Lockheed Martin Corporation (NYSE:LMT) reported fourth quarter 2015 net sales of $12.9 billion, compared to $12.5 billion in the fourth quarter of 2014. Net earnings in the fourth quarter of 2015 were $933 million, or $3.01 per share, compared to $904 million, or $2.82 per share, in the fourth quarter of 2014. Cash from operations in the fourth quarter of 2015 was $1.4 billion, compared to $(201) million of cash used in operations, after pension contributions of $1.0 billion, in the fourth quarter of 2014.

Fourth quarter 2015 net earnings included a special charge for workforce reductions of $67 million, which decreased net earnings $44 million, or $0.14 per share; and non-recoverable transaction costs of $45 million associated with the acquisition of Sikorsky Aircraft Corporation (Sikorsky) and the Corporation’s strategic review of its government IT and technical services businesses, which decreased net earnings $28 million, or $0.09 per share.  These costs were offset by the recognition of a full-year U.S. research and development (R&D) tax credit resulting from the enactment of tax legislation in the fourth quarter of 2015, which increased net earnings $71 million, or $0.23 per share.  Fourth quarter 2014 net earnings included a special charge for a non-cash goodwill impairment of $119 million, which decreased net earnings $107 million, or $0.33 per share, partially offset by the recognition of a full-year R&D tax credit due to the temporary reinstatement of the R&D tax credit in the fourth quarter of 2014, which increased earnings $45 million, or $0.14 per share.

Net sales in 2015 were $46.1 billion, compared to $45.6 billion in 2014. Net earnings in 2015 were $3.6 billion, or $11.46 per share, compared to $3.6 billion, or $11.21 per share, in 2014. Cash from operations in 2015 was $5.1 billion, compared to cash from operations in 2014 of $3.9 billion after pension contributions of $2.0 billion.

Net earnings in 2015 included special charges for workforce reductions of $102 million, which decreased net earnings $66 million, or $0.21 per share; and non-recoverable transaction costs of $45 million associated with the acquisition of Sikorsky and the Corporation’s strategic review of its government IT and technical services businesses, which decreased net earnings $28 million, or $0.09 per share.  These costs were offset by the recognition of the R&D tax credit, which increased net earnings $71 million, or $0.23 per share.  Net earnings in 2014 included a special charge for a non-cash goodwill impairment of $119 million, which decreased net earnings $107 million, or $0.33 per share, partially offset by the recognition of the R&D tax credit, which increased earnings $45 million, or $0.14 per share.

“The corporation completed a year of exceptional operational accomplishments for customers and financial returns to stockholders,” said Lockheed Martin Chairman, President and CEO Marillyn Hewson.  “The successful closure of the Sikorsky acquisition and completion of the strategic review of our IS&GS businesses, coupled with our record backlog, position the corporation for future growth and value creation for our customers and our stockholders.”

Strategic Actions

Acquisition of Sikorsky Aircraft Corporation

On Nov. 6, 2015, the Corporation completed its acquisition of Sikorsky for $9.0 billion, net of cash acquired.  Sikorsky, a global company primarily engaged in the design, manufacture and support of military and commercial helicopters, has been aligned under the Corporation’s Mission Systems and Training (MST) business segment.  The Corporation funded the acquisition with new debt issuances, commercial paper and cash on hand.  The Corporation and United Technologies Corporation made a joint election under Section 338(h)(10) of the Internal Revenue Code, which treats the transaction as an asset purchase for tax purposes.  This election generates a cash tax benefit with an estimated net present value of $1.9 billion for the Corporation and its stockholders.  The financial results of Sikorsky have been included in the Corporation’s consolidated results of operations from the Nov. 6, 2015 acquisition date through Dec. 31, 2015.

Strategic Review of Government IT and Technical Services Businesses

Information Systems & Global Solutions Divestiture

The Corporation announced today that it has entered into a definitive agreement to separate and combine its Information Systems & Global Solutions (IS&GS) business segment with Leidos Holdings, Inc. (Leidos) in a tax-efficient Reverse Morris Trust transaction anticipated to unlock approximately $5.0 billion in estimated enterprise value for the Corporation’s stockholders, including a $1.8 billion one-time special cash payment to Lockheed Martin.  Additionally, Lockheed Martin stockholders will receive approximately 50.5 percent of the outstanding equity of Leidos on a fully diluted basis with an estimated value of $3.2 billion.  Subsequent to the program realignment described below, the IS&GS business segment represents the government IT and technical services businesses that were under strategic review.  The transaction is expected to close in the third or fourth quarter of 2016.  Until closing, IS&GS will operate as a business segment of the Corporation and financial results for the IS&GS business segment will be reported in continuing operations.  A copy of the news release announcing the transaction is available on the Corporation’s website atwww.lockheedmartin.com/investor.

