• Article
• Discussion
• Edit
• History
• Bookmark

Flash Player 9 or higher is required to view the chart Click here to download Flash Player now 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 10 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 4 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 3 votes 100% agree Add your own Bulls Reason See all Bears Reasons Bears: Reasons To Sell Proportion of sales to the U.S. Government has increased 50% 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 2 votes 50% agree High pension costs loom on horizon 42% 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 7 votes 42% 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 1 votes 0% agree Add your own Bears Reason Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

Top Contributors Chris McFarland Scott Thorn catherine foo Related Articles Raytheon Company (RTN) General Dynamics (GD) Iraq War Boeing Company (BA) Arms Export Control Act Related Blog Posts » See All Related Posts powered by Wikinvest Wire

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. While the government has historically distributed contracts among major defense contractors evenly to keep all in business, beginning in the 1980s government contracts for defense projects became more scarce due to a change in the way revenues from contracts were taxed. 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.

LMT 2007 Annual Report^[4]

LMT 2007 Annual Report^[5]

Google Finance^[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^[7] 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^[8]. 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^[9].

[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.^[10] 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^[11].

• 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^[12]. Sales for this segment grew 6% in 2007 to $11.1 billion, while operating increased by 12%^[13]

• Information Systems and Global Services (25% of sales, 20% of operating profit): This group essentially provides IT solutions for its customers^[14]. 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)^[15]

• 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^[16]. 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 ^[17]

[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 ^[18]

[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^[19].

• Raytheon Company (RTN): 2007 revenue - $21.3 billion^[20].

• Northrop Grumman (NOC): 2007 revenue - $32.0 billion^[21].

• General Dynamics (GD): 2007 revenue - $27.2 billion^[22].

 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

Choose View:20052006200720082009Most Recent

2005 Data

2006 Data

2007 Data

2008 Data

2009 Data

Most Recent Data Available

+ Select more metrics (23)

Company	Data From	Percentage of Revenue from Department of Defense	Revenue from Aerospace	Revenue from Integrated Defense Systems	Backlog	Revenue	Revenue by Geography- United States	Revenue from the Government
Boeing Company (BA)	2007	40.6%[23]	$11.7B[24]	$32.1B[25]	$297B[25]	$66.4B[26]	$39.3B[27]	$26.9B[23]
General Dynamics (GD)	2007	67.7%[28]	$4.83B[29]	Add	$46.8B[30]	$27.2B[31]	$22.5B[29]	$18.8B[28]
Lockheed Martin (LMT)	2007	83.8%[32]	$8.2B[33]	Add	$76.7B[34]	$41.9B[35]	Add	$40.6B[32]
Northrop Grumman (NOC)	2007	89.6%[36]	$3.13B[37]	Add	$64.1B[38]	$32B[39]	Add	$28.7B[36]
Raytheon Company (RTN)	2007	80.8%[40]	$4.29B[41]	$4.7B[41]	$36.6B[42]	$21.3B[43]	$17.1B[44]	$18.3B[44]

+ Select more companies (5)

See all Aerospace Defense Contractors Industry WikiData

[edit] References

1. ↑ Google Finance, "Lockheed Martin"
2. ↑ Wet Feet, "Lockheed Martin Company Overview"
3. ↑ Lockheed 1Q08 Earnings Release
4. ↑ Lockheed Martin, "2007 Annual pg. 94"
5. ↑ Lockheed Martin, "2007 Annual pg. 94"
6. ↑ Google Finance, "Lockheed Martin"
7. ↑ Lockheed Martin, "2007 Annual Report pg. 71"
8. ↑ Google Finance, "Lockheed Martin"
9. ↑ Lockheed Martin, "2007 Annual Report"
10. ↑ Reuters, "Lockheed Martin Corp"
11. ↑ Lockheed Martin, "2007 Annual Report pg. 47"
12. ↑ Reuters, "Lockheed Martin Corp"
13. ↑ Lockheed Martin, "2007 Annual Report pg. 47
14. ↑ Reuters, "Lockheed Martin Corp"
15. ↑ Lockheed Martin, "2007 Annual Report pg. 48"
16. ↑ Reuters, "Lockheed Martin Corp"
17. ↑ Lockheed Martin, "2007 Annual Report pg. 49"
18. ↑ Forbes, "Lockheed Prices In An Obama Presidency"
19. ↑ Google Finance, "The Boeing Company"
20. ↑ Google Finance, "Raytheon Company"
21. ↑ Google Finance, "Northrop Grumman Corporation"
22. ↑ Google Finance, "General Dynamics Corporation"
23. ↑ ^{23.0 23.1} BA, 2007 10-K, Item 7, Page 28
24. ↑ BA, 2007 10-K, Item 7, Page 32
25. ↑ ^{25.0 25.1} BA, 2007 10-K, Item 6, Page 18
26. ↑ BA, 2007 10-K, Item 8, Page 48
27. ↑ BA, 2007 10-K, Item 8, Page 104
28. ↑ ^{28.0 28.1} GD, 2007 10-K, Item 1, Page 10
29. ↑ ^{29.0 29.1} GD, 2007 10-K, Item 8, Page 58
30. ↑ GD, 2007 10-K, Item 6, Page 18
31. ↑ GD, 2007 10-K, Item 8, Page 36
32. ↑ ^{32.0 32.1} LMT, 2007 10-K, Item 8, Page 94
33. ↑ LMT, 2007 10-K, Item 7, Page 45
34. ↑ LMT, 2007 10-K, Item 1, Page 17
35. ↑ LMT, 2007 10-K, Item 8, Page 62
36. ↑ ^{36.0 36.1} NOC, 2007 10-K, Item 6, Page 24
37. ↑ NOC, 2007 10-K, Item 8, Page 79
38. ↑ NOC, 2007 10-K, Item 7, Page 48
39. ↑ NOC, 2007 10-K, Item 8, Page 62
40. ↑ RTN, 2007 10-K, Item 8, Page 93
41. ↑ ^{41.0 41.1} RTN, 2007 10-K, Item 8, Page 91
42. ↑ RTN, 2007 10-K, Item 6, Page 29
43. ↑ RTN, 2007 10-K, Item 8, Page 58
44. ↑ ^{44.0 44.1} RTN, 2007 10-K, Item 8, Page 93