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 SEPTEMBER 30, 1996 COMMISSION FILE NUMBER 1-11437
---------------------
LOCKHEED MARTIN CORPORATION
----------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1893632
- ------------------------------- --------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6801 ROCKLEDGE DRIVE, BETHESDA, MD 20817
- ---------------------------------------- --------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (301) 897-6000
----------------------------
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) HAD 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 OCTOBER 31, 1996
- ----------------------------- ----------------------------------
COMMON STOCK, $1 PAR VALUE 192,705,594
LOCKHEED MARTIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 30, 1996
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Earnings-
Three Months and Nine Months Ended September 30,
1996 and 1995 .......................................... 3
Condensed Consolidated Statement of Cash Flows-
Nine Months Ended September 30, 1996 and 1995 .......... 4
Condensed Consolidated Balance Sheet-September 30, 1996
and December 31, 1995 .................................. 5
Notes to Condensed Consolidated Financial Statements .... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 17
Part II. Other Information
Item 1. Legal Proceedings ................................... 27
Item 6. Exhibits and Reports on Form 8-K .................... 28
Signatures ...................................................... 29
Exhibit 11. Computation of Earnings Per Common Share............ 30
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges .. 32
Exhibit 27. Financial Data Schedule
2
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
-------- -------- -------- -------
(In millions, except per share data)
Net sales $7,028 $5,551 $19,213 $16,801
Costs and expenses:
Cost of sales 6,353 5,041 17,373 15,367
Merger related and consolidation
expenses - - - 690
------ ------ ------- -------
Earnings from operations 675 510 1,840 744
Other income and expenses, net 61 24 92 89
------ ------ ------- -------
736 534 1,932 833
Interest expense 226 70 486 222
------ ------ ------- -------
Earnings before income taxes 510 464 1,446 611
Income tax expense 199 177 564 240
------ ------ ------- -------
Net earnings $ 311 $ 287 $ 882 $ 371
====== ====== ======= =======
Earnings per common share:
Assuming no dilution $ 1.55 $ 1.43 $ 4.40 $ 1.72
====== ====== ======= =======
Assuming full dilution $ 1.38 $ 1.29 $ 3.93 $ 1.67
====== ====== ======= =======
Cash dividends declared per common share $ .40 $ .35 $ 1.20 $ .99
====== ====== ======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------
1996 1995
--------- --------
(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 882 $ 371
Adjustments to reconcile earnings to net cash
provided by operating activities:
Merger related and consolidation expenses
-Provision - 690
-Payments (185) (135)
Depreciation and amortization 894 665
Changes in operating assets and liabilities (283) (972)
------- -----
Net cash provided by operating activities 1,308 619
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to properties, net of purchased
operations (581) (394)
Business combination with Loral Corporation (7,313) -
Other acquisitions, investments and divestitures 10 (211)
------- -----
Net cash used for investing activities (7,884) (605)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) related to debt 6,439 (286)
Issuances (repurchases) of common shares 84 (17)
Common stock dividends (232) (183)
Preferred stock dividends (45) (45)
------- -----
Net cash provided by (used for) financing activities 6,246 (531)
------- -----
Net decrease in cash and cash equivalents (330) (517)
Cash and cash equivalents at beginning of period 653 639
------- -----
Cash and cash equivalents at end of period $ 323 $ 122
======= =====
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
1996 1995
------------- ------------
(In millions)
ASSETS
Current assets:
Cash and cash equivalents $ 323 $ 653
Receivables 5,221 3,876
Inventories 3,101 2,804
Deferred income taxes 1,007 580
Other current assets 541 264
------- -------
Total current assets 10,193 8,177
Property, plant and equipment 4,322 3,165
Intangible assets related to contracts and
programs acquired 2,158 1,808
Cost in excess of net assets acquired 10,501 2,817
Other assets 3,095 1,681
------- -------
$30,269 $17,648
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 787 $ -
Accounts payable 1,211 787
Customer advances and amounts in excess
of costs incurred 1,536 1,570
Salaries, benefits and payroll taxes 1,033 567
Income taxes 628 292
Current maturities of long-term debt 176 722
Other current liabilities 2,673 1,353
------- -------
Total current liabilities 8,044 5,291
Long-term debt 11,076 3,010
Post-retirement benefit liabilities 2,526 1,778
Other liabilities 1,434 1,136
Stockholders' equity:
Series A preferred stock, $50 liquidation
preference per share 1,000 1,000
Common stock, $1 par value per share 201 199
Additional paid-in capital 808 683
Retained earnings 5,443 4,838
Unearned ESOP shares (263) (287)
------- -------
Total stockholders' equity 7,189 6,433
------- -------
$30,269 $17,648
======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(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 13,
1996 in its 1995 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 nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - BUSINESS COMBINATION WITH LORAL CORPORATION
On January 7, 1996, the Corporation and its wholly-owned subsidiary, LAC
Acquisition Corporation (LAC), entered into an Agreement and Plan of Merger (the
Loral Merger Agreement) with Loral Corporation (Loral) pursuant to which LAC
agreed to purchase all of the issued and outstanding shares of common stock of
Loral (together with the associated preferred stock purchase rights) for an
aggregate consideration of $38 per share in cash (the Tender Offer). The Tender
Offer was made as part of a series of transactions that resulted in (i) the
distribution to stockholders of Loral immediately prior to the consummation of
the Tender Offer 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 (ii) the acquisition by the Corporation of Loral's defense
electronics and systems integration businesses (the Loral Transaction).
In accordance with the terms of the Tender Offer and the Loral Merger Agreement,
on April 23, 1996, LAC purchased approximately 94.5 percent of the outstanding
shares of common stock of Loral. Subsequent to the consummation of the Tender
Offer, on April 29, 1996, LAC merged with and into Loral and each remaining
share of common stock of Loral not owned by LAC was converted into the right to
receive $38. Each outstanding share of common stock of LAC was converted into
shares of common stock of Loral, and Loral changed its name to Lockheed Martin
Tactical Systems, Inc. (Tactical Systems). As a result of these transactions,
Tactical Systems 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.
