Information Systems & Global Services
| ($ millions) | | 4th Quarter | | | Year | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| Net sales | | $ | 3,299 | | | $ | 2,835 | | | $ | 11,611 | | | $ | 10,213 | |
| Operating profit | | $ | 307 | | | $ | 275 | | | $ | 1,076 | | | $ | 949 | |
| Operating margin | | | 9.3 | % | | | 9.7 | % | | | 9.3 | % | | | 9.3 | % |
Net sales for IS&GS increased by 16% for the quarter and 14% for the year ended December 31, 2008 from the comparable 2007 periods. Sales increased in all three lines of business for both the quarter and the year. The increase in Global Services principally was due to Pacific Architect & Engineers (PAE) programs, mission services and other international activities. The increase in Mission Solutions primarily was driven by mission and combat support solutions activities, as well as by transportation and security solutions. The increase in Information Systems mainly was due to higher volume on enterprise solutions and services activities.
Operating profit for IS&GS increased by 12% for the quarter and 13% for the year ended December 31, 2008 from the comparable 2007 periods. Operating profit increased in all three lines of business for both the quarter and the year. The increase in Global Services operating profit primarily was attributable to volume and improved performance on mission services programs and other international activities. Mission Solutions operating profit increased due to higher volume and improved performance on transportation and security solutions programs, as well as mission and combat support solutions activities. In Information Systems, operating profit increased due to higher volume on information technology programs and a benefit from a contract restructuring during the first quarter of 2008, which more than offset declines in mission services activities.
Aeronautics
| ($ millions) | | 4th Quarter | | | Year | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| Net sales | | $ | 2,865 | | | $ | 3,004 | | | $ | 11,473 | | | $ | 12,303 | |
| Operating profit | | $ | 369 | | | $ | 385 | | | $ | 1,433 | | | $ | 1,476 | |
| Operating margin | | | 12.9 | % | | | 12.8 | % | | | 12.5 | % | | | 12.0 | % |
Net sales for Aeronautics decreased by 5% for the quarter and 7% for the year ended December 31, 2008 from the comparable 2007 periods. In the quarter, decreases in Combat Aircraft more than offset an increase in Other Aeronautics Programs and Air Mobility. The decrease in Combat Aircraft was due to lower volume on F-16 and F-22 programs, which more than offset an increase in F-35 volume. The increase in Other Aeronautics Programs mainly was due to higher volume in sustainment services activities. The increase in Air Mobility mainly was due to higher volume on C-130 support activities. There were three C-130J deliveries in both the fourth quarter of 2008 and the fourth quarter of 2007. During the year, decreases in Combat Aircraft and Air Mobility more than offset increases in Other Aeronautics Programs. The decrease in Combat Aircraft was due to lower volume on F-16, F-22 and F-35 programs. The decrease in Air Mobility primarily was due to lower volume on other air mobility programs. There were 12 C-130J deliveries in both 2008 and 2007. The increase in Other Aeronautics Programs mainly was due to higher volume in sustainment services activities.
Operating profit decreased by 4% for the quarter and 3% for the year ended December 31, 2008 from the comparable 2007 periods. During the quarter, operating profit declines in Combat Aircraft more than offset increases in Air Mobility and Other Aeronautics Programs. In Combat Aircraft, the decrease mainly was due to lower volume and the decline in 2008 of the amount of favorable inception-to-date performance adjustments recognized on the F-22 program, which more than offset improved performance on F-16 programs. The increase in Air Mobility primarily was due to higher volume and improved performance on C-130 support activities. The increase in Other Aeronautics Programs mainly was due to improved performance on sustainment services activities. During 2008, operating profit declines in Combat Aircraft partially were offset by increases in Other Aeronautics Programs and Air Mobility. In Combat Aircraft, the decline mainly was due to lower volume on F-16 programs and lower volume and the decline in 2008 of the amount of favorable inception-to-date performance adjustments on the F-22 program. The increase in Other Aeronautics Programs mainly was due to higher volume in sustainment services activities, which partially was offset by a decrease in operating profit due to performance on a P-3 modification contract. In Air Mobility, operating profit increased mainly due to higher volume and improved performance on C-130 support activities, which more than offset a decline on C-5 programs.
