- Generates $1.1 Billion of Free Cash Flow in the Third Quarter
- Increases 2002 Free Cash Flow Guidance to at Least $1.5 Billion And Improves the Two-Year Guidance to at Least $2.2 Billion
- Expects Sales of Approximately $26.0 Billion in 2002 and Reaffirms 2003 Guidance of $27.0 – $28.0 Billion
- Projects Outlook for 2002 Earnings Per Share from Continuing Operations to Reach Higher End of the $2.50 – $2.55 Range And Provides Guidance for 2003 Earnings Per Share of $2.75 – $2.85 Before Possible Pension Impacts
Lockheed Martin
Corporation today reported third quarter 2002 earnings from
continuing operations of $0.66 per diluted share, compared to a third quarter
2001 loss from continuing operations of $0.20 per diluted share. Third
quarter 2001 results were reduced by $0.63 per share for the effects of
certain nonrecurring and unusual items. There were no nonrecurring and
unusual items in the third quarter of 2002. After adjusting last year’s
results for the impact of adopting SFAS No. 142 and excluding the nonrecurring
and unusual items, third quarter 2001 earnings per share from continuing
operations would have been $0.59. Including discontinued operations, the
Corporation reported net earnings of $0.64 in the third quarter of 2002 versus
net earnings of $0.50 per share in the third quarter of 2001.
Net sales for the third quarter of 2002 were $6.5 billion, a five percent
increase over the third quarter 2001 sales of $6.2 billion. Year-to-date
sales increased by 13 percent to $18.8 billion. Forecasted sales for the year
2002 are now expected to be approximately $26.0 billion as compared to the
prior guidance range of between $25.4 – $26.0 billion. Forecasted sales for
the year 2003 were reaffirmed between $27.0 – $28.0 billion.
The Corporation generated $1.1 billion in free cash flow in the third
quarter of 2002 and $2.4 billion of free cash flow year-to-date. Free cash
flow is defined as cash provided by operating activities less capital
expenditures and excludes any proceeds from, or income tax payments on,
divestitures. The Corporation increased its free cash flow outlook to at
least $1.5 billion from at least $1.3 billion for the year 2002 and to at
least $2.2 billion from at least $2.0 billion over the two-year period
2002 – 2003.
“In the third quarter, we are pleased with solid results in both the
operational and financial areas,” said Chairman and Chief Executive Officer
Vance Coffman. “We continue to achieve mission success and customer
satisfaction in all of our business areas as demonstrated by the successful
inaugural launch of the Atlas V, completion of test events on precision guided
munitions and sustained progress on the F/A-22 and F-35 programs.
Additionally, our cash flow continues to improve the Corporation’s financial
strength and flexibility.”
CONSOLIDATED RESULTS
3rd Quarter Year-to-Date
2002 2001 2002 2001
GAAP Earnings (Loss) Per Share
Continuing Operations $0.66 ($0.20) $1.94 $0.44
Discontinued Operations (0.02) 0.70 (0.06) 0.63
Net Earnings Per Share $0.64 $0.50 $1.88 $1.07
Adjusted Earnings Per Share
Continuing Operations -- GAAP $0.66 ($0.20) $1.94 $0.44
Less: Benefit of R&D tax credit 0.00 0.00 (0.20) 0.00
Nonrecurring and Unusual
Items in Continuing
Operations 0.00 0.63 0.00 0.62
Add: Impact of SFAS 142 adoption N/A 0.16 N/A 0.43
Adjusted Earnings from Continuing
Operations $0.66 $0.59 $1.74 $1.49
The Corporation expects its 2002 earnings per share from continuing
operations outlook to reach the higher end of the $2.50 – $2.55 range,
excluding nonrecurring and unusual items. The 2002 earnings projection
excludes the one-time impact of a research and development (R&D) tax credit
claim benefit of $0.20 per share and is based, among other factors, upon an
assumed tax rate of approximately 31 percent. Prior guidance for earnings per
share from continuing operations of $2.75 – $2.85 in 2003 is subject to
possible pension plan assumption changes. The 2003 earnings projections
assume an effective tax rate of approximately 32 percent.
As previously disclosed, GAAP earnings are impacted by pension (SFAS 87)
and retiree medical (SFAS 106) benefit plans. This is particularly true with
pension benefits, where SFAS 87 income or expense calculations are sensitive
to changes in various key economic assumptions and workforce demographics.
