LMT

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter ended March 29, 2009
Business Overview: A global security company engaged in the research, design, development, manufacture, and sustainment of advanced technology systems. Principal customers are U.S. Government agencies (84% of 2008 sales). Operations are organized into four segments: Electronic Systems, Information Systems & Global Services (IS&GS), Aeronautics, and Space Systems.

Key Financial Metrics

Margins: Operating margin was approximately 10.2% in Q1 2009 compared to 11.8% in Q1 2008. Effective income tax rate was 31.9% in Q1 2009 versus 32.7% in Q1 2008.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 4% year-over-year, driven by growth in Electronic Systems (+4%), IS&GS (+10%), and Space Systems (+2%). Aeronautics sales declined 1% due to lower volume on F-16 and F-22 programs.
• Profit Decline: Operating profit decreased 10% to $1.057 billion. This was primarily due to a $142 million expense in "Unallocated Corporate" costs (versus $28 million income in 2008) driven by the FAS/CAS pension adjustment, and a decrease in "Other Income" due to the absence of a $16 million gain recognized in 2008 from the sale of ownership interests in LKEI/ILS.
• Segment Performance: Operating profit increased in Electronic Systems (+7%), IS&GS (+5%), and Aeronautics (+10%). Space Systems operating profit declined 8% due to lower equity earnings from United Launch Alliance (ULA) and the absence of a prior-year contract negotiation benefit.
• Cash Flow: Operating cash flow improved significantly by $338 million to $1.218 billion, largely due to higher customer advances on Air Mobility and Combat Aircraft programs.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• DoD Budget: The company is assessing the impact of the Department of Defense's FY2010 budget recommendations, which propose stable or increased support for F-35, AEHF, LCS, and Aegis programs, but cancellation of the VH-71 Presidential Helicopter and restructuring of the MKV program.
• Capital Deployment: Lockheed Martin continues a balanced strategy of investing in the business, making selective acquisitions, repurchasing shares, and increasing dividends. In Q1 2009, the company repurchased $499 million of stock and paid $227 million in dividends.
• Liquidity: The company maintains $2.4 billion in cash and a $1.5 billion revolving credit facility. Management believes access to capital markets remains available despite economic uncertainty.

Risks and Contingencies:

• Legal Proceedings: Ongoing litigation includes False Claims Act allegations regarding subcontractor invoices, a grand jury subpoena regarding an eDOCS contract, and an ERISA class action regarding 401(k) plan fees. Management believes the probability of a material adverse effect is remote.
• Environmental: Recorded environmental liabilities total $809 million, with $683 million in assets recorded for expected future recovery from government contracts.
• Pension Obligations: Significant pension liabilities exist ($12.3 billion accrued). The FAS/CAS pension adjustment negatively impacted Q1 2009 earnings due to negative actual returns on plan assets in 2008 and lower discount rates.
• United Launch Alliance (ULA): Lockheed Martin and Boeing have committed to providing up to $25 million each in additional capital and $200 million in financial support to ULA. No funding was provided in Q1 2009, but $22 million is expected to be contributed in Q2 2009.

Investor Verification Checklist

• Pension Impact: Verify the magnitude of the FAS/CAS pension adjustment ($114 million expense) and its impact on future quarters given the negative asset returns in 2008.
• DoD Budget Exposure: Assess the specific financial impact of the proposed FY2010 DoD budget changes, particularly the cancellation of the VH-71 program and potential work scope realignment.
• Legal Exposure: Monitor the status of the ERISA class action lawsuit and the False Claims Act investigations, as outcomes could result in fines or penalties.
• Share Repurchases: Confirm the remaining capacity under the share repurchase program (25.6 million shares remaining as of March 29, 2009) and future buyback intentions.
• ULA Commitments: Track the timing and necessity of the remaining $22 million capital contribution to United Launch Alliance scheduled for Q2 2009.