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LMT AT A GLANCE

P/E ► 8.83 LOW EV/EBITDA ► 6.20 AVG ROA ► 10.5% AVG ROE ► 46.6% HIGH Debt to Equity ► 10.4 VERY HIGH Current Ratio ► 1.07 LOW Interest Coverage Ratio ► 12.1 AVG

 

 

 

 

 

 

Lockheed Martin (NYSE:LMT) is the world's largest defense contractor by revenue as of fiscal 2008.^[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 84% of Lockheed Martin's revenue in fiscal 2008.^[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 FY2008, the underfunded plan covered 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 caused considerable reductions in earnings as the company subsidized pensions with current earnings.^[5]

Company Overview

Business and Financial Metrics

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).

2008 LMT Net Sales by Business Segment ^[6]

2008 LMT Operating Profit by Business Segment ^[7]

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. For example, on December 24, 2008, LMT completed its acquisition of University Systems & Technology, Inc. (UNITECH), a company which provides interactive training and simulation programs to the U.S. Armed Forces, and other U.S. and international governmental agencies.^[8]

Q3 FY2009 Summary

LMT beat analyst expectations of $1.83 earnings per share when it reported $2.07 earnings per share for the third reporting quarter of FY2009.^[9] LMT's revenue increased to $11.1 billion for the third quarter of FY2009 compared with $10.6 billion for the third quarter of FY2008.^[10] LMT attributes these increased earnings to greater demand for military cargo jets, especially its C-130J transport plane. However, LMT is cautious about 2010 as the Obama administration shifts defense priorities away from some traditional weapons systems.^[11] For example, LMT has seen a slowdown in its traditionally fast-growing Information Systems and Global Services business segment, where earnings fell 8.6%.^[12]

Business Segments

• Aeronautics (27% of sales in FY2008): 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.^[13] Net sales for this group decreased by 7% in 2008 to $11.5 billion; while operating income decreased by 3%. This was mainly due to an decreases in the operating profit of Combat Aircraft of $947 million, which was due to the less orders for the F-16 and F-22 programs^[14] Orders for transport and un-manned aircraft and services remained constant.^[15]

• Electronic Systems (27% of sales in FY2008): 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.^[16] Sales for this segment grew 4.3% in 2008 to $11.6 billion, while operating profit increased by 7%^[17] 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.^[18]

• Information Systems and Global Services (27% of sales in FY2008): This group essentially provides IT solutions for its customers.^[19] 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.^[20] Part of this increase in sales/operating profit stems from increased activity in global security solutions (services related to national security, surveillance, etc).^[21] 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.^[22]

• Space Systems (19% of sales in FY2008): This business segments manufactures both government and commercial satellites, defensive missile systems, and space transportation systems.^[23] In FY2008, net sales decreased by 2% (to $8.03 billion), operating profit increased by 11% to $953 million. The decrease in revenues stemmed from a significant slow down in satellite sales to governments; these lower revenues were offset by improved performance in the Space Transportation Division, which overall resulted in an increase in profit.^[24]

Key Trends and Forces

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

U.S. National Defense Spending as Percentage of Total Budget Outlays^[25]

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.^[26] 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.^[27] 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.^[28]

Following a String of Lost Contracts, LMT Chooses to Cut Employees because of LMT's Costly Pension Program

Following several lost contracts in 2008 and 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.^[27][29] 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.^[30]

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.

Sales To Foreign Markets Are Heavily Regulated

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.

Competition

For comparison purposes, Lockheed Martin had $42.7 billion in 2008 revenues.

• Boeing Company (BA): 2008 revenue - $60.9 billion^[31].
• Raytheon Company (RTN): 2008 revenue - $23.2 billion^[32].
• Northrop Grumman (NOC): 2008 revenue - $33.9 billion^[33].
• General Dynamics (GD): 2008 revenue - $29.3 billion^[34]

References

1. ↑ Lockheed Martin 2008 Annual Report, page 4
2. ↑ Wet Feet, "Lockheed Martin Company Overview"
3. ↑ ^{3.0 3.1} Senate Votes to Eliminate Money for Additional F-22 Fighter Jets
4. ↑ Manufacturing.net: Lockheed Martin Lowers Outlook Over Pension Costs
5. ↑ Manufacturing.net: Lockheed Martin Lowers Outlook Over Pension Costs
6. ↑ Lockheed Martin 2008 Annual Report, page 46
7. ↑ Lockheed Martin 2008 Annual Report, page 46
8. ↑ Lockheed Martin Completes Acquisition Of Universal Systems & Technology, Inc. (UNITECH)
9. ↑ Lockheed Martin Corporation Beats Analyst Expectations
10. ↑ Lockheed’s Profit Rises, but Its Outlook Slips
11. ↑ Lockheed profit up, but outlook weakens
12. ↑ Lockheed's 3Q profit rises; outlook weak in 2010
13. ↑ Reuters, "Lockheed Martin Corp"
14. ↑ 2008 Lockheed Martin Annual Report, page 56-57
15. ↑ 2008 Lockheed Martin Annual Report, page 56-57
16. ↑ Reuters, "Lockheed Martin Corp"
17. ↑ Lockheed Martin, 2008 Annual Report, page 53-54
18. ↑ Lockheed Martin, 2008 Annual Report, page 53
19. ↑ Reuters, "Lockheed Martin Corp"
20. ↑ Lockheed Martin, 2008 Annual Report, page 53-54
21. ↑ Lockheed Martin, "2007 Annual Report pg. 48"
22. ↑ Lockheed Martin, 2008 Annual Report, page 53
23. ↑ Reuters, "Lockheed Martin Corp"
24. ↑ 2008 Lockheed Martin Annual Report, page 57-58
25. ↑ [1]
26. ↑ The Economist: Defence companies: In the line of fire
27. ↑ ^{27.0 27.1} The Economist: Defence companies: In the line of fire
28. ↑ Forbes, "Lockheed Prices In An Obama Presidency"
29. ↑ Laid Off Lockheed Martin Employees to Leave this Week
30. ↑ Lockheed Martin loses contract, makes cuts
31. ↑ Google Finance, "The Boeing Company"
32. ↑ Google Finance, "Raytheon Company"
33. ↑ Google Finance, "Northrop Grumman Corporation"
34. ↑ Google Finance, "General Dynamics Corporation"
35. ↑ Lockheed Martin Financials
36. ↑ Boeing Financials
37. ↑ Northrop Grumman Financials
38. ↑ Raytheon Financials
39. ↑ General Dynamics Financials