FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1997 COMMISSION FILE NUMBER 1-11437
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LOCKHEED MARTIN CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1893632
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (301) 897-6000
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AS OF JULY 31, 1997
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COMMON STOCK, $1 PAR VALUE 194,014,842
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
Page No.
Part I. Financial Information
Item I. Financial Statements
Condensed Consolidated Statement of Earnings -
Three Months and Six Months Ended June 30, 1997 and 1996........... 3
Condensed Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1997 and 1996............................ 4
Condensed Consolidated Balance Sheet -
June 30, 1997 and December 31, 1996................................ 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................10
Part II. Other Information
Item 1. Legal Proceedings..............................................15
Item 4. Submission of Matters to a Vote of Security Holders............16
Item 6. Exhibits and Reports on Form 8-K...............................17
Signatures..................................................................18
Exhibit 11. Computation of Earnings Per Common Share........................19
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges...............21
Exhibit 27. Financial Data Schedule
2
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------- -------- ------- -------
(In millions, except per share data)
Net sales $6,898 $7,076 $13,572 $12,185
Cost of sales 6,261 6,383 12,279 11,020
------ ------ ------- -------
Earnings from operations 637 693 1,293 1,165
Other income and expenses, net 52 1 73 31
------ ------ ------- -------
689 694 1,366 1,196
Interest expense 201 189 402 260
------ ------ ------- -------
Earnings before income taxes 488 505 964 936
Income tax expense 180 206 366 365
------ ------ ------- -------
Net earnings $ 308 $ 299 $ 598 $ 571
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Earnings per common share:
Assuming no dilution $ 1.59 $ 1.50 $ 3.08 $ 2.85
====== ====== ======= =======
Assuming full dilution $ 1.40 $ 1.33 $ 2.74 $ 2.55
====== ====== ======= =======
Cash dividends declared per common share $ .40 $ .40 $ .80 $ .80
====== ====== ======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1997 1996
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(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 598 $ 571
Adjustments to reconcile earnings to net cash provided
by operating activities:
Merger related and consolidation payments (68) (145)
Depreciation and amortization 524 533
Changes in operating assets and liabilities (1,091) (552)
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Net cash (used for) provided by operating activities (37) 407
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to properties, net of purchased operations (357) (347)
Business combination with Loral Corporation -- (7,313)
Other acquisitions, investments and divestitures 863 (33)
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Net cash provided by (used for) investing activities 506 (7,693)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds related to debt (327) 7,159
Issuance of common stock 42 50
Common stock dividends (154) (156)
Preferred stock dividends (30) (30)
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Net cash (used for) provided by financing activities (469) 7,023
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Net decrease in cash and cash equivalents -- (263)
Cash and cash equivalents at beginning of period -- 653
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Cash and cash equivalents at end of period $ -- $ 390
======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, DECEMBER 31,
1997 1996
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(In millions)
ASSETS
Current Assets:
Cash and cash equivalents $ -- $ --
Receivables 5,411 4,999
Inventories 3,673 3,053
Deferred income taxes 1,066 1,088
Other current assets 401 800
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Total current assets 10,551 9,940
Property, plant and equipment 3,607 3,721
Intangible assets related to contracts and
programs acquired 1,638 1,767
Cost in excess of net assets acquired 10,029 10,394
Other assets 3,573 3,435
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$29,398 $29,257
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,280 $ 1,294
Customer advances and amounts in excess of
costs incurred 3,341 2,600
Salaries, benefits and payroll taxes 1,046 991
Income taxes 542 925
Short-term borrowings 930 1,110
Current maturities of long-term debt 845 180
Other current liabilities 1,489 1,604
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Total current liabilities 9,473 8,704
Long-term debt 9,376 10,188
Post-retirement benefit liabilities 2,049 2,077
Other liabilities 1,170 1,432
Stockholders' equity:
Series A preferred stock, $50 liquidation
preference per share 1,000 1,000
Common stock, $1 par value per share 193 193
Additional paid-in capital 132 92
Retained earnings 6,237 5,823
Unearned ESOP shares (232) (252)
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Total stockholders' equity 7,330 6,856
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$29,398 $29,257
======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Lockheed Martin Corporation (the Corporation) has
continued to follow the accounting policies set forth in the consolidated
financial statements filed with the Securities and Exchange Commission (SEC) on
March 14, 1997 in its 1996 Annual Report on Form 10-K. In the opinion of
management, the interim financial information provided herein reflects all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results of operations for the interim periodS. The results
of operations for the three months and six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - TRANSACTION AGREEMENT WITH NORTHROP GRUMMAN CORPORATION
On July 3, 1997, the Corporation and Northrop Grumman Corporation (Northrop
Grumman) announced that they had entered into an Agreement and Plan of Merger
(the Merger Agreement) to combine the companies in a transaction with a total
estimated value of approximately $11.6 billion, including Northrop Grumman debt
to be assumed by the Corporation of approximately $3.1 billion (the Merger).
