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Lockheed Martin Corp. (LMT)


Analysis of Goodwill and Intangible Assets

High level of difficulty


Accounting Policy on Goodwill and Intangible Assets

Goodwill

The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses.

Lockheed Martin’s goodwill balance was $10.8 billion at both December 31, 2018 and 2017. Lockheed Martin performs an impairment test of the goodwill at least annually in the fourth quarter or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may be impaired. Such events or changes in circumstances may include a significant deterioration in overall economic conditions, changes in the business climate of Lockheed Martin’s industry, a decline in the market capitalization, operating performance indicators, competition, reorganizations of the business, U.S. Government budget restrictions or the disposal of all or a portion of a reporting unit. Lockheed Martin’s goodwill has been allocated to and is tested for impairment at a level referred to as the reporting unit, which is the business segment level or a level below the business segment. The level at which Lockheed Martin tests goodwill for impairment requires Lockheed Martin to determine whether the operations below the business segment constitute a self-sustaining business for which discrete financial information is available and segment management regularly reviews the operating results.

Lockheed Martin may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. For selected reporting units where Lockheed Martin uses the qualitative approach, Lockheed Martin performs a qualitative evaluation of events and circumstances impacting the reporting unit to determine the likelihood of goodwill impairment. Based on that qualitative evaluation, if Lockheed Martin determines it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary. Otherwise Lockheed Martin performs a quantitative impairment test. Lockheed Martin performs quantitative tests for most reporting units at least once every three years. However, for certain reporting units Lockheed Martin may perform a quantitative impairment test every year.

For the quantitative impairment test Lockheed Martin compares the fair value of a reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the carrying value of the reporting unit, including goodwill, exceeds its fair value, a goodwill impairment loss is recognized in an amount equal to that excess. Lockheed Martin generally estimates the fair value of each reporting unit using a combination of a discounted cash flow (DCF) analysis and market-based valuation methodologies such as comparable public company trading values and values observed in recent business acquisitions. Determining fair value requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates, discount rates and relevant comparable public company earnings multiples and relevant transaction multiples. The cash flows employed in the DCF analysis are based on Lockheed Martin’s best estimate of future sales, earnings and cash flows after considering factors such as general market conditions, U.S. Government budgets, existing firm orders, expected future orders, contracts with suppliers, labor agreements, changes in working capital, long term business plans and recent operating performance. The discount rates utilized in the DCF analysis are based on the respective reporting unit’s weighted average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the respective reporting unit. The carrying value of each reporting unit includes the assets and liabilities employed in its operations, goodwill and allocations of certain assets and liabilities held at the business segment and corporate levels.

During the fourth quarters of 2018, 2017 and 2016, Lockheed Martin performed the annual goodwill impairment test for each of the reporting units. The results of Lockheed Martin’s annual impairment tests of goodwill indicated that no impairment existed.

Intangible assets

Intangible assets from acquired businesses are recognized at their estimated fair values at the date of acquisition and consist of customer programs, trademarks, customer relationships, technology and other intangible assets. Customer programs include values assigned to major programs of acquired businesses and represent the aggregate value associated with the customer relationships, contracts, technology and trademarks underlying the associated program and are amortized on a straight-line basis over a period of expected cash flows used to measure the fair value, which ranges from nine to 20 years. Acquired intangibles deemed to have indefinite lives are not amortized, but are subject to annual impairment testing. This testing compares carrying value to fair value and, when appropriate, the carrying value of these assets is reduced to fair value. Finite-lived intangibles are amortized to expense over the applicable useful lives, ranging from three to 20 years, based on the nature of the asset and the underlying pattern of economic benefit as reflected by future net cash inflows. Lockheed Martin performs an impairment test of finite-lived intangibles whenever events or changes in circumstances indicate their carrying value may be impaired.

Source: 10-K (filing date: 2019-02-08).


