Lockheed Martin (NYSE: LMT) is a United States aerospace, defense, security, and advanced technology company with worldwide interests. It was formed by the merger of Lockheed Corporation with Martin Marietta in March 1995. It is headquartered in Bethesda, Maryland, in the Washington Metropolitan Area. Lockheed Martin employs 133,000 people worldwide. Robert J. Stevens is the current Chairman and Chief Executive Officer.
Lockheed Martin is among the very largest defense contractors in the world, and in 2008 70% of Lockheed Martin's revenues came from military sales.[1] It "receives one of every 14 dollars doled out by the Pentagon."[2]
Lockheed Martin operates in four business segments. These comprise, with respective percentages of 2009 total net sales of $45.2 bn, Aeronautics (27%), Electronic Systems (27%), Information Systems & Global Solutions (27%), and Space Systems (19%). In 2009 US Government contracts accounted for $38.4 bn (85%), foreign government contracts $5.8 bn (13%), and commercial and other contracts $0.9 bn (2%).[3] In both 2009 and 2008 the company topped the list of US Federal Contractors.
The company has received the Collier Trophy twice – in 2001 for being part of developing the X-35/F-35B LiftFan Propulsion System,[4][5][6] and again in 2006 for leading the team that developed the F-22 Raptor fighter jet.

Lockheed Martin (NYSE:LMT) is the world's largest defense contractor by revenue as of fiscal 2009.[1] As a manufacturer of primarily electronic, information, aeronautic, and space systems, LMT has benefited from the increased defense spending that has accompanied the Afghan and Iraq War.

United States government spending represented 85% of Lockheed Martin's revenue in fiscal 2009.[2] As a result, the company is sensitive to political changes that impact federal government spending priorities. Historically, Republican political victories have benefited Lockheed Martin through increases in defense spending. For example, tensions between Congress and Democratic President Obama surmounted on July 14, 2009 regarding a pending $680 billion military spending bill for 2010, in which Obama vowed to veto if the bill included funding more F-22s, jet fighters which LMT produces. Consequently, on July 22, 2009, the bill was rejected, which stripped $1.75 billion of funding needed for the additional jets.[3]

As is common in the defense industry, Lockheed Martin's operating costs are extremely high. In addition, Lockheed Martin faces enormous pension obligations. As of FY2009, the underfunded plan covered about 140,000 employees.[4] As seen in the first quarter of 2009, negative return on the investments in its pension fund along with changes in the interest rate caused considerable reductions in earnings as the company subsidized pensions with current earnings.[5]

Company Overview

Business and Financial Metrics
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Business Segments
1.3 Q1 FY2010 Summary
1.4 Q2 FY2010 Summary
1.5 Q3 FY2010 Summary
1.6 Q4 FY2010 Summary
2 Key Trends and Forces
2.1 U.S. Government spending influences the company's revenues
2.2 Following a String of Lost Contracts, LMT Chooses to Cut Employees because of LMT's Costly Pension Program
3 Competition
4 References
The Lockheed Martin Corporation is involved in the research, development, and manufacturing of technological systems, products, and services. It makes money by producing, operating, and maintaining these products for its customers, which are almost always governments (mainly the US government).



2009 LMT Net Sales by Business Segment[6]
Lockheed Martin has been helped by the increased defense spending after the September 11 terrorist attacks and subsequent wars in the Middle East. Its growth continues to be fueled by global political instability, such as the conflicts in the Middle East particularly because Israel is Lockheed Martin's primary export partner. While civilian contracts do not play a very significant role, Lockheed Martin's diversification program (even within government contracts themselves) helps it sustain its net income and revenue levels even during times of global peace. Lockheed's diversification program focuses mainly on the acquisition of companies that can help them expand into civil endeavors.

Business Segments
Aeronautics (27% of sales in FY2009): This segment of the company is involved in the design and manufacturing of combat, transport, and un-manned aircraft, air vehicles, and similar technologies that are sold to the U.S. Government and its allies. Some of this group's major products include the F-16 and F-22 fighter jets or the C-130 Hercules and C-5 Super Galaxy transport planes.[7] Net sales in Aeronautics posted $12.2 billion, and the three principal lines of business were "Combat Aircraft", "Air Mobility", and "Global Sustainment."[8] Of these, "Global Sustainment" is playing a larger portion of the Aeronautics business, as it is focused in providing logistics support, sustaining engineering, aviation upgrades, and other services toward existing lines of aircraft.
Electronic Systems (27% of sales in FY2009): This group designs integrated hardware and software systems for many different uses. There are three subgroups within this segment: "Maritime Systems and Sensors", "Missiles and Fire Control", and "Platform, Training and Transportation Systems". "Maritime Systems and Sensors" is involved in the creation, sale, and implementation of nautical systems, with uses ranging from missile defense to port management. "Missiles and Fire Control" designs, sells, and implements land and air systems for missile defense, battlefield missiles, and precious weapons. The "Platform, Training and Transportation Systems" business integrates mission-specific systems and provides information management to governments.[9] Net sales for this segment were at $12.2 billion in fiscal 2009, with the US government representing 70% of this segment's sales.[10] Major projects in this division include the Terminal High Altitude Area Defense system, VH-71 Presidential Helicopter, the Aegis Weapons System, and the Arrowhead fire control system for Apache helicopters.[11]