Under the terms of the Merger Agreement, which was unanimously approved by the
respective Boards of Directors of the Corporation and Northrop Grumman, Northrop
Grumman stockholders will receive 1.1923 shares of Lockheed Martin common stock
for each share of Northrop Grumman common stock. The consummation of the Merger
is subject to, among other things, the approval by the stockholders of the
Corporation of the issuance of Lockheed Martin common stock, the approval of the
Merger by stockholders of Northrop Grumman, and certain regulatory approvals.
It is anticipated that the transaction, which is expected to close in late 1997
or early 1998, will qualify for pooling-of-interests accounting treatment;
however, the Corporation is considering other transactions which could, if
consummated, result in accounting for the transaction as a purchase.
NOTE 3 - BUSINESS COMBINATION WITH LORAL CORPORATION
In April 1996, the Corporation purchased all of the issued and outstanding
shares of common stock of Loral Corporation (Loral) for an aggregate
consideration of $38 per share in cash. The purchase involved a series of
transactions that resulted in (i) the distribution to stockholders of Loral,
immediately prior to the consummation of the purchase, of shares of capital
stock in Loral Space & Communications, Ltd. (Loral SpaceCom), a newly-formed
company, which now owns and manages substantially all of Loral's former space
and satellite telecommunications interests, and in which the Corporation
acquired shares of preferred stock that were convertible into 20 percent of
Loral SpaceCom's common stock on a fully diluted basis at the date of
acquisition, and (ii) the acquisition by the Corporation of Loral's defense
electronics and systems integration businesses (collectively, the Loral
Transaction). In connection with the Loral Transaction, Loral changed its name
to Lockheed Martin Tactical Systems, Inc. (Tactical Systems), which became a
wholly-owned subsidiary of the Corporation. The operations of Tactical Systems
have been included in the results of operations of the Corporation from April 1,
1996. Effective June 30, 1997, Tactical Systems was merged with and into the
Corporation.
With regard to the Loral Transaction, the total purchase price paid, including
acquisition costs, was approximately $7.6 billion. The Loral Transaction was
accounted for using the purchase method of accounting. Purchase accounting
adjustments were recorded to allocate the purchase price to assets acquired and
liabilities assumed based on fair values at the date of acquisition.
6
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Note 4 - INVENTORIES
June 30, December 31,
1997 1996
--------- ------------
(In millions)
Work in process, primarily on long-term
contracts and programs in progress $ 5,425 $ 4,456
Less customer advances and progress payments (2,666) (2,446)
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2,759 2,010
Other inventories 914 1,043
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$ 3,673 $ 3,053
======= =======
Note 5 -- CONTINGENCIES
The Corporation or its subsidiaries are parties to or have property subject to
litigation and other proceedings, including matters arising under provisions
relating to the protection of the environment. In the opinion of management and
counsel, the probability is remote that the outcome of these matters will have a
material adverse effect on the results of the Corporation's operations or its
financial position. These matters include the following items:
Environmental matters -- In 1991, the Corporation entered into a consent
decree with the U.S. Environmental Protection Agency (EPA) relating to certain
property in Burbank, California, which obligated the Corporation to design and
construct facilities to monitor, extract, and treat groundwater, and to operate
and maintain such facilities for approximately eight years. A second consent
decree is being finalized which will obligate the Corporation to fund the
continued operation and maintenance of these facilities through the year 2018.
The Corporation estimates that expenditures required to comply with the consent
decrees over their remaining terms will be approximately $110 million.
The Corporation has also been operating under a cleanup and abatement order
from the California Regional Water Quality Control Board affecting its
facilities in Burbank, California. This order requires site assessment and
action to abate groundwater contamination by a combination of groundwater and
soil cleanup and treatment. Based on experience derived from initial remediation
activities, the Corporation estimates the anticipated costs of these actions in
excess of the requirements under the EPA consent decree to approximate $90
million over the remaining term of the project.
The Corporation is responding to three administrative orders issued by the
California Regional Water Quality Control Board in connection with the
Corporation's former Lockheed Propulsion Company facilities in Redlands,
California. Under the orders, the Corporation is investigating the impact and
potential remediation of regional groundwater contamination by perchlorates and
chlorinated solvents. The Corporation is also working with local water
purveyors to assure that public water supplies are maintained.
The Corporation is involved in other proceedings and potential proceedings
relating to environmental matters, including disposal of hazardous wastes and
soil and water contamination. The extent of the Corporation's financial exposure
cannot in all cases be reasonably estimated at this time. In addition to the
matters with respect to the Burbank property described above, a liability of
approximately $340 million for those cases in which an estimate of financial
exposure can be determined has been recorded.
7
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Under an agreement with the U.S. Government, the Burbank groundwater treatment
and soil remediation expenditures referenced above are being allocated to the
Corporation's operations as general and administrative costs and, under existing
government regulations, these and other environmental expenditures related to
U.S. Government business, after deducting any recoveries from insurance or other
responsible parties, are allowable in establishing the prices of the
Corporation's products and services. As a result, a substantial portion of the
expenditures will be reflected in the Corporation's sales and cost of sales
pursuant to U.S. Government agreement or regulation. The Corporation has
recorded an asset for the portion of these costs that are probable of future
recovery in pricing of the Corporation's products and services for U.S.