6
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The total purchase price paid for Tactical Systems, net of cash balances
acquired, was approximately $7.3 billion.
In connection with the above transactions, the Corporation acquired shares of
preferred stock of Loral SpaceCom that were convertible into 20 percent of Loral
SpaceCom's common stock on a fully diluted basis. The Corporation's ownership
of the preferred stock of Loral SpaceCom is subject to certain limitations and
restrictions set forth in the terms and conditions of the preferred stock and in
agreements between the Corporation and Loral SpaceCom.
The Loral Transaction has been accounted for using the purchase method of
accounting. Preliminary purchase accounting adjustments have been recorded to
allocate the purchase price to assets acquired and liabilities assumed,
resulting in approximately $7.9 billion of cost in excess of net assets acquired
being recorded (which will be amortized ratably over a 40-year period). Such
adjustments are subject to change resulting from the completion of future
analyses. The Corporation expects to complete and announce its plans for
integration and any consolidation activities by the end of 1996.
The following unaudited pro forma combined earnings data presents the results of
operations of the Corporation and Tactical Systems for the nine months ended
September 30, 1996 and 1995, with pro forma adjustments as if the Loral
Transaction had been consummated as of the beginning of the periods presented.
This pro forma combined earnings data does not purport to be indicative of
results of operations that would have resulted if the Loral Transaction had
occurred on the applicable dates indicated above. Moreover, this data is not
intended to be indicative of future results of operations.
Lockheed Tactical Pro Forma Pro Forma
Martin Systems/(a)/ Adjustments Combined
-------- ------------ ----------- ---------
(In millions, except per share data)
NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net sales $19,213 $1,403 $ (43) /(c)/ 20,573
Net earnings 882 126 (120) /(d)/ 888
Earnings per common share:
Assuming no dilution 4.40 N/A N/A 4.43
Assuming full dilution 3.93 N/A N/A 3.96
7
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Lockheed Tactical Pro Forma Pro Forma
Martin Systems/(a)/ Adjustments Combined
-------- ------------ ----------- ---------
(In millions, except per share data)
NINE MONTHS ENDED
SEPTEMBER 30, 1995
Net sales $16,801 $4,828 $(130) /(c)/ $21,499
Net earnings 371 /(b)/ 259 (359) /(d)/ 271
Earnings per common share:
Assuming no dilution 1.72 N/A N/A 1.19
Assuming full dilution 1.67 N/A N/A *
/(a)/ Financial data presented represents the operating results of Tactical
Systems for the first quarter of 1996. The operating results of Tactical
Systems for the second and third quarters of 1996 have been included in
the Lockheed Martin financial data.
/(b)/ Net earnings includes the effect of the Corporation's merger related and
consolidation expenses recorded in 1995 related to the formation of
Lockheed Martin. The after-tax effect of these charges was $436 million,
or $1.96 per common share assuming full dilution.
* Anti-dilutive. Calculated earnings per common share was $1.22 for Pro
Forma Combined.
The unaudited pro forma adjustments described below are based upon preliminary
estimates and certain assumptions that management of the Corporation believes
are reasonable in the circumstances. Such adjustments are subject to change
resulting from the completion of future analyses.
/(c)/ To eliminate intercompany sales.
/(d)/ To record the amortization of estimated intangible assets and additional
estimated interest expense resulting from the Loral Transaction, net of
the effects of income taxes.
The funds for the consummation of the Loral Transaction were provided through
the issuance of commercial paper by the Corporation and through borrowings under
revolving credit facilities (the Credit Facilities) with a syndicate of
commercial banks. The Credit Facilities
8
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
consisted of a 364-day unsecured revolving credit facility in the amount of $5
billion (the Short-Term Facility) and a 5-year unsecured revolving credit
facility in the amount of $5 billion (the 5-Year Facility). In connection with
the establishment of the Credit Facilities, the Corporation and Loral each
terminated their previously existing revolving credit facilities. Approximately
$6 billion of commercial paper was issued and approximately $1 billion was
borrowed under the 5-Year Facility to finance the Loral Transaction on the
closing date. During the second quarter of 1996, the Corporation issued $5
billion in debt securities (see Note 4). 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. On July 26,
1996, the Corporation terminated the Short-Term Facility.
In connection with the Loral Transaction, the Corporation assumed the
obligations of Loral as guarantor under the Revolving Credit Agreement of
Globalstar, L.P. (the Globalstar Revolving Credit Agreement), an affiliate of
Loral SpaceCom, and the parties to the Globalstar Revolving Credit Agreement
released Loral from its prior guarantee. The maximum principal amount of loans
to Globalstar, L.P. that are guaranteed by the Corporation is $250 million,
subject to the assumption by certain of the Globalstar partners of a portion of
the Corporation's obligations as guarantor.
NOTE 3 - INVENTORIES
September 30, December 31,
1996 1995
------------- ------------
(In millions)
Work in process, primarily on long-term
contracts and programs in progress $ 5,011 $ 3,721
Less customer advances and progress payments (2,877) (1,772)
------- -------
2,134 1,949
Other inventories 967 855
------- -------
$ 3,101 $ 2,804
======= =======
NOTE 4 - DEBT
During the second quarter of 1996, the Corporation issued $5 billion of long-
term fixed rate debt securities, the entire amount registered under the
Corporation's shelf registration statement which became effective on May 10,
1996. These Notes and Debentures range in maturity from two years to 40 years,
with interest rates ranging from 6.55% to 7.75%. The registered holder of each
40-year Debenture may elect, between March 1 and April 1, 2008, to have the
Debenture, or some portion thereof, repaid by the Corporation on May 1, 2008.
