Lockheed Martin Corporation — Q3 2009 Form 10-Q
Business context and period: Defense, aerospace, and government-services contractor with four segments: Electronic Systems, Information Systems & Global Services (IS&GS), Aeronautics, and Space Systems. This unaudited quarterly report covers the quarter ended September 27, 2009, and the first nine months of 2009; comparisons are with the corresponding 2008 periods.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $11.056 billion | $10.577 billion | $32.665 billion | $31.599 billion |
| Operating profit | $1.085 billion | $1.242 billion | $3.225 billion | $3.783 billion |
| Net earnings | $797 million | $782 million | $2.197 billion | $2.394 billion |
| Diluted EPS | $2.07 | $1.92 | $5.61 | $5.82 |
| Operating margin | 9.8% | 11.7% | 9.9% | 12.0% |
- Sales increased 5% in Q3 and 3% year to date. Sales rose in all four segments in both comparison periods.
- Operating profit fell 13% in Q3 and 15% year to date. Management attributed the decline to higher unallocated corporate costs, especially the FAS/CAS pension adjustment, lower other income, and weaker results in IS&GS and Space Systems. Segment gains in Aeronautics and Electronic Systems partly offset these pressures.
- Net earnings rose slightly in Q3 despite lower operating profit, helped by lower income tax expense and interest expense. Year-to-date net earnings declined 8%.
- The Q3 effective tax rate was 25.7%, versus 31.6% a year earlier; the nine-month rate was 29.2%, versus 32.2%. A $58 million tax benefit from settling IRS examinations increased Q3 and year-to-date earnings by $0.15 per share.
- Operating cash flow for the first nine months was $3.778 billion, versus $3.424 billion. Capital expenditures were $481 million, implying cash flow after capital expenditures of approximately $3.297 billion, compared with $2.921 billion in 2008.
Liquidity, debt, and capital allocation
- At September 27, cash and cash equivalents were $2.709 billion, with $455 million in short-term investments. Current assets were $12.443 billion and current liabilities $11.583 billion.
- Total debt, net of unamortized discounts, was approximately $3.8 billion; the debt-to-total-capital ratio was 55%, compared with 57% at year-end 2008. The company had an undrawn $1.5 billion revolving credit facility and no commercial paper borrowings.
- Cash from operations funded $1.362 billion of share repurchases and $668 million of dividends during the first nine months. The board authorized 20 million additional repurchase shares in September; approximately 35.4 million authorized shares remained available at quarter-end. The quarterly dividend was raised to $0.63 from $0.57 beginning in Q4.
- Accrued pension liabilities were $12.793 billion, up from $12.004 billion at year-end. Management anticipated at least $1.0 billion of discretionary pension-plan contributions in Q4 2009 and approximately $1.4 billion in 2010.
Material changes and segment trends
- Electronic Systems: Nine-month sales increased 3% and operating profit 4%, supported by tactical missile, fire-control, and simulation and training activity.
- IS&GS: Nine-month sales increased 5%, but operating profit declined 5%, reflecting lower performance adjustments and the absence of prior-year contract benefits.
- Aeronautics: Nine-month sales rose 4% and operating profit 8%, with growth in F-35 and C-130J activity partly offset by lower F-22 and F-16 results.
- Space Systems: Nine-month sales increased 1%, while operating profit declined 10%, including lower equity earnings from United Launch Alliance and fewer favorable contract adjustments.
- Corporate FAS/CAS pension expense was $342 million for the first nine months, versus $96 million of income in 2008. The company cited 2008 plan-asset returns and a lower year-end discount rate as drivers.
Outlook, risks, and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management said the nine-month results are not necessarily indicative of full-year results.
- The FY2010 federal budget process remained uncertain, with most agencies operating under a continuing resolution. Management identified potential effects from program funding decisions and a possible shift of work from contractors to government employees.
- Program changes included termination for convenience notices on the VH-71 and TSAT Mission Operations System contracts, expected completion of remaining authorized MKV work in 2009, and the proposed completion of F-22 production at 187 aircraft. Management did not anticipate that the terminations would materially adversely affect the corporation overall, but settlements remained to be negotiated.
- Environmental remediation liabilities were $862 million, with $726 million of related estimated recovery assets recorded. The company said some potential remediation obligations could not yet be reasonably estimated.
- Notable disputed matters include the UK Ministry of Defence’s Soothsayer contract default and repayment demands, and the New York MTA’s termination and claims concerning a security-system contract. The company disputes the allegations in both matters. Other litigation and government investigations are also described; management assessed the probability of a material adverse effect on the company overall as remote, while noting outcomes cannot be predicted with certainty.
- Other risks include government funding and procurement priorities, contract awards or terminations, pension assumptions and asset returns, technology and delivery performance, supply-chain capacity, legal and environmental contingencies, and economic and political conditions.
- The interim financial statements received an independent accountant’s review, not an audit. Management reported disclosure controls effective at quarter-end and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether FY2010 appropriations and defense program decisions change expected demand, particularly for F-22, VH-71, TSAT, and MKV-related work.
- How operating margins and corporate pension costs develop, including year-end pension assumptions, actual plan returns, and planned contributions.
- Whether operating cash flow remains sufficient alongside pension funding, dividends, acquisitions, and share repurchases.
- Developments and potential financial exposure in the Soothsayer, MTA, environmental, and other disclosed legal matters.
- Whether the $58 million IRS settlement benefit and other nonrecurring or market-related items affect comparisons with future periods.