Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2002
Business Overview: Lockheed Martin designs, develops, and manufactures advanced technology systems for domestic and international defense and commercial markets, with the U.S. Government as its principal customer. The company operates four principal segments: Systems Integration, Space Systems, Aeronautics, and Technology Services.
Key Financial Metrics
| Metric (in millions) | Q3 2002 | Q3 2001 | 9 Months 2002 | 9 Months 2001 |
|---|---|---|---|---|
| Net Sales | $6,542 | $6,221 | $18,798 | $16,656 |
| Operating Profit | $576 | $58 | $1,576 | $876 |
| Net Earnings | $290 | $213 | $847 | $462 |
| Diluted EPS (Total) | $0.64 | $0.50 | $1.88 | $1.07 |
| Cash from Operations (9mo) | N/A | $2,728 | $2,194 | |
| Cash & Equivalents (End of Period) | N/A | $3,490 | $1,801 | |
| Total Debt (Long-term + Current) | N/A | $7,456 | $7,511 |
Note: Debt figures calculated as Current maturities of long-term debt ($763M) plus Long-term debt ($6,693M) for 2002; and Current maturities ($89M) plus Long-term debt ($7,422M) for 2001.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 5% in Q3 and 13% year-to-date (YTD) compared to 2001, driven by growth in all segments except Corporate and Other.
- Profitability Surge: Operating profit increased significantly ($518M in Q3, $700M YTD) primarily due to the adoption of SFAS No. 142 (eliminating goodwill amortization) and the absence of nonrecurring charges that impacted 2001 results (e.g., Loral Space write-down, debt repayment losses).
- Accounting Changes: Adoption of SFAS No. 142 reduced amortization expense by approximately $68M in Q3 and $205M YTD compared to 2001. The useful life of the F-16 intangible asset was extended from six to ten years.
- Discontinued Operations: Q3 2002 reported a $10M loss from discontinued operations, contrasting with a $300M gain in Q3 2001 driven by the sale of Lockheed Martin IMS Corporation.
- Tax Benefit: YTD 2002 earnings included a $90M benefit from the settlement of a research and development (R&D) tax credit claim.
Guidance, Outlook, and Risks
- Share Repurchase: In October 2002, the company authorized a new share repurchase plan for up to 23 million shares, replacing a 1995 plan.
- Pension Liability Adjustment: Management expects a year-end 2002 adjustment to pension plans that could reduce stockholders' equity by $1 billion to $2 billion due to lower discount rates and negative asset returns. This is not expected to impact debt covenant compliance.
- Divestitures: The company is exiting the Global Telecommunications business. Agreements are in place to sell COMSAT World Systems and Lockheed Martin Intersputnik (LMI), subject to regulatory approval. The sale of COMSAT International was completed in October 2002.
- Commercial Launch Market: Financial performance in commercial launch vehicles continues to deteriorate due to industry-wide oversupply and pricing pressures. Charges of approximately $60M were recorded in 2002 for market pressures.
- Contingencies:
- Environmental: Total environmental liabilities recorded were $460M at September 30, 2002, including a $185M liability for the Redlands, CA site.
- Legal: Ongoing litigation regarding the Pit 9 waste remediation contract with the U.S. Department of Energy. The Court of Appeals affirmed a dismissal of Lockheed's claim for lack of jurisdiction; the company will pursue remedies in a district court counterclaim.
- Russian Advances: $589M in advances to Russian manufacturer Khrunichev for Proton launch vehicles. Realization of these amounts depends on future launch demand and the political environment in Russia.
Investor Verification Checklist
- Adjusted Earnings: Verify the impact of the $90M R&D tax credit and the elimination of goodwill amortization on reported earnings to assess core operational performance.
- Pension Assumptions: Monitor the final year-end 2002 actuarial assumptions for pension plans, as a $1B-$2B equity reduction is anticipated.
- Commercial Launch Exposure: Review the status of the $589M advances to Khrunichev and the outlook for the commercial satellite launch market, which is currently underpricing pressure.
- Divestiture Timelines: Track regulatory approvals for the sale of COMSAT World Systems and LMI to confirm the exit from the telecommunications segment.
- Environmental Liabilities: Assess the potential for increased costs related to the Redlands, CA perchlorate remediation plan and the Pit 9 litigation outcome.