LMT

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2006
Business Overview: Lockheed Martin is a global aerospace and defense company serving primarily U.S. Government agencies (85% of 2005 sales). Operations are organized into five segments: Aeronautics, Electronic Systems, Space Systems, Integrated Systems & Solutions, and Information & Technology Services.

Key Financial Metrics

Margins: Operating margin was approximately 10.5% in Q1 2006 compared to 7.4% in Q1 2005. The effective income tax rate was 32.6% for Q1 2006.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 9% year-over-year, driven by growth in Electronic Systems (+17%), Space Systems (+18%), and Information & Technology Services (+9%). Aeronautics sales declined 3% due to fewer C-130J deliveries and lower F-16 volume.
• Profitability Surge: Operating profit rose 54% to $971 million. This was driven by improved performance across all segments and a significant reduction in unallocated corporate expenses (which turned from a $132 million expense in 2005 to a $40 million net income in 2006).
• Unusual Items: "Other income and expenses, net" increased to $211 million from $88 million. This includes a $127 million gain from the sale of Inmarsat shares and a $23 million gain from the sale of Space Imaging assets. In contrast, Q1 2005 included a $47 million gain from Intelsat sales and a $30 million satellite impairment charge.
• Cash Flow: Operating cash flow decreased by $363 million to $1.2 billion, primarily due to a reduction in cash provided by working capital accounts (receivables, inventories, and customer advances) despite higher net earnings.
• Shareholder Returns: The company repurchased $883 million of common stock (12.0 million shares) and increased the quarterly dividend to $0.30 per share from $0.25.

Guidance, Outlook, and Risks

• Accounting Changes: Effective January 1, 2006, the company adopted FAS 123(R) for stock-based compensation, resulting in a $30 million expense ($18 million net impact) for the quarter.
• Joint Venture Status: The proposed 50-50 joint venture with Boeing, United Launch Alliance (ULA), remains pending regulatory approval from the FTC. Closing has not been scheduled, and either party may terminate the agreement if conditions are not met.
• Legal and Environmental: The company faces ongoing litigation regarding environmental remediation (Redlands, California; Paducah, Kentucky) and a grand jury subpoena regarding missile detection patents. Management believes the probability of a material adverse effect is remote. Total recorded environmental liabilities were $464 million.
• Pension Obligations: The company made significant prepayments to pension plans in 2005, reducing 2006 funding requirements. Expected 2006 contributions are $100-$110 million for defined benefit plans and $230-$240 million for retiree medical plans.
• Outlook: Management states that quarterly results may not be indicative of full-year results due to the long-term nature of contracts. Capital expenditures are expected to increase over the next two years.

Investor Verification Checklist

• ULA Transaction: Monitor the status of the United Launch Alliance regulatory approval and potential impact on Space Systems revenue recognition.
• Working Capital Trends: Verify the sustainability of the decline in operating cash flow relative to net earnings, specifically regarding customer advances and receivables.
• Environmental Liabilities: Review the $464 million in recorded environmental liabilities and the potential for increased costs at Redlands and other sites.
• Stock-Based Compensation: Assess the ongoing impact of FAS 123(R) adoption on future earnings, with $199 million of unrecognized compensation cost remaining.
• Share Repurchases: Confirm the remaining capacity under the share repurchase program (approx. 30.1 million shares remaining as of March 31, 2006).