Lockheed Martin had a fantastic 2014, by the numbers. 

With sales revenue of $45.6 billion and net earnings above $3.6 billion, it seems little wonder the prime Pentagon provider was barely nosed out by Boeing in winning the 2015 Aviation Week Top-Performing Companies category for their peer group. Indeed, with a 2015 TPC score of 96—behind Boeing’s 97—and a five-year running average of 90 (Boeing, 93), Lockheed is otherwise well above the rest of the aerospace and defense industry, and has reason to boast. 

Thanks, that is, to its retirees.

If not for a growing tailwind benefit of how Lockheed accounts for its pension liabilities, as well as its experienced foreign-exchange (FX) hedging and other asset-management accounting moves, Lockheed’s 2014 financial results and TPC scores would look worse. Indeed, they could look significantly worse if the final numbers reflected only the suburban Washington-based contractor’s core business operations, especially as Pentagon budgets have flatlined in recent years.

For instance, Lockheed’s cash from operations for 2014 was $3.9 billion after making a discretionary, advance pension-liability contribution of $2 billion. That compared to cash from operations for 2013 of $4.5 billion after pension contributions of $2.25 billion.

And even as those pension payments may sound robust, Lockheed still had a “large” pension deficit of $11.2 billion at the end of 2014, according to Fitch Ratings. Yet executives said in January they do not plan to make any more payments through 2017.

In the meantime, pension income swung to $376 million for 2014 after a $482 million loss the year before, in part due to arcane accounting treatments and benefits enjoyed by federal contractors. That income stream should only improve. 

“We expect Lockheed Martin will be the industry’s biggest beneficiary of rapidly growing pension expense recoveries over the next several years,” Moody’s Investors Service says.

In looking over 2014 results, the TPC Council of Advisers noted the strong and growing effect of pensions, FX and other bookkeeping in annual financial results. More than any other factor, pension treatments increasingly are underpinning A&D results, an effect that is only expected to gain steam (AW&ST Oct. 13, 2014, p. 50).

“It’s based on the growth in their pension,” says Byron Callan, a widely followed defense industry analyst at Capital Alpha Partners and a TPC adviser.

“Some of these numbers are going to be driven more by these swings in the pendulum and the [federal contractor accounting] rules, the Financial Accounting Standards rules on pension treatment,” Callan says. “It’s fascinating if you look at forward analyst projections, particularly for some of the large U.S. primes; they’re going to show pretty good earnings growth over the next couple of years.”

Callan says the benefit was most pronounced at Lockheed, but other companies on the TPC list also bask in the afterglow of financial engineering. 

“They will be the top-performing firms when it’s really not something that’s coming from how they fundamentally manage their programs as much as it is from the fact that, as in Lockheed’s case, they’ve prepaid a lot of their pension plan,” he says. “They’ll recover that under the cash roll.”

Companies in the two top TPC peer groups also are collectively doing a “very good job” of hedging their international revenue mix denominated in other than their native currencies, according to industry analyst Mike Lowry, who compiles TPC scores as a service for Aviation Week.

For example, even as the U.S. dollar approached an almost five-year-high value compared with other currencies last year, TPC companies in the over-$20 billion revenue category lost only $421 million in FX effects on cash via hedging. That is down from $505 million in 2013. In 2014, Boeing lost just $87 million while many companies such as Lockheed reported no change.

Analysts see the numbers play out in many other ways, too. One so-called quality-of-earnings measurement that Wall Street tracks is the Dupont calculation. According to Investorpedia.com and Lowry, return on equity (ROE) is a closely watched number indicating how a company’s management does in creating value. But it can be misleading, too. The advanced Dupont model defines the percentage contribution of a ROE result from operating and/or debt sources, i.e., financial engineering.

Across the top TPC category (revenue-weighted), 30.2% of ROE was attributable to financial engineering in 2014. At Boeing, it was 29%; Lockheed, 57.1%; Honeywell International, 27.7%; Raytheon, 22.2%; BAE Systems, 44.9%; Northrop Grumman, 34.1%; General Dynamics, 19.4%; United Technologies, 29.8%; and Airbus Group, 17.8%. Rolls-Royce’s was not measurable.

In the end, TPC advisers suspect that if pension treatments could be stripped out of calculations, then BAE Systems (No. 5), Airbus Group (No. 9) and Rolls-Royce (No. 10) might all move up in the Top 10 listing of the highest, over-$20 billion annual revenue category. General Dynamics, which accounts for its pension differently than other primes, might too, as the way it handles its pension now does not let it enjoy the same benefits.