Government business. The portion that is expected to be allocated to commercial
business has been reflected in cost of sales. The recorded amounts do not
reflect the possible future recovery of portions of the environmental costs
through insurance policy coverage or from other potentially responsible parties,
which the Corporation is pursuing as required by agreement and U.S. Government
regulation. Any such recoveries, when received, would reduce the Corporation's
liability as well as the allocated amounts to be included in the Corporation's
U.S. Government sales and cost of sales.
Waste remediation contract -- In 1994, the Corporation was awarded a $180
million fixed price contract by the U.S. Department of Energy (DOE) for the
Phase II design, construction and limited test of remediation facilities, and
the Phase III full remediation of waste found in Pit 9, located on the Idaho
National Engineering and Environmental Laboratory reservation. The Corporation
has incurred significant unanticipated costs and scheduling issues due to
complex technical and contractual matters which threaten the viability of the
overall Pit 9 program. Management completed its investigation to identify and
quantify the overall effects of these matters, and summarized its findings in a
request for equitable adjustment (REA) which was delivered to the DOE on March
31, 1997. The provisions of the REA include, but are not limited to, the
recovery of a portion of unanticipated costs incurred by the Corporation and the
restructuring of the contract to provide for a more equitable sharing of the
risks associated with the Pit 9 project. To date, the Corporation and the DOE
have not reached any agreements on cost recovery or other contract restructuring
matters. As a result, the Corporation has reduced work activities at the Pit 9
site, awaiting further direction from the DOE. In July 1997, the Subcommittee
on Oversight and Investigations of the U.S. House of Representatives Commerce
Committee held hearings on the matter at which representatives of the
Corporation and the DOE testified.
Note 6 - OTHER
In March 1997, the Corporation executed a definitive agreement valued at
approximately $525 million to reposition 10 non-core business units as a new
independent company, L-3 Communications Corporation, in which the Corporation
retained a 34.9% ownership interest at closing. These business units, primarily
composed of high-technology, product-oriented companies, contributed
approximately 2% of the Corporation's net sales during the three month period
ended March 31, 1997. The transaction, which closed on April 30, 1997 with an
effective date of March 30, 1997, did not have a material impact on the
Corporation's earnings. Concurrent with the announcement of this transaction in
February 1997, the Corporation announced a new organizational structure which
reassigned management responsibility for certain business units. As a result,
the Corporation's operations were divided into five business segments. The
operations of Tactical Systems are reflected in the Electronics, Information &
Services, and Energy and Other segments.
Commercial paper borrowings of approximately $2.2 billion were outstanding at
June 30, 1997. Approximately $1.25 billion of these borrowings were classified
as long-term debt in the Corporation's condensed consolidated balance sheet,
based on management's ability and intention to maintain this debt outstanding
for at least one year. During the third quarter of 1996, the Corporation entered
into interest rate swap agreements to fix the interest rates on $875 million of
its commercial paper borrowings. These agreements will mature during 1997. The
effects of these interest rate swap agreements are recorded periodically as an
adjustment to interest expense related to commercial paper borrowings. The
Corporation is exposed to the risk of nonperformance by the intermediaries to
these agreements, though such nonperformance is not anticipated.
8
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The Corporation's total interest payments were $389 million and $228 million
for the six months ended June 30, 1997 and 1996, respectively.
The Corporation's federal and foreign income tax payments were $727 million
and $610 million for the six months ended June 30, 1997 and 1996, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which
establishes new standards for computing and disclosing earnings per share. The
Statement requires dual presentation of "basic" and "diluted" earnings per
share, each as defined therein, which replace primary and fully diluted earnings
per share, respectively, required under current guidance. SFAS No. 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption is not permitted; however, after the
effective date, all prior period earnings per share data presented will be
required to be restated to conform to the provisions of the new standard.
Management does not currently anticipate that earnings per share computed under
the new standard will differ materially from earnings per share computed and
disclosed under current guidance.
Effective January 1, 1997, the Corporation adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) No. 96-1,
"Environmental Remediation Liabilities." In addition to providing a
nonauthoritative discussion of major federal legislation dealing with
environmental matters, SOP No. 96-1 also provides authoritative guidance on
certain accounting issues relative to the recognition, measurement, display and
disclosure of environmental remediation liabilities. The impact of the adoption
of this SOP was not material to the Corporation's consolidated results of
operations, financial position or disclosures.
9
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TRANSACTION AGREEMENT WITH NORTHROP GRUMMAN CORPORATION
On July 3, 1997, the Corporation and Northrop Grumman Corporation (Northrop
Grumman) announced that they had entered into an Agreement and Plan of Merger
(the Merger Agreement) to combine the companies in a transaction with a total
estimated value of approximately $11.6 billion, including Northrop Grumman debt
to be assumed by the Corporation of approximately $3.1 billion (the Merger).
