Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2004
Business Overview: Lockheed Martin is a global aerospace and defense contractor serving domestic and international defense, civil government, and commercial markets. Over 75% of sales are derived from U.S. Government agencies. The company operates through five segments: Aeronautics, Electronic Systems, Space Systems, Integrated Systems & Solutions (IS&S), and Information & Technology Services (I&TS).
Key Financial Metrics
| Metric (in millions) | Q1 2004 | Q1 2003 |
|---|---|---|
| Net Sales | $8,347 | $7,059 |
| Operating Profit | $536 | $505 |
| Net Earnings | $291 | $250 |
| Diluted EPS | $0.65 | $0.55 |
| Cash from Operations | $1,062 | $544 |
| Cash and Equivalents (End of Period) | $2,124 | $2,090 |
| Long-Term Debt | $6,072 | $6,072 |
| Stockholders' Equity | $7,024 | $6,756 |
Margins: Operating margin was approximately 6.4% in Q1 2004 compared to 7.2% in Q1 2003. Net margin was 3.5% in Q1 2004 compared to 3.5% in Q1 2003.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 18% year-over-year, driven by growth across all five business segments. Aeronautics saw a 38% increase due to higher F-35 and F-16 deliveries.
- Profitability: Operating profit rose 6% to $536 million. Segment operating profits increased in all areas, with Aeronautics up 42% and Information & Technology Services up 25%.
- Cash Flow: Operating cash flow nearly doubled to $1.062 billion, attributed to earnings growth and improved working capital management (inventory reduction and receivables collection).
- Interest Expense: Decreased by $32 million to $108 million, resulting from debt reduction and the issuance of lower-cost convertible debentures in 2003.
- Dividends: Cash dividends declared per share increased to $0.22 from $0.12 in the prior year.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
- Management expects cash from operations to remain strong.
- Capital expenditures are expected to increase over the next two years consistent with business growth.
- The company plans to finance the pending acquisition of The Titan Corporation using existing cash and cash equivalents.
Pending Acquisition (The Titan Corporation):
- Lockheed Martin agreed to acquire Titan for approximately $1.7 billion in cash (reduced from $22/share to $20/share) and assume $600 million in debt.
- Risk/Contingency: The deal is contingent on the resolution of SEC and Department of Justice investigations regarding Titan's payments to international consultants. Titan must obtain written confirmation that the DOJ considers the investigation resolved or enter a plea agreement.
Legal and Environmental Contingencies:
- Environmental: Total recorded liabilities for environmental matters are approximately $425 million. Significant sites include Redlands, CA (perchlorate contamination), Great Neck, NY, and Burbank/Glendale, CA.
- Waste Remediation Contract: A lawsuit with the U.S. Department of Energy regarding the Pit 9 contract termination is pending. Lockheed Martin seeks approximately $270 million in damages; the DOE seeks approximately $100 million. A decision is expected later in 2004.
Investment Risks:
- Intelsat: Intelsat announced an IPO. If the offering price is below the carrying value of Lockheed Martin's investment, a charge to earnings may be required.
- Advances to Russian Manufacturers: $325 million in advances to Khrunichev (Proton launch vehicles) and $64 million to RD AMROSS (Atlas engines) are recorded in inventories. Realization depends on launch services being provided and the political environment in Russia.
Investor Verification Checklist
- Titan Acquisition Status: Monitor the outcome of the DOJ/SEC investigations into Titan Corporation and the scheduled stockholder vote (expected on or after June 7, 2004).
- Environmental Liabilities: Verify the status of the perchlorate remediation in Redlands, CA, and the final court decision on the Pit 9 waste remediation lawsuit.
- Intelsat Valuation: Track the pricing of the Intelsat IPO to assess potential impairment charges on Lockheed Martin's equity investment.
- Government Funding: Assess the impact of U.S. Government budget priorities and funding availability on the Aeronautics and Space Systems segments, which rely heavily on government contracts.
- Executive Transition: Note the announced retirement of CEO Vance D. Coffman effective August 6, 2004, and the succession by Robert J. Stevens.