Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2001
Business Overview: The Corporation operates in five principal segments: Systems Integration, Space Systems, Aeronautics, Technology Services, and Global Telecommunications. The period was characterized by significant portfolio restructuring, including the divestiture of non-core businesses and the integration of COMSAT Corporation.
Key Financial Metrics
| Metric (in millions) | Q3 2001 | Q3 2000 | 9M 2001 | 9M 2000 |
|---|---|---|---|---|
| Net Sales | $6,384 | $5,960 | $17,355 | $17,734 |
| Operating Profit | $580 | $(26) | $1,371 | $625 |
| Net Earnings (Loss) | $213 | $(704) | $462 | $(608) |
| Diluted EPS | $0.49 | $(1.74) | $1.07 | $(1.54) |
| Cash from Operations (9M) | $2,194 | $1,745 | ||
| Cash & Equivalents (End of Period) | $1,801 | $1,938 | ||
| Total Debt Reduction (9M) | $2.2 billion decrease |
Material Changes vs. Prior Period
- Profitability Turnaround: The Company reported a net loss of $704 million in Q3 2000, driven largely by a $755 million impairment loss on the sale of Aerospace Electronics Systems (AES). In Q3 2001, the Company returned to profitability with $213 million in net earnings.
- Divestitures and Gains: In Q3 2001, the sale of Lockheed Martin IMS Corporation generated a $476 million gain. Conversely, a $361 million charge was recorded for the write-down of the investment in Loral Space & Communications Ltd.
- Debt Reduction: Total debt decreased by $2.2 billion during the first nine months of 2001, primarily due to the pre-payment of $1.05 billion in private placement debt and the early redemption of $175 million in debentures (resulting in a $36 million extraordinary loss).
- Segment Performance: Aeronautics sales increased 40% quarter-over-year due to F-22 ramp-up and F-16 development. Space Systems sales increased 5% quarter-over-year but faced operating profit pressure from commercial launch vehicle inventory assessments.
Guidance, Outlook, and Risks
- Joint Strike Fighter (JSF): On October 26, 2001, the Department of Defense selected Lockheed Martin for the JSF program. The initial contract is expected to increase backlog by approximately $19 billion in Q4 2001.
- Astrolink Contingency: The Company ceased additional investment in Astrolink International, LLC, a joint venture. Unless Astrolink secures funding, the Company expects a nonrecurring charge in Q4 2001. A total write-off could reduce net earnings by approximately $275 million.
- Accounting Changes: Adoption of SFAS No. 142 (Goodwill) effective Jan 1, 2002, is expected to increase 2002 net earnings by approximately $270 million by eliminating goodwill amortization.
- Environmental and Legal: The Company faces ongoing environmental remediation obligations (estimated at $90 million for Redlands and $45 million for Burbank/Glendale) and litigation regarding the DOE Pit 9 waste remediation contract.
Investor Verification Checklist
- Astrolink Exposure: Verify the status of Astrolink's funding and the potential magnitude of the Q4 2001 charge (estimated up to $420 million pre-tax).
- JSF Contract Details: Confirm the timing and specific terms of the $19 billion backlog addition from the Joint Strike Fighter award.
- Goodwill Impairment Testing: Monitor the results of the SFAS No. 142 impairment testing for goodwill, particularly in the Global Telecommunications segment.
- Commercial Launch Market: Assess the impact of continued market pressures on the Atlas and Proton launch vehicle programs and associated inventory provisions.
- Debt Maturities: Review the schedule for the replacement of the expiring $3.5 billion credit facility and future debt service requirements.