Under the terms of the Merger Agreement, which was unanimously approved by the
respective Boards of Directors of the Corporation and Northrop Grumman, Northrop
Grumman stockholders will receive 1.1923 shares of Lockheed Martin common stock
for each share of Northrop Grumman common stock. The consummation of the Merger
is subject to, among other things, the approval by the stockholders of the
Corporation of the issuance of Lockheed Martin common stock, the approval of the
Merger by stockholders of Northrop Grumman, and certain regulatory approvals.
It is anticipated that the transaction, which is expected to close in late 1997
or early 1998, will qualify for pooling-of-interests accounting treatment;
however, the Corporation is considering other transactions which could, if
consummated, result in accounting for the transaction as a purchase.
BUSINESS COMBINATION WITH LORAL CORPORATION
In April 1996, the Corporation purchased all of the issued and outstanding
shares of common stock of Loral Corporation (Loral) for an aggregate
consideration of $38 per share in cash. The purchase involved a series of
transactions that resulted in (i) the distribution to stockholders of Loral,
immediately prior to the consummation of the purchase, of shares of capital
stock in Loral Space & Communications, Ltd. (Loral SpaceCom), a newly-formed
company, which now owns and manages substantially all of Loral's former space
and satellite telecommunications interests, and in which the Corporation
acquired shares of preferred stock that were convertible into 20 percent of
Loral SpaceCom's common stock on a fully diluted basis at the date of
acquisition, and (ii) the acquisition by the Corporation of Loral's defense
electronics and systems integration businesses (collectively, the Loral
Transaction). In connection with the Loral Transaction, Loral changed its name
to Lockheed Martin Tactical Systems, Inc. (Tactical Systems), which became a
wholly-owned subsidiary of the Corporation. The operations of Tactical Systems
have been included in the results of operations of the Corporation from April 1,
1996. Effective June 30, 1997, Tactical Systems was merged with and into the
Corporation.
With regard to the Loral Transaction, the total purchase price paid, including
acquisition costs, was approximately $7.6 billion. At the effective date of the
Loral Transaction, the Corporation assumed approximately $1.9 billion of debt
obligations of the former Loral Corporation. The Loral Transaction was accounted
for using the purchase method of accounting. Purchase accounting adjustments
were recorded to allocate the purchase price to assets acquired and liabilities
assumed based on fair values at the date of acquisition.
The funds for the consummation of the Loral Transaction were provided through
the issuance of approximately $6.6 billion of commercial paper and an
approximate $1 billion borrowing under a 5-year unsecured revolving credit
facility (the 5-Year Facility). During the second quarter of 1996, the
Corporation issued $5 billion of long-term fixed rate debt securities. The net
proceeds from the sale of the debt securities were used to repay the $1 billion
borrowed under the 5-Year Facility and to reduce the amount of commercial paper
outstanding.
REPOSITIONING OF NON-CORE BUSINESSES AND NEW ORGANIZATIONAL STRUCTURE
In March 1997, the Corporation executed a definitive agreement valued at
approximately $525 million to reposition 10 non-core business units as a new
independent company, L-3 Communications Corporation (L-3), in which the
Corporation retained a 34.9% ownership interest at closing. These business
units, primarily composed of high-technology, product-oriented companies, had
approximately 4,900 employees and contributed approximately 2% of the
Corporation's net sales during the three month period ended March 31, 1997. The
transaction, which closed on April 30, 1997 with an effective date of March 30,
1997, did not have a material impact on the Corporation's earnings.
10
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Concurrent with the announcement of this transaction in February 1997, the
Corporation announced a new organizational structure which reassigned management
responsibility for certain business units. As a result, the Corporation's
operations were divided into five business segments. Prior year data has been
reclassified to conform to the new presentation.
RESULTS OF OPERATIONS
The Corporation's operating cycle is long-term and involves various types of
production contracts and varying production delivery schedules. Accordingly,
results of a particular quarter, or quarter-to-quarter comparisons of recorded
sales and profits, may not be indicative of future operating results. The
following comparative analysis should be viewed in this context.
Consolidated net sales for the second quarter were $6.9 billion in 1997, a
three percent decrease from the $7.1 billion recorded for the comparable period
in 1996. The 1996 results include the operations of Martin Marietta Materials,
Inc. (Materials), which was divested during the fourth quarter of 1996; the
Space Shuttle processing operations, which the Corporation transferred to United
Space Alliance, LLC (USA), an unconsolidated joint venture, during the second
half of 1996; the operations of the Corporation's Armament Systems and Defense
Systems businesses, which were sold to General Dynamics Corporation (General
Dynamics) in a transaction which concluded with the Corporation's receipt of
$450 million in cash on January 2, 1997; and the operations which were
repositioned as L-3 effective March 30, 1997. Excluding the effects of these
divestitures, net sales for the second quarter of 1997 would have increased by
six percent over comparable 1996 results for the same period. Consolidated net
sales for the first six months ended June 30, 1997 were $13.6 billion, an 11
percent increase over the $12.2 billion reported for the same period in 1996.
