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Lockheed Martin (NYSE:LMT) is the world's largest defense contractor in terms of revenue. Since the enormous buildup in US defense spending following the September 11th 2001 terrorist attacks, Lockheed Martin's sales and earnings have increased steadily each year.[1] As a manufacturer of all kinds of military technology, LMT has benefited widely from the increased defense spending that has accompanied the Afghan and Iraq War . In 2007, the firm generated $42.7 billion in net sales (a 2% increase over 2007) and $3.2 billion in net earnings (a 13% increase over 2007).[2]
United States government spending represents 85% of Lockheed Martin's revenue[3]. As a result, the company is extremely sensitive to political changes that impact federal government spending priorities. Historically, Republican political victories have benefited Lockheed Martin through increases in defense spending. As is common in the defense industry, Lockheed Martin's operating costs are extremely high. In addition, Lockheed Martin faces enormous pension obligations. The underfunded plan currently covers about 130,000 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 can cause considerable reductions in earnings as the company must subsidize pensions with current earnings.[5]
[edit] Company Overview
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). Revenues have grown from $35.5 billion in 2004 to $42.7 billion in 2007, increasing steadily every year over that time span.[6]
Lockheed Martin has been helped by the increased defense spending after the September 11 terrorist attacks. Its growth continues to be fueled by global political instability, such as conflicts in the Middle East, particularly since 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) may help them sustain their net income and revenue levels even during a time of global peace. Lockheed's diversification program focuses mainly on the acquisition of companies that can help them expand into civil endeavors. For example, in 2007 the company acquired Management System Designers, which focuses on information technology and science solutions for life sciences and civil agencies. In 2006, Lockheed Martin acquired, among others, Aspen Systems Corporation, which focuses on information management for businesses[9] Despite this, the program hasn't been all that successful as evidenced by the percentage of revenue from government contracts.
[edit] Business Financials and Metrics
Lockheed's revenue grew in 2007, with net sales increasing 6% to $41.9 billion. Net earnings, however, rose 20% to $3.0 billion[10]. Volume increases in the F-22 program more than offset declines on the F-16 program. Lockheed's Information Systems & Global Services division achieved the highest sales growth (14%) in 2007, spearheaded by higher volume and growth in mission services activities and a series of acquisitions[11].
[edit] Business Segments
- Aeronautics (29% of sales, 32% of operating profit): This segment of the company is involved in the design and manufacturing of military aircraft, air vehicles, and similar technologies; these 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.[12] Net sales for this group increased by 1% in 2007 to $12.3 billion; however, operating income increased by 21%. This was mainly due to an increase in the operating profit of Combat Aircraft of $326 million, which was due to the improved F-16 and F-22 programs[13].
- Electronic Systems (27% of sales, 30% of operating profit): 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.[14]. Sales for this segment grew 4.3% in 2008 to $11.6 billion, while operating profit increased by 7%[15] Current 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.[16]
- Information Systems and Global Services (25% of sales, 20% of operating profit): This group essentially provides IT solutions for its customers[17]. Information Systems and Global Services had its sales increase by 14% in 2008 to $11.6 billion; operating profit increased by 13% to $1.1 billion.[18] Part of this increase in sales/operating profit stems from increased activity in global security solutions (services related to national security, surveilance, etc)[19] 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.[20]
- Space Systems (19% of sales, 18% of operating profit): This business segments manufactures both government and commercial satellites, defensive missile systems, and space transportation systems[21]. While net sales only increase by 4% (to $8.2 billion), operating profit increased by 15% to $856 million. This increase in operating profit was mainly due to improved performance by the Satellites division, which saw its operating profit increase by $69 million [22]
[edit] Key Trends and Forces
[edit] Government spending influences the company's revenues
Lockheed Martin is very susceptible to fluctuations in the Department of Defense's budget since contracts with the United States Government account for 85% of its income. The distribution of government spending may also affect Lockheed Martin. For example, the cancellation of future combat aircraft programs would detract from revenue. Lockheed Martin's revenue may also suffer given reduced defense or R&D spending, cutbacks on existing orders, or the Iraq War ending sooner than expected. The government sometimes cancels contracts if the cost of a program becomes larger than anticipated.