The debt securities are guaranteed by Tactical Systems (see Note 5).
9
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
In February 1996, the Corporation entered into interest rate hedging agreements
to offset a portion of its exposure to rising interest rates related to the
anticipated long-term financings. These agreements were closed in the second
quarter of 1996 in connection with the Corporation's issuance of its long-term
debt securities. The Corporation realized a gain of approximately $150 million
on the closing of these agreements, which has been deferred and is being
amortized and recognized as an adjustment to interest expense over the terms of
the related debt obligations.
At the effective date of the Loral Transaction, the Corporation assumed
approximately $1.9 billion of debt obligations of the former Loral Corporation.
Commercial paper borrowings of approximately $2.8 billion were outstanding at
September 30, 1996. Approximately $2 billion of these borrowings were
classified as long-term debt in the Corporation's consolidated condensed 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 a portion 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.
Each bank's obligation to make loans under the 5-Year Facility is subject to,
among other things, compliance by the Corporation with various representations,
warranties, covenants and agreements, including but not limited to covenants
limiting the ability of the Corporation and certain of its subsidiaries to
encumber their assets and a covenant not to exceed a maximum leverage ratio.
The Corporation's total interest payments were $372 million and $206 million for
the nine months ended September 30, 1996 and 1995, respectively.
NOTE 5 - SUMMARIZED CONSOLIDATING FINANCIAL INFORMATION
The $5 billion of debt obligations issued by the Corporation in the second
quarter of 1996 are guaranteed by Tactical Systems. In accordance with SEC
disclosure requirements, summarized consolidating financial information follows:
10
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Non-
Lockheed Tactical Guarantor
Martin(a) Systems(b) Entities Eliminations Consolidated
--------- ---------- -------- ------------ ------------
(In millions)
EARNINGS DATA
- -------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
Net sales $ 4,532 $177 $2,727 $(408) $ 7,028
Earnings from operations 507 (1) 194 (25) 675
Net earnings 311 201 293 (494) 311
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995
Net sales $ 5,169 $ - $ 611 $(229) $ 5,551
Earnings from operations 463 - 72 (25) 510
Net earnings 287 - 22 (22) 287
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Net sales $13,725 $264 $6,274 $(1,050) $19,213
Earnings from operations 1,479 14 406 (59) 1,840
Net earnings 882 291 501 (792) 882
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
Net sales $14,847 $ - $2,481 $(527) $16,801
Earnings from operations 598 - 191 (45) 744
Net earnings 371 - 139 (139) 371
11
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Non-
Lockheed Tactical Guarantor
Martin(a) Systems(b) Entities Eliminations Consolidated
--------- ---------- -------- ------------ ------------
(In millions)
CASH FLOWS DATA
- ---------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Net cash provided by (used for):
Operating activities $ 955 $ 273 $ 80 $ $ 1,308
Investing activities (7,510) (236) (138) - (7,884)
Financing activities 6,296 (48) (2) - 6,246
------- ----- ----- --- -------
Net decrease in cash
and cash equivalents (259) (11) (60) - (330)
Cash and cash equivalents:
Beginning of period 401 39 213 - 653
------- ----- ----- --- -------
End of period $ 142 $ 28 $ 153 $ - $ 323
======= ===== ===== === =======
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
Net cash provided by (used for):
Operating activities $ 425 $ $ 194 $ - $ 619
Investing activities (380) - (225) - (605)
Financing activities (528) - (3) - (531)
------- ----- ----- --- -------
Net decrease in cash
and cash equivalents (483) - (34) - (517)
Cash and cash equivalents:
Beginning of period 652 - (13) - 639
------- ----- ----- --- -------
End of period $ 169 $ - $ (47) $ - $ 122
======= ===== ===== === =======
12
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Non-
Lockheed Tactical Guarantor
Martin(a) Systems(b) Entities Eliminations Consolidated
--------- ---------- -------- ------------ ------------
(In millions)
BALANCE SHEET DATA
- ------------------
AS OF SEPTEMBER 30, 1996
Current assets - Public $6,747 $ 551 $ 2,895 $ - $ 10,193
- Affiliated (c) 1,051 - 307 (1,358) -
Noncurrent assets - Public 8,418 641 11,017 - 20,076
- Affiliated (c) 8,358 9,848 4,651 (22,857) -
Current liabilities - Public 4,536 195 3,313 - 8,044
- Affiliated (c) 92 310 91 (493) -
Long-term debt 9,734 1,204 138 - 11,076
Other noncurrent liabilities
- Public 3,023 927 10 - 3,960
- Affiliated (c) - - - - -
Equity 7,189 8,404 15,318 (23,722) 7,189
AS OF DECEMBER 31, 1995
Current assets - Public $6,484 $ - $ 1,693 $ - $ 8,177
- Affiliated (c) 262 - 448 (710) -
Noncurrent assets - Public 8,281 - 1,190 - 9,471
- Affiliated (c) 1,999 - 4,597 (6,596) -
Current liabilities - Public 4,430 - 861 - 5,291
- Affiliated (c) 448 - 262 (710) -
Long-term debt 2,863 - 147 - 3,010
Other noncurrent liabilities
- Public 2,852 - 62 - 2,914
- Affiliated (c) - - - - -
Equity 6,433 - 6,596 (6,596) 6,433
(a) Data is related to the parent company only.
(b) Data is related to Tactical Systems, Inc. only and pertains to operations
from April 1, 1996.
(c) Amounts represent activity with Lockheed Martin affiliated companies.
13
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
NOTE 6 - 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, that have the potential to affect
the results of the Corporation's operations or its financial position. These
matters include the following items which were disclosed in the consolidated
financial statements in the Corporation's 1995 Annual Report on Form 10-K.