This increase was primarily due to the inclusion of the operations of the
former Tactical Systems companies for the entire 1997 period versus only a
portion of 1996, offset by the absence in 1997 of the operations of the divested
entities discussed previously. Excluding the effects of these items, net sales
for the six months ended June 30, 1997 would have been six percent higher than
the comparable period in 1996.
The Corporation's operating profit (earnings before interest and taxes) for
the second quarter of 1997 was $689 million versus $694 million for the
comparable 1996 period. Excluding the impact of the divestitures discussed
above, operating profit for the second quarter of 1997 would have increased by
eight percent above the operating profit for the comparable 1996 period.
Operating profit for the first six months ended June 30, 1997 was $1,366 million
versus $1,196 million as reported for the comparable period in 1996. Excluding
the effects of the transactions referred to above, operating profit for the six
months ended June 30, 1997 would have increased by 13 percent from the
comparable 1996 period.
Net earnings for the second quarter of 1997 were $308 million, or $1.40 per
common share assuming full dilution. These amounts represent increases from the
reported second quarter 1996 net earnings of $299 million, or $1.33 per common
share. Net earnings for the six months ended June 30, 1997 were $598 million,
or $2.74 per common share assuming full dilution, versus $571 million, or $2.55
per common share, for the comparable 1996 period. The effective income tax rate
for the second quarter of 1997 was 37 percent as compared to 41 percent for the
second quarter of 1996, and 38 percent versus 39 percent for the first six
months of 1997 and 1996, respectively. The effective rates for each period were
higher than the statutory corporate federal income tax rate principally due to
the nondeductibility for tax purposes of certain costs in excess of net assets
acquired associated with previous acquisition activities.
The Corporation's backlog of undelivered orders was approximately $48.1
billion at June 30, 1997, slightly lower than the $50.4 billion reported at
December 31, 1996. The lower backlog at June 30, 1997 reflects the divestiture
of the Corporation's Armament Systems, Defense Systems and L-3 businesses. The
Corporation received orders for approximately $13.1 billion in new and follow-on
business during the first six months of 1997.
11
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following table displays second quarter and year-to-date net sales and
operating profit for the Corporation's business segments.
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- -------
(In millions)
Net Sales:
Space & Strategic Missiles $1,986 $2,078 $ 3,884 $ 3,833
Electronics 1,755 1,901 3,493 2,792
Information & Services 1,680 1,651 3,327 2,634
Aeronautics 1,447 1,201 2,806 2,500
Energy and Other 30 245 62 426
------ ------ ------- -------
$6,898 $7,076 $13,572 $12,185
====== ====== ======= =======
Operating Profit:
Space & Strategic Missiles $ 234 $ 303 $ 543 $ 553
Electronics 137 140 272 226
Information & Services 115 71 203 106
Aeronautics 160 122 287 230
Energy and Other 43 58 61 81
------ ------ ------- -------
$ 689 $ 694 $ 1,366 $ 1,196
====== ====== ======= =======
Net sales of the Space & Strategic Missiles segment decreased by four percent
in the second quarter of 1997 from the comparable 1996 period. This decrease
resulted from the timing of Atlas launches (one in the second quarter of 1997
versus two in the second quarter of 1996) and from decreased activity in various
classified programs. Net sales for the first six months of 1997 were slightly
higher than the comparable 1996 amount. Operating profit for the second quarter
and year-to-date 1997 decreased by 23 percent and two percent, respectively, as
compared to 1996, principally because of timing of the recognition of award fees
on certain space programs.
Second quarter 1997 Electronics segment net sales decreased by eight percent
versus the same period in 1996 due to the exclusion of the results of the
Armament Systems and Defense Systems businesses which were sold to General
Dynamics early in 1997. Excluding the results of operations of these companies,
second quarter net sales would have decreased by two percent from the comparable
1996 amount, principally due to a reduction in sales volume for the BSY-2
program. Year-to-date net sales for 1997 increased by 25 percent over the
comparable 1996 amount due to the inclusion of the operations of certain
former Tactical Systems companies for the entire 1997 period versus only a
portion of 1996, partially offset by the Armament Systems and Defense Systems
dispositions. Excluding the results of operations of these companies, net sales
for the first six months of 1997 would have decreased by three percent from the
comparable 1996 amount, as a result of reductions in sales volume for the BSY-2,
LANTIRN and AEGIS programs. Operating profit for the second quarter of 1997
decreased by two percent from the comparable 1996 amount principally because of
the Armament Systems and Defense Systems divestitures. Excluding the operations
of these companies, operating profit would have increased by three percent.
Operating profit for the first six months of 1997 increased by 20 percent as
compared to 1996, resulting from the inclusion of the former Tactical Systems
companies and the dispositions of the Armament Systems and Defense Systems
companies noted above. Excluding the results of operations of these companies,
year-to-date 1997 operating profit would have decreased by eight percent
compared to 1996. This decrease was primarily attributable to increased
investment in new programs and changes in estimates related to certain avionics
and surveillance programs.
