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Microsoft Excel LibreOffice Calc

Lockheed Martin Corp. (LMT)


Analysis of Goodwill and Intangible Assets

Difficulty: Advanced


Goodwill and Intangible Assets Accounting Policy

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., Statement of Financial Position, Goodwill and Intangible Assets

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Customer programs hidden hidden hidden hidden hidden
Customer relationships hidden hidden hidden hidden hidden
Other hidden hidden hidden hidden hidden
Finite-lived acquired intangibles, gross carrying amount hidden hidden hidden hidden hidden
Accumulated amortization hidden hidden hidden hidden hidden
Finite-lived acquired intangibles, net carrying amount hidden hidden hidden hidden hidden
Trademark hidden hidden hidden hidden hidden
Indefinite-lived acquired intangibles hidden hidden hidden hidden hidden
Acquired intangibles hidden hidden hidden hidden hidden
Goodwill hidden hidden hidden hidden hidden
Goodwill and acquired intangibles hidden hidden hidden hidden hidden

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.

Analyst Adjustments: Removal of Goodwill

Lockheed Martin Corp., adjustments to financial data

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Adjustment to Total Assets
Total assets (as reported) hidden hidden hidden hidden hidden
Less: Goodwill hidden hidden hidden hidden hidden
Total assets (adjusted) hidden hidden hidden hidden hidden
Adjustment to Stockholders’ Equity (deficit)
Stockholders’ equity (deficit) (as reported) hidden hidden hidden hidden hidden
Less: Goodwill hidden hidden hidden hidden hidden
Stockholders’ equity (deficit) (adjusted) hidden hidden hidden hidden hidden
Adjustment to Net Earnings
Net earnings (as reported) hidden hidden hidden hidden hidden
Add: Goodwill impairment charges hidden hidden hidden hidden hidden
Net earnings (adjusted) hidden hidden hidden hidden hidden

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 Ratios: Removal of Goodwill (Summary)

Lockheed Martin Corp., adjusted ratios

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net Profit Margin
Reported net profit margin hidden hidden hidden hidden hidden
Adjusted net profit margin hidden hidden hidden hidden hidden
Total Asset Turnover
Reported total asset turnover hidden hidden hidden hidden hidden
Adjusted total asset turnover hidden hidden hidden hidden hidden
Financial Leverage
Reported financial leverage hidden hidden hidden hidden hidden
Adjusted financial leverage hidden hidden hidden hidden hidden
Return on Equity (ROE)
Reported ROE hidden hidden hidden hidden hidden
Adjusted ROE hidden hidden hidden hidden hidden
Return on Assets (ROA)
Reported ROA hidden hidden hidden hidden hidden
Adjusted ROA hidden hidden hidden hidden hidden

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).

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 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 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., Ratios: Reported vs. Adjusted


Adjusted Net Profit Margin

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (USD $ in millions)
Net earnings hidden hidden hidden hidden hidden
Net sales hidden hidden hidden hidden hidden
Ratio
Net profit margin1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Selected Financial Data (USD $ in millions)
Adjusted net earnings hidden hidden hidden hidden hidden
Net sales hidden hidden hidden hidden hidden
Ratio
Adjusted net profit margin2 hidden hidden hidden hidden hidden

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 × hidden ÷ hidden = hidden

2 Adjusted net profit margin = 100 × Adjusted net earnings ÷ Net sales
= 100 × hidden ÷ hidden = hidden

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 deteriorated from 2016 to 2017 but then improved from 2017 to 2018 not reaching 2016 level.

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (USD $ in millions)
Net sales hidden hidden hidden hidden hidden
Total assets hidden hidden hidden hidden hidden
Ratio
Total asset turnover1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Selected Financial Data (USD $ in millions)
Net sales hidden hidden hidden hidden hidden
Adjusted total assets hidden hidden hidden hidden hidden
Ratio
Adjusted total asset turnover2 hidden hidden hidden hidden hidden

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
= hidden ÷ hidden = hidden

2 Adjusted total asset turnover = Net sales ÷ Adjusted total assets
= hidden ÷ hidden = hidden

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 improved from 2016 to 2017 and from 2017 to 2018.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (USD $ in millions)
Total assets hidden hidden hidden hidden hidden
Stockholders’ equity (deficit) hidden hidden hidden hidden hidden
Ratio
Financial leverage1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Selected Financial Data (USD $ in millions)
Adjusted total assets hidden hidden hidden hidden hidden
Adjusted stockholders’ equity (deficit) hidden hidden hidden hidden hidden
Ratio
Adjusted financial leverage2 hidden hidden hidden hidden hidden

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)
= hidden ÷ hidden = hidden

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders’ equity (deficit)
= hidden ÷ hidden = hidden

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)

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (USD $ in millions)
Net earnings hidden hidden hidden hidden hidden
Stockholders’ equity (deficit) hidden hidden hidden hidden hidden
Ratio
ROE1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Selected Financial Data (USD $ in millions)
Adjusted net earnings hidden hidden hidden hidden hidden
Adjusted stockholders’ equity (deficit) hidden hidden hidden hidden hidden
Ratio
Adjusted ROE2 hidden hidden hidden hidden hidden

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 × hidden ÷ hidden = hidden

2 Adjusted ROE = 100 × Adjusted net earnings ÷ Adjusted stockholders’ equity (deficit)
= 100 × hidden ÷ hidden = hidden

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

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (USD $ in millions)
Net earnings hidden hidden hidden hidden hidden
Total assets hidden hidden hidden hidden hidden
Ratio
ROA1 hidden hidden hidden hidden hidden
Adjusted for Goodwill
Selected Financial Data (USD $ in millions)
Adjusted net earnings hidden hidden hidden hidden hidden
Adjusted total assets hidden hidden hidden hidden hidden
Ratio
Adjusted ROA2 hidden hidden hidden hidden hidden

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 × hidden ÷ hidden = hidden

2 Adjusted ROA = 100 × Adjusted net earnings ÷ Adjusted total assets
= 100 × hidden ÷ hidden = hidden

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.