Space Systems
| ($ millions) | | 4th Quarter | | | Year | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| Net sales | | $ | 2,034 | | | $ | 2,128 | | | $ | 8,027 | | | $ | 8,203 | |
| Operating profit | | $ | 210 | | | $ | 236 | | | $ | 953 | | | $ | 856 | |
| Operating margin | | | 10.3 | % | | | 11.1 | % | | | 11.9 | % | | | 10.4 | % |
Net sales for Space Systems decreased 4% for the quarter and 2% for the year ended December 31, 2008 from the comparable 2007 periods. In both periods, a sales decline in Satellites partially was offset by growth in Space Transportation. In Satellites, sales declines during the quarter in commercial satellite activities more than offset increases in government satellites programs. During the year, sales declined in both commercial and government satellite activities due to lower volume. There were no commercial satellite deliveries during the fourth quarter of 2008, as compared to one delivery in the fourth quarter of 2007. There were two commercial satellite deliveries during 2008, compared to four in 2007. The sales growth in Space Transportation primarily was due to higher volume on the Orion program.
Operating profit decreased by 11% for the quarter and increased by 11% for the year ended December 31, 2008 from the comparable 2007 periods. During the quarter, operating profit declined in both Satellites and Space Transportation. In Satellites, operating profit declined in the quarter due to performance on certain government satellite programs. In Space Transportation, the decrease mainly was attributable to lower equity earnings on the United Launch Alliance (ULA) joint venture, which offset higher volume on the Orion program. During the year, the increase in operating profit was due to Space Transportation, which partially was offset by a decline in Satellites. In Space Transportation, the increase mainly was attributable to higher equity earnings on the ULA joint venture, volume on the Orion program, and the results from successful negotiations of a terminated commercial launch service contract in the first quarter of 2008. The improvement in ULA’s earnings also reflects the absence in 2008 of a charge recognized in the third quarter of 2007 for asset impairment on the Delta II medium lift launch vehicles. In Satellites, operating profit declined during the year due to lower volume and performance on certain government satellite programs.
Unallocated Corporate Income (Expense), Net
| ($ millions) | | 4th Quarter | | | Year | |
| | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| FAS/CAS pension adjustment | | $ | 32 | | | $ | (12 | ) | | $ | 128 | | | $ | (58 | ) |
| Stock compensation expense | | | (40 | ) | | | (33 | ) | | | (155 | ) | | | (149 | ) |
| Unusual items, net | | | 48 | | | | — | | | | 193 | | | | 71 | |
| Other, net | | | 53 | | | | 4 | | | | (5 | ) | | | (28 | ) |
| Unallocated corporate income (expense), net | | $ | 93 | | | $ | (41 | ) | | $ | 161 | | | $ | (164 | ) |
Consistent with the manner in which the Corporation’s business segment operating performance is evaluated by senior management, certain items are excluded from the business segment results and included in “Unallocated corporate income (expense), net.” See the Corporation’s 2007 Form 10-K for a description of “Unallocated corporate income (expense), net,” including the FAS/CAS pension adjustment.
The FAS/CAS pension adjustment (calculated as the difference between FAS 87 expense and the CAS cost amounts) moved from expense to income in 2008 due to an increase in the discount rate and other factors such as actual return on plan assets. This change is consistent with the Corporation’s previously disclosed assumptions used to compute the 2008 amounts.
For purposes of segment reporting, the following unusual items were included in “Unallocated corporate income (expense), net” for the quarters and years ended December 31, 2008 and 2007:
2008 –
· | A fourth quarter gain, net of state income taxes, of $48 million representing the recognition of the remaining portion of the deferred net gain from the 2006 sale of the Corporation’s ownership interest in Lockheed Khrunichev Energia International, Inc. (LKEI) and International Launch Services, Inc. (ILS). At the time of the sale, the Corporation deferred recognition of any gains pending the expiration of its responsibility to refund advances for future launch services. |
· | A third quarter gain, net of state income taxes, of $44 million representing the recognition of a portion of the deferred net gain from the 2006 sale of the Corporation’s ownership interest in LKEI and ILS. |
| | |
· | Second quarter earnings, net of state income taxes, of $85 million associated with reserves related to various land sales that are no longer required. Reserves were recorded at the time of each land sale based on the U.S. Government’s assertion of its right to share in the sale proceeds. This matter was favorably settled with the U.S. Government in the second quarter. |
· | A first quarter gain, net of state income taxes, of $16 million representing the recognition of a portion of the deferred net gain from the 2006 sale of the Corporation’s ownership interest in LKEI and ILS. |
Recognition of the deferred net gain increased net earnings by $32 million ($0.08 per share) during the fourth quarter of 2008. This fourth quarter item, along with the previously reported items increased net earnings by $126 million ($0.31 per share) during the year ended December 31, 2008.