12
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Second quarter 1997 Information & Services segment net sales increased by two
percent from the comparable 1996 amount. This increase occurred despite the
absence in 1997 of the Space Shuttle processing operations transferred to USA
during the second half of 1996 and the operations of the businesses repositioned
as L-3. Year-to-date 1997 net sales increased by 26 percent over the comparable
1996 period due to the inclusion of the operations of certain former Tactical
Systems companies for the entire 1997 period versus only a portion of 1996,
offset by the effect of the absence of the Corporation's Space Shuttle
processing operations and the absence of the L-3 operations in 1997. Excluding
the effects of these items, net sales for both the second quarter and year-to-
date would have increased by 21 percent from the respective comparable 1996
periods. These increases resulted primarily from an increase in sales volume
related to commercial products, air traffic control systems and information
management systems. Second quarter and year-to-date 1997 operating profit
increased by 62 percent and 92 percent, respectively, over the comparable 1996
periods. These increases were principally the result of overall margin
improvements in the segment's systems integration and information systems
programs. In addition, operating profit for the second quarter 1997 excludes the
operations of the businesses repositioned as L-3, while the year-to-date 1997
operating profit also includes the former Tactical Systems companies for the
entire period versus only a portion of 1996. Excluding the effects of these
items, second quarter and year-to-date 1997 operating profit would have
increased by 83 percent and 98 percent, respectively, from the amounts recorded
for the comparable 1996 periods.
Second quarter and year-to-date 1997 Aeronautics net sales increased by 20
percent and 12 percent, respectively, from the comparable 1996 amounts. These
increases resulted from the timing of deliveries of F-16 fighter aircraft and F-
16 support volume, offset somewhat by fewer deliveries of C-130 airlift
aircraft. Operating profit for second quarter and year-to-date 1997 increased
by 31 percent and 25 percent, respectively, as compared to the respective
comparable 1996 amounts, principally due to increased F-16 deliveries noted
above as well as performance improvements at certain of the segment's aircraft
and logistics centers.
Net sales and operating profit of the Energy and Other segment for the second
quarter and first six months of 1997 decreased significantly from the comparable
1996 amounts primarily due to the divestiture of Materials during the fourth
quarter of 1996. The decrease in operating profit was somewhat offset by gains
recorded in 1997 from the Corporation's investment portfolio. In 1994, the
Corporation was awarded a $180 million fixed price contract by the U.S.
Department of Energy (DOE) for the Phase II design, construction and limited
test of remediation facilities, and the Phase III full remediation of waste
found in Pit 9, located on the Idaho National Engineering and Environmental
Laboratory reservation. The Corporation has incurred significant unanticipated
costs and scheduling issues due to complex technical and contractual matters
which threaten the viability of the overall Pit 9 program. Management completed
its investigation to identify and quantify the overall effects of these matters,
and has summarized its findings in a request for equitable adjustment (REA)
which was delivered to the DOE on March 31, 1997. The provisions of the REA
include, but are not limited to, the recovery of a portion of unanticipated
costs incurred by the Corporation and the restructuring of the contract to
provide for a more equitable sharing of the risks associated with the Pit 9
project. To date, the Corporation and the DOE have not reached any agreements on
cost recovery or other contractual restructuring matters. As a result, the
Corporation has reduced work activities at the Pit 9 site, awaiting further
direction from the DOE. In July 1997, the Subcommittee on Oversight and
Investigations of the U.S. House of Representatives Commerce Committee held
hearings on the matter at which representatives of the Corporation and the DOE
testified.
The Corporation is responding to three administrative orders issued by the
California Regional Water Quality Control Board in connection with the
Corporation's former Lockheed Propulsion Company facilities in Redlands,
California. Under the orders, the Corporation is investigating the impact and
potential remediation of regional groundwater contamination by perchlorates and
chlorinated solvents. The Corporation is also working with local water purveyors
to assure that public water supplies are maintained.
13
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1997, $37 million of cash was used for
operating activities, compared to $407 million provided by operating activities
during the first six months of 1996. This fluctuation resulted principally from
increased cash flow requirements on certain aircraft programs. Net cash
provided by investing activities during the first six months of 1997 was $506
million, compared to $7.7 billion used for investing activities during the first
six months of 1996. The 1996 amount reflected the use of approximately $7.3
billion of cash related to the Loral Transaction, while the 1997 amount
reflected the receipt of $450 million from General Dynamics during 1997 for the
sale of the Corporation's Armament Systems and Defense Systems operations and
the receipt of more than $400 million in cash from the repositioning of L-3.
Net cash used for financing activities was $469 million in the first six months
of 1997 versus $7.0 billion provided by financing activities during the same
period in 1996. The 1996 amount reflected the issuance of debt to finance the
Loral Transaction while the 1997 amount principally reflected repayments of debt
and dividend activity.
