What Are The Risks Lockheed Martin Faces From Its U.S. Defense Business?

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In 2015, Lockheed Martin (NYSE: LMT) derived close to 78% of its total sales from the U.S. Government. This figure includes 58% from the Department of Defense (DoD). It is expected that the company will continue to derive most of its sales from the work performed under U.S. Government contracts. That said, the U.S. Government continues to face significant deficit reduction pressures and it is likely that this trend is will continue in the near future. This is bound to have a negative impact on Lockheed’s top line. Such conditions invite increased scrutiny on all programs, large or complex. In the following note, we discuss some of the risks Lockheed Martin faces in its U.S. businesses.

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  • Contracts are conditioned upon the continuing availability of Congressional appropriations. Usually, the Congress appropriates funds on a fiscal year basis, even though most contracts span over many years. Hence, it is possible that contracts are partially funded initially and additional funds are granted only as Congress makes further appropriations. At times, the contract is abandoned or cancelled altogether. This proves to be a major risk undertaken by the company in regards to future sales.
  • The company’s latest program — the F-35 — represented 20% of its total sales in 2015 and is expected to represent a higher percentage of sales going forward. If a decision is made to cut the spending or reduce the planned orders, it could adversely impact the company’s operational results.
  • On the flip side, due to the varied range of defense, homeland security and information technology products and services offered by the company, it seems less likely that cuts in any specific contract or program will have significant impacts on the business in the long term. However, termination of multiple or large programs could adversely affect the business and financial performance. That said, potential changes in funding priorities could also gain the business new or additional opportunities in terms of existing, follow-on or replacement programs.
  • Generally, with  businesses that have longer cycles such as Aeronautics and Space Systems, and with products businesses within the Missiles and Fire Control and Mission Systems and Training, the impact of the budget reductions on the operating results are spread out and minimal. However, smaller businesses with short term contracts are the most susceptible to the impacts of budget reduction. This is true in the case of Lockheed’s Information Systems & Global Solutions business segment. Such services businesses are also at the risk of increased market pressures such as lower troop numbers and increased re-competition. Additionally, most of the services businesses have suffered from lower volumes in the recent past due to improved field performance that requires less service support.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment / ask questions on the comments section

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of Lockheed

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