LMT

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2001
Business Overview: The Corporation operates in five principal segments: Systems Integration, Space Systems, Aeronautics, Technology Services, and Global Telecommunications (which includes COMSAT operations consolidated since August 2000). The company primarily provides products and services under contracts with the U.S. Government.

Key Financial Metrics

Note: Total Debt calculated as Short-term borrowings ($0) + Current maturities of long-term debt ($901) + Long-term debt ($9,029).

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 10% to $5.0 billion, driven by lower volumes in Systems Integration, Space Systems, and Aeronautics segments. This was partially offset by a 47% increase in Global Telecommunications sales due to the inclusion of COMSAT.
• Profit Growth: Operating profit increased 14% to $372 million despite lower sales, aided by nonrecurring items and improved performance in Space Systems and Technology Services.
• Cash Flow Surge: Operating cash flow more than doubled to $1.0 billion, primarily due to a significant milestone payment (approx. $450 million net) from the F-16 contract with the United Arab Emirates and proceeds from real estate sales.
• Liquidity Improvement: Cash and cash equivalents rose from $1.5 billion to $2.4 billion. Total debt decreased by $29 million during the quarter.

Guidance, Outlook, and Unusual Items

Unusual Items Impacting Results

• Gain on Real Estate Sale: A nonrecurring gain of $111 million (net of tax: $72 million) from the sale of surplus property in Sunnyvale, CA, increased net earnings by $0.17 per share.
• Impairment Charge: A nonrecurring charge of $100 million (net of tax: $65 million) related to the impairment of the investment in Americom Asia-Pacific, LLC, reduced net earnings by $0.15 per share.
• Adjusted EPS: Excluding these items, diluted EPS would have been $0.23 for Q1 2001 compared to $0.12 for Q1 2000.

Outlook and Management Commentary

• Backlog: Undelivered orders remained unchanged at $56.4 billion. New orders of $5.0 billion were received, offset by sales.
• Divestitures: The company announced an agreement to sell COMSAT Mobile Communications to Telenor for $116.5 million, expected to close in H2 2001. Management anticipates continuing to divest non-core businesses and surplus properties.
• Investments: The company plans to complete a $400 million investment commitment to Astrolink International, LLC, with $54 million remaining as of March 31, 2001.

Risks and Contingencies

• Environmental: Estimated expenditures for environmental remediation (Redlands, Burbank, Glendale) are approximately $90 million and $45 million respectively. A liability of $190 million is recorded for other properties.
• Legal: Ongoing litigation with the U.S. Department of Energy regarding the Pit 9 waste remediation contract. The DOE terminated the contract for default in 1998; Lockheed Martin is seeking cost recovery.
• Market Risk: Exposure to interest rates and foreign currency exchange rates, managed via forward exchange contracts and potential interest rate swaps.

Investor Verification Checklist

• Nonrecurring Items: Verify the sustainability of earnings by excluding the $111 million real estate gain and $100 million impairment charge.
• COMSAT Integration: Assess the long-term profitability of the Global Telecommunications segment, which currently shows an operating loss of $130 million.
• Environmental Liabilities: Monitor the outcome of perchlorate studies in Redlands and the finalization of remediation costs, as current estimates may change.
• DOE Litigation: Track the status of the Pit 9 contract dispute and potential recovery of costs or liability exposure.
• Debt Maturities: Confirm the company's ability to service approximately $900 million of long-term debt maturing in 2001, with $825 million due in Q2.