Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2003
Business Overview: Lockheed Martin is a global aerospace and defense contractor providing advanced technology systems, products, and services. Principal customers include U.S. Government agencies. The company operates in five segments: Aeronautics, Electronic Systems, Space Systems, Integrated Systems & Solutions (ISS), and Technology Services. In Q2 2003, the company reorganized its segments, forming ISS and renaming Systems Integration to Electronic Systems.
Key Financial Metrics
| Metric (in millions) | Q2 2003 | Q2 2002 | YTD 2003 | YTD 2002 |
|---|---|---|---|---|
| Net Sales | $7,709 | $6,290 | $14,768 | $12,256 |
| Operating Profit | $470 | $526 | $975 | $1,000 |
| Net Earnings | $242 | $339 | $492 | $557 |
| Diluted EPS | $0.54 | $0.75 | $1.09 | $1.24 |
| Operating Cash Flow (YTD) | $1,389 | $1,548 | ||
| Free Cash Flow (YTD) | ||||
| Total Debt (End of Period) | $6,239 | $7,582 | ||
| Cash & Equivalents |
Note: Total Debt calculated as Current Maturities ($164M) + Long-term Debt ($6,075M) for June 30, 2003. YTD Free Cash Flow is Operating Cash Flow less CapEx ($202M).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 23% in Q2 and 20% YTD compared to 2002, driven by higher volume in Aeronautics (F-35, F/A-22, F-16, C-130J) and Space Systems (Satellites, Launch Services).
- Profit Decline: Despite revenue growth, operating profit decreased 11% in Q2 and 3% YTD. This was primarily due to a $122 million "Unallocated Corporate" expense in Q2 2003 (vs. $41 million income in Q2 2002), largely driven by a $68 million FAS/CAS pension adjustment.
- Segment Performance:
- Aeronautics: Sales up 55% Q/Q; Operating profit up 47%.
- Space Systems: Sales up 24% Q/Q; Operating profit up 58%.
- Electronic Systems: Sales up 7% Q/Q; Operating profit up 8%.
- ISS: Sales up 8% Q/Q; Operating profit down 9% due to prior year performance recognition.
- Debt Reduction: Total debt decreased by approximately $1.3 billion YTD due to scheduled repayments, prepayments of $450 million in debentures, and the resolution of the Space Imaging guarantee.
Guidance, Outlook, and Risks
- Unusual Items:
- Commercial Mail Sorting Exit: Recorded a $41 million charge ($27 million net of tax) in Q2 2003 to exit the commercial mail sorting business.
- Debt Prepayment: Recorded a $19 million loss (net of tax) in Q1 2003 for early repayment of $450 million in debentures.
- Space Imaging: Recorded a $19 million gain (net of tax) in Q1 2003 from the partial reversal of a guarantee charge after paying $130 million to acquire Space Imaging's borrowings.
- Outlook & Strategy: Management expects to continue exploring the sale of non-core businesses and passive equity investments. The company announced a tender offer to purchase outstanding 7.25% Notes and 8.375% Debentures and plans a private offering of convertible debentures to fund the buyback.
- Risks & Contingencies:
- Environmental: Significant liabilities recorded for remediation at Redlands, CA ($185M), Great Neck, NY ($70M), and Burbank/Glendale, CA ($60M). Total environmental liability is approximately $445 million.
- Legal: Ongoing litigation regarding the Pit 9 waste remediation contract with the U.S. Department of Energy; False Claims Act lawsuits regarding LANTIRN pods; and a RICO lawsuit filed against Boeing regarding the EELV program.
- Advances to Russian Manufacturers: $283 million in advances to Khrunichev and $57 million to RD AMROSS are included in inventories, subject to risks regarding launch service delivery and political environment.
- Pension Costs: Projected substantial increases in FAS 87 pension expense and CAS funding for 2004.
Investor Verification Checklist
- Pension Adjustments: Verify the impact of the FAS/CAS pension adjustment on future earnings, as management projects substantial increases in 2004.
- Debt Refinancing: Monitor the outcome of the tender offer for 7.25% Notes and 8.375% Debentures and the success of the convertible debenture offering.
- Environmental Liabilities: Review the status of remediation costs at Redlands, CA, and potential recoveries from the U.S. Government or other parties.
- Legal Proceedings: Track the progress of the Pit 9 contract dispute and the False Claims Act lawsuits, which could result in significant fines or repayments.
- Segment Reclassification: Ensure comparability of segment data when analyzing trends, as the ISS segment was newly formed in Q2 2003.