[edit] Sales To Foreign Markets Are Heavily Regulated
Arms sales to foreign governments is heavily regulated by the Arms Export Control Act. Foreign investments on behalf of Lockheed Martin, such as a joint venture with the Russian government on space systems, carry more risks due to instability in Russia.
[edit] US Politics Influences Government Spending
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, especially because Democrats have recently 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 [23]
[edit] Pensions Will Increase the Company's Expenses Within The Next Few Years
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.
[edit] Competition
For comparison purposes, Lockheed Martin had $41.9 billion in 2007 revenues.
- Boeing Company (BA): 2007 revenue - $66.4 billion[24].
- Raytheon Company (RTN): 2007 revenue - $21.3 billion[25].
- Northrop Grumman (NOC): 2007 revenue - $32.0 billion[26].
- General Dynamics (GD): 2007 revenue - $27.2 billion[27].
| Company | 2005 Revenue ($M) | 2005 Net Income ($M) | 2006 Revenue ($M) | 2006 Net Income ($M) | 2007 Revenue ($M) | 2007 Net Income ($M) | Biggest Division |
| Lockheed Martin | $37,213.00 | $1,825.00 | $39,620.00 | $2,529.00 | $41862.00 | $3,033.00 | Electronic Systems |
| Boeing | $53,621.00 | $2,572.00 | $61,530.00 | $2,215.00 | $66,387.00 | $4,074.00 | Civilian Aircraft |
| Northrop Grumman (NOC) | $30,067.00 | $1,400.00 | $30,148.00 | $1,542.00 | $32,018.00 | $1,790.00 | Electronic Systems |
| Raytheon Company (RTN) | $19,038.00 | $871.00 | $20,291.00 | $1,283.00 | $21,301.00 | $3,520.00 | Space and Airborne Systems |
| General Dynamics (GD) | $20,975.00 | $1,461.00 | $24,063.00 | $1,856.00 | $27,240.00 | $2,072.00 | Information Systems and Technology |
[edit] References
- ↑ Lockheed Martin 2008 Annual Report, page 39
- ↑ Lockheed Martin 2008 Annual Report, page 2
- ↑ Wet Feet, "Lockheed Martin Company Overview"
- ↑ Manufacturing.net: Lockheed Martin Lowers Outlook Over Pension Costs
- ↑ Manufacturing.net: Lockheed Martin Lowers Outlook Over Pension Costs
- ↑ Lockheed Martin 2008 Annual Report, page 39
- ↑ Lockheed Martin, "2007 Annual pg. 94"
- ↑ Lockheed Martin, "2007 Annual pg. 94"
- ↑ Lockheed Martin, "2007 Annual Report pg. 71"
- ↑ Google Finance, "Lockheed Martin"
- ↑ Lockheed Martin, "2007 Annual Report"
- ↑ Reuters, "Lockheed Martin Corp"
- ↑ Lockheed Martin, "2007 Annual Report pg. 47"
- ↑ Reuters, "Lockheed Martin Corp"
- ↑ Lockheed Martin, 2008 Annual Report, page 53-54
- ↑ Lockheed Martin, 2008 Annual Report, page 53
- ↑ Reuters, "Lockheed Martin Corp"
- ↑ Lockheed Martin, 2008 Annual Report, page 53-54
- ↑ Lockheed Martin, "2007 Annual Report pg. 48"
- ↑ Lockheed Martin, 2008 Annual Report, page 53
- ↑ Reuters, "Lockheed Martin Corp"
- ↑ Lockheed Martin, "2007 Annual Report pg. 49"
- ↑ Forbes, "Lockheed Prices In An Obama Presidency"
- ↑ Google Finance, "The Boeing Company"
- ↑ Google Finance, "Raytheon Company"
- ↑ Google Finance, "Northrop Grumman Corporation"
- ↑ Google Finance, "General Dynamics Corporation"
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