Based on the current market performance and our preliminary analysis, the
Corporation anticipates that the discount rate and the long-term rate of
return on plan assets that will be used for the 2003 SFAS 87 pension expense
calculation may be lower. The pension plan assumptions in our existing 2003
guidance include a discount rate of 7.25%, expected long-term rate of return
on plan assets of 9.5% and an assumed 2002 return on plan assets of
approximately 5%. The existing guidance for retirement plan expense (SFAS 106
and SFAS 87) in 2003 is $200 million to $300 million. The retiree medical
element (SFAS 106) of that guidance is an expense of approximately $150
million to $200 million and is not expected to change materially. The SFAS 87
pension expense in that guidance is approximately $50 million to $100 million.
The discount rate assumption, the long-term rate of return assumption and
the actual return on plan assets that will be used for calculating the 2003
SFAS 87 pension expense will be finalized at year-end consistent with the
Corporation’s pension plan measurement date. The actual year-to-date return
on plan assets through September 30, 2002 was negative.
The following is provided to assist with the analysis of the potential
incremental impact to the Corporation’s existing guidance for 2003 SFAS 87
pension expense of approximately $50 million to $100 million:
* Lowering the discount rate by 25 basis points would increase 2003 SFAS
87 pension expense by approximately $40 million to $50 million.
* Lowering the long-term rate of return on assets by 25 basis points
would increase 2003 SFAS 87 pension expense by approximately
$55 million to $65 million.
* Each 100 basis point decline in the actual return on plan assets,
compared to the 2002 assumed rate of return of approximately 5%, would
increase 2003 SFAS 87 pension expense by approximately $10 million.
SFAS 87 determines pension income or expense for GAAP financial reporting
purposes but not the funding requirements for the pension plans, which are
subject to Cost Accounting Standards as well as Internal Revenue Service (IRS)
minimum funding calculations. Additionally, since pension funding is an
allowable cost under federal acquisition regulations, a majority of the
Corporation’s pension funding is recoverable on government contracts.
However, to the extent that IRS funding requirements exceed those allowable in
a given year, any excess would be recoverable in subsequent years. Due to its
recoverability, the impact of increased funding requirements is not expected
to materially affect cash flow in 2003 and has been reflected in the
Corporation’s improved free cash flow guidance.
The balance sheet is expected to be adjusted at year-end in accordance
with SFAS 87 to record a minimum pension liability. This adjustment would be
a non-cash reduction of equity, would not impact earnings and would be
reversible should market performance improve and interest rates increase at
the end of 2003. Assuming there is no significant change in interest rates or
equity market performance for the remainder of the year, we anticipate that
the after-tax adjustment to equity would be in the range of $1 billion to
$2 billion.
Consistent with our prior practice, updated earnings and cash flow
guidance for 2003 and our initial 2004 guidance will be provided in January
2003.
THIRD QUARTER AND YEAR-TO-DATE DETAILED REVIEW
Continuing Operations
Net sales for the third quarter of 2002 were $6.5 billion, a five percent
increase over third quarter 2001 sales of $6.2 billion. Net sales for the
nine months ended September 30, 2002 were $18.8 billion, a 13 percent increase
over the $16.7 billion sales recorded in the comparable 2001 period.
Earnings from continuing operations for the third quarter of 2002 were
$300 million, or $0.66 per share, compared to a loss from continuing
operations of $87 million, or $0.20 per share, reported in the third quarter
of 2001. There were no nonrecurring and unusual items recorded in the third
quarter of 2002. Earnings from continuing operations for the third quarter of
2001 included the after-tax impact of three nonrecurring and unusual items
which decreased third quarter 2001 earnings from continuing operations by $274
million, or $0.63 per share.
Earnings from continuing operations for the nine months ended September
30, 2002 were $875 million, or $1.94 per share, which included the one-time
impact of a settlement of an R&D tax credit claim which increased 2002
earnings from continuing operations by $90 million, or $0.20 per share.
Earnings from continuing operations for the nine months ended September 30,
2001 were $189 million, or $0.44 per share. The combination of all
nonrecurring and unusual items decreased earnings from continuing operations
for the nine months ended September 30, 2001 by $267 million, or $0.62 per
share.
Interest expense of $147 million and $440 million for the quarter and nine
months ended September 30, 2002, respectively, was lower by $25 million and
$109 million than the comparable periods in 2001 primarily as a result of the
reduction in the Corporation’s debt.