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 obligates the Corporation to design and construct facilities
to monitor, extract, and treat groundwater and operate and maintain such
facilities for approximately eight years. The Corporation estimates that
expenditures required to comply with the terms of the consent decree over the
remaining term of the project will be approximately $50 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 cost of these actions in excess of the
requirements under the EPA consent decree to approximate $155 million over the
remaining term of the project.
In addition, 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. A
liability of approximately $335 million for those cases in which an estimate of
financial exposure can be determined has been recorded.
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 recovery of portions of the environmental costs through
insurance policy coverage or from other potentially responsible parties to the
contamination, which the Corporation is pursuing as required by
14
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
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.
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 addition to those described
above. In the opinion of management and counsel, the probability is remote that
the outcome of litigation and proceedings will have a material adverse effect on
the results of the Corporation's operations or its financial position.
NOTE 7 - OTHER
During the second quarter of 1996, the Corporation's Board of Directors
terminated the systematic common stock repurchase plan that had been established
to counter the future dilutive effect of common stock issued by the Corporation
under its 1995 Omnibus Performance Award Plan. A separate program authorized in
1995 for the repurchase of up to nine million common shares to counter the
dilutive effect of common stock issued under the Corporation's other benefit and
compensation programs and for other purposes related to such plans remains in
effect. Through September 30, 1996, no common shares have been repurchased by
the Corporation.
During the first quarter of 1995, the Corporation recorded a pretax charge of
$165 million for merger related expenses in connection with the formation of the
Corporation. During the second quarter of 1995, the Corporation recorded a
pretax charge of $525 million in conjunction with a corporate-wide consolidation
plan under which the Corporation would close certain facilities and laboratories
and eliminate duplicative field offices in the U.S. and abroad, eliminating up
to approximately 12,000 positions. The charge represented the portion of the
accrued costs and net realizable value adjustments that are not probable of
recovery. The after-tax effect of these charges was $436 million, or $1.96 per
share assuming full dilution. As of September 30, 1996, cumulative merger
related and consolidation expenditures were approximately $390 million which
primarily relate to the formation of the Corporation, the elimination of
positions and the closure of foreign and domestic marketing offices.
The Corporation's federal and foreign income tax payments were $756 million and
$160 million for the nine months ended September 30, 1996 and 1995,
respectively.
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", effective January 1, 1996. SFAS No. 121 requires
that certain long-lived assets to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Additionally, SFAS No. 121 requires that
certain long-lived assets to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The adoption of this standard did not
have a material effect on the Corporation's consolidated earnings and financial
condition.
15
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
During the third quarter of 1996, the Corporation announced its intention to
distribute its 81 percent interest in Martin Marietta Materials, Inc.
(Materials) to its stockholders (the Exchange Offer). Under the terms of the
Exchange Offer, the Corporation's stockholders were given the opportunity to
exchange each Lockheed Martin common share held for 4.72 common shares of
Materials on a tax-free basis. The Exchange Offer expired by its terms on
October 18, 1996 and was oversubscribed. On October 23, 1996, approximately 7.9
million shares of the Corporation's common stock were exchanged for the 37.35
million shares of Materials common stock held by the Corporation. As a result of
this transaction, the Corporation has no remaining ownership interest in
Materials and has reduced its common shares outstanding by approximately 4
percent. Based on preliminary calculations, management anticipates that the
Corporation will recognize a gain of approximately $350 million during the
fourth quarter of 1996.
16
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS COMBINATION WITH LORAL CORPORATION
On January 7, 1996, the Corporation and its wholly-owned subsidiary, LAC
Acquisition Corporation (LAC) entered into an Agreement and Plan of Merger (the
Loral Merger Agreement) with Loral Corporation (Loral) pursuant to which LAC
agreed to purchase all of the issued and outstanding shares of common stock of
Loral (together with the associated preferred stock purchase rights) for an
aggregate consideration of $38 per share in cash (the Tender Offer). The Tender
Offer was made as part of a series of transactions that resulted in (i) the
distribution, to stockholders of Loral immediately prior to the consummation of
the Tender Offer, 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 (ii) the acquisition by the Corporation of Loral's defense
electronics and systems integration businesses (the Loral Transaction).
In accordance with the terms of the Tender Offer and the Loral Merger Agreement,
on April 23, 1996, LAC purchased approximately 94.5 percent of the outstanding
shares of common stock of Loral. Subsequent to the consummation of the Tender
Offer, on April 29, 1996, LAC merged with and into Loral, and each remaining
share of common stock of Loral not owned by LAC was converted into the right to
receive $38. Each outstanding share of LAC was converted into shares of common
stock of Loral, and Loral changed its name to Lockheed Martin Tactical Systems,
Inc. (Tactical Systems). As a result of these transactions, Tactical Systems
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. The total purchase price paid for Tactical Systems, net of cash
balances acquired, was approximately $7.3 billion.
In connection with the above transactions, the Corporation acquired shares of
preferred stock of Loral SpaceCom that were convertible into 20 percent of Loral
SpaceCom's common stock on a fully diluted basis. The Corporation's ownership
of the preferred stock of Loral SpaceCom is subject to certain limitations and
restrictions set forth in the terms and conditions of the preferred stock and in
agreements between the Corporation and Loral SpaceCom.
The Loral Transaction has been accounted for using the purchase method of
accounting. Preliminary purchase accounting adjustments have been recorded to
allocate the purchase price to assets acquired and liabilities assumed,
resulting in approximately $7.9 billion of cost in excess of net assets acquired
being recorded (which will be amortized ratably over a 40-year period). Such
adjustments are subject to change upon the completion of further analyses. The
Corporation expects to complete and announce its plans for integration and any
consolidation activities by the end of 1996.
