Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Filing Date: March 5, 2004
Lockheed Martin is a leading global security and aerospace company primarily serving U.S. Government agencies (78% of 2003 net sales) and foreign governments (16%). The company operates through five segments: Aeronautics, Electronic Systems, Space Systems, Integrated Systems & Solutions (IS&S), and Information & Technology Services (I&TS). In 2003, the company reorganized its segments, creating IS&S and renaming the Technology Services segment to I&TS following the acquisition of Affiliated Computer Services' (ACS) federal IT business.
Key Financial Metrics (2003)
| Metric | 2003 Value | 2002 Value |
|---|---|---|
| Net Sales | $31.82 billion | $26.58 billion |
| Earnings from Operations | $1.98 billion | $1.95 billion |
| Net Earnings | $1.05 billion | $0.50 billion |
| Diluted EPS | $2.34 | $1.11 |
| Operating Cash Flow | $1.81 billion | $2.29 billion |
| Total Debt (Long-term + Current) | $6.21 billion | $7.58 billion |
| Stockholders' Equity | $6.76 billion | $5.87 billion |
| Negotiated Backlog | $76.9 billion | $70.4 billion |
Segment Performance (2003 Net Sales): Aeronautics ($10.2B), Electronic Systems ($9.0B), Space Systems ($6.0B), IS&S ($3.4B), and I&TS ($3.2B).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 20% year-over-year, driven by higher volumes in Aeronautics (F-16 and F-35 programs) and Space Systems (government satellite programs).
- Profitability Surge: Net earnings more than doubled to $1.05 billion. This improvement was significantly aided by the absence of the massive impairment charges recorded in 2002 related to telecommunications investments ($776 million) and Russian launch services ($173 million).
- Debt Reduction: The company aggressively reduced its debt load, retiring $2.2 billion of high-cost debt and issuing $1.0 billion in lower-cost convertible debentures. Total debt decreased from $9.9 billion in 2000 to $6.2 billion in 2003.
- Acquisitions: Completed the acquisition of ACS's federal IT business for approximately $585 million, expanding capabilities in business process outsourcing.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary
Management anticipates sustained growth in defense budgets driven by the war on terrorism and homeland security needs. The company expects strong cash flow to continue, with a strategic focus on share repurchases and dividends. The F/A-22 Raptor program is in low-rate initial production, and the F-35 Joint Strike Fighter is in the system development and demonstration phase.
Significant Risks and Contingencies
- Titan Corporation Merger: A pending $2.4 billion acquisition of The Titan Corporation is under review by the SEC and Department of Justice regarding alleged improper payments to international consultants. The merger is subject to stockholder approval and the resolution of these investigations.
- Government Contract Dependency: 78% of revenue comes from the U.S. Government. Contracts are subject to termination for convenience and funding uncertainties based on Congressional appropriations.
- Environmental Liabilities: The company has recorded approximately $425 million in liabilities for environmental remediation, primarily at sites in California and New York. Actual costs may vary based on regulatory changes.
- Pension Obligations: A decrease in the discount rate assumption to 6.25% increased projected pension expenses for 2004. The company made a $450 million discretionary prepayment to its pension trust in December 2003.
Unusual Items
2003 results included a $146 million loss on the early retirement of debt and a $41 million charge for exiting the commercial mail sorting business. Conversely, a $15 million gain was recorded on the sale of the commercial IT business.
Investor Verification Checklist
- Titan Merger Status: Verify the outcome of the SEC/DOJ investigation into Titan Corporation and whether the merger will close as scheduled.
- F/A-22 Program Review: Monitor the Office of Management and Budget's comprehensive review of the F/A-22 program, which could impact future production rates and funding.
- Pension Funding: Confirm the impact of the 2003 discount rate change on 2004 pension expense and cash funding requirements.
- Commercial Space Market: Assess the recovery of the commercial satellite and launch vehicle markets, which remain under pressure due to excess capacity.
- Environmental Remediation: Review updates on the Redlands, California groundwater contamination litigation and remediation costs.