Lockheed Martin Corporation — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2009; comparisons are with the quarter and six months ended June 29, 2008. The interim financial statements are unaudited and were reviewed by Ernst & Young, which reported no material modifications were known to be required.
Business context and results
Lockheed Martin operates in Electronic Systems, Information Systems & Global Services (IS&GS), Aeronautics, and Space Systems. The U.S. Government is its principal customer. Second-quarter net sales increased 2% to $11.236 billion; first-half sales rose 3% to $21.609 billion.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $11.236bn | $11.039bn | $21.609bn | $21.022bn |
| Operating profit | $1.083bn | $1.363bn | $2.140bn | $2.541bn |
| Net earnings | $734m | $882m | $1.400bn | $1.612bn |
| Diluted EPS | $1.88 | $2.15 | $3.55 | $3.90 |
| Operating margin, approximately | 9.6% | 12.3% | 9.9% | 12.1% |
| Net margin, approximately | 6.5% | 8.0% | 6.5% | 7.7% |
Q2 product sales were $9.030 billion versus $9.108 billion; services sales increased to $2.206 billion from $1.931 billion. The operating-profit and earnings declines occurred despite sales growth, with corporate pension costs and the absence of favorable prior-year items weighing on results.
Cash flow, liquidity and capital
- First-half operating cash flow was $2.354 billion, versus $2.368 billion a year earlier. The filing cites lower earnings and working-capital effects, including increased receivables, partly offset by a noncash increase in pension expense.
- Cash and cash equivalents were $2.672 billion at June 28, up from $2.168 billion at December 31, 2008; short-term investments were $65 million. Cash flow after capital expenditures was approximately $2.055 billion.
- Investing activities used $500 million, including $299 million of capital expenditures and $187 million for acquisitions and affiliate investments. Financing activities used $1.382 billion, including $969 million of share repurchases and $449 million of dividends paid.
- Total debt, net of unamortized discounts, was approximately $3.8 billion; the debt-to-total-capital ratio was 57%. The company had a $1.5 billion revolving credit facility with no borrowings, and no commercial paper outstanding.
- Current assets were $11.913 billion and current liabilities $11.287 billion (approximately 1.06 current ratio). Pension liabilities were $12.530 billion, up from $12.004 billion at year-end.
Material changes and segment performance
- Operating profit fell 21% in Q2 and 16% in the first half. Unallocated corporate expense shifted to $194 million in Q2 and $336 million for the first half, compared with corporate income of $48 million and $76 million, respectively, in 2008. The principal driver was the unfavorable FAS/CAS pension adjustment.
- Electronic Systems first-half sales and operating profit increased 2% and 3%. IS&GS sales rose 8%, but operating profit declined 2%; management expects its 2009 operating profit and margins to be below 2008.
- Aeronautics first-half sales increased 3% and operating profit 9%, supported by F-35 and F-16 activity and improved performance. Space Systems sales fell 3% and operating profit 13%, reflecting lower commercial launch and satellite activity and other program factors.
- Prior-year comparisons included $85 million of Q2 income from resolving land-sale reserves and a $16 million first-quarter gain related to a 2006 divestiture. These items increased 2008 net earnings by $56 million ($0.14 per share) in Q2 and $66 million ($0.16 per share) for the first half; they did not recur in 2009.
- Cash dividends paid per share increased to $0.57 per quarter from $0.42. The company repurchased 13.2 million shares for $969 million in the first half and had about 20 million shares remaining under its repurchase authorization at June 28.
Outlook, risks and contingencies
- No consolidated full-year earnings or revenue guidance is provided in the filing. Management said 2009 IS&GS operating profit and margins were expected to decrease from 2008. Annual capital expenditures over the next three years were expected to exceed 2008 levels.
- Management was assessing the proposed FY2010 defense budget. The proposal supported or increased several programs, including F-35, AEHF, LCS, Aegis, and THAAD, while contemplating completion of F-22 production, cancellation of VH-71 and TSAT, and termination or restructuring of MKV. The company said it did not then anticipate contract terminations would materially adversely affect the corporation as a whole, subject to settlement negotiations.
- The U.K. Ministry of Defence declared default on the Soothsayer contract and demanded repayment of amounts paid, liquidated damages, interest, and reserved possible additional re-procurement claims. Lockheed Martin disputed the position. The MTA also terminated its security-system contract for alleged default and sought damages; Lockheed Martin disputed the allegations and asserted its own claims. Amounts ultimately payable or recoverable are not established in the filing.
- Recorded environmental liabilities were $821 million, with $690 million of related estimated future cost-recovery assets. The company noted that exposure at some sites could not be reasonably estimated. It also had $3.1 billion of outstanding letters of credit, surety bonds, and similar arrangements, generally drawable if it failed to perform.
- Other risks include defense funding and contract changes, pension assumptions and asset returns, supplier and counterparty credit, program execution, litigation, and environmental remediation. Management said previously disclosed risk factors had not materially changed. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth can translate into improved operating profit and margins, particularly given the higher corporate pension expense and IS&GS outlook.
- Progress and financial consequences of the Soothsayer and MTA disputes, including any settlements, damages, or recoveries.
- Congressional decisions on FY2010 defense funding and the final effects of program cancellations, terminations, or restructuring.
- Cash conversion and receivables growth, together with pension funding assumptions and the carrying value and recoverability of environmental assets.
- Continuation of shareholder returns and capital spending while maintaining liquidity, debt levels, and contingent support commitments, including those associated with ULA.