Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2004
Business Overview: Lockheed Martin is a global aerospace and defense company serving domestic and international defense, civil government, and commercial markets. Over 75% 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
| Metric (in millions) | Q2 2004 | Q2 2003 | YTD 6mo 2004 | YTD 6mo 2003 |
|---|---|---|---|---|
| Net Sales | $8,776 | $7,709 | $17,123 | $14,768 |
| Operating Profit | $544 | $470 | $1,080 | $975 |
| Net Earnings | $296 | $242 | $587 | $492 |
| Diluted EPS | $0.66 | $0.54 | $1.31 | $1.09 |
| Operating Cash Flow (YTD) | $1,796 (2004) | $1,389 (2003) | ||
| Free Cash Flow (YTD) | ||||
| Long-Term Debt | $6,070 (Jun 30, 2004) | $6,072 (Dec 31, 2003) | ||
| Cash & Equivalents | $2,243 (Jun 30, 2004) | $1,010 (Dec 31, 2003) |
Margins: Operating margin for the six months ended June 30, 2004, was approximately 6.3% ($1,080M / $17,123M). Net margin was approximately 3.4%.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 14% in Q2 and 16% year-to-date compared to 2003. Growth was driven by all five business segments.
- Profitability: Operating profit rose 16% in Q2 and 11% year-to-date. Net earnings increased 22% in Q2 and 19% year-to-date.
- Segment Performance:
- Aeronautics: Sales up 31% (Q2) and 34% (YTD) due to higher F-16 and F-35 volumes. Operating profit up 48% (Q2) and 45% (YTD) as the company began recognizing profits on C-130J deliveries.
- Electronic Systems: Sales up 1% (Q2) and 4% (YTD); operating profit up 4% (Q2) and 7% (YTD).
- Space Systems: Sales flat (Q2) and up 2% (YTD); operating profit up 28% (Q2) and 21% (YTD).
- IS&S and I&TS: Both segments saw sales increases of roughly 19-21% and significant operating profit growth (21-39%) due to higher volume in intelligence, defense, and IT services.
- Interest Expense: Decreased by $13 million in Q2 and $45 million YTD due to debt reduction and the issuance of lower-cost convertible debentures in 2003.
- Unallocated Corporate Expenses: Increased significantly in 2004 due to a larger FAS/CAS pension adjustment ($298M YTD 2004 vs. $140M YTD 2003). The 2003 period included a $41M charge for exiting the commercial mail sorting business, which did not recur in 2004.
Guidance, Outlook, Risks, and Unusual Items
- Merger Termination: On June 26, 2004, Lockheed Martin terminated its merger agreement with The Titan Corporation because Titan failed to satisfy closing conditions regarding the resolution of Foreign Corrupt Practices Act (FCPA) investigations.
- Divestitures:
- Agreed to sell COMSAT General business to Intelsat, Ltd. for $90 million (expected Q4 2004).
- Anticipates a gain of approximately $60 million from the sale of New Skies Satellites, N.V. (expected late Q4 2004 or early 2005).
- Capital Allocation: The company increased quarterly dividends to $0.22 per share (from $0.12 in 2003). Repurchased 5.8 million shares for $278 million in the first six months of 2004. Debt-to-total capital ratio improved to 46%.
- Legal and Contingencies:
- Environmental: Accrued liabilities for environmental matters total approximately $425 million.
- Pit 9 Litigation: Awaiting a court decision on a dispute with the U.S. Department of Energy regarding a terminated waste remediation contract. Lockheed Martin seeks approximately $270 million in damages.
- Meridian, MS Shooting: Facing lawsuits and EEOC charges related to a 2003 fatal shooting incident at a manufacturing facility.
- Accounting Changes: Proposed FASB standards regarding share-based payments and contingently convertible debt could adversely impact future net earnings and diluted EPS calculations.
- Risks: Key risks include U.S. Government funding availability, contract terminations, performance issues with suppliers (specifically Russian launch vehicle provider Khrunichev), and the outcome of ongoing legal proceedings.
Investor Verification Checklist
- Segment Profitability: Verify the sustainability of the C-130J profit recognition in the Aeronautics segment, which was a primary driver of Q2 earnings growth.
- Pension Costs: Review the impact of the FAS/CAS pension adjustment, which significantly increased unallocated corporate expenses in 2004 compared to 2003.
- Merger Activity: Monitor the status of the terminated Titan merger and the closing of the COMSAT General and New Skies Satellites divestitures.
- Legal Exposure: Track the resolution of the Pit 9 litigation with the DOE and the EEOC charges related to the Meridian, MS facility.
- Debt Structure: Confirm the terms and interest rate exposure of the $1.0 billion convertible debentures issued in 2003.