Lockheed Martin
A Financial Perspective
Professor Edward Kaplan
April 19, 2015

TABLE OF CONTENTS:

Executive Summary:
As the forefront of our national defense and aerospace industry, Lockheed Martin has provided complex yet highly efficient based technology driven products to their customers. With its business core highly concentrated in the aerospace industry, Lockheed Martin has branched off to include technology systems for global security, defense systems, and satellites primarily for the U.S. Department of Defense and other federal agencies. With its advanced patented technologies, Lockheed Martin has become the largest provider for such services to the U.S. Government. Head-quartered in Bethesda, MD, and employing well over 115,000 people worldwide, Lockheed Martin’s Mission; “Solve complex challenges, advance scientific discovery and deliver innovative solutions to help customers keep people safe and provide them essential services” (Lockheed Martin).
It was over a hundred years ago that on August 16, 1912, Glenn L. Martin began his company in Los Angeles, California, building his first plane in a rented church building at the influence and urging of friend Orville Wright. It was also 4 months later and hundreds of miles away, that Allan and Malcom Lockheed founded the Alco Hydro-Aeroplane Company, later becoming the Lockheed Aircraft Company. Together they built high speed seaplanes that broke all types of records for flights overwater flights. Both groups, Martin and his brothers as well as the Lockheed family believed in innovation and complex thinking strategies, a mission that has carried and evolved with the growing of his company into now where they are building some of the world’s most innovative and advanced products in the marketplace.
With global sales in 2014 hitting $45.6 Billion and a backlog of production well over $$80.5 Billion, Lockheed Martin (LMT Stock Ticker Symbol) is one of the World’s largest defense contractors, with over 82% of its revenue coming from military sales. Broken down into 5 business units, LMT offers services and products under; Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles & Fire Control, Mission Systems and Training, and finally Space Systems. A little more in-depth perspective of these business units: Aeronautics comprises of approximately $14.9 billion or 31% of sales in 2014 sales all which include tactical aircraft, airlift, and research and development. Some of the major programs instituted by Lockheed under this division have included: F-35 Joint Strike Fighter, F-16 Fighting, and the F-22 Fifth Generation Stealth Fighter. IS&GS include about $7.8 billion in 2014 sales which involve federal services such as government and commercial IT solutions. Missiles & Fire Control tracked about $7.7 billion in sales where technology includes High Altitude Defense Mechanisms Joint Tactical Vehicles, and missile productions of top classified programs. The fourth business unit on the pyramid; Mission Systems and Training brought in around $7.1 billion in sales naval technology as well as simulated training programs. Last, but also a very important business unit, Spacy Systems account for being the second largest unit in sales with about $8.1 billion. Providing all space launch, commercial/government satellites, and all other strategic space missions.
Lockheed Martin faces competition both from a domestic and global level when it comes to other large defense and aerospace companies. What distinguishes this community of competition from other industries, is that companies tend to work together on certain projects therefore being able to provide customers the best end product. An example of such cohesion is Lockheed and Northrop Grumman working together on the F-35 project. But also like many different industries, many defense companies also look to compete with each other to win both domestic and global contract awards.

Executive Leadership Team:
Marillyn A Hewson- Chairman, President, & CEO
Bruce L. Tanner- Exectuive Vice President and Chief Financial Officer
Richard F. Ambrose- Executive Vice President, Space Systems
Sondra L. Barbour- Executive Vice President, Information Systems & Global Solutions
Dale P. Bennett- Executive Vice President, Missions Systems & Training
Orlando P. Carvalho- Executive Vice President, Aeronautics
Patrick M. Dewar- Executive Vice President; Lockheed Martin International
Richard H. Edwards- Executive Vice President; Missiles and Fire Control
Brian P. Colan- Vice President; Controller and Chief Accounting Officer

