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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 MARCH 31, 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 IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
6801 ROCKLEDGE DRIVE, BETHESDA, MD 20817
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
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 APRIL 30, 1996
-------------------------- --------------------------------
Common Stock, $1 par value 199,050,823
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LOCKHEED MARTIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Earnings--Three Months
Ended March 31, 1996 and 1995................................ 3
Condensed Consolidated Statement of Cash Flows--Three Months Ended
March 31, 1996 and 1995........................................... 4
Condensed Consolidated Balance Sheet--March 31, 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.................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.......... 17
Item 6. Exhibits and Reports on Form 8-K............................. 18
Signatures............................................................ 20
Exhibit 11. Computation of Earnings Per Common Share
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges
Exhibit 27. Financial Data Schedule
2
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
---------- ----------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
Net sales................................................ $5,109 $5,644
Costs and expenses:
Cost of sales.......................................... 4,637 5,189
Merger related expenses................................ -- 165
---------- ----------
Earnings from operations................................. 472 290
Other income and expenses, net........................... 30 22
---------- ----------
502 312
Interest expense......................................... 71 79
---------- ----------
Earnings before income taxes............................. 431 233
Income tax expense....................................... 159 96
---------- ----------
Net earnings............................................. $ 272 $ 137
========== ==========
Earnings per common share:
Assuming no dilution................................... $ 1.35 $ .65
========== ==========
Assuming full dilution................................. $ 1.22 $ .62
========== ==========
Cash dividends declared per common share................. $ .40 $ .29
========== ==========
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
3
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................ $ 272 $ 137
Adjustments to reconcile earnings to net cash provided
by operating activities:
Merger related and consolidation expenses
--Provision......................................... -- 165
--Payments.......................................... (51) (11)
Depreciation and amortization......................... 214 222
Changes in operating assets and liabilities........... (574) (327)
--------- ---------
Net cash (used for) provided by operating activities.... (139) 186
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to properties, net of purchased operations.... (123) (127)
Acquisitions and investments............................ (33) (141)
--------- ---------
Net cash used for investing activities.................. (156) (268)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds related to debt............... (131) 7
Issuances of common shares.............................. 14 19
Common stock dividends.................................. (70) (55)
Preferred stock dividends............................... (15) (15)
--------- ---------
Net cash used for financing activities.................. (202) (44)
--------- ---------
Net decrease in cash and cash equivalents............... (497) (126)
Cash and cash equivalents at beginning of period........ 653 639
--------- ---------
Cash and cash equivalents at end of period.............. $ 156 $ 513
========= =========
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
4
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents............................. $ 156 $ 653
Receivables........................................... 4,130 3,876
Inventories........................................... 2,862 2,804
Deferred income taxes................................. 572 580
Other current assets.................................. 300 264
------- -------
Total current assets................................ 8,020 8,177
Property, plant and equipment........................... 3,116 3,165
Intangible assets related to contracts and programs ac-
quired................................................. 1,763 1,808
Cost in excess of net assets acquired................... 2,769 2,817
Other assets............................................ 2,014 1,681
------- -------
$17,682 $17,648
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings................................. $ 253 $ --
Accounts payable...................................... 763 787
Customer advances and amounts in excess of costs in-
curred............................................... 1,416 1,570
Salaries, benefits and payroll taxes.................. 713 567
Income taxes.......................................... 253 292
Current maturities of long-term debt.................. 345 722
Other current liabilities............................. 1,486 1,353
------- -------
Total current liabilities........................... 5,229 5,291
Long-term debt.......................................... 3,003 3,010
Post-retirement benefit liabilities..................... 1,667 1,778
Other liabilities....................................... 1,127 1,136
Stockholders' equity:
Series A preferred stock, $50 liquidation preference
per share............................................ 1,000 1,000
Common stock, $1 par value per share.................. 199 199
Additional paid-in capital............................ 711 683
Retained earnings..................................... 5,025 4,838
Unearned ESOP shares.................................. (279) (287)
------- -------
6,656 6,433
------- -------
$17,682 $17,648
======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
5
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 quarter ended March 31, 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.