2007 –
· | A second quarter gain, net of state income taxes, of $25 million related to the sale of the Corporation’s remaining 20% interest in COMSAT International. |
· | A first quarter gain, net of state income taxes, of $25 million related to the sale of land. |
· | First quarter earnings, net of state income taxes, of $21 million related to the reversal of legal reserves from the settlement of certain litigation claims. |
These items and the 2007 first quarter income tax benefit of $59 million ($0.14 per share) described in the Income Taxes discussion below, increased net earnings by $105 million ($0.25 per share) during the year ended December 31, 2007.
The increase in “Other, net” for the quarter and year ended December 31, 2008 from the comparable periods in 2007 is primarily attributable to income from a reduction in the value of certain market-based, non-qualified employee benefit obligations.
The Corporation also reported in “Other non-operating (expense) income, net” for both the quarter and year ended December 31, 2008, unrealized losses on marketable securities held to fund certain non-qualified employee benefit obligations.
Income Taxes
Our effective income tax rates were 29.6% and 31.6% for the quarter and year ended December 31, 2008 and 32.4% and 30.6% for the comparable 2007 periods. The effective rates for all periods were lower than the statutory rate of 35% due to tax deductions for U.S. manufacturing activities, the research tax credit, and dividends related to our employee stock ownership plan. The effective tax rate for 2008 was higher than in 2007 primarily due to a benefit recorded in the first quarter of 2007 arising from the closure of the IRS examination of the 2003 and 2004 tax years.
The Emergency Economic Stabilization Act of 2008 signed by the President on October 3, 2008 retroactively extends the research and development (R&D) tax credit for two years, from January 1, 2008 to December 31, 2009, and increases the alternative simplified R&D credit rate from 12% to 14% for calendar year 2009. As a result of these changes, we recorded additional earnings of approximately $36 million in the fourth quarter of 2008, which resulted in a lower effective tax rate for the quarter ended December 31, 2008 than the comparable 2007 period.
Headquartered in Bethesda, Md., Lockheed Martin is a global security company that employs about 146,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The corporation reported 2008 sales of $42.7 billion.
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| NEWS MEDIA CONTACT: | Jeff Adams, 301/897-6308 |
| INVESTOR RELATIONS CONTACT: | Jerry Kircher, 301/897-6584 |
Web site: www.lockheedmartin.com
Conference call: Lockheed Martin will webcast the earnings conference call (listen-only mode) at 3 p.m. E.S.T. on January 22, 2009. A live audio broadcast, including relevant charts, will be available on the Investor Relations page of the company’s web site at: http://www.lockheedmartin.com/investor.
FORWARD-LOOKING STATEMENTS
Statements in this release that are "forward-looking statements" are based on Lockheed Martin’s current expectations and assumptions. Forward-looking statements in this release include estimates of future sales, earnings and cash flow. These statements are not guarantees of future performance and are subject to risks and uncertainties. Actual results could differ materially due to factors such as: the availability of government funding for our products and services both domestically and internationally; changes in government and customer priorities and requirements (including changes to respond to the priorities of the new U.S. Administration and Congress, Department of Defense reviews, budgetary constraints, and cost-cutting initiatives); the impact of economic recovery and stimulus plans and continued military operations in Iraq and Afghanistan on funding for existing defense programs; the award or termination of contracts; actual returns (or losses) on pension plan assets, interest and discount rates and other changes that may impact pension plan assumptions; changes in counter-party credit risk exposure; difficulties in developing and producing operationally advanced technology systems; the timing and customer acceptance of product deliveries; materials availability and performance by key suppliers, subcontractors and customers; charges from any future impairment reviews that may result in the recognition of losses and a reduction in the book value of goodwill or other long-term assets; the future impact of legislation, rulemaking, and changes in accounting, tax, defense procurement, or export policies; the future impact of acquisitions or divestitures, joint ventures or teaming arrangements; the outcome of legal proceedings and other contingencies (including lawsuits, government investigations or audits, and environmental remediation efforts); the competitive environment for the Corporation’s products and services; and economic, business and political conditions domestically and internationally.