Information Systems and Global Services (27% of sales in FY2009): This group provides IT solutions for its customers.[12] Information Systems and Global Services had net sales of $12.1 billion, with the US government accounting for approximately 94% of this segment's total net sales.[13] Part of this increase in sales compared to FY2008 stems from increased activity in global security solutions (services related to national security, surveillance, etc). Some examples of this segments offerings are the FAA en route Automation Modernization program, Joint Tactical Radio System program, and the MILSATCOM Mission Operations Segment program.[14]
Space Systems (19% of sales in FY2009): This business segments manufactures both government and commercial satellites, defensive missile systems, and space transportation systems.[15] In FY2009, "Space Systems" posted net sales of $8.6 billion sales, with the US Government accounting for approximately 97% of this segment's sales.[16]
Q1 FY2010 Summary
LMT reported an 18% drop in profits in the first reporting quarter of FY2010 to $547 million from $666 million in first quarter FY2009.[17] Earnings per share also dipped from $1.68 to $145, which included a charge of 25 cents a share from losing the health-tax credit.[18]

Sales, on the other hand, rose 3% to $10.6 billion from a year ago, but this fell from $12.5 billion compared to the previous quarter.[19] LMT's backlog fell to $75 billion from $78 billion at end of 2009.[20] This discrepancy between bottom-line and top-line was a result of cost control; operating margins for example fell from 9.2% from 9.9% in the prior quarter and 10.2% from a year earlier.<ref.Lockheed Topples Estimate</ref>

Q2 FY2010 Summary
LMT posted earnings of $825 million, or $2.20 EPS for the second reporting quarter of FY2010, an increase of 12.4% compared to $734 million, or $1.88 EPS, in Q2 FY2009.[21] LMT's revenues for the second quarter were $11.44 billion, up 4% compared to $11.07 billion in Q2 FY2009.[22] These figures, even excluding the tax gains of $96 million during the second quarter which led to $1.96 per share, topped analyst estimates of $1.78 EPS.[23]

LMT attributes positive earnings results to stronger military hardware sales and a gain from plans to sell off a business unit. Like the rest of the defense industry, LMT is trying to cope with major changes from the Pentagon (representing roughly 85% of revenues), as the U.S. government defense budget begins to tighten and toughen rules for contractors to cut costs.[24] As such, LMT stated that it plans to sell two units, Enterprise Integration Group and Pacific architects and Engineers business, which provide services for intelligence and other governmental agencies.

Q3 FY2010 Summary
LMT posted earnings of $571 million ($1.57 EPS) in the third reporting quarter ending September 26, 2010, down 28% compared to $797 million ($2.07 EPS) same quarter last year.[25] Despite the decrease in net income, LMT reported a 6% increase in sales to $11.375 billion compared to $10.767 billion same quarter last year.[26] The discrepancy between top and bottom line is partially attributed to a charge on an early-exit program for executives, in which LMT paid $178 million in early-exit packages for 600 executives who accepted in exchange for leaving LMT.[27]

Disregarding unusual expenses, the profits from LMT's four operating divisions stayed or grew steady, with electronics systems unit seeing the largest increase in profit to $425 million from $404 same quarter last year.[28] However, LMT lowered annual forecasts from continuing operations by 40 cents a share to $6.75 to $6.95, as LMT's primary customers, United States and United Kingdom, continue to cut defense spending.[29]

Q4 FY2010 Summary
LMT posted earnings of $983 million, or $2.73 EPS, an 18.9% increase compared to $827 million or $2.17 EPS same quarter last year.[30] This figure beat analyst consensus estimates of $2.10 EPS, as LMT incurred an unusual charge of $42 million related to consolidation within its Mission Systems & Sensors line.[31] This quarter also included a non-recurring reduction of income tax expense related to R&D tax credits and additional benefits from U.S. manufacturing deductions.