In connection with the above transactions, the Corporation acquired shares
of preferred stock of Loral SpaceCom that are 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 will be accounted for under the purchase method of
accounting. The total purchase price paid for Tactical Systems was
approximately $7 billion. The Corporation's cost basis investment in Loral
SpaceCom is approximately $600 million.
The following unaudited pro forma combined financial data presents the
results of operations of the Corporation and Tactical Systems for the three
months ended March 31, 1996 and 1995, with pro forma adjustments as if the
Loral Transaction had been consummated as of the beginning of the periods
presented, and the balance sheet, with pro forma adjustments as if the Loral
Transaction had occurred on March 31, 1996. This pro forma combined financial
data does not purport to be indicative of results of operations or financial
position
6
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(UNAUDITED)
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 or financial position.
UNAUDITED PRO FORMA COMBINED EARNINGS DATA
-------------------------------------------------------------
LOCKHEED TACTICAL PRO FORMA PRO FORMA
MARTIN SYSTEMS ADJUSTMENTS COMBINED
------------ ----------- ------------- ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH
31, 1996
Net sales............... $ 5,109 $1,403 $ (43)(a) $ 6,469
Net earnings............ 272 126 (118)(b) 280
Earnings per share, as-
suming full dilution... 1.22 N/A N/A 1.26
THREE MONTHS ENDED MARCH
31, 1995
Net sales............... $ 5,644 $1,459 $ (43)(a) $ 7,060
Net earnings............ 137 101 (118)(b) 120
Earnings per share, as-
suming full dilution... .62 N/A N/A .54
UNAUDITED PRO FORMA COMBINED BALANCE SHEET DATA
-------------------------------------------------------------
LOCKHEED TACTICAL PRO FORMA PRO FORMA
MARTIN SYSTEMS ADJUSTMENTS COMBINED
------------ ----------- ------------- ------------
(IN MILLIONS)
AS OF MARCH 31, 1996
Current assets.......... $ 8,020 $2,150 $ -- $10,170
Cost in excess of net
assets acquired........ 2,769 1,924 5,691 (c) 10,384
Other assets............ 6,893 1,909 1,313 (c)(d) 10,115
------------ ----------- ------------ ------------
Total assets............ $17,682 $5,983 $ 7,004 $30,669
============ =========== ============ ============
Current liabilities..... $ 5,229 $1,570 $ 1,451 (c)(e) $ 8,250
Long-term debt.......... 3,003 1,857 7,000 (d)(e) 11,860
Other liabilities....... 2,794 787 322 (c) 3,903
Stockholders' equity.... 6,656 1,769 (1,769)(c) 6,656
------------ ----------- ------------ ------------
Total liabilities and
stockholders' equity... $17,682 $5,983 $ 7,004 $30,669
============ =========== ============ ============
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.
(a) To eliminate intercompany sales.
(b) 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.
(c) To adjust the assets and liabilities of Tactical Systems to their
estimated fair values.
(d) To record the Corporation's investment in Loral SpaceCom.
(e) To record the assumed issuance of debt to finance the Loral
Transaction.
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 consist 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
7
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(UNAUDITED)
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.
Each bank's obligation to make loans under the Credit Facilities 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 anticipates refinancing a portion of the indebtedness
incurred in connection with the Loral Transaction in the long-term debt
markets by the end of 1996. On March 25, 1996, the Corporation filed a shelf
registration statement with the Securities and Exchange Commission for the
offering of up to $5 billion in debt securities which may be issued from time
to time by the Corporation. The shelf registration statement became effective
on May 10, 1996. The debt securities will be fully and unconditionally
guaranteed by Tactical Systems. The debt securities and the guarantees will be
unsecured obligations of the Corporation and Tactical Systems, respectively.
The net proceeds from the sale of the debt securities offered by the
Corporation will be added to the general funds of the Corporation and will be
available to repay debt incurred in connection with the Loral Transaction and
for general corporate purposes. The Corporation's ability to issue debt
securities at any given time is dependent, among other things, upon market
conditions.
