Lockheed Martin Corporation: Q3 2008 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 28, 2008, and the nine-month period ended on the same date. Lockheed Martin Corporation is a large accelerated filer incorporated in Maryland. The company operates in four principal business segments: Aeronautics, Electronic Systems, Information Systems & Global Services (IS&GS), and Space Systems. Approximately 84% of sales are derived from U.S. Government agencies.
Key Financial Metrics
| Metric (in millions) | Q3 2008 | Q3 2007 | 9M 2008 | 9M 2007 |
|---|---|---|---|---|
| Net Sales | $10,577 | $11,095 | $31,599 | $31,021 |
| Operating Profit | $1,242 | $1,163 | $3,783 | $3,312 |
| Net Earnings | $782 | $766 | $2,394 | $2,234 |
| Diluted EPS | $1.92 | $1.80 | $5.82 | $5.21 |
| Operating Cash Flow (9M) | $3,406 (vs. $3,821 in 2007) | |||
| Cash & Equivalents | $2,463 (as of Sept 28, 2008) | |||
| Total Debt (Long-term + Current) | $3,805 (as of Sept 28, 2008) |
Material Changes vs. Prior Period
- Revenue: Q3 2008 net sales decreased 5% year-over-year, primarily due to lower combat aircraft deliveries in Aeronautics and commercial satellite deliveries in Space Systems. However, the nine-month period showed a 2% increase driven by growth in IS&GS and Electronic Systems.
- Profitability: Operating profit increased 7% in Q3 and 14% for the nine months ended September 28, 2008. This growth was driven by improved performance in Electronic Systems, IS&GS, and Space Systems, offsetting declines in Aeronautics.
- Unusual Items: Net earnings were favorably impacted by non-recurring items, including a $44 million gain from the sale of International Launch Services (ILS) interests and an $85 million gain from the elimination of reserves related to land sales disputes.
- Debt Management: The company redeemed or converted its entire $1.0 billion floating rate convertible debenture issue in August 2008. Additionally, $500 million in new long-term notes were issued in Q1 2008.
Guidance, Outlook, and Risks
- Dividends: The Board increased the quarterly dividend to $0.57 per share, effective Q4 2008 (up from $0.42).
- Share Repurchases: The Board authorized an additional 30 million shares for repurchase in September 2008. The company repurchased 22.1 million shares in the first nine months of 2008.
- Tax Outlook: The Emergency Economic Stabilization Act of 2008 retroactively extended the R&D tax credit. Management expects to record approximately $38 million in additional earnings in Q4 2008 due to this legislation.
- Pension Risks: Significant volatility in financial markets creates uncertainty regarding the discount rate and actual return on plan assets for 2008. Management provided scenarios indicating potential required cash contributions of up to $825 million in 2009 if asset returns degrade significantly.
- Legal & Environmental: The company faces ongoing litigation regarding False Claims Act allegations and environmental remediation. Environmental liabilities increased by $191 million in Q3 2008, though a portion is expected to be recovered through government contracts.
Investor Verification Checklist
- Segment Performance: Verify the specific volume and performance drivers behind the decline in Aeronautics sales (F-16/F-35) versus the growth in IS&GS.
- Pension Assumptions: Monitor year-end 2008 actuarial assumptions, specifically the discount rate and actual return on plan assets, as these will significantly impact 2009 cash contributions and equity.
- Environmental Liabilities: Review the $191 million increase in environmental liabilities and the probability of recovery for the $160 million asset recorded.
- Debt Structure: Confirm the impact of the $1.0 billion convertible debenture conversion on future interest expense and share count dilution.
- Legal Proceedings: Track the status of the Department of Justice interventions in False Claims Act lawsuits and the outcome of the Redlands, California groundwater litigation.