LMT

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2006
Business Overview: Lockheed Martin is a global aerospace and defense contractor serving primarily U.S. Government agencies (85% of 2005 sales). Operations are organized into five segments: Aeronautics, Electronic Systems, Space Systems, Information & Technology Services (I&TS), and Integrated Systems & Solutions (IS&S).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 4% in Q3 and 7% year-to-date (YTD) compared to 2005. Growth was driven by Electronic Systems (+11% Q3), Space Systems (+10% Q3), and I&TS (+16% Q3). Aeronautics sales declined 7% in Q3 due to lower volume on C-130, C-5, and F-16 programs.
• Profitability: Operating profit rose 28% in Q3 and 34% YTD. All five segments reported increased operating profit. Margins improved due to better program performance and volume increases.
• One-Time Gains: YTD 2006 results included significant non-operating gains: $127 million from the sale of Inmarsat shares, $23 million from Space Imaging asset sales, and $51 million from land sales. These contributed to a $416 million "Other income and expenses" total for the nine months.
• Tax Benefits: A $62 million tax benefit related to export tax claims reduced the effective tax rate to 22.8% in Q3 and 29.2% YTD.
• Debt Restructuring: In August 2006, the company exchanged $1.079 billion of old debt for new 6.15% Notes due 2036, paying $343 million in cash consideration. This reduced total long-term debt by approximately $542 million since year-end 2005.

Guidance, Outlook, and Risks

• Dividends: The Board increased the quarterly dividend to $0.35 per share (from $0.30), payable in December 2006.
• Share Repurchases: The company repurchased 25.3 million shares for $1.9 billion in the first nine months of 2006. Approximately 37 million shares remain available under the current program.
• United Launch Alliance (ULA): The joint venture with Boeing received FTC approval in October 2006. Closing is pending, but no specific date is set. Upon closing, Lockheed will no longer recognize sales for Atlas launch operations included in the JV.
• Accounting Changes: Adoption of FAS 123(R) for stock-based compensation resulted in $83 million of expense YTD. Adoption of FAS 158 (pension accounting) is expected to reduce stockholders' equity by approximately $2.6 billion at year-end 2006.
• Subsequent Event: In October 2006, the company sold its interests in LKEI and ILS (Proton launch services). Due to retained liability for customer advances, the transaction is not recognized as a divestiture, and approximately $60 million of earnings is deferred until 2008.
• Risks: Key risks include U.S. Government funding availability, contract terminations, pension funding requirements, and environmental remediation liabilities (recorded at $464 million).

Investor Verification Checklist

• Deferred Earnings: Verify the timeline and conditions for recognizing the $60 million deferred earnings from the LKEI/ILS sale, dependent on Proton launch performance.
• Pension Impact: Confirm the final impact of FAS 158 adoption on year-end equity and future cash contribution requirements.
• ULA Closing: Monitor the status of the United Launch Alliance closing and its impact on future Space Systems revenue recognition.
• Environmental Liabilities: Review updates on the $464 million environmental liability, particularly regarding the Redlands, California groundwater contamination case.
• Non-Recurring Items: Adjust earnings analysis to exclude the $127 million Inmarsat gain and other one-time land sale gains to assess core operating performance.