LMT

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: A global security company engaged in the research, design, development, manufacture, and sustainment of advanced technology systems. Principal customers are U.S. Government agencies (84% of 2008 net sales), with the remainder split between foreign governments (13%) and commercial customers (3%).
Segments: Electronic Systems, Information Systems & Global Services (IS&GS), Aeronautics, and Space Systems.

Key Financial Metrics (2008)

Note: Stockholders' Equity decreased significantly due to a non-cash adjustment of approximately $7.25 billion related to the remeasurement of postretirement benefit plans under FAS 158.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 2% year-over-year, driven by growth in Electronic Systems and IS&GS, partially offset by declines in Aeronautics (fewer combat aircraft deliveries) and Space Systems.
• Profitability: Operating profit increased 13% to $5.13 billion. This was aided by lower unallocated corporate costs and higher "Other Income (Expense), Net" ($482 million vs. $293 million in 2007), which included the recognition of a deferred gain from the 2006 sale of Lockheed Khrunichev Energia International, Inc. (LKEI).
• Equity Impact: The adoption of FAS 158 resulted in a substantial reduction in stockholders' equity due to negative asset returns on pension plans and a decrease in the discount rate used for benefit obligations.
• Debt Reduction: Long-term debt decreased by approximately $740 million, primarily due to the redemption of $1.0 billion in floating rate convertible debentures in August 2008.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Management expects overall defense spending to continue increasing over the next few years, albeit at lower rates of growth, as the new Administration balances defense priorities with economic stimulus initiatives.
• Revenue growth is expected to exceed DoD budget growth, driven by the F-35 program entering low-rate initial production and expansion in information technology solutions.
• Capital expenditures for 2009 are expected to exceed 2008 levels to support program requirements, including F-35 production and Space Systems facility modernization.

Risks and Contingencies:

• Funding Risk: 84% of sales depend on U.S. Government appropriations; contracts are subject to termination or delay if funding is not appropriated.
• Benefit Plan Volatility: Earnings and cash flows are sensitive to changes in discount rates and asset returns for postretirement benefit plans. The 2008 market downturn significantly increased future pension expense requirements.
• Legal Proceedings: The company is subject to various investigations and litigation, including False Claims Act allegations and environmental remediation obligations. Management believes the probability of a material adverse effect is remote.
• Supply Chain: Reliance on single-source suppliers for critical materials (e.g., carbon fiber, aluminum lithium) poses potential risks for program delays or cost increases.

Investor Verification Checklist

• Pension Funding: Verify the impact of the 2008 negative asset returns on 2009 pension expense (projected to increase to ~$1.04 billion from $462 million in 2008) and required cash contributions.
• F-35 Program Status: Monitor the transition from development to low-rate initial production and associated cost/schedule risks.
• Backlog Composition: Review the funded vs. unfunded backlog ratio ($51.1 billion funded vs. $29.8 billion unfunded) to assess revenue certainty.
• Legal Reserves: Track the resolution of the LKEI/ILS deferred gain recognition and ongoing environmental remediation liabilities ($809 million recorded).
• Share Repurchases: Confirm remaining capacity under the share repurchase program (approx. 33.7 million shares remaining as of year-end 2008).