Discontinued Operations
On December 7, 2001, the Corporation announced its plans to sell certain
of its Global Telecommunications services businesses and realign the other
LMGT businesses and equity investments to other Lockheed Martin business
units. The results of operations of the businesses held for sale are reported
in discontinued operations. On January 11, 2002 the Corporation completed the
sale of its Mobile Communications business and on October 11, 2002 completed
the sale of an 81% equity interest in COMSAT International. Agreements are in
place to sell the remaining discontinued operations business — World Systems
and Lockheed Martin Intersputnik. The pending sales are subject to regulatory
and customary closing conditions. No gains or losses are expected to be
recognized on these sales.
The Corporation reported a loss from discontinued operations of
$10 million, or $0.02 per share in the third quarter of 2002 as compared to
earnings from discontinued operations of $300 million, or $0.70 per share in
the comparable 2001 period. For the nine months ended September 30, 2002, the
loss from discontinued operations was $28 million or $0.06 per share, as
compared to earnings from discontinued operations of $273 million, or $0.63
per share in the comparable 2001 period. Both periods of 2001 were favorably
impacted by an after-tax gain of $309 million from the sale of Lockheed Martin
IMS Corporation.
Net Earnings
For the third quarters of 2002 and 2001, the Corporation’s net earnings
were $290 million or $0.64 per share and $213 million or $0.50 per share,
respectively. For the nine month periods, the net earnings were $847 million
or $1.88 per share in 2002 and $462 million or $1.07 per share for 2001.
SEGMENT RESULTS
To enhance the comparability and discussion of continuing operations, the
Corporation reflects all goodwill amortization for periods prior to January 1,
2002 in the Corporate and Other segment since such amortization ceased with
the adoption of SFAS No. 142. The effect of extending Aeronautics’ contract
intangible asset related to the F-16 program is also reflected in the
Corporate and Other segment. As a result of these changes, 2001 earnings
before interest and taxes (EBIT) for all segments have been adjusted for the
adoption of this Statement. In addition, as disclosed in the 2001 Annual
Report, retirement plan income (SFAS 87 and SFAS 106) is allocated to the
segments and has declined from 2001 due to a decrease in pension income
(SFAS 87) which negatively affects margins over comparable periods.
Systems Integration
($ millions)
3rd Quarter Year-to-Date
2002 2001 2002 2001
Net Sales $2,253 $2,237 $6,586 $6,282
EBIT $248 $246 $702 $698
Margin 11.0% 11.0% 10.7% 11.1%
Net sales for the Systems Integration segment increased by one percent and
five percent for the quarter and nine months ended September 30, 2002,
respectively, from the comparable 2001 periods. For the quarter, increased
sales in the segment’s Command, Control, Communication, Computers and
Intelligence (C4I) line of business were partially offset by lower sales in
the segment’s remaining lines of business. For the nine months, volume
increases in the segment’s Missiles & Fire Control, and C4I lines of business
were partially offset by lower volume in the segment’s Systems Integration-
Owego line of business.
EBIT for the quarter and year-to-date periods in 2002 increased slightly
from the respective periods of the prior year. In both periods increased EBIT
at Missiles & Fire Control and C4I were offset by declines at Owego and Naval
Electronics and Surveillance Systems. Year-to-date margins were reduced by
the decline in volume on mature production programs and by higher volume on
development programs.
Space Systems
($ millions)
3rd Quarter Year-to-Date
2002 2001 2002 2001
Net Sales $1,843 $1,793 $5,496 $5,023
EBIT $126 $128 $370 $442
Nonrecurring & unusual
items 0 0 0 (111)
Adjusted EBIT $126 $128 $370 $331
Adjusted Margin 6.8% 7.1% 6.7% 6.6%
Net sales for the Space Systems segment increased by three percent and by
nine percent for the quarter and nine months ended September 30, 2002,
respectively, from the comparable 2001 periods. For the quarter the increases
in the segment’s commercial space line of business more than offset declines
in the segment’s government space line of business. The increase in
commercial space is primarily attributable to higher commercial satellite
deliveries. The decrease in government space is mainly due to declines in
volume on government launch vehicle programs (Titan) and ground systems
activities partially offset by higher volumes on government satellite
programs.
The increase in net sales for the nine months ended September 30, 2002
resulted from higher volumes in both commercial space and government space.
The increase in commercial space is primarily attributable to higher
commercial satellite deliveries and increased launch vehicle activities, with
seven commercial launches during the nine-month period of 2002 compared to
five during the comparable 2001 period. In government space, increases in
government satellite programs and ground systems activities more than offset
declines in volume on government launch vehicle programs.
Adjusted EBIT (excluding nonrecurring and unusual items) decreased two
percent and increased 12 percent for the quarter and nine months ended
September 30, 2002, respectively, from the comparable 2001 periods.
