Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2005
Business Overview: A leading systems integrator providing advanced technology systems, products, and services to domestic and international defense, civil, and homeland security markets. Approximately 80% of sales are to U.S. Government agencies. Operations are divided into five segments: Aeronautics, Electronic Systems, Space Systems, Integrated Systems & Solutions, and Information & Technology Services.
Key Financial Metrics
| Metric (in millions) | Q2 2005 | Q2 2004 | YTD 6mo 2005 | YTD 6mo 2004 |
|---|---|---|---|---|
| Net Sales | $9,295 | $8,776 | $17,783 | $17,123 |
| Operating Profit | $764 | $544 | $1,394 | $1,080 |
| Net Earnings | $461 | $296 | $830 | $587 |
| Diluted EPS | $1.02 | $0.66 | $1.85 | $1.31 |
| Operating Cash Flow (6mo) | $2,245 (2005) vs $1,796 (2004) | |||
| Cash & Equivalents | $3,062 (as of June 30, 2005) | |||
| Long-Term Debt | $4,874 (as of June 30, 2005) | |||
| Debt-to-Total Capital | 39% (improved from 42% in 2004) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 6% in Q2 and 4% YTD compared to 2004. Growth was driven by Electronic Systems (+24% Q2), Space Systems (+5% Q2), and Information & Technology Services (+9% Q2), offset by a decline in Aeronautics (-8% Q2) due to lower F-16 volumes.
- Profitability: Operating profit surged 40% in Q2 and 29% YTD. All five business segments reported increased operating profits.
- Unusual Items:
- Inmarsat IPO: Recognized a $42 million deferred gain (net of tax $27 million) following the June 2005 IPO of Inmarsat, reducing ownership from 14.0% to 8.9%.
- Intelsat Sale: Recorded a $47 million gain (net of tax $31 million) from the sale of a 25% interest in Intelsat, Ltd. in January 2005.
- Impairment Charge: Recorded a $30 million charge (net of tax $19 million) in Q1 2005 for the impairment of a telecommunications satellite due to market overcapacity.
- Acquisitions: Completed the acquisition of SYTEX Group (approx. $480 million) in March 2005 to expand IT services, and STASYS Limited in February 2005.
Guidance, Outlook, and Risks
- Joint Venture: Announced a 50-50 joint venture with Boeing, United Launch Alliance (ULA), to combine Atlas and Delta launch operations. Expected to close in H2 2005; not expected to materially impact results.
- Capital Allocation: Continued share repurchases ($355 million net in first six months) and dividend increases ($0.25 per share in 2005 vs $0.22 in 2004). Approximately 11 million shares remain available for repurchase under the current program.
- Accounting Changes: Plans to adopt FAS 123(R) regarding stock-based compensation in Q1 2006. The ultimate impact on earnings is not yet known.
- Legal & Environmental:
- Environmental liabilities recorded at approximately $420 million, primarily for remediation in California and New York.
- Ongoing litigation includes a patent infringement suit by Space Systems Loral (remanded to District Court) and lawsuits regarding the 2003 Meridian, Mississippi facility incident (partial summary judgment granted in favor of Lockheed).
- Risks: Dependence on U.S. Government funding, potential contract terminations, and political risks associated with Russian launch services (Khrunichev advances of $307 million).
Investor Verification Checklist
- Segment Performance: Verify the sustainability of profit growth in Electronic Systems and Space Systems given the decline in Aeronautics F-16 volumes.
- One-Time Gains: Assess the impact of the $66 million combined pre-tax gains from Inmarsat and Intelsat on the reported net earnings.
- Environmental Exposure: Review the $420 million environmental liability reserve and the status of the Redlands, California groundwater contamination proceedings.
- ULA Transaction: Monitor the regulatory approval status of the United Launch Alliance joint venture and its impact on future launch revenue recognition.
- Debt Management: Confirm the trajectory of debt reduction and the utilization of the $1.5 billion revolving credit facility.