Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2007
Business Overview: Lockheed Martin is a global security and aerospace company primarily serving U.S. Government agencies (84% of 2006 sales). Operations are organized into four segments: Aeronautics, Electronic Systems, Information Systems & Global Services (IS&GS), and Space Systems. In February 2007, the company realigned operations, merging previous segments into the new IS&GS division.
Key Financial Metrics
| Metric (in millions) | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Net Sales | $11,095 | $9,605 | $31,021 | $28,780 |
| Net Earnings | $766 | $629 | $2,234 | $1,800 |
| Earnings Per Share (Diluted) | $1.80 | $1.46 | $5.21 | $4.12 |
| Operating Cash Flow (9M) | $3,821 (2007) vs $3,450 (2006) | |||
| Cash & Equivalents | $3,094 (Sep 30, 2007) | |||
| Long-Term Debt | $4,303 (Sep 30, 2007) | |||
| Debt-to-Capital Ratio | 37% (Sep 30, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 16% in Q3 2007 and 8% for the nine-month period compared to 2006. Growth was recorded across all four business segments.
- Profitability: Earnings before interest and taxes (EBIT) rose 32% in Q3 and 22% for the nine months. Segment operating profit increased in every segment.
- Segment Performance:
- Aeronautics: Sales up 12% (Q3) driven by F-22, F-16, and F-35 volume.
- Electronic Systems: Sales up 10% (Q3) driven by air defense and fire control systems.
- IS&GS: Sales up 24% (Q3) due to acquisitions (Pacific Architects and Engineers, Management Systems Designers) and organic growth.
- Space Systems: Sales up 19% (Q3) driven by Satellites and Strategic & Defensive Missile Systems, offset by declines in Space Transportation following the ULA joint venture formation.
- One-Time Items: Q3 2007 results included a $25 million gain from the sale of Comsat International interest and a $25 million gain from land sales. Q3 2006 included a $31 million land sale gain and $127 million gain from Inmarsat stock sales.
Guidance, Outlook, and Risks
- Dividends: The Board increased the quarterly dividend to $0.42 per share, effective Q4 2007 (up from $0.35).
- Share Repurchases: The company repurchased $1.8 billion of stock in the first nine months of 2007. Approximately 36 million shares remain available under the current program.
- Convertible Debentures: $1.0 billion of floating-rate convertible debentures became convertible in Q3 2007 as the stock price exceeded 130% of the conversion price. The company has agreed to pay cash for the accreted principal amount upon conversion.
- Legal & Environmental:
- Environmental liabilities recorded at $571 million (Sep 30, 2007), with $464 million expected to be recovered via government contracts.
- Ongoing litigation includes a grand jury subpoena regarding a 2004-2005 contract competition and environmental claims at the Paducah Gaseous Diffusion Plant.
- Joint Ventures: The company made an additional $177 million contribution to United Launch Alliance (ULA) in Q3 2007 to finalize working capital adjustments.
Investor Verification Checklist
- Convertible Debt Conversion: Verify the timing and cash impact of the potential conversion of $1.0 billion in debentures in Q4 2007.
- Segment Realignment: Confirm the long-term impact of the February 2007 segment realignment on future reporting and performance metrics.
- Environmental Liabilities: Monitor the status of the Redlands, California groundwater contamination case and the $571 million recorded liability.
- ULA Financials: Track the $395 million excess of ULA net assets over book value, which is being recognized ratably over 10 years.
- Pension Assumptions: Watch for year-end 2007 updates on discount rate assumptions, which could impact stockholders' equity by $1.1 billion to $1.2 billion.