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Largest defense contractor has capacity for lucrative gov't contracts![]() |
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Increases in global instability will continue to fuel defense spending![]() |
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Significant export opportunities for defense products![]() |
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Pressure for fiscal responsibility could affect government contracts![]() |
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Proportion of sales to the U.S. Government has increased![]() |
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High pension costs loom on horizon |
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High pension costs loom on horizon![]() |
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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]
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.
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].
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.
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.
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]
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.
For comparison purposes, Lockheed Martin had $41.9 billion in 2007 revenues.
| Company | 2005 Revenue ($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 |
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