Lockheed Martin (LMT)

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See all Bulls Reasons Bulls: Reasons To Buy Largest defense contractor has capacity for lucrative gov't contracts 100% agree Largest defense contractor has capacity for lucrative gov't contracts Lockheed Martin is the world's largest defense contractor with enough capacity for the most lucrative government contracts. Lockheed Martin is the leading aerospace company in the US and has had good earnings growth, but its PE ratio is lower than average for its... read more View or Edit Reason 2 votes 100% agree Increases in global instability will continue to fuel defense spending 100% agree Increases in global instability will continue to fuel defense spending Recent increases in global instability will continue to fuel defense spending and thus, Lockheed Martin's growth. View or Edit Reason 1 votes 100% agree Significant export opportunities for defense products 100% agree Significant export opportunities for defense products Current export opportunities for products such as the F-16 fighter jet and anticipated export opportunities for the Joint Strike Fighter will provide significant revenue. View or Edit Reason 1 votes 100% agree See all Bears Reasons Bears: Reasons To Sell High pension costs loom on horizon 100% agree High pension costs loom on horizon With the majority of its workforce set to retire, profits may be hurt by potentially high pension costs. View or Edit Reason 2 votes 100% agree Proportion of sales to the U.S. Government has increased 0% agree Proportion of sales to the U.S. Government has increased Proportion of sales to the U.S. Government has increased from 78% (2003) to 84% (2007), decreasing customer diversification. View or Edit Reason 0 votes 0% agree Pressure for fiscal responsibility could affect government contracts 0% agree Pressure for fiscal responsibility could affect government contracts Pressure for fiscal responsibility could result in the delay, reduction, or cancellation of certain government contracts. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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United States government spending represents 85% of Lockheed Martin's revenue^[2]. 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. Government defense spending once represented a reliable stream of income for Lockheed Martin as the government historically distributed contracts among major defense contractors to keep all of them afloat. In the 1980s, government contracts for defense projects became more scarce. Despite the recent surge in defense spending that has accompanied military activity in Iraq, the aerospace industry has not recovered fully from its 1980s contraction.

As is common in the defense industry, Lockheed Martin's operating costs are extremely high. In addition, Lockheed Martin faces enormous pension obligations. Three quarters of its 130,000 workers are scheduled to retire in the next 10 years, making its profits sensitive to changes in the interest rate. This was further illustrated in the first quarter 2008 earnings report. Lockheed reported a non-operating loss of $7 million versus a gain of $37 million in 1Q07 and specifically cited the interest rate's effect on the pension plan as the culprit.^[3]

[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 integrating, operating, and maintaining these products for domestic and international customers, which are almost always governments (mainly the US government). Revenues have grown from $35.5 billion in 2004 to $41.9 billion in 2007, increasing every year over that time span.

2007

2007

Growth from 1998 to 2007

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.

[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^[4]. 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^[5].

[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.^[6] 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^[7].

• Electronic Systems (27% of sales, 30% of operating profit): This group is responsible for creating effective systems for various 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, among other things^[8]. Sales for this segment grew 6% in 2007 to $11.1 billion, while operating increased by 12%^[9]

• Information Systems and Global Services (25% of sales, 20% of operating profit): This group essentially provides IT solutions for its customers^[10]. Information Systems and Global Services had its sales increase by 14% in 2007 to $10.2 billion; operating profit increased by 18% to $949 million. Part of this increase in sales/operating profit stems from increased activity in global security solutions (services related to national security, surveilance, etc)^[11]

• 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^[12]. 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 ^[13]

[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.

[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^[14].

• Raytheon Company (RTN): 2007 revenue - $21.3 billion^[15].

• Northrop Grumman (NOC): 2007 revenue - $32.0 billion^[16].

• General Dynamics (GD): 2007 revenue - $27.2 billion^[17].

