Lockheed Martin Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter ended September 26, 2010; year-to-date figures cover the nine months ended that date. Comparatives are the quarter and nine months ended September 27, 2009. Amounts are U.S. dollars.
Business context and financial performance
Lockheed Martin is a global security and aerospace company whose principal customer is the U.S. Government. It reports four segments: Aeronautics, Electronic Systems, Information Systems & Global Solutions (IS&GS), and Space Systems.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $11.375 billion | $10.767 billion | $33.009 billion | $31.792 billion |
| Operating profit | $889 million | $1.068 billion | $2.969 billion | $3.171 billion |
| Continuing-operations earnings | $565 million | $786 million | $1.816 billion | $2.163 billion |
| Net earnings | $571 million | $797 million | $1.943 billion | $2.197 billion |
| Diluted EPS | $1.57 | $2.07 | $5.23 | $5.61 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $3.387 billion | $3.778 billion |
Quarterly sales increased 6%, while operating profit fell 17%. Nine-month sales rose 4%, while operating profit declined 6%. Gross margin was approximately 7.0% in Q3 versus 9.2% a year earlier; operating margin was approximately 7.8% versus 9.9%. The filing attributes much of the profit decline to the executive separation charge and, year to date, lower Aeronautics profit and higher pension expense. These margins are calculated from reported figures.
Q3 segment sales and operating profit were: Aeronautics $3.300 billion and $396 million; Electronic Systems $3.583 billion and $425 million; IS&GS $2.524 billion and $217 million; Space Systems $1.968 billion and $235 million. Sales grew in all segments except Space Systems. Year-to-date operating profit increased at Electronic Systems and Space Systems, was essentially unchanged at IS&GS, and declined at Aeronautics.
Cash, debt, and liquidity
- At September 26, cash and cash equivalents were $2.656 billion and short-term investments were $767 million. Total current assets were $13.939 billion; current liabilities were $11.638 billion.
- Long-term debt, net of unamortized discounts, was $5.019 billion; the debt-to-total-capital ratio was 56%, compared with 55% at December 31, 2009. The company reported no borrowings under its $1.5 billion revolving facility or commercial paper arrangements during the nine-month period.
- Nine-month operating cash flow was $3.387 billion, down from $3.778 billion. Capital expenditures were $394 million; operating cash flow less capital expenditures was therefore $2.993 billion, a simple calculation rather than a company-defined free-cash-flow measure.
- Cash uses included $1.4 billion of discretionary pension contributions, $1.566 billion of share repurchases, and $700 million of dividends paid. The company planned another $800 million pension contribution in Q4. The Q4 dividend was increased to $0.75 per share.
Material changes, outlook, and key risks
- Executive separation program: A $178 million charge was recorded in Q3; it reduced net earnings by $116 million, or $0.32 per diluted share for the quarter. About 600 executives were approved to participate, with most separations expected February 1, 2011. Management expects substantial recovery of costs through future U.S. Government contract pricing.
- Planned divestitures: PAE and most of EIG were classified as discontinued operations. PAE’s sale was expected around year-end 2010. After quarter-end, on October 13, the company announced a definitive agreement to sell EIG for $815 million, subject to regulatory review and customary conditions. Nine-month discontinued-operations earnings of $127 million included a $96 million deferred tax benefit related to the planned PAE sale.
- Pensions: Qualified-plan net pension expense increased to $1.072 billion for the first nine months, from $777 million. The company estimated that, under specified assumptions including a 5.0% year-end discount rate, pension remeasurement could reduce year-end 2010 equity by more than $2.5 billion, without affecting 2010 net earnings, and could produce approximately $1.2 billion of FAS/CAS pension expense in 2011. These are scenario estimates, not finalized results; the discount rate and actual asset returns remained uncertain.
- F-35: The DoD recertified the program but planned to restructure its development phase. The filing cites schedule, cost, flight-testing, supply-chain, and software challenges. Lockheed Martin’s ability to earn its share of the remaining $614 million SDD fee depends on milestones, most of which had not yet been determined. The DCMA withdrew its prior validation of the Fort Worth earned-value management system; corrective actions and potential re-audit remain relevant.
- Other contingencies: Recorded environmental liabilities were $959 million, with $825 million of associated estimated recovery assets. Outstanding letters of credit, surety bonds, and similar arrangements totaled $3.7 billion. The filing describes disputed contract, False Claims Act, ERISA, and environmental proceedings; management judged a material adverse effect on the company as a whole to be remote, while noting outcomes cannot be predicted with certainty.
- Management outlook: Management expected operating cash flow to remain sufficient for operations and anticipated capital expenditures for the foreseeable future. No specific full-year earnings or revenue guidance is provided in the supplied filing text. The company cautions that interim results may not indicate full-year results.
The interim statements were reviewed by Ernst & Young, not audited. Management reported effective disclosure controls as of September 26, 2010, and no material change in internal control over financial reporting during the quarter. Management said previously disclosed risk factors had not materially changed.
Important facts for investors to verify
- Progress, final sale terms, closing timing, and proceeds for the PAE and EIG divestitures.
- F-35 cost, schedule, technical baseline, fee milestones, and restoration of EVMS compliance at Fort Worth.
- Year-end pension assumptions, actual asset returns, required contributions, and the effect on equity and 2011 pension expense.
- Whether expected recovery of the VESP and environmental costs through government contract pricing is realized.
- Developments in material litigation and government investigations, as well as the cash and credit capacity needed for guarantees and other contingent arrangements.