Lockheed Martin Corporation — Q1 2010 Form 10-Q
Reporting period: Quarter ended March 28, 2010; comparable quarter ended March 29, 2009. Amounts are in U.S. dollars. The interim financial statements are unaudited; Ernst & Young performed a review, not an audit.
Business context and results
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 Services (IS&GS), and Space Systems. Management cautions that quarterly results may not indicate full-year performance because of long-term contracts and varying delivery schedules.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net sales | $10.637 billion | $10.373 billion |
| Operating profit | $982 million | $1.057 billion |
| Earnings before taxes | $922 million | $978 million |
| Net earnings | $547 million | $666 million |
| Diluted EPS | $1.45 | $1.68 |
| Operating margin | 9.2% | 10.2% |
| Net margin | 5.1% | 6.4% |
| Cash from operating activities | $1.649 billion | $1.218 billion |
Sales increased 3%, while operating profit fell 7%, net earnings fell 18%, and diluted EPS fell 14%. The effective tax rate rose to 40.7% from 31.9%, chiefly because of a $96 million ($0.25 per share) charge following legislation eliminating a future retiree prescription-drug tax deduction. Interest expense increased $12 million to $88 million, primarily reflecting notes issued in late 2009.
Q1 2010 segment results: Aeronautics sales were $2.933 billion and operating profit $324 million; Electronic Systems, $2.914 billion and $388 million; IS&GS, $2.872 billion and $233 million; Space Systems, $1.918 billion and $213 million. Aeronautics and IS&GS profit declined; Electronic Systems and Space Systems profit was broadly unchanged.
Cash, balance sheet, and capital
- Cash and cash equivalents were $3.288 billion at March 28, 2010, up from $2.391 billion at year-end 2009; short-term investments were $239 million.
- Current assets were $13.919 billion and current liabilities $11.572 billion, a current ratio of approximately 1.20. Long-term debt, net of unamortized discounts, was $5.053 billion. Debt-to-total capital was 56%, versus 55% at year-end.
- Stockholders’ equity was $4.028 billion, down $101 million from year-end. Accrued pension liabilities were $11.184 billion.
- Operating cash flow increased $431 million year over year, helped by a $325 million federal tax refund, increased recovery of pension costs under government accounting rules, and timing of other working-capital items. Inventory growth and lower customer advances partly offset these benefits.
- Investing cash use was $8 million; financing cash use was $730 million, including $516 million of share repurchases and $238 million of dividends. Cash increased $897 million during the quarter.
- The company had no borrowings under its $1.5 billion revolving credit facility and no commercial paper outstanding. It reported $3.5 billion of letters of credit, surety bonds, and other performance-related arrangements.
Material changes and management commentary
- Aeronautics sales rose 5%, mainly on higher F-35 volume; profit fell 9%, largely from lower F-22 volume and fewer favorable performance adjustments. There were six F-16 deliveries versus eight a year earlier.
- IS&GS sales rose 4%, but profit fell 4%, with weakness in Intelligence and Defense partly offset by Civil growth. Electronic Systems and Space Systems sales and profit were generally stable.
- Unallocated corporate expense increased to $176 million from $142 million, including higher stock-based and deferred-compensation expense. Pension expense under GAAP increased, while the reported FAS/CAS pension adjustment was a $110 million expense.
- Management said operating cash flow should remain sufficient for operations and anticipated capital expenditures. It expected annual capital expenditures of approximately $1.0 billion and anticipated $1.4 billion of discretionary qualified-pension contributions and $155 million of required retiree-medical and life-insurance contributions in 2010. The company noted that it expected higher Pension Protection Act funding requirements beginning in 2011.
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management stated that Q1 results are not necessarily indicative of full-year results.
Outlook, risks, contingencies, and unusual items
- F-35: The DoD reported projected total program costs 57% above the original 2001 baseline, triggering the Nunn-McCurdy review process. Lockheed Martin expected recertification after DoD reviews and did not anticipate a material effect, but recertification and program execution remained risks.
- Legal and contract matters: Disputes include the U.K. Ministry of Defence Soothsayer contract, the New York MTA security-system contract and related subcontractor claims, False Claims Act matters, and employee-benefit-plan litigation. Management said it believed the probability of these matters causing a material adverse effect on the company as a whole was remote, while noting outcomes cannot be predicted with certainty.
- Environmental obligations: Recorded environmental liabilities were $879 million, with $742 million of assets recorded for estimated future recovery, principally through government contract pricing. The company said exposure cannot be reasonably estimated in all cases.
- Pensions and ULA: Pension assumptions, asset returns, discount rates, and future funding needs may affect results and cash flows. Lockheed Martin and Boeing each committed up to $200 million of support to ULA; none had been drawn, and management did not expect contributions to be required.
- Other risks: The filing identifies government funding and priorities, contract awards or termination, cost and schedule performance, supplier and customer performance, pension assumptions, litigation, environmental remediation, and economic and political conditions as factors that could cause actual results to differ from expectations.
Important facts for investors to verify
- Whether the $96 million Medicare Part D-related tax charge is clearly separated when assessing underlying earnings and the effective tax rate.
- Whether the F-35 program completed DoD recertification and how cost, schedule, and production developments affected company results.
- Whether operating cash flow remains strong after the temporary tax refund and how working capital, pension contributions, and customer advances evolve.
- Whether pension expense, required and discretionary funding, and future government-contract cost recovery change materially.
- Developments in the disclosed contract disputes, environmental remediation, and ULA support commitments, including any resulting cash exposure.