17
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The funds for the consummation of the Loral Transaction were provided through
the issuance of commercial paper by the Corporation and through borrowings under
revolving credit facilities (the Credit Facilities) with a syndicate of
commercial banks. The Credit Facilities consisted of a 364-day unsecured
revolving credit facility in the amount of $5 billion (the Short-Term Facility)
and a 5-year unsecured revolving credit facility in the amount of $5 billion
(the 5-Year Facility). Approximately $6 billion of commercial paper was issued
and approximately $1 billion was borrowed under the 5-Year Facility to finance
the Loral Transaction on the closing date. During the second quarter of 1996,
the Corporation issued $5 billion in debt securities (see Liquidity and Capital
Resources section below). 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. On July 26, 1996, the
Corporation terminated the $5 billion Short-Term Facility.
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.
The consolidated results of operations for the Corporation for both the quarter
and nine months ended September 30, 1996 include the operations of Tactical
Systems from April 1, 1996. During the third quarter of 1996, the Corporation
announced a new organizational structure that combined the Tactical Systems
businesses with those of Lockheed Martin. In addition, certain heritage
Lockheed Martin business units were reassigned to different segments. As a
result, the Corporation's operations are now divided into five reportable
business segments: Space & Strategic Missiles; Aeronautics; Electronics; C3I &
Systems Integration; and Information, Energy and Other. The operations of
Tactical Systems have been reflected, for segment reporting purposes, in the
Electronics, C3I & Systems Integration and Information, Energy and Other
segments.
Consolidated net sales for the third quarter of 1996 were $7.0 billion, which
represents a 27 percent increase from the $5.6 billion recorded for the
comparable period of 1995. Consolidated net sales for the nine months ended
September 30, 1996 were $19.2 billion, a 14 percent increase over the $16.8
billion reported for the same period in 1995. Increases in the Electronics, C3I
& Systems Integration and Information, Energy and Other segments, which are due
principally to the inclusion of the results of operations of Tactical Systems as
discussed above, more than offset decreases in the Aeronautics segment.
The Corporation's operating profit (earnings before interest and taxes) for the
third quarter of 1996 was $736 million, which represents a 38 percent increase
from the $534 million reported
18
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
(Continued)
for the comparable period in 1995. Operating profit for the nine months ended
September 30, 1996 was $1,932 million versus $833 million as reported for the
comparable period in 1995. During the second quarter of 1995, the Corporation
recorded a pretax charge of $525 million in conjunction with a corporate-wide
consolidation plan under which the Corporation would close certain facilities
and laboratories and eliminate duplicative field offices in the U.S. and abroad.
The 1995 period also includes the effect of a $165 million pretax charge taken
in the first quarter for merger related expenses. Excluding the effect of these
charges, operating profit for the nine months ended September 30, 1996 increased
by 27 percent from the comparable 1995 period. The increases in operating profit
in 1996 from the comparable 1995 periods are driven in large part by increases
in the Space and Strategic Missiles segment, and by increases in the
Electronics, C3I & Systems Integration and Information, Energy and Other
segments, which are due principally to the inclusion of the results of
operations of Tactical Systems as discussed above.
Net earnings for the third quarter of 1996 were $311 million, or $1.38 per
common share assuming full dilution, which were eight percent and seven percent
greater, respectively, than the third quarter 1995 net earnings of $287 million,
or $1.29 per common share assuming full dilution. Net earnings for the nine
months ended September 30, 1996 were $882 million, or $3.93 per common share
assuming full dilution. Net earnings for the nine months ended September 30,
1995 of $371 million, or $1.67 per common share assuming full dilution, include
the after-tax effects of the merger related and consolidation expenses described
above. Excluding the effects of these charges, net earnings and earnings per
common share assuming full dilution would have been $807 million and $3.63 per
share, respectively.
The effective income tax rate was 39 percent for the quarter and nine months
ended September 30, 1996. The effective income tax rate for the quarter ended
September 30, 1995 was 38 percent. Excluding the effect of the merger related
and consolidation expenses recorded during the first half of 1995, the
comparable effective income tax rate for the nine months ended September 30,
1995 was 39 percent. 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 cost in excess of net assets
acquired associated with previous acquisition activities.
The Corporation's backlog of undelivered orders was approximately $49.1 billion,
a 19 percent increase from the $41.1 billion reported at December 31, 1995,
primarily due to the addition of the backlog related to Tactical Systems.
As previously mentioned, the Corporation announced a new organizational
structure that combined the Tactical Systems businesses with those of Lockheed
Martin and reassigned certain heritage Lockheed Martin business units. The
discussion of business segments that follows reflects the new reporting
structure. Prior year amounts for the third quarter and nine-month periods have
been reclassified to conform with the 1996 presentation.
19
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following table displays third quarter and year-to-date net sales for the
Corporation's business segments.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1996 1995 1996 1995
--------- ---------- --------- ----------
(In millions)
Net Sales:
Space & Strategic Missiles $1,865 $1,893 $ 5,699 $ 5,825
Aeronautics 1,477 1,640 3,977 4,882
Electronics 1,212 737 3,344 2,286
C3I & Systems Integration 1,257 385 2,853 1,119
Information, Energy and Other 1,217 896 3,340 2,689
------ ------ ------- -------
$7,028 $5,551 $19,213 $16,801
====== ====== ======= =======
The following table displays the pretax impact of the merger related and
consolidation expenses reflected in operating profit for the nine months ended
September 30, 1995 as identified to each segment.