Goodwill and Intangible Assets Disclosure

Lockheed Martin Corp., balance sheet: goodwill and intangible assets

US$ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Customer programs 3,184  3,184  3,184  3,127  — 
Customer relationships 344  352  359  309  309 
Other 53  71  111  171  171 
Finite-lived acquired intangibles, gross carrying amount 3,581  3,607  3,654  3,607  480 
Accumulated amortization (974) (697) (448) (294) (174)
Finite-lived acquired intangibles, net carrying amount 2,607  2,910  3,206  3,313  306 
Trademark 887  887  887  834  18 
Indefinite-lived acquired intangibles 887  887  887  834  18 
Acquired intangibles 3,494  3,797  4,093  4,147  324 
Goodwill 10,769  10,807  10,764  13,576  10,862 
Goodwill and acquired intangibles 14,263  14,604  14,857  17,723  11,186 

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-09).

Item Description The company
Acquired intangibles Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Lockheed Martin Corp.’s acquired intangibles declined from 2016 to 2017 and from 2017 to 2018.
Goodwill Amount after accumulated impairment loss of an asset representing future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Lockheed Martin Corp.’s goodwill increased from 2016 to 2017 but then slightly declined from 2017 to 2018 not reaching 2016 level.
Goodwill and acquired intangibles Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Lockheed Martin Corp.’s goodwill and acquired intangibles declined from 2016 to 2017 and from 2017 to 2018.

Adjustments to Financial Statements: Removal of Goodwill

Lockheed Martin Corp., adjustments to financial statements

US$ in millions

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Adjustment to Total Assets
Total assets (as reported) 44,876  46,521  47,806  49,128  37,073 
Less: Goodwill 10,769  10,807  10,764  13,576  10,862 
Total assets (adjusted) 34,107  35,714  37,042  35,552  26,211 
Adjustment to Stockholders’ Equity (deficit)
Stockholders’ equity (deficit) (as reported) 1,394  (683) 1,511  3,097  3,400 
Less: Goodwill 10,769  10,807  10,764  13,576  10,862 
Stockholders’ equity (deficit) (adjusted) (9,375) (11,490) (9,253) (10,479) (7,462)
Adjustment to Net Earnings
Net earnings (as reported) 5,046  2,002  5,302  3,605  3,614 
Add: Goodwill impairment charges —  —  —  —  119 
Net earnings (adjusted) 5,046  2,002  5,302  3,605  3,733 

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-09).


Lockheed Martin Corp., Financial Data: Reported vs. Adjusted


Adjusted Financial Ratios: Removal of Goodwill (Summary)

Lockheed Martin Corp., adjusted financial ratios

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net Profit Margin
Reported net profit margin 9.39% 3.92% 11.22% 7.81% 7.93%
Adjusted net profit margin 9.39% 3.92% 11.22% 7.81% 8.19%
Total Asset Turnover
Reported total asset turnover 1.20 1.10 0.99 0.94 1.23
Adjusted total asset turnover 1.58 1.43 1.28 1.30 1.74
Financial Leverage
Reported financial leverage 32.19 31.64 15.86 10.90
Adjusted financial leverage
Return on Equity (ROE)
Reported ROE 361.98% 350.89% 116.40% 106.29%
Adjusted ROE
Return on Assets (ROA)
Reported ROA 11.24% 4.30% 11.09% 7.34% 9.75%
Adjusted ROA 14.79% 5.61% 14.31% 10.14% 14.24%

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-09).

Financial ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Lockheed Martin Corp.’s adjusted net profit margin ratio deteriorated from 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Lockheed Martin Corp.’s adjusted total asset turnover ratio improved from 2016 to 2017 and from 2017 to 2018.
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Lockheed Martin Corp.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Lockheed Martin Corp., Financial Ratios: Reported vs. Adjusted


Adjusted Net Profit Margin

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net earnings 5,046  2,002  5,302  3,605  3,614 
Net sales 53,762  51,048  47,248  46,132  45,600 
Profitability Ratio
Net profit margin1 9.39% 3.92% 11.22% 7.81% 7.93%
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Adjusted net earnings 5,046  2,002  5,302  3,605  3,733 
Net sales 53,762  51,048  47,248  46,132  45,600 
Profitability Ratio
Adjusted net profit margin2 9.39% 3.92% 11.22% 7.81% 8.19%

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-09).

