies
There have been no significant
changes to the critical accounting policies we disclosed in Managements Discussion and Analysis of Financial Condition and Results of Operations in our 2015 Form 10-K.
Recent Accounting Pronouncements
See Note 10 (under the
caption Recent Accounting Pronouncements) for information related to new accounting standards.
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Lockheed Martin Corporation