Commercial space decreased quarter over quarter due primarily to the lower
profitability of the three commercial launches this quarter as compared to the
two launches in the respective 2001 period. EBIT also included the adverse
effects of adjustments of $25 million in 2002 and $45 million in 2001 recorded
to reflect the continued industry-wide oversupply and further deterioration of
pricing in the commercial launch market. In government space, EBIT increases
due to the higher volume on government satellite programs more than offset the
declines resulting from the decreased volume on government launch vehicle
programs.
The increase in adjusted EBIT for the nine months ended September 30, 2002
is primarily attributable to reduced losses in commercial space that more than
offset lower EBIT in government space. Commercial satellite losses declined
in 2002 as operating performance improved. In the first quarter of 2001, a
$40 million loss provision was recorded on certain commercial satellite
contracts. Financial performance on commercial launch vehicles continues to
deteriorate including charges of $60 million (net of a favorable contract
adjustment of $20 million) recorded in 2002 for market and pricing pressures
compared to $85 million in 2001. The 2002 year-to-date decrease in government
space is primarily due to the reduced volume on government launch vehicle
programs partially offset by increases on government satellite programs and
ground systems activities.
In 2001, the nonrecurring and unusual item was related to the sale of
surplus real estate.
Aeronautics
($ millions)
3rd Quarter Year-to-Date
2002 2001 2002 2001
Net Sales $1,668 $1,449 $4,549 $3,362
EBIT $126 $125 $360 $308
Margin 7.6% 8.6% 7.9% 9.2%
Net sales for the Aeronautics segment increased by 15 percent and 35
percent for the quarter and nine months ended September 2002, respectively,
from the comparable 2001 periods. The increase in sales for both periods is
the result of initial ramp-up of F-35 Joint Strike Fighter System Development
& Demonstration activities and higher volume on F/A-22 Low Rate Initial
Production (LRIP) as well as higher volume of development activities on the
F-16 and C-5 programs. In the quarter, sales increases were partially offset
by four fewer C-130J deliveries while for the nine month period sales were
increased by the delivery of one additional C-130J in 2002 over the comparable
2001 period.
EBIT for the quarter and year-to-date periods in 2002 increased by one
percent and 17 percent, respectively, from the comparable 2001 periods. These
increases are primarily due to the higher volume on the programs described
above partially offset by a $15 million charge related to performance issues
on an aircraft modification contract. Margins were lower due to increased
development activities on F-35, F-16 and C-5 aircraft programs, the ramp-up of
F/A-22 LRIP and the previously mentioned performance issue. The comparative
margins for the quarter were also affected by having one C-130J delivery in
2002 compared to five deliveries in 2001. C-130J deliveries do not impact EBIT
due to the previously disclosed suspension of earnings recognition on the
program.
Technology Services
($ millions)
3rd Quarter Year-to-Date
2002 2001 2002 2001
Net Sales $776 $734 $2,157 $1,972
EBIT $48 $39 $131 $109
Margin 6.2% 5.3% 6.1% 5.5%
Net sales for Technology Services increased by six percent and nine
percent for the quarter and nine months ended September 30, 2002,
respectively, from the comparable 2001 periods. For the quarter and nine
months, the increase in sales was primarily attributable to growth in the
government information technology and defense lines of business. This growth
was partially offset by lower sales in the commercial information technology
and NASA lines of business.
EBIT for the segment increased by 23 percent and 20 percent for the
quarter and nine months ended September 30, 2002, respectively, from the
comparable 2001 periods. In both periods, the EBIT increased mainly due to
the higher volume in government information technology and improved
performance in commercial information technology partially offset by lower
EBIT on the military aircraft, NASA and energy lines of business.
Corporate and Other
($ millions)
3rd Quarter Year-to-Date
2002 2001 2002 2001
EBIT (Loss) $28 ($480) $13 ($681)
Nonrecurring & unusual
items 0 421 0 521
Impact of SFAS No. 142 0 68 0 205
Adjusted EBIT $28 $9 $13 $45
Adjusted EBIT for the Corporate and Other segment increased by $19 million
for the quarter and decreased by $32 million for the nine months ended
September 30, 2002 from the comparable 2001 periods. For the nine month
period, lower interest income and an increase in corporate expenses, primarily
in stock-based deferred compensation costs, partially offset by lower losses
from certain equity investments accounted for the decline in EBIT. The
increase in EBIT for the quarter is primarily the result of a decrease in
corporate expenses, mainly in stock-based deferred compensation costs, and by
lower losses from certain equity investments.