Commercial paper borrowings of approximately $2.2 billion were outstanding at
June 30, 1997. Of this amount, $1.25 billion has been classified as long-term
debt in the Corporation's condensed consolidated balance sheet based on
management's ability and intention to maintain this debt outstanding for at
least one year. Total debt, including short-term borrowings, amounted to
approximately 60 percent of total capitalization at June 30, 1997, a reduction
from the 63 percent reported at December 31, 1996. This reduction is the result
of net repayments related to debt during the first six months of 1997 of $327
million combined with a $474 million increase in stockholders' equity during the
same period. The increase in stockholders' equity resulted primarily from net
earnings for the period of $598 million and option and ESOP activity, offset by
dividends totaling $184 million.
Cash on hand and temporarily invested, internally generated funds and
available financing resources are expected to be sufficient to meet anticipated
operating and debt service requirements and discretionary investment needs.
Consistent with the Corporation's desire to generate cash to reduce debt,
management anticipates that, subject to prevailing financial, market and
economic conditions, the Corporation may divest other non-core businesses or
surplus properties.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the
Exchange Act). All forward looking statements involve risks and uncertainties.
The forward looking statements in this document are intended to be subject to
the safe harbor protection provided by Sections 27A of the Securities Act and
21E of the Exchange Act. For a discussion identifying some important factors
that could cause actual results to vary materially from those anticipated in
the forward looking statements, see the Corporation's Securities and Exchange
Commission filings, including, but not limited to, the discussion of
"Competition and Risk" and the discussion of "Government Contracts and
Regulations" on pages 11 through 14 and pages 14 through 15, respectively, of
the Corporation's Annual Report on Form 10-K for the year ended December 31,
1996 (Form 10-K); "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 51 through 63 of the 1996 Annual Report, and
"Note 1 - Summary of Significant Accounting Policies", "Note 3 - Repositioning
of Non-Core Businesses and New Organizational Structure" and "Note 14 -
Commitments and Contingencies" of the Notes to Consolidated Financial Statements
on pages 70 through 71, pages 72 through 73, and pages 80 through 81,
respectively, of the Audited Consolidated Financial Statements included in the
1996 Annual Report and incorporated by reference into the Form 10-K; and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 10 through 14 of this Form 10-Q, and "Note 2 - Transaction
Agreement with Northrop Grumman Corporation", "Note 5 - Contingencies" and "Note
6 - Other" of the Notes to Unaudited Condensed Consolidated Financial Statements
on page 6, pages 7 through 8, and pages 8 through 9, respectively, of the
Unaudited Condensed Consolidated Financial Statements included in this Form
10-Q.
14
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On May 21, 1997, Lockheed Martin Electro-Optical Systems was served with a
grand jury subpoena issued by the United States District Court for the Central
District of California seeking documents relating to the accounting treatment of
contract payments received from the government. On July 18, 1997, two
Department of Defense, Office of the Inspector General (DoD IG) subpoenas were
served on Electro-Optical Systems and Lockheed Martin Tactical Systems, Inc.
seeking additional documents relating to the accounting treatment of contract
payments received from the U.S. Government. Effective June 30, 1997, Lockheed
Martin Tactical Systems, Inc. was merged with and into the Corporation.
On July 11, 1997, the Corporation was served with a grand jury subpoena issued
by the United States District Court for the Western District of Tennessee,
seeking documents related to the operation of the Milan Army Ammunition Plant.
The subpoena appears to be a continuation of a kickback investigation initiated
in January 1994 and previously reported by the Corporation involving vendors and
former employees of the Milan Army Ammunition Plant. The Milan Army Ammunition
Plant was operated by the Corporation's Armament Systems business which was sold
to General Dynamics Corporation effective January 1, 1997. Under the terms of
the agreement with General Dynamics, the Corporation retained responsibility for
investigations of this type.
On July 16, 1997, four grand jury subpoenas issued by the United States
District Court for the Middle District of Florida were served on employees of
Lockheed Martin Electronics & Missiles. On July 21, 1997, a DoD IG subpoena was
served on Lockheed Martin Electronics & Missiles seeking documents related to
various LANTIRN program contracts. The subpoenas apparently relate to the U.S.
Government's investigation of allegations raised in a qui tam lawsuit against
the Corporation in United States District Court for the Middle District of
Florida.
15
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION (Continued)
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders on April 24, 1997, the stockholders of
Lockheed Martin Corporation:
. Elected the following individuals to the Board of Directors for one-year
terms expiring in 1998:
Votes Cast For Votes Withheld
-------------- --------------
Norman R. Augustine 167,485,144 3,212,731
Marcus C. Bennett 167,664,314 3,033,561
Lynne V. Cheney 167,595,753 3,102,122
Vance D. Coffman 167,654,455 3,043,420
Houston I. Flournoy 167,577,820 3,120,055
James F. Gibbons 167,634,635 3,063,240
Edward E. Hood, Jr. 167,626,479 3,071,396
Caleb B. Hurtt 167,661,339 3,036,536
Gwendolyn S. King 167,567,264 3,130,611
Vincent N. Marafino 167,567,759 3,130,116
Eugene F. Murphy 167,542,868 3,155,007
Allen E. Murray 167,605,548 3,092,327
Frank Savage 167,673,915 3,023,960
Daniel M. Tellep 167,526,763 3,171,112
Carlisle A. H. Trost 167,484,979 3,212,896
James R. Ukropina 167,652,264 3,045,611
Douglas C. Yearley 167,614,358 3,083,517
. Ratified the appointment of Ernst & Young LLP, independent auditors, to audit
the consolidated financial statements of the Corporation as of and for the
fiscal year ending December 31, 1997. There were 167,993,219 votes for the
appointment, 1,615,165 votes against the appointment, and 1,089,491
abstentions.
