Lockheed Martin Corp. (NYSE:LMT)

The period under review demonstrates fluctuating financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) exhibited volatility, beginning at US$6,442 million, decreasing to US$5,745 million, then increasing to US$6,983 million before declining again to US$5,464 million, and finally recovering to US$6,105 million. Invested capital also showed movement, initially decreasing from US$28,620 million to US$26,603 million, followed by increases to US$27,427 million, US$28,784 million, and ultimately reaching US$30,349 million. The cost of capital remained relatively stable, fluctuating within a narrow range between 6.86% and 6.99% throughout the observed timeframe.

Economic Profit Trend

Economic profit mirrored the NOPAT trend, starting at US$4,460 million, decreasing to US$3,885 million, increasing to a peak of US$5,094 million, then declining to US$3,490 million, and concluding at US$3,991 million. This suggests a strong correlation between NOPAT and economic profit, as expected. The peak in economic profit in 2023 coincided with the highest NOPAT value during the period.

Relationship between NOPAT and Economic Profit

The observed fluctuations in economic profit are directly influenced by changes in NOPAT. While the cost of capital remained relatively constant, the variations in NOPAT had a significant impact on the magnitude of economic profit. A higher NOPAT generally resulted in a higher economic profit, and vice versa.

Invested Capital and Economic Profit

The increase in invested capital from 2022 through 2025 did not consistently translate into higher economic profit. While invested capital increased, economic profit experienced a decline in 2024, indicating that the returns on the additional capital were not sufficient to offset the cost of that capital. The final year, 2025, showed both increased invested capital and economic profit, suggesting improved capital efficiency.

Overall, the financial performance demonstrated a pattern of cyclicality. While economic profit remained positive throughout the period, its magnitude varied considerably, influenced primarily by NOPAT fluctuations and, to a lesser extent, changes in invested capital.

Net operating profit after taxes (NOPAT) exhibited fluctuations over the five-year period. While generally tracking closely with net earnings, NOPAT demonstrated a slightly different trajectory, particularly in the earlier years. An initial observation reveals a period of growth followed by contraction and subsequent recovery.

Overall Trend

NOPAT began at US$6,442 million in 2021, experienced a slight decrease to US$5,745 million in 2022, then increased substantially to US$6,983 million in 2023. A subsequent decline to US$5,464 million occurred in 2024, followed by a recovery to US$6,105 million in 2025. This pattern suggests sensitivity to underlying operational factors and potentially external economic conditions.

Comparison to Net Earnings

In 2021 and 2022, NOPAT was marginally higher than net earnings. This difference narrowed in 2023, with NOPAT exceeding net earnings by US$63 million. In 2024, the difference widened again, with net earnings falling more significantly than NOPAT. By 2025, NOPAT surpassed net earnings by US$1,088 million, indicating a divergence in the factors impacting reported net income versus core operational profitability.

Year-over-Year Changes

The largest year-over-year increase in NOPAT occurred between 2022 and 2023, with a growth of US$1,238 million. The most substantial decrease was observed between 2023 and 2024, representing a decline of US$1,519 million. The final period, from 2024 to 2025, showed a positive change of US$641 million, indicating a return to growth after the 2024 dip.

The fluctuations in NOPAT warrant further investigation to determine the underlying drivers. Factors such as changes in revenue, operating expenses, and tax rates could contribute to these observed patterns. The increasing difference between NOPAT and net earnings in the later years also suggests a need to analyze non-operating items impacting net income.

The reported federal and foreign income tax expense exhibited volatility over the five-year period. It decreased from US$1,235 million in 2021 to US$948 million in 2022, before increasing to US$1,178 million in 2023. A subsequent decline to US$884 million was noted in 2024, followed by a modest increase to US$905 million in 2025.

Cash operating taxes demonstrated a different pattern. An initial increase from US$1,500 million in 2021 to US$1,910 million in 2022 was observed. This was followed by a decrease to US$1,825 million in 2023 and a further reduction to US$1,662 million in 2024. A significant decrease occurred in 2025, with cash operating taxes falling to US$723 million.

Trend Analysis - Cash Operating Taxes

Cash operating taxes generally decreased over the period from 2022 to 2025. The most substantial decline occurred between 2024 and 2025, representing a reduction of approximately US$939 million. This suggests a potential shift in the timing of tax payments relative to reported income, or a change in underlying tax liabilities.

Relationship between Tax Expense and Cash Taxes

A consistent difference exists between federal and foreign income tax expense and cash operating taxes. Cash operating taxes were consistently higher than the reported tax expense from 2021 through 2024. However, in 2025, cash operating taxes fell below the reported tax expense. This divergence could be attributable to factors such as deferred tax assets, tax credits, or differences in accounting versus cash-based tax calculations.

Potential Implications

The substantial decrease in cash operating taxes in 2025 warrants further investigation. It could indicate improved tax efficiency, changes in tax legislation, or a temporary reduction in taxable income. The difference between reported tax expense and cash taxes should be examined to understand the underlying drivers and potential impact on future cash flows.