Program Realignment

During the fourth quarter of 2015, the Corporation realigned certain programs among its business segments in connection with the strategic review of its government IT and technical services businesses.  As part of the realignment:

  • mission IT and services programs supporting the Corporation’s platforms were transferred from the IS&GS business segment to the MST business segment;
  • energy solutions programs were transferred from the IS&GS business segment to the Missiles and Fire Control (MFC) business segment;
  • space services programs were transferred from the IS&GS business segment to the Space Systems business segment; and
  • technical services programs were transferred from the MFC business segment to the IS&GS business segment.

The program realignment did not impact the Corporation’s consolidated results of operations.  The amounts, discussion, and presentation of the Corporation’s business segment financial results for all periods included in this news release reflect this realignment.

Summary Financial Results

The following table presents the Corporation’s summary financial results prepared in accordance with U.S. generally accepted accounting principles (GAAP).

(in millions, except per share data) Quarters Ended Dec. 31,     Years Ended Dec. 31,
  2015     2014     2015     2014
Net sales        $12,917       $12,530       $46,132       $45,600
                             
Business segment operating profit   $1,411       $1,407       $5,486       $5,588
Unallocated items                            
FAS/CAS pension adjustment   113       121       471       376
Special items                            
Severance charges1   (67)             (102)      
Goodwill impairment charges         (119)             (119
Other, net2, 3   (176)       (67)       (419)       (253
Total unallocated items   (130)       (65)       (50)       4
Consolidated operating profit1,2,3   $1,281       $1,342       $5,436       $5,592
                             
Net earnings1,2,3,4   $933       $904       $3,605       $3,614
                             
Diluted earnings per share1,2,3,4   $3.01       $2.82       $11.46       $11.21
                             
Cash from operations5   $1,364       $(201)       $5,101       $3,866
 

1   Severance charges in 2015 consist of amounts associated with the elimination of certain positions at the MST business segment and the IS&GS business segment (prior to program realignment).  These charges reduced net earnings about $44 million, or $0.14 per share, in the quarter ended Dec. 31, 2015 and about $66 million, or $0.21 per share, in the year ended Dec. 31, 2015.  Severance charges for initiatives that are not significant are included in business segment operating profit.

2   Other, net in the quarter and year ended Dec. 31, 2015 includes a non-cash asset impairment charge of approximately $90 million related to the Corporation’s decision to divest a non-core asset in 2016. This charge was partially offset by a net deferred tax benefit of about $80 million, which is recorded in income tax expense. The net impact reduced net earnings by about $10 million, or $0.03 per share, in the quarter and year ended Dec. 31, 2015.

3     Other, net in the quarter and year ended Dec. 31, 2015 includes approximately $45 million of non-recoverable transaction costs associated with the acquisition of Sikorsky and the Corporation’s strategic review, which reduced net earnings about $28 million, or $0.09 per share.

4   The amounts and per share data reported may change between the earnings release date and filing of the Corporation’s Form 10-K due to ongoing purchase accounting analysis related to the Sikorsky acquisition.

5   The Corporation made no contributions to its heritage qualified defined benefit pension trust in the quarter and year ended Dec. 31, 2015, compared to $1.0 billion and $2.0 billion in the quarter and year ended Dec. 31, 2014. The Corporation made approximately $5 million in contributions to the Sikorsky qualified defined benefit pension plan in the quarter and year ended Dec. 31, 2015.   Additionally, the Corporation made net income tax payments of approximately $585 million and $1.8 billion in the quarter and year ended Dec. 31, 2015, compared to approximately $535 million and $1.5 billion in the quarter and year ended Dec. 31, 2014.

