Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2005
Business Overview: Lockheed Martin is a leading systems integrator providing advanced technology systems, products, and services to domestic and international defense, civil, and homeland security markets. Approximately 80% 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
| Financial Metric (in millions) | Q3 2005 | Q3 2004 | 9 Months 2005 | 9 Months 2004 |
|---|---|---|---|---|
| Net Sales | $9,201 | $8,438 | $26,984 | $25,561 |
| Operating Profit | $706 | $561 | $2,100 | $1,641 |
| Net Earnings | $427 | $307 | $1,257 | $894 |
| Diluted EPS | $0.96 | $0.69 | $2.81 | $2.00 |
| Operating Margin | 7.7% | 6.6% | 7.8% | 6.4% |
| Net Cash from Operations (9M) | $3,138 (2005) vs $2,835 (2004) | |||
| Cash & Equivalents (Sep 30, 2005) | $3,140 | |||
| Long-Term Debt (Sep 30, 2005) | $4,874 | |||
| Debt-to-Capitalization | 40% (down from 42% in 2004) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9% in Q3 2005 and 6% for the nine-month period compared to 2004. Growth was driven by all segments except Information & Technology Services (flat in Q3) and Aeronautics (down 2% for nine months due to F-16 volume declines).
- Profitability Expansion: Operating profit rose 26% in Q3 and 28% for the nine months. This was driven by improved performance across all segments, particularly in Electronic Systems and Space Systems.
- Segment Performance:
- Aeronautics: Q3 sales up 8% (C-130J growth); nine-month sales down 2% (F-16 declines offset by F/A-22 and F-35 volume).
- Electronic Systems: Sales up 9% (Q3) and 13% (9M); operating profit up 19% (Q3) and 23% (9M) due to tactical missile and radar programs.
- Space Systems: Sales up 17% (Q3) and 9% (9M); operating profit up 36% (Q3) and 25% (9M) driven by government satellite volume and improved launch vehicle performance.
- Unusual Items:
- Gains: Recognized a $42 million deferred gain from the Inmarsat IPO (after-tax impact $27 million) and a $47 million gain from the sale of Intelsat interest (after-tax impact $31 million).
- Charges: Recorded a $30 million impairment charge (after-tax impact $19 million) for a telecommunications satellite due to market overcapacity.
Guidance, Outlook, and Risks
- Dividends and Buybacks: The quarterly dividend was increased to $0.30 per share, effective December 2005. The company repurchased 14.9 million shares for $933 million in the first nine months of 2005. Approximately 47 million shares remain available for repurchase under the current program.
- United Launch Alliance (ULA): A 50-50 joint venture with Boeing to combine Atlas and Delta launch operations is pending regulatory approval. Closing is expected in Q4 2005. SpaceX has filed an antitrust lawsuit to block the transaction.
- Accounting Changes: The company expects to adopt FAS 123(R) in Q1 2006, which will result in an estimated additional expense of $100 million (reducing EPS by $0.15) on a full-year basis due to stock option expensing.
- Legal and Environmental:
- Environmental liabilities totaled $455 million as of September 30, 2005, primarily related to sites in California and New York.
- Management considers the probability of material adverse effects from pending litigation (including False Claims Act cases and environmental suits) to be remote, though outcomes cannot be predicted with certainty.
- Operational Risks: Risks include government funding availability, changes in defense priorities, and the impact of military operations in Iraq and Afghanistan on program funding.
Investor Verification Checklist
- ULA Regulatory Approval: Monitor the status of the Federal Trade Commission (FTC) review and the outcome of the SpaceX antitrust lawsuit regarding the United Launch Alliance joint venture.
- Government Contract Funding: Verify the stability of U.S. Government funding for key programs (F-35, C-130J, F/A-22) given potential budgetary constraints or priority shifts.
- Environmental Liabilities: Review updates on remediation costs for the Redlands, Burbank, and Glendale facilities, particularly regarding perchlorate contamination standards in California.
- Stock-Based Compensation Impact: Assess the actual financial impact of FAS 123(R) adoption in 2006 on net earnings and EPS.
- Divestiture Proceeds: Confirm the realization of expected gains from the secondary offering of Inmarsat shares (expected $85 million gain).