Nine Months Ended
September 30, 1995
-------------------
(In millions)
Merger Related and Consolidation Expenses:
Space & Strategic Missiles $263
Aeronautics 138
Electronics 89
C3I & Systems Integration 4
Information, Energy and Other 196
----
$690
====
20
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following table depicts third quarter and year-to-date operating profit,
excluding 1995 merger related and consolidation expenses for the Corporation's
business segments. The subsequent discussion of significant operating results
of each business segment excludes the effect of these nonrecurring expenses.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------
1996 1995 1996 1995
----------- ---------- ---------- ---------
(In millions)
Operating Profit, Excluding 1995 Merger
Related and Consolidation Expenses:
Space & Strategic Missiles $ 237 $ 189 $ 790 $ 555
Aeronautics 135 131 365 406
Electronics 126 78 330 227
C3I & Systems Integration 103 39 190 84
Information, Energy and Other 135 97 257 251
----- ------ ------ ------
$ 736 $ 534 $1,932 $1,523
===== ====== ====== ======
Net sales of Space & Strategic Missiles decreased slightly in the third quarter
of 1996 from the comparable 1995 period. Reduced production volume on the
Trident fleet ballistic missile program was largely offset by increases in
commercial satellite sales volume and in classified program activity. Year-to-
date 1996 net sales have also decreased slightly compared with the comparable
prior year amounts, primarily because of the timing of Atlas launches (five
launches in the 1996 period compared to eight launches in the 1995 period) and
the reduced fleet ballistic missile production volume discussed above. Third
quarter and year-to-date 1996 operating profit increased by 25 percent and 42
percent, respectively, compared to the corresponding 1995 periods, principally
as a result of timing of the recognition of award fees on certain space programs
and from increased volume and improved margins on several programs.
Third quarter 1996 Aeronautics net sales decreased ten percent from the
comparable 1995 amount. This decrease resulted from fewer deliveries of C-130
airlift aircraft as well as the completion during 1995 of P-3 maritime patrol
aircraft deliveries to the Republic of Korea. However, these decreases were
somewhat offset by increased F-16 fighter aircraft deliveries. Year-to-date
1996 net sales decreased 19 percent from the comparable 1995 period due to
fewer C-130, P-3 and F-16 aircraft deliveries. Operating profit for the third
quarter of 1996 was slightly better than the comparable 1995 period; however,
year-to-date 1996 operating profit decreased by ten percent from the comparable
1995 amount as a result of the volume decreases noted above. Operating margins
in both 1996 periods improved over the corresponding 1995 periods.
21
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Third quarter and year-to-date 1996 net sales and operating profit of
Electronics increased significantly from the comparable 1995 amounts due to the
inclusion of the operations of certain Tactical Systems companies since April 1,
1996. Third quarter and year-to-date 1996 net sales excluding the operations of
the Tactical Systems companies were four percent and seven percent higher,
respectively, than the comparable 1995 amounts. These increases were due
primarily to increases in volume in several programs and the transition of
certain programs from development to production status. Excluding the operations
of Tactical Systems companies, operating profit for the third quarter and year-
to-date 1996 periods were 36 percent and 17 percent higher, respectively, than
the corresponding 1995 periods, reflecting improved margins on various
electronics and missiles programs.
Third quarter and year-to-date 1996 net sales and operating profit of C3I &
Systems Integration also increased significantly from the comparable 1995
amounts due to the inclusion of the operations of certain Tactical Systems
companies since April 1, 1996. Excluding the operations of the Tactical Systems
companies, third quarter and year-to-date 1996 net sales were comparable to the
corresponding 1995 amounts. Operating profit excluding the Tactical Systems
companies for the 1996 third quarter and year-to-date was significantly lower
than the comparable 1995 periods primarily due to production and performance
declines in various simulation and training programs and from timing of award
fee recognition.
Net sales of the Information, Energy and Other segment for the third quarter and
year-to-date 1996 also reflect the inclusion of the operations of certain
Tactical Systems companies since April 1, 1996. Excluding the Tactical Systems
companies, net sales for the third quarter and year-to-date 1996 periods
increased by 11 percent and eight percent, respectively, over the comparable
1995 amounts. These increases were principally the result of increased sales
volume for commercial products and services activities. Third quarter and year-
to-date 1996 operating profits increased by 39 percent and two percent,
respectively, from the corresponding 1995 periods. Excluding the operations of
the Tactical Systems companies, operating profits for the third quarter and
year-to-date 1996 were 14 percent higher and 22 percent lower, respectively,
than the corresponding 1995 amounts. The increase in the third quarter of 1996
reflects gains from the sale of a portion of the Corporation's investment
portfolio. The decrease in year-to-date operating profit principally represents
lower margins on commercial products. The Corporation has a $180 million fixed-
price contract with the Department of Energy (DOE) to clean up contaminated
waste found in Pit 9, located on the Idaho National Engineering Laboratory
reservation. The program continues to experience schedule delays and technical
and cost issues that are related to, among other things, the design and
construction/acquisition of processing facilities and equipment. Discussions
with the DOE regarding these contract issues are ongoing.
22
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1996, approximately $1.3 billion of cash was
provided by operating activities, compared with $619 million during the same
period in 1995. Increases in cash generated from operations in the first nine
months of 1996 more than offset increased interest and income tax payments made
during that period. The increase in cash used for investing activities during
the first nine months of 1996 was primarily due to the payment of approximately
$7.3 billion in connection with the Loral Transaction. Net cash provided by
financing activities was $6.2 billion in the first nine months of 1996,
principally reflecting the issuance of debt to finance the Loral Transaction,
versus $531 million used for financing activities for the same period of 1995.
Total debt, including short-term borrowings, amounted to approximately 63
percent of total capitalization at September 30, 1996, an increase from the 37
percent reported at December 31, 1995, but a decline from the 65 percent
reported at June 30, 1996. As previously discussed, in connection
with the consummation of the Loral Transaction, approximately $7 billion of debt
was incurred through the issuance of commercial paper by the Corporation and
through borrowings under the 5-Year Facility. During the second quarter of
1996, the Corporation issued $5 billion of long-term debt securities, the entire
amount registered under the Corporation's shelf registration statement which
became effective on May 10, 1996. 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. These Notes and
Debentures, which are guaranteed by Tactical Systems, range in maturity from two
years to 40 years, with interest rates ranging from 6.55% to 7.75%. At the
effective date of the Loral Transaction, the Corporation assumed approximately
$1.9 billion of debt obligations of the former Loral Corporation.