LMT's top line came to $12.8 billion compared to $12.2 billion same quarter last year, a 4.9% increase and beat analyst consensus estimates of $12.47 billion.[32] Further, LMT finished the fiscal year 2010 with $78.2 billion of backlog, including $20.5 billion of new orders booked in the fourth quarter. In particular, LMT's Aeronautics business segment reported quarterly sales increases of 19% growth to $3.9 billion due, as higher deliveries such as the C-130J. These deliveries, however, were offset by a decrease in volume of F-16s and F-22's.[33]

Key Trends and Forces

U.S. Government spending influences the company's revenues


U.S. National Defense Spending as Percentage of Total Budget Outlays[34]
Lockheed Martin is susceptible to fluctuations in the Department of Defense's budget since contracts with the United States government account for 85% of its income. Therefore, the distribution of government spending also affects Lockheed Martin. For example, the cancellation of F-22 jets on July 14, 2009 priced at $1.75 billion by Congress detracted from revenue for LMT.[3]

Although US defense spending more than doubled during the Bush administration, President Obama has mentioned on several occasions his desire to reduce the defense budget.[35] Often, while such a goal might reduce LMT's revenues in the long-run, defense allocations are planned several years in advance, so there will be a lag before any reductions by the Obama administration take effect.[36] But when these decisions occur abruptly, LMT suffers tremendously.

With the Democratic Party taking the majority of both chambers in Congress, there has been some speculation as to what will happen to the defense industry. This is because Democrats have traditionally been strong advocates for a balanced government budget. Defense aerospace spending and its growth rate have already been capped for the fiscal years 2008-2012. That said, it is very likely that Congress will still approve the purchase of additional aircraft and ships according to press releases by the Democrat-controlled House Appropriations Committee.

Lockheed Martin will be negatively affected by the Obama presidency, as military/defense spending will be cut under his administration; Obama has made it clear that one of his priorities is ending the war in Iraq. The company has already taken this into consideration, lowering its 2009 expectations.[37] Further, depending on political preferences, LMT's operations can be curtailed if it does business with a country that no longer is in favorable terms with the United States. This is because arms sales to foreign governments are tightly regulated by the Arms Export Control Act. Foreign investments by Lockheed Martin, such as a joint venture with the Russian government on space systems, carry the risk of total loss if U.S. regulators deem instability in Russia or the hostility of that government to require the project's termination.

Following a String of Lost Contracts, LMT Chooses to Cut Employees because of LMT's Costly Pension Program
Following several lost contracts in 2009 as the Obama administration scaled back from the war, LMT has resulted in major layoffs within unprofitable divisions that have been shutdown. For example, President Obama's order to terminate LMT's VH-71 Kestrel (Presidential transport helicopter) resulted in LMT to collect only $4 billion of the original $13 billion contract, forcing LMT to lay-off 600 employees in October 2009.[36][38] Also, following another lost contract on the National Institutes of Health, LMT further laid off dozens of employees in LMT's Information Systems & Global Services division.[39] In January 2010, LMT decided to cut 1,200 jobs as it foresees a slowdown in its upcoming work with the Pentagon.[40] The additional layoffs are connected with the previous lost helicopter contract, which has resulted in the fusion of two business units.

LMT's choice to cut down employees rather than other operating costs is a result of LMT's large pension plan. Approximately 100,000 of Lockheed Martin's 130,000 person workforce are scheduled to retire within the next decade. Therefore, pension costs (especially when interest rates are low) can severely impact the company's profits. Since a large portion of Lockheed Martin's pension funds are in investment accounts, low interest rates can reduce the company's profits as the company must supplement the existing funds to meet its obligations to its retirees.

Competition

For comparison purposes, Lockheed Martin had $45.2 billion in FY2009 revenues.

Boeing Company (BA): 2009 revenue - $68.3 billion[41].
Raytheon Company (RTN): 2009 revenue - $24.9 billion[42].
Northrop Grumman (NOC): 2009 revenue - $33.8 billion[43].
General Dynamics (GD): 2009 revenue - $32.0 billion[44]

Company FY2009 Net Profit Margin FY2009 Operating Margin FY2009 EBITD Margin Return on Average Equity Biggest Division
Lockheed Martin[45] 6.69% 9.88% 11.15% 86.47% Electronic Systems
Boeing[46] 1.96% 3.07% 4.57% 320.14% Civilian Aircraft
Northrop Grumman (NOC)[47] 4.66% 7.36% 9.40% 12.78% Electronic Systems
Raytheon Company (RTN)[48] 7.95% 12.23% 13.84% 20.47% Space and Airborne Systems
General Dynamics (GD)[49] 7.53% 11.49% 13.25% 21.42%
 
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