These are only some of the factors that may affect the forward-looking statements contained in this press release. For further information regarding risks and uncertainties associated with Lockheed Martin’s business, please refer to the Corporation’s SEC filings, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” and “Legal Proceedings” sections of the Corporation’s 2007 annual report on Form 10-K, which may be obtained at the Corporation’s website: http://www.lockheedmartin.com
It is the Corporation’s policy to only update or reconfirm its financial projections by issuing a press release. The Corporation generally plans to provide a forward-looking outlook as part of its quarterly earnings release but reserves the right to provide an outlook at different intervals or to revise its practice in future periods. All information in this release is as of January 21, 2009. Lockheed Martin undertakes no duty to update any forward-looking statement to reflect subsequent events, actual results or changes in the Corporation’s expectations. We also disclaim any duty to comment upon or correct information that may be contained in reports published by investment analysts or others.
NON-GAAP PERFORMANCE MEASURES
The Corporation believes that reporting ROIC provides investors with greater visibility into how effectively Lockheed Martin uses the capital invested in its operations. The Corporation uses ROIC to evaluate multi-year investment decisions and as a long-term performance measure, and also uses ROIC as a factor in evaluating management performance for incentive compensation purposes. ROIC is not a measure of financial performance under generally accepted accounting principles, and may not be defined and calculated by other companies in the same manner. ROIC should not be considered in isolation or as an alternative to net earnings as an indicator of performance.
The Corporation calculates ROIC as follows:
Net earnings plus after-tax interest expense divided by average invested capital (stockholders’ equity plus debt), after adjusting stockholders’ equity by adding back adjustments related to postretirement benefit plans.
| (In millions, except percentages) | | 2008 Actual | | | 2007 Actual |
Net Earnings Interest Expense (multiplied by 65%) 1 | | $ | 3,217 222 | | | $ | 3,033 229 |
| | $ | 3,439 | | | $ | 3,262 |
| | | | | | | | |
Average debt 2, 5 Average equity 3, 5 Average Benefit Plan Adjustments 4,5 | | $ | 4,346 8,236 3,256 | | | $ | 4,416 7,661 3,171 |
| | $ | 15,838 | | | $ | 15,248 |
| | | | | | | | |
RETURN ON INVESTED CAPITAL | | | 21.7% | | | | 21.4% |
| (In millions, except percentages) | | 2009 Projections |
| | | Current Update | | October 2008 |
Net Earnings Interest Expense (multiplied by 65%) 1 |  | Combined | | Combined |
| | ≥ $3,000 | | ≥ $3,300 |
| | | | | |
Average debt 2, 5 Average equity 3, 5 Average Benefit Plan Adjustments 4,5 | | Combined | | Combined |
| | ≤ $16,650 | | ≤ $16,500 |
| | | | | |
RETURN ON INVESTED CAPITAL | | ≥ 18.0% | | ≥ 20.0% |
_______
| 1 | Represents after-tax interest expense utilizing the federal statutory rate of 35%. |
| 2 | Debt consists of long-term debt, including current maturities, and short-term borrowings (if any). |
| 3 | Equity includes non-cash adjustments, primarily for unrecognized benefit plan actuarial losses and prior service costs, the adjustment for the adoption of FAS 158 in 2006 and the additional minimum pension liability in years prior to 2007. |
| 4 | Average Benefit Plan Adjustments reflect the cumulative value of entries identified in our Statement of Stockholders’ Equity discussed in Note 3. |
5 | Yearly averages are calculated using balances at the start of the year and at the end of each quarter. |