2016 Financial Outlook

The following table and other sections of this news release contain forward-looking statements, which are based on the Corporation’s current expectations. Actual results may differ materially from those projected. It is the Corporation’s practice not to incorporate adjustments into its financial outlook for proposed acquisitions, divestitures, ventures, changes in law and restructuring activities until such items have been consummated or enacted. For additional factors that may impact the Corporation’s actual results, refer to the “Forward-Looking Statements” section in this news release.

(in millions, except per share data)   Current Outlook
     
Net sales          $49,500 – $51,000
     
Business segment operating profit   $4,900 – $5,050
   FAS/CAS pension adjustment   ~975
   Other, net   ~(275)
Consolidated operating profit   $5,600 – $5,750
     
Diluted earnings per share   $11.45 – $11.75
     
Cash from operations   ≥ $5,300

The Corporation’s outlook for 2016 reflects a full year of operations of Sikorsky, which was acquired in the fourth quarter of 2015 (the outlook may change as a result of ongoing purchase accounting analysis which will be completed in 2016); incorporates the R&D tax credit, which was permanently extended through legislation enacted in the fourth quarter of 2015; reflects a full year of operations of the IS&GS business segment as the timing of the closing of the announced transaction is uncertain (the outlook for 2016 will be updated when and if the transaction closes); assumes no contributions to the Corporation’s heritage pension plans, as none are required using current assumptions; and includes the impact of planned contributions to the Sikorsky qualified defined benefit pension plan.

Cash Deployment Activities

The Corporation’s cash deployment activities during the quarter and year ended Dec. 31, 2015 consisted of the following:

  • repurchasing 3.2 million shares for $707 million and 15.2 million shares for $3.1 billion during the quarter and year ended Dec. 31, 2015, compared to 1.2 million shares for $224 million and 11.5 million shares for $1.9 billion during the quarter and year ended Dec. 31, 2014;
  • paying cash dividends of $505 million and $1.9 billion during the quarter and year ended Dec. 31, 2015, compared to $474 million and $1.8 billion during the quarter and year ended Dec. 31, 2014;
  • making no contributions to the Corporation’s heritage pension trust during the quarter and year ended Dec. 31, 2015, compared to $1.0 billion and $2.0 billion during the quarter and year ended Dec. 31, 2014;
  • paying $9.0 billion for acquisitions of businesses and investments in affiliates, net of cash acquired, during the quarter and year ended Dec. 31, 2015, compared to $276 million and $898 million during the quarter and year ended Dec. 31, 2014; and
  • making capital expenditures of $439 million and $939 million during the quarter and year ended Dec. 31, 2015, compared to $389 million and $845 million during the quarter and year ended Dec. 31, 2014.

In October 2015, the Corporation borrowed $6.0 billion under a 364-day revolving credit facility (the 364-day Facility) to partially fund the $9.0 billion purchase price of Sikorsky, net of cash acquired. The remainder of the Sikorsky purchase price was funded with cash from operations and approximately $1.0 billion in commercial paper borrowings.  In November 2015, the Corporation borrowed $7.0 billion of fixed interest rate long-term notes (the November 2015 Notes), the proceeds of which were used to repay the $6.0 billion of outstanding borrowings under the 364-day Facility and for general corporate purposes.  The November 2015 Notes have fixed interest rates ranging from 1.85 percent to 4.70 percent and mature between 2018 and 2046. Commercial paper borrowings used to fund the Sikorsky acquisition were repaid in the fourth quarter of 2015. (Original Source)

Shares of Lockheed Martin closed yesterday at $211.01. LMT has a 1-year high of $227.91 and a 1-year low of $181.91. The stock’s 50-day moving average is $216.01 and its 200-day moving average is $210.12.

On the ratings front, Lockheed Martin has been the subject of a number of recent research reports. In a report released yesterday, William Blair analyst Anil Doradla assigned a Buy rating on LMT. Separately, on January 6, RBC’s Robert Stallard upgraded the stock to Buy and has a price target of $250.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Anil Doradla and Robert Stallard have a total average return of 9.0% and 5.1% respectively. Doradla has a success rate of 57.1% and is ranked #397 out of 3593 analysts, while Stallard has a success rate of 58.1% and is ranked #444.

Overall, one research analyst has rated the stock with a Sell rating, one research analyst has assigned a Hold rating and 2 research analysts have given a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $229.75 which is 8.9% above where the stock closed yesterday.

Lockheed Martin Corp is a security and aerospace company. The Company is engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services.