2018 Calculations

1 Net profit margin = 100 × Net earnings ÷ Net sales
= 100 × 5,046 ÷ 53,762 = 9.39%

2 Adjusted net profit margin = 100 × Adjusted net earnings ÷ Net sales
= 100 × 5,046 ÷ 53,762 = 9.39%

Profitability ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Lockheed Martin Corp.’s adjusted net profit margin ratio deteriorated from 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.

Adjusted Total Asset Turnover

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net sales 53,762  51,048  47,248  46,132  45,600 
Total assets 44,876  46,521  47,806  49,128  37,073 
Activity Ratio
Total asset turnover1 1.20 1.10 0.99 0.94 1.23
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Net sales 53,762  51,048  47,248  46,132  45,600 
Adjusted total assets 34,107  35,714  37,042  35,552  26,211 
Activity Ratio
Adjusted total asset turnover2 1.58 1.43 1.28 1.30 1.74

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-09).

2018 Calculations

1 Total asset turnover = Net sales ÷ Total assets
= 53,762 ÷ 44,876 = 1.20

2 Adjusted total asset turnover = Net sales ÷ Adjusted total assets
= 53,762 ÷ 34,107 = 1.58

Activity ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Lockheed Martin Corp.’s adjusted total asset turnover ratio improved from 2016 to 2017 and from 2017 to 2018.

Adjusted Financial Leverage

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Total assets 44,876  46,521  47,806  49,128  37,073 
Stockholders’ equity (deficit) 1,394  (683) 1,511  3,097  3,400 
Solvency Ratio
Financial leverage1 32.19 31.64 15.86 10.90
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Adjusted total assets 34,107  35,714  37,042  35,552  26,211 
Adjusted stockholders’ equity (deficit) (9,375) (11,490) (9,253) (10,479) (7,462)
Solvency Ratio
Adjusted financial leverage2

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-09).

2018 Calculations

1 Financial leverage = Total assets ÷ Stockholders’ equity (deficit)
= 44,876 ÷ 1,394 = 32.19

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders’ equity (deficit)
= 34,107 ÷ -9,375 =

Solvency ratio Description The company
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.

Adjusted Return on Equity (ROE)

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net earnings 5,046  2,002  5,302  3,605  3,614 
Stockholders’ equity (deficit) 1,394  (683) 1,511  3,097  3,400 
Profitability Ratio
ROE1 361.98% 350.89% 116.40% 106.29%
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Adjusted net earnings 5,046  2,002  5,302  3,605  3,733 
Adjusted stockholders’ equity (deficit) (9,375) (11,490) (9,253) (10,479) (7,462)
Profitability Ratio
Adjusted ROE2

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-09).

2018 Calculations

1 ROE = 100 × Net earnings ÷ Stockholders’ equity (deficit)
= 100 × 5,046 ÷ 1,394 = 361.98%

2 Adjusted ROE = 100 × Adjusted net earnings ÷ Adjusted stockholders’ equity (deficit)
= 100 × 5,046 ÷ -9,375 =

Profitability ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity.

Adjusted Return on Assets (ROA)

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net earnings 5,046  2,002  5,302  3,605  3,614 
Total assets 44,876  46,521  47,806  49,128  37,073 
Profitability Ratio
ROA1 11.24% 4.30% 11.09% 7.34% 9.75%
Adjusted for Goodwill
Selected Financial Data (US$ in millions)
Adjusted net earnings 5,046  2,002  5,302  3,605  3,733 
Adjusted total assets 34,107  35,714  37,042  35,552  26,211 
Profitability Ratio
Adjusted ROA2 14.79% 5.61% 14.31% 10.14% 14.24%

Based on: 10-K (filing date: 2019-02-08), 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-09), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-09).

2018 Calculations

1 ROA = 100 × Net earnings ÷ Total assets
= 100 × 5,046 ÷ 44,876 = 11.24%

2 Adjusted ROA = 100 × Adjusted net earnings ÷ Adjusted total assets
= 100 × 5,046 ÷ 34,107 = 14.79%

Profitability ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Lockheed Martin Corp.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.