In 2001, the nonrecurring and unusual items included a charge related to
the Corporation’s investment in Loral Space & Communications LTD, a charge
related to the impairment of the Corporation’s investment in Americom Asia-
Pacific, and a loss on the early extinguishment of debt. Also, the
Corporation now reflects all goodwill amortization for periods prior to
January 1, 2002 and the effect of extending Aeronautics’ contract intangible
asset related to the F-16 program (impact of SFAS No. 142) in Corporate and
Other’s adjusted EBIT to enhance comparability.
THIRD QUARTER 2002 ACHIEVEMENTS
* First Atlas V launch vehicle debuted successfully, delivering Eutelsat
Hot Bird 6 satellite into orbit.
* Atlas IIAS launch vehicle successfully boosted Hispasat satellite into
orbit-62nd consecutive Atlas success.
* Selected by the U.S. Postal Service to build and deploy the Automated
Package Processing Systems. More than 120 systems could eventually be
delivered under contract with a value up to $550 million.
* Turkey joined the F-35 Joint Strike Fighter System Development and
Demonstration phase, becoming the seventh international partner.
* Space Operations awarded $314 million contract to support NASA in
conducting research, developing products and serving space community in
astrobiology and related areas of earth, space and life sciences.
* The Kwajalein Range Services (KRS) joint venture, of which we own 49%,
was awarded the Kwajalein Range logistics contract -- a key facility to
the missile defense program. The potential value to the joint venture
is $2.7 billion over 15 years.
* Awarded $90 million funding increment for continued leadership of
Missile Defense National Team's battle management, command and control
and communications program.
* Awarded $200 million FBI Technology Refresh program. Five-year program
will modernize agency's critical infrastructure.
* Received one of two $75 million U.S. Army contracts to develop and test
system architecture and technology that will be core to Army's
multibillion Warfighter Information Network-Tactical (WIN-T) program.
* F/A-22 successfully completed its first supersonic missile launch.
F/A-22 also completed the 1,000th test sortie with over 2,400 test
hours.
Web site: http://www.lockheedmartin.com
Conference call: Lockheed Martin will webcast the earnings conference
call (listen-only mode) at 11 a.m. E.T. on October 25, 2002. A live audio
broadcast will be available on the Investor Relations page of the company’s
web site at http://www.lockheedmartin.com/investor .
SAFE HARBOR
NOTE: Statements in this press release, including the statements relating
to projected future financial performance, are considered forward-looking
statements under the federal securities laws. Sometimes these statements will
contain words such as “anticipates,” “expects,” “plans,” “projects,”
“estimates,” “outlook,” “forecast,” and other similar words. These statements
are not guarantees of our future performance and are subject to risks,
uncertainties and other important factors that could cause our actual
performance or achievements to be materially different from those we may
project.
Our actual financial results will likely be different from those projected
due to the inherent nature of projections and may be better or worse than
projected. Given these uncertainties, you should not rely on forward-looking
statements. Forward-looking statements also represent our estimates and
assumptions only as of the date that they were made. We expressly disclaim a
duty to provide updates to forward-looking statements, and the estimates and
assumptions associated with them, after the date of this press release to
reflect the occurrence of subsequent events, changed circumstances or changes
in our expectations.
In addition to the factors set forth in our 2001 Form 10-K and 2002 Form
10-Q filings with the Securities and Exchange Commission
(http://www.sec.gov ), the following factors could affect our forward-looking
statements: our ability to achieve or quantify savings for our customers or
ourselves through our global cost-cutting program and other financial
management programs; the ability to obtain or the timing of obtaining future
government awards; the availability of government funding and customer
requirements both domestically and internationally; changes in government or
customer priorities due to program reviews or revisions to strategic
objectives (including changes in priorities to respond to recent terrorist
threats or to improve homeland security); difficulties in developing and
producing operationally advanced technology systems; the competitive
environment; economic business and political conditions domestically and
internationally; program performance and the timing of contract payments; the
timing and customer acceptance of product deliveries and launches; the level
of returns on pension and retirement plan assets, and the outcome of
contingencies (including completion of any acquisitions and divestitures,
litigation and environmental remediation efforts). Our ability to monetize
assets or businesses placed in discontinued operations will depend upon market
and economic conditions, and other factors, and may require receipt of
regulatory or governmental approvals. Realization of the value of the
Corporation’s investments in equity securities, or related equity earnings for
a given period, may be affected by the investee’s ability to obtain adequate
funding and execute its business plan, general market conditions, industry
considerations specific to the investee’s business, and/or other factors.
These are only some of the numerous factors that may affect the forward-
looking statements contained in this press release.
