LMT

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2004
Business Overview: Lockheed Martin is a global aerospace and defense contractor serving domestic and international defense, civil government, and commercial customers. 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

Margins (9M 2004): Operating margin was approximately 6.4%; Net margin was approximately 3.5%.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 4% in Q3 and 12% for the nine months ended September 30, 2004, compared to 2003. Growth was driven by Aeronautics (F-35, F/A-22, C-5 programs) and Information & Technology Services.
• Profitability: Operating profit rose 31% in Q3 and 17% for the nine-month period. Net earnings increased 41% in Q3 and 26% for the nine months.
• Segment Performance:
  • Aeronautics: Sales up 22% (9M) due to higher volume on combat aircraft and air mobility programs.
  • Space Systems: Sales declined slightly due to fewer commercial satellite deliveries, though operating profit increased due to improved launch services profitability.
  • Electronic Systems: Operating profit declined nominally in Q3 due to losses on international simulation contracts.
• One-Time Items: The 2003 period included significant charges ($127 million) related to early debt repayment and a $41 million charge for exiting the commercial mail sorting business. No comparable items occurred in 2004.
• Debt Reduction: Long-term debt decreased slightly to $6.1 billion. The company repurchased $465 million of common stock and paid $294 million in dividends during the nine-month period.

Guidance, Outlook, and Risks

• Dividend Increase: The quarterly dividend was increased to $0.25 per share, payable December 30, 2004.
• Debt Tender Offers: In October 2004, the company announced tender offers to repurchase up to $850 million of outstanding notes. This is expected to result in an after-tax charge of approximately $90 million in Q4 2004 but will reduce future interest expense by ~$75 million annually.
• Acquisition Termination: The merger agreement with The Titan Corporation was terminated in June 2004 due to Titan's failure to resolve Department of Justice investigations regarding Foreign Corrupt Practices Act violations.
• Investment Exits: Pending sales of Intelsat and New Skies Satellites holdings are expected to close in late 2004 or early 2005, potentially generating ~$680 million and ~$150 million in after-tax proceeds, respectively.
• Legal Contingencies:
  • DoE Pit 9 Contract: Awaiting court decision on a terminated $180 million contract; company seeks ~$270 million in damages.
  • Meridian, MS Shooting: Multiple lawsuits filed regarding a 2003 workplace shooting; company claims are without merit.
  • Environmental: Total recorded liabilities for environmental matters are approximately $425 million.
• Accounting Changes: New rules regarding share-based payments and contingently convertible debt may impact future earnings per share calculations.

Investor Verification Checklist

• Verify the impact of the October 2004 debt tender offers on Q4 2004 earnings and future interest expense.
• Monitor the resolution of the DoE Pit 9 litigation and the potential recovery of costs recorded in inventory.
• Track the closing of the Intelsat and New Skies Satellites divestitures and the realization of projected proceeds.
• Assess the sustainability of Aeronautics segment growth, specifically regarding F-35 and F/A-22 program volumes.
• Review the status of the Meridian, MS shooting lawsuits and potential liability exposure.
• Confirm the impact of the new FASB standard on share-based payments on future pro forma earnings.