Commercial paper borrowings of approximately $2.8 billion were outstanding at
September 30, 1996. Approximately $2 billion of these borrowings were
classified as long-term debt in the Corporation's consolidated condensed balance
sheet, based on management's ability and intention to maintain this debt
outstanding for at least one year.
In February 1996, the Corporation entered into interest rate hedging agreements
to offset a portion of its exposure to rising interest rates related to the
anticipated long-term financings. These agreements were closed in the second
quarter of 1996 in connection with the Corporation's issuance of its long-term
debt securities. The Corporation realized a gain of approximately $150 million
on the closing of these agreements, which has been deferred and is being
amortized and recognized as an adjustment to interest expense over the terms of
the related debt obligations. In August 1996, the Corporation entered into
interest rate swap agreements to fix the interest rates on a portion 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.
23
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
In connection with the Loral Transaction, the Corporation assumed the
obligations of Loral as guarantor under the Revolving Credit Agreement of
Globalstar, L.P. (the Globalstar Revolving Credit Agreement), an affiliate of
Loral SpaceCom, and the parties to the Globalstar Revolving Credit Agreement
released Loral from its prior guarantee. The maximum principal amount of loans
to Globalstar, L.P. that are guaranteed by the Corporation is $250 million,
subject to the assumption by certain of the Globalstar partners of a portion of
the Corporation's obligations as guarantor.
The Corporation held cash and cash equivalent balances of $323 million and $653
million at September 30, 1996 and December 31, 1995, respectively.
Stockholders' equity at September 30, 1996 was approximately $7.2 billion, a
$756 million increase from the balance at the end of 1995. The increase was
principally due to year-to-date 1996 earnings net of dividends paid and the
issuance of new shares upon exercise of employee stock options. Cash dividends
per common share were increased in the first quarter of 1996 from $.35 to $.40
in accordance with the settlement of certain class action lawsuits filed on
behalf of the former shareholders of Lockheed Corporation and Martin Marietta
Corporation. In accordance with the provisions of the settlement, this higher
quarterly dividend rate was paid for the second and third quarters of 1996. In
October 1996, the Board of Directors of the Corporation maintained this
increased rate by declaring a cash dividend of $.40 per share to be paid for the
fourth quarter of 1996.
During the third quarter of 1996, the Corporation announced its intention to
distribute its 81 percent interest in Martin Marietta Materials, Inc.
(Materials) to its stockholders (the Exchange Offer). Under the terms of the
Exchange Offer, the Corporation's stockholders were given the opportunity to
exchange each Lockhead Martin common share held for 4.72 common shares of
Materials on a tax-free basis. The Exchange Offer expired by its terms on
October 18, 1996 and was oversubscribed. On October 23, 1996, approximately 7.9
million shares of the Corporation's common stock were exchanged for the 37.35
million shares of Materials common stock held by the Corporation. As a result of
this transaction, the Corporation has no remaining ownership interest in
Materials and has reduced its common shares outstanding by approximately 4
percent. Based on preliminary calculations, management anticipates that the
Corporation will recognize a gain of approximately $350 million during the
fourth quarter of 1996.
On November 7, 1996, the Corporation announced that it had entered into a
definitive agreement to sell its Armament Systems and Defense Systems business
units to General Dynamics Corporation for $450 million (subject to adjustment
under the terms of the contract). The transaction is expected to close by the
end of 1996. Based on preliminary calculations, management anticipates that the
transaction will have an immaterial effect on net earnings.
Consistent with the Corporation's plan to generate cash to reduce debt,
management anticipates that, subject to prevailing financial, market and
economic conditions, the Corporation will divest other non-core businesses and
will consider making a public offering of shares of Lockheed Martin stock to
further reduce outstanding debt.
24
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Corporation expects to complete and announce its plans for integration and
any consolidation activities related to the Loral Transaction during the fourth
quarter of 1996.
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.
OTHER MATTERS
During the second quarter of 1996, the Corporation's Board of Directors
terminated the systematic common stock repurchase plan that had been
established to counter the future dilutive effect of common stock issued by the
Corporation under its 1995 Omnibus Performance Award Plan. A separate program
authorized in 1995 for the repurchase of up to nine million common shares to
counter the dilutive effect of common stock issued under the Corporation's other
benefit and compensation programs and for other purposes related to such plans
remains in effect. Through September 30, 1996, no common shares have been
repurchased by the Corporation.
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," effective January 1, 1996. SFAS No. 121 requires that
certain long-lived assets to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Additionally, SFAS No. 121 requires that
certain long-lived assets to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The adoption of this standard did not
have a material effect on the Corporation's consolidated earnings and financial
condition.
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 and Section 21E of the
Securities Exchange Act of 1934. 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 and 21E.
For a discussion identifying some important factors that could cause actual
results to differ 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 10 through 12 and
pages 13 through 14, respectively, of the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1995 (Form 10-K); "Management's
Discussion and Analysis of Financial Condition and Results of
25
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operations" on pages 44 through 56 of the Annual Report and "Note 1 - Summary of
Significant Accounting Policies" and "Note 14 - Commitments and Contingencies"
of the Notes to Consolidated Financial Statements on pages 62 through 63 and 73
through 74, respectively, of the Audited Consolidated Financial Statements
included in the 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 17 through 26 of this Form 10-Q and "Note 2 - Business
Combination with Loral Corporation," "Note 6 - Contingencies" and "Note 7 -
Other" of the Notes to Unaudited Condensed Consolidated Financial Statements on
pages 6 through 9, pages 14 through 15, and pages 15 through 16, respectively,
of the Unaudited Condensed Consolidated Financial Statements included in this
Form 10-Q.
