LMT

Lockheed Martin Corporation - Q1 2002 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the three-month period ended March 31, 2002. Lockheed Martin Corporation operates in four principal segments: Systems Integration, Space Systems, Aeronautics, and Technology Services. The reporting period reflects the exit from the Global Telecommunications Services business, with remaining assets classified as held for sale. The company also adopted SFAS No. 142 effective January 1, 2002, eliminating goodwill amortization.

Key Financial Metrics

Note: Q1 2001 figures include nonrecurring items and goodwill amortization not present in 2002.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 26% to $5.97 billion, driven by volume growth across all segments, particularly Aeronautics (+56%) and Space Systems (+32%).
• Profitability: Operating profit rose 21% to $474 million. Adjusted for accounting changes and nonrecurring items, operating profit increased 5% year-over-year.
• Accounting Changes: Adoption of SFAS No. 142 eliminated $61 million in goodwill amortization expense compared to Q1 2001. Additionally, the useful life of the F-16 intangible asset was extended, reducing amortization by approximately $8 million per quarter.
• Cash Flow: Operating cash flow decreased significantly to $428 million from $1.05 billion in Q1 2001. This decline is attributed to the absence of $185 million in proceeds from a real estate sale in 2001 and changes in working capital (specifically customer advances).
• Debt Reduction: Interest expense decreased $49 million to $148 million due to debt portfolio reductions. Total debt remained relatively stable at approximately $7.5 billion.

Outlook, Risks, and Contingencies

• Segment Performance:
  • Aeronautics: Sales surged due to F-22 volume and C-130J deliveries. A seven-week strike at Marietta, Georgia, ended April 28, 2002; management does not expect a material impact on 2002 consolidated results.
  • Space Systems: Profit increased due to three commercial launches (none in Q1 2001) and the absence of a $40 million loss provision recorded in the prior year.
• Divestitures: The company expects to complete the sale of businesses held for sale (including COMSAT World Systems) by the end of 2002. The sale of COMSAT Mobile Communications was completed in Q1 2002 with no material impact.
• Legal and Environmental:
  • Pit 9 Contract: Ongoing litigation with the U.S. Department of Energy regarding a $180 million waste remediation contract. The company is defending a suit seeking recovery of $54 million and pursuing cost recovery for unanticipated expenses.
  • Environmental Remediation: Estimated expenditures for Redlands, California groundwater contamination are approximately $85 million. Burbank/Glendale remediation costs are estimated at $50 million net of government reimbursement.
• Market Risks: Primary exposure is to interest rates. The company uses interest rate swaps to hedge approximately $920 million of fixed-rate debt. A 1% change in LIBOR would impact interest expense by approximately $9 million.

Investor Verification Checklist

• Strike Impact: Verify the actual operational and financial impact of the Aeronautics segment strike that concluded in late April 2002.
• Divestiture Timeline: Monitor the closing of the COMSAT World Systems sale to Intelsat, expected in the second half of 2002.
• Environmental Liabilities: Track the status of California's perchlorate regulations, as a formal adoption of the 4 ppb standard could increase clean-up costs at the Redlands site.
• Pit 9 Litigation: Review updates on the appeal regarding the Court of Federal Claims' dismissal of the company's complaint against the DoE.
• Commercial Launches: Assess the sustainability of Space Systems' revenue growth, which was heavily influenced by three commercial launches in Q1 2002 compared to zero in Q1 2001.