A significant market strategy and focus for Lockheed is on program execution and first class quality control on production, therefore producing highly reliable products. At the tip, is providing technology to enable US Defense Systems to be at the forefront of all global defense systems. Driving sales while continuing to think of affordable initiatives is key to Lockheed’s growth strategies. With sales comes investing internally to systematically grow and fulfill new requirements for domestic and international customers alike. Learning the importance of Research and Development, LMT also looks to invest heavily in 2015 to differentiate itself from competitors. Investment in growing a strong workforce of smart and critical thinking individuals is key to Lockheed’s success of creating services and systems for customers. With this thinking comes the ability to return cash to their investors in the form of dividends and share repurchases. From a broad sense to keying certain initiatives, the strategy of Lockheed Martin heavily relies on the Aeronautics segment. With the F-35 Program being the strongest and largest program generating 17% of total consolidated net sales. With the U.S. Defense requirement of ~2500 aircraft, and numerous orders still in backlog for both domestic and international, the program looks to be the driving force for future revenue and growth opportunities.
Looking into the future based on 2014, LMT reported a minimal 1% decline in net sales and operating profit in the first two fiscal quarters of 2014. That bring said, at $889 million, their earnings grew 3% and earnings per share grew 5% year over year to $2.76. Looking into the past few years minus the fiscal year of 2014, Lockheed’s revenue has continued to show growth. The company’s EBITDA margin has also been stable in the range of 10%–13%. One of the major reasons for this slowdown has been the budget cuts of the U.S. Department of Defense. Spending cuts or as the term sequestration, by the US Government’s Budget Control Act of 2011 has forced well over $50 billion in annual cuts running through 2023. Budget cuts affected Lockheed by lowering the number of planned aircraft deliveries, thus the reason you see a big fall in revenue in 2013. To help offset slower growth, LMT looks to reduce workforce which means its Goodyear Plant factory in 2015 to be shutdown.
Why to invest in LMT even though government spending is down still looks promising, Some of the major takeaways as to positive outlooks are that; strong cash flows for 2015, share repurchases of $2 billion expected, a strong backlog and future for the F-35 program, diversification of investments, increases R&D, and the expansion into international territories as well as acquisitions into other specialty companies. Lockheed Martin through its past 12 years, has paid dividends to its investors. After the fall of 2013, LMT also saw its Stock Price grow 25%, doubling the performance of the S&P. A bright outlook and key is Lockheed along with the $2 billion in stock repurchases is also reducing its total outstanding share count to below 300 million shares by end of fiscal 2017. This plan would result in returning all of the company’s annual free cash to stockholders over the next few years. Overall there is a good chance for investors to earn good to substantial returns from LMT into the future.

Lockheed Financial Statements

Period Ending | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Total Revenue | 45,600,000 | 45,358,000 | 47,182,000 | Cost of Revenue | 40,345,000 | 41,171,000 | 42,986,000 | | Gross Profit | 5,255,000 | 4,187,000 | 4,196,000 | | | Operating Expenses | | Research Development | - | - | - | | Selling General and Administrative | (337,000) | (318,000) | (238,000) | | Non Recurring | - | - | - | | Others | - | - | - | | | | Total Operating Expenses | - | - | - | | | | | | Operating Income or Loss | 5,592,000 | 4,505,000 | 4,434,000 | | | | | Income from Continuing Operations | | | Total Other Income/Expenses Net | 6,000 | - | 21,000 | | | Earnings Before Interest And Taxes | 5,598,000 | 4,505,000 | 4,455,000 | | | Interest Expense | 340,000 | 350,000 | 383,000 | | | Income Before Tax | 5,258,000 | 4,155,000 | 4,072,000 | | | Income Tax Expense | 1,644,000 | 1,205,000 | 1,327,000 | | | Minority Interest | - | - | - | | | | | Net Income From Continuing Ops | 3,614,000 | 2,950,000 | 2,745,000 | | | | | Non-recurring Events | | | Discontinued Operations | - | 31,000 | - | | | Extraordinary Items | - | - | - | | | Effect Of Accounting Changes | - | - | - | | | Other Items | - | - | - | | | | | | Net Income | 3,614,000 | 2,981,000 | 2,745,000 | | Preferred Stock And Other Adjustments | - | - | - | | | | Net Income Applicable To Common Shares | 3,614,000 | 2,981,000 | 2,745,000 | |

Stock Analysis

Cost of Equity Common Stock: * Beta from Regression
Capital Asset Pricing Model (CAPM) r - Rf = beta x ( Km - Rf ) + alpha
Where r is the fund's return rate, Rf is the risk-free return rate, and Km is the return of the index.