26
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
The Corporation is primarily engaged in providing products and services under
contracts with the United States Government and, to a lesser degree, under
direct foreign sales contracts, some of which are funded by the United States
Government. All such contracts are subject to extensive legal and regulatory
requirements and, from time to time, agencies of the United States Government
investigate whether the Corporation's operations are being conducted in
accordance with these requirements. Such investigations could result in
administrative, civil or criminal liabilities, including repayments, fines or
penalties being imposed upon the Corporation, or could lead to suspension or
debarment from future government contracting. The Corporation is also a party
to or has its property subject to various other litigation and proceedings,
including matters arising under provisions relating to the protection of the
environment (collectively, proceedings).
The Corporation's property in Burbank, California (a former aircraft
manufacturing facility) is the subject of a 1991 consent decree with the U.S.
Environmental Protection Agency which obligates the Corporation to design and
construct facilities to monitor, extract and treat groundwater. The same
facility is subject to a cleanup and abatement order from the California
Regional Water Quality Board which requires site assessment and action to abate
groundwater contamination through a combination of groundwater and soil cleanup
and treatment. (See Note 6 - Contingencies of the Notes to Unaudited Condensed
Consolidated Financial Statements included elsewhere in this Form 10-Q.) On
August 1, 1996, the Corporation consummated a settlement with a group of 1,350
residents living in the vicinity of the facility. The settlement, valued at
approximately $67 million, resolved, without litigation, claims of personal
injury and property damage asserted by the residents and alleged to be related
to environmental contamination stemming from historical operations of the former
facility. The Corporation settled the matter for business reasons after a
lengthy mediation, without any admission of liability, notwithstanding its
continuing position that the facility does not and has not posed a risk to the
community. As the result of publicity surrounding the settlement during the
third quarter, the Corporation has been named in two purported federal class
action suits and a series of state actions on behalf of over 800 individual
residents and former residents of Burbank alleging similar claims of personal
injury, property damage and fear of future illnesses. These matters have all
been removed to federal court in Los Angeles and have been proposed to be
coordinated under the caption "In Re Burbank Aircraft Plant Environmental
Litigation." The Corporation believes that it has strong defenses to these
claims which it is preparing to assert. As with its remediation activities
relating to environmental matters, the Corporation has tendered these matters to
its insurance carriers, who have contested coverage, and is investigating the
potential for asserting indemnity/contribution claims against other responsible
parties.
The Corporation is involved in various other legal and environmental
proceedings arising in the ordinary course of its business, but in the opinion
of management and counsel the probability is remote that the outcome of any such
litigation or proceedings, whether specifically described above or referred to
generally in this paragraph, will have a material adverse effect on the results
of the Corporation's operations or its financial position.
27
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 nine months ended September
30, 1996 and 1995.
2. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of
Earnings to Fixed Charges for the nine months ended September 30, 1996.
3. Exhibit 27. Financial Data Schedule for the nine months ended September 30,
1996.
(b) Reports on Form 8-K filed in the third quarter of 1996
None.
28
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: November 13, 1996 by: /s/Robert E. Rulon
----------------- ------------------------------
Robert E. Rulon
Vice President and Controller
(Chief Accounting Officer)
29
EXHIBIT 11
LOCKHEED MARTIN CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended
September 30,
------------------------
1996 1995
---------- ---------
(In millions, except
per share data)
ASSUMING NO DILUTION:
- --------------------
Average number of common shares outstanding 191.2 190.0
====== ======
Net earnings $ 311 $ 287
Less: Preferred stock dividends (15) (15)
------ ------
Net earnings applicable to common stock $ 296 $ 272
====== ======
Earnings per common share $ 1.55 $ 1.43
====== ======
ASSUMING FULL DILUTION:
- -----------------------
Average number of common shares outstanding 191.2 190.0
Dilutive stock options-based on the treasury stock
method using the September 30 market prices, if
higher than average market price 4.6 4.2
Assumed conversion of the Convertible Series A
Preferred Stock 28.9 28.9
------ ------
224.7 223.1
====== ======
Net earnings $ 311 $ 287
====== ======
Earnings per common share $ 1.38 $ 1.29
====== ======
30
EXHIBIT 11
(Continued)
LOCKHEED MARTIN CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
Nine Months Ended
September 30,
------------------------
1996 1995
---------- ---------
(In millions, except
per share data)
ASSUMING NO DILUTION:
- --------------------
Average number of common shares outstanding 190.2 189.4
====== ======
Net earnings $ 882 $ 371
Less: Preferred stock dividends (45) (45)
------ ------
Net earnings applicable to common stock $ 837 $ 326
====== ======
Earnings per common share $ 4.40 $ 1.72
====== ======
ASSUMING FULL DILUTION:
- -----------------------
Average number of common shares outstanding 190.2 189.4
Dilutive stock options-based on the treasury stock
method using the September 30 market prices, if
higher than average market price 5.1 4.3
Assumed conversion of the Convertible Series A
Preferred Stock 28.9 28.9
------ ------
224.2 222.6
====== ======
Net earnings $ 882 $ 371
====== ======
Earnings per common share $ 3.93 $ 1.67
====== ======
31
EXHIBIT 12
LOCKHEED MARTIN CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN MILLIONS, EXCEPT RATIO)
EARNINGS:
Earnings from continuing operations before income taxes $1,446
Interest expense 486
Amortization of debt premium and discount, net --
Portion of rents representative of an interest factor 67
------
Adjusted earnings from continuing operations before
income taxes and fixed charges $1,999
======
FIXED CHARGES:
Interest expense $ 486
Amortization of debt premium and discount, net --
Portion of rents representative of an interest factor 67
Capitalized interest 2
------
Total fixed charges $ 555
======
RATIO OF EARNINGS TO FIXED CHARGES 3.6
======
32
5
1,000,000
9-MOS
DEC-31-1996
SEP-30-1996
323
0
5,221
0
3,101
10,193
9,976
5,654
30,269
8,044
11,076
0
1,000
201
5,988
30,269
19,213
19,213
17,373
17,373
92
0
486
1,446
564
882
0
0
0
882
4.40
3.93