. Rejected a stockholder proposal which recommended that the Board of Directors
implement a program to achieve a salary administration schedule that limits
the highest paid persons in the Corporation to a total annual compensation of
no more than five times the national median wage paid to full-time employees.
There were 12,461,695 votes for the proposal, 145,489,783 votes against the
proposal, and 2,583,635 abstentions.
. Rejected a stockholder proposal which recommended that the Board of Directors
take necessary actions to insure that future outside directors not serve more
than six years. There were 14,301,978 votes for the proposal, 143,827,760
votes against the proposal, and 2,405,375 abstentions.
16
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION (Continued)
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1. Exhibit 11. Lockheed Martin Corporation Computation of Earnings per
Common Share for the three months and six months ended June
30, 1997 and 1996.
2. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of Earnings
to Fixed Charges for the six months ended June 30, 1997.
3. Exhibit 27. Financial Data Schedule for the six months ended June 30,
1997.
(b) Reports on Form 8-K filed in the second quarter of 1997.
None.
(c) Reports on Form 8-K filed subsequent to the second quarter of 1997.
1. Current report on Form 8-K filed on July 9, 1997.
Item 5. Other Events
The registrant filed information concerning an Agreement and
Plan of Merger dated as of July 2, 1997 among the registrant, Hurricane
Sub, Inc. (a wholly owned subsidiary of the registrant) and Northrop
Grumman Corporation.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated July 3, 1997
announcing the proposed combination of the registrant and Northrop
Grumman Corporation.
17
LOCKHEED MARTIN CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOCKHEED MARTIN CORPORATION
---------------------------
(Registrant)
Date: August 12, 1997 by: /s/Robert E. Rulon
--------------- -------------------------------
Robert E. Rulon
Vice President and
Chief Accounting Officer
18
Exhibit 11
LOCKHEED MARTIN CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended
June 30,
1997 1996
------ ------
(In millions, except per
share data)
ASSUMING NO DILUTION:
- ---------------------
Average number of common shares outstanding 184.7 190.2
====== ======
Net earnings $ 308 $ 299
Less: Preferred stock dividends (15) (15)
------ ------
Net earnings applicable to common stock $ 293 $ 284
====== ======
Earnings per common share $ 1.59 $ 1.50
====== ======
ASSUMING FULL DILUTION:
- -----------------------
Average number of common shares outstanding 184.7 190.2
Dilutive stock options-based on the treasury stock
method using the June 30 market prices, if
higher than average market price 5.1 4.7
Assumed conversion of the Series A preferred stock 28.9 28.9
------ ------
218.7 223.8
====== ======
Net earnings $ 308 $ 299
====== ======
Earnings per common share $ 1.40 $ 1.33
====== ======
19
Exhibit 11 (Continued)
LOCKHEED MARTIN CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
Six Months Ended
June 30,
1997 1996
------ ------
(In millions, except per
share data)
ASSUMING NO DILUTION:
- ---------------------
Average number of common shares outstanding 184.4 189.7
====== ======
Net earnings $ 598 $ 571
Less: Preferred stock dividends (30) (30)
------ ------
Net earnings applicable to common stock $ 568 $ 541
====== ======
Earnings per common share $ 3.08 $ 2.85
====== ======
ASSUMING FULL DILUTION:
- -----------------------
Average number of common shares outstanding 184.4 189.7
Dilutive stock options-based on the treasury stock
method using the June 30 market prices, if
higher than average market price 5.0 4.9
Assumed conversion of the Series A preferred stock 28.9 28.9
------ ------
218.3 223.5
====== ======
Net earnings $ 598 $ 571
====== ======
Earnings per common share $ 2.74 $ 2.55
====== ======
20
Exhibit 12
LOCKHEED MARTIN CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(In millions, except ratio)
EARNINGS:
Net earnings $ 598
Income tax expense 366
Interest expense 402
Amortization of debt premium and discount, net (2)
Portion of rents representative of an interest factor 43
------
Adjusted earnings before taxes and fixed charges $1,407
======
FIXED CHARGES:
Interest expense $ 402
Amortization of debt premium and discount, net (2)
Portion of rents representative of an interest factor 43
Capitalized interest 2
------
Total fixed charges $ 445
======
RATIO OF EARNINGS TO FIXED CHARGES 3.2
======
21
5
1,000,000
6-MOS
DEC-31-1997
JUN-30-1997
0
0
5,411
0
3,673
10,551
8,612
5,005
29,398
9,473
9,376
0
1,000
193
6,137
29,398
13,572
13,572
12,279
12,279
73
0
402
964
366
598
0
0
0
598
3.08
2.74