The fluctuations in both reported tax expense and cash operating taxes suggest a dynamic tax environment. Continued monitoring of these figures is recommended to assess the sustainability of observed trends and their impact on overall financial performance.

The composition of invested capital exhibits notable shifts over the five-year period. Total reported debt & leases consistently increased, while stockholders’ equity experienced a decline before stabilizing. These movements significantly influence the overall invested capital figure.

Total Reported Debt & Leases

A clear upward trend is observed in total reported debt & leases, increasing from US$13,076 million in 2021 to US$22,771 million in 2025. The rate of increase accelerated between 2021 and 2023, then moderated slightly in the subsequent two years. This suggests a growing reliance on debt financing.

Stockholders’ Equity

Stockholders’ equity demonstrated a substantial decrease from US$10,959 million in 2021 to US$6,333 million in 2023. A modest recovery is then seen, with equity reaching US$6,721 million in 2025. This decline and subsequent stabilization may be attributable to factors such as share repurchases, dividend payments, or retained earnings performance.

Invested Capital

Invested capital initially decreased from US$28,620 million in 2021 to US$26,603 million in 2022, coinciding with the decline in stockholders’ equity. It then experienced a gradual increase, reaching US$30,349 million in 2025. The increasing trend in debt appears to be the primary driver of this overall increase in invested capital in the later years, offsetting the earlier decline and the relatively flat equity position.

The interplay between debt and equity significantly shapes the invested capital base. The increasing debt levels, coupled with the initial decrease and subsequent stabilization of equity, suggest a changing capital structure. Further investigation into the reasons behind these trends would be beneficial for a comprehensive understanding of the company’s financial position.

The economic spread ratio exhibited fluctuations over the five-year period. Initial values demonstrated a generally strong performance, followed by a period of decline and subsequent partial recovery. Economic profit also showed variability, while invested capital generally increased throughout the period.

Economic Spread Ratio

The economic spread ratio began at 15.58% in 2021, indicating a substantial spread between the return on invested capital and the cost of capital. A decrease was observed in 2022, with the ratio falling to 14.60%. This downward trend continued into 2024, reaching a low of 12.13%. However, the ratio experienced an increase in 2023, rising to 18.57%, before settling at 13.15% in 2025. This suggests periods of enhanced profitability relative to capital costs, interspersed with periods of diminished returns.

Economic Profit

Economic profit started at US$4,460 million in 2021. It decreased to US$3,885 million in 2022. A significant increase was then recorded in 2023, reaching US$5,094 million. Subsequently, economic profit declined to US$3,490 million in 2024 and remained relatively stable at US$3,991 million in 2025. The fluctuations in economic profit directly influence the economic spread ratio.

Invested Capital

Invested capital demonstrated a consistent upward trend throughout the period. Starting at US$28,620 million in 2021, it decreased slightly to US$26,603 million in 2022. However, it then increased steadily, reaching US$27,427 million in 2023, US$28,784 million in 2024, and US$30,349 million in 2025. This growth in invested capital, coupled with the fluctuations in economic profit, contributed to the observed changes in the economic spread ratio.

The interplay between economic profit and invested capital suggests a dynamic relationship between profitability and capital allocation. While invested capital consistently grew, the economic spread ratio’s performance was more variable, indicating that the efficiency of capital deployment, as measured by the spread, was not constant over the period.

The economic profit margin exhibited fluctuations over the five-year period. Initial values decreased before increasing and then declining again, suggesting a cyclical pattern in profitability relative to sales. A review of the underlying factors driving sales and cost of capital would be beneficial to understand these fluctuations.

Economic Profit Margin Trend

The economic profit margin began at 6.65% in 2021. A decrease was observed in 2022, with the margin falling to 5.89%. The margin then increased substantially in 2023, reaching 7.54%, representing the highest value within the observed period. However, this was followed by a decline to 4.91% in 2024 and a slight recovery to 5.32% in 2025. This indicates a potential weakening of profitability relative to revenue in the latter years of the period.

Economic profit itself followed a similar pattern. While economic profit decreased from 2021 to 2022, it increased in 2023, then decreased in 2024 and experienced a modest increase in 2025. The economic profit margin’s movement suggests that changes in economic profit are not solely driven by absolute profit levels, but also by the corresponding changes in sales revenue.

Sales Correlation

Sales demonstrated an overall upward trend, increasing from US$67,044 million in 2021 to US$75,048 million in 2025. However, the economic profit margin did not consistently increase alongside sales. The peak margin occurred in 2023, despite sales being lower than in 2024 and 2025. This suggests that factors beyond revenue growth, such as cost management or capital efficiency, significantly influence the economic profit margin.

The observed volatility in the economic profit margin warrants further investigation. Understanding the drivers behind these fluctuations is crucial for assessing the company’s long-term financial performance and identifying areas for improvement.