 Lockheed Martin

	Select All  |  Select None Metrics Revenue by Geography- Latin America Revenue by Geography - Europe Revenue by Geography - Asia Revenue by Geography - Africa Revenue by Geography - International Net Income Operating Income Revenue from the Department of Defense Revenue from Marine Contracts Revenue from Information Systems and Technology Revenue from Commercial Customers Revenue from Non-US Customers Contracts Awarded Bookings Funded R&D Expense Unfunded R&D Expense Revenue Revenue by Geography- United States Revenue from the Government Percentage of Revenue from Department of Defense Revenue from Aerospace Revenue from Integrated Defense Systems Backlog Cancel

	Select All  |  Select None Companies Boeing Company (BA) Raytheon Company (RTN) General Dynamics (GD) Lockheed Martin (LMT) Northrop Grumman (NOC) Cancel

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Company	Data From	Backlog	Revenue from Aerospace	Revenue from the Government	Revenue	Revenue from Integrated Defense Systems	Percentage of Revenue from Department of Defense	Revenue by Geography- United States
Boeing Company (BA)	2007	$297B[18]	$11.7B[19]	$26.9B[20]	$66.4B[21]	$32.1B[18]	40.6%[20]	$39.3B[22]
General Dynamics (GD)	2007	$46.8B[23]	$4.83B[24]	$18.8B[25]	$27.2B[26]	Add	67.7%[25]	$22.5B[24]
Lockheed Martin (LMT)	2007	$76.7B[27]	$8.2B[28]	$40.6B[29]	$41.9B[30]	Add	83.8%[29]	Add
Northrop Grumman (NOC)	2007	$64.1B[31]	$3.13B[32]	$28.7B[33]	$32B[34]	Add	89.6%[33]	Add
Raytheon Company (RTN)	2007	$36.6B[35]	$4.29B[36]	$18.3B[37]	$21.3B[38]	$4.7B[36]	80.8%[39]	$17.1B[37]

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[edit] References

1. ↑ Google Finance, "Lockheed Martin"
2. ↑ Wet Feet, "Lockheed Martin Company Overview"
3. ↑ Lockheed 1Q08 Earnings Release
4. ↑ Google Finance, "Lockheed Martin"
5. ↑ Lockheed Martin, "2007 Annual Report"
6. ↑ Reuters, "Lockheed Martin Corp"
7. ↑ Lockheed Martin, "2007 Annual Report pg. 47
8. ↑ Reuters, "Lockheed Martin Corp"
9. ↑ Lockheed Martin, "2007 Annual Report pg. 47
10. ↑ Reuters, "Lockheed Martin Corp"
11. ↑ Lockheed Martin, "2007 Annual Report pg. 48"
12. ↑ Reuters, "Lockheed Martin Corp"
13. ↑ Lockheed Martin, "2007 Annual Report pg. 49"
14. ↑ Google Finance, "The Boeing Company"
15. ↑ Google Finance, "Raytheon Company"
16. ↑ Google Finance, "Northrop Grumman Corporation"
17. ↑ Google Finance, "General Dynamics Corporation"
18. ↑ ^{18.0 18.1} BA, 2007 10-K, Item 6, Page 18
19. ↑ BA, 2007 10-K, Item 7, Page 32
20. ↑ ^{20.0 20.1} BA, 2007 10-K, Item 7, Page 28
21. ↑ BA, 2007 10-K, Item 8, Page 48
22. ↑ BA, 2007 10-K, Item 8, Page 104
23. ↑ GD, 2007 10-K, Item 6, Page 18
24. ↑ ^{24.0 24.1} GD, 2007 10-K, Item 8, Page 58
25. ↑ ^{25.0 25.1} GD, 2007 10-K, Item 1, Page 10
26. ↑ GD, 2007 10-K, Item 8, Page 36
27. ↑ LMT, 2007 10-K, Item 1, Page 17
28. ↑ LMT, 2007 10-K, Item 7, Page 45
29. ↑ ^{29.0 29.1} LMT, 2007 10-K, Item 8, Page 94
30. ↑ LMT, 2007 10-K, Item 8, Page 62
31. ↑ NOC, 2007 10-K, Item 7, Page 48
32. ↑ NOC, 2007 10-K, Item 8, Page 79
33. ↑ ^{33.0 33.1} NOC, 2007 10-K, Item 6, Page 24
34. ↑ NOC, 2007 10-K, Item 8, Page 62
35. ↑ RTN, 2007 10-K, Item 6, Page 29
36. ↑ ^{36.0 36.1} RTN, 2007 10-K, Item 8, Page 91
37. ↑ ^{37.0 37.1} RTN, 2007 10-K, Item 8, Page 93
38. ↑ RTN, 2007 10-K, Item 8, Page 58
39. ↑ RTN, 2007 10-K, Item 8, Page 93