Lockheed Martin Corporation: Q3 2003 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2003. Lockheed Martin Corporation operates as a lead systems integrator in defense, space, homeland security, and government information technology markets. The company reorganized its business segments in Q2 2003, forming a new Integrated Systems & Solutions (IS&S) segment and renaming the former Systems Integration segment to Electronic Systems. The company's principal customers are agencies of the U.S. Government.
Key Financial Metrics
| Metric (in millions) | Q3 2003 | Q3 2002 | 9 Months 2003 | 9 Months 2002 |
|---|---|---|---|---|
| Net Sales | $8,078 | $6,542 | $22,846 | $18,798 |
| Operating Profit | $428 | $576 | $1,403 | $1,576 |
| Net Earnings | $217 | $290 | $709 | $847 |
| Diluted EPS | $0.48 | $0.64 | $1.57 | $1.88 |
| Operating Cash Flow (9mo) | $1,674 (vs. $2,728 in 2002) | |||
| Cash & Equivalents | $1,835 (as of Sept 30, 2003) | |||
| Total Debt | Decreased to approx. $6.2B (from $7.6B in 2002) |
Margins: Operating margin for Q3 2003 was approximately 5.3% ($428M / $8,078M), down from 8.8% in Q3 2002. Net margin was 2.7% for Q3 2003.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 23% in Q3 and 22% year-to-date, driven by higher volumes in Aeronautics (F-35, F/A-22, F-16) and Space Systems (Satellites).
- Profit Decline: Despite revenue growth, operating profit fell 26% in Q3 and 11% year-to-date. This was primarily due to Unallocated Corporate expenses, specifically a $127 million loss on the early retirement of debt in Q3 and a $220 million FAS/CAS pension adjustment for the nine-month period.
- Segment Performance: All five business segments (Aeronautics, Electronic Systems, Space Systems, IS&S, Technology Services) reported increased operating profits compared to the prior year periods. Aeronautics saw the largest profit increase (71% in Q3).
- Debt Reduction: The company aggressively reduced debt, retiring $971 million of long-term debt in Q3 alone and repurchasing $251 million in the open market, resulting in a $1.4 billion total debt reduction year-to-date.
Guidance, Outlook, and Risks
- Acquisitions:
- Agreed to acquire The Titan Corporation for approximately $2.4 billion (expected close Q1 2004).
- Agreed to acquire ACS's federal IT business and sell its commercial IT business to ACS (expected close Q4 2003).
- Dividends: Board authorized an increase in the quarterly dividend from $0.12 to $0.22 per share, effective Q4 2003.
- Contingencies & Risks:
- Environmental: Significant liabilities recorded for remediation at Redlands, CA ($185M), Great Neck, NY ($70M), and Burbank/Glendale, CA ($60M).
- Legal: Ongoing litigation regarding the Pit 9 waste remediation contract with the U.S. Department of Energy; trial began August 2003.
- Russian Advances: $310 million in advances to Khrunichev (Proton launches) and $86 million to RD AMROSS (RD-180 engines) remain in inventory, subject to political and market risks.
- Pension Costs: Management projects FAS 87 pension expense and CAS funding will increase substantially in 2004.
Investor Verification Checklist
- Debt Retirement Impact: Verify the sustainability of earnings given the $146 million pre-tax loss on debt retirement in the first nine months of 2003.
- Pension Obligations: Review the projected increase in FAS 87 pension expense and CAS funding for 2004, which could pressure future margins.
- Acquisition Integration: Assess the financial impact and integration risks of the pending Titan Corporation acquisition ($2.4B) and the ACS IT swap.
- Environmental Liabilities: Monitor the status of the Pit 9 litigation and potential changes in remediation costs for California and New York sites.
- Launch Services Exposure: Evaluate the risk associated with $396 million in advances to Russian partners (Khrunichev and RD AMROSS) amidst geopolitical and market overcapacity concerns.