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. At the closing date for the
Loral Transaction, those agreements supported approximately $100 million of
deferred gains. The amounts of deferred gains are subject to change as
interest rates fluctuate. These agreements are expected to be closed in
connection with the Corporation's issuance of long-term debt obligations, and
any gains or losses at closing will be deferred and recognized as adjustments
to interest expense over the terms of the related debt obligations.
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
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(IN MILLIONS)
Work in process, primarily on long-term contracts
and programs in progress.......................... $ 3,891 $ 3,721
Less customer advances and progress payments....... (1,935) (1,772)
------- -------
1,956 1,949
Other inventories.................................. 906 855
------- -------
$ 2,862 $ 2,804
======= =======
8
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(UNAUDITED)
NOTE 4--DEBT
The Corporation's total interest payments were $63 million and $69 million
for the quarters ended March 31, 1996 and 1995, respectively. Commercial paper
borrowings of $253 million were outstanding at March 31, 1996.
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, 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; however, this
estimate is likely to change as work progresses and additional experience is
gained.
In addition, the Corporation is involved in several 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 $285 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 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.
9
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(UNAUDITED)
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 6--OTHER
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. This charge reduced net earnings by $110 million, or $.50
per common share assuming full dilution.
The Corporation's federal and foreign income tax payments were approximately
$222 million and $7 million for the three months ended March 31, 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.
10
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RECENT DEVELOPMENTS
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.
In connection with the above transactions, the Corporation acquired shares
of preferred stock of Loral SpaceCom that are 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 will be accounted for under the purchase method of
accounting. The total purchase price paid for Tactical Systems was
approximately $7 billion. The Corporation's cost basis investment in Loral
SpaceCom is approximately $600 million.
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 consist of a $5 billion
364-day unsecured revolving credit facility (the Short-Term Facility) and a $5
billion five-year unsecured revolving credit facility (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. As described more fully in the Liquidity and Capital Resources
section below, management of the Corporation anticipates refinancing a portion
of the indebtedness incurred in connection with the Loral Transaction in the
long-term debt markets.
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 first quarter were $5.1 billion in 1996, a
nine percent decrease from the $5.6 billion recorded for the comparable period
in 1995. Decreases in the Aeronautics and Space & Strategic Missiles
11
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--(CONTINUED)
segments were partially offset by increases in the Information & Technology
Services and Electronics segments. The Corporation's operating profit
(earnings before interest and taxes) for the first quarter of 1996 was $502
million versus $312 million for the comparable 1995 period. The 1995 operating
profit reflected a $165 million pretax charge for fees and other merger
related expenses related to the March 1995 formation of Lockheed Martin
Corporation. Excluding the effect of these merger related expenses, first
quarter 1996 operating profit increased by five percent over the comparable
1995 period, as adjusted. Earnings growth in the Space & Strategic Missiles
segment more than offset the reduction of earnings in the Aeronautics segment.
Net earnings for the first quarter of 1996 were $272 million, or $1.22 per
common share assuming full dilution. Both amounts represent increases from the
reported first quarter 1995 net earnings of $137 million and earnings per
common share assuming full dilution of $.62. However, the 1995 amounts
reflected the after-tax effects of the merger related expenses identified
above of $110 million, or $.50 per common share assuming full dilution.
Excluding the effect of this nonrecurring charge, first quarter 1996 net
earnings and earnings per common share assuming full dilution would have been
ten percent and nine percent greater, respectively, than the corresponding
1995 adjusted amounts.
The effective income tax rate for the first quarter of 1996 was 37 percent
as compared to 41 percent for the first quarter of 1995. The higher rate in
1995 was principally caused by the nondeductibility of certain merger related
expenses that were capitalized for federal income tax purposes. Excluding the
effects of the merger related expenses, the Corporation's first quarter 1995
effective tax rate would have been 38 percent. The effective rates for both
periods 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 $42.5
billion at March 31, 1996, a three percent increase from the $41.1 billion
reported at December 31, 1995. During the first quarter, the Corporation
received orders for approximately $7 billion in new and follow-on business.
12
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--(CONTINUED)
The following table displays first quarter net sales and operating profit
for the Corporation's business segments.
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
--------- ---------
(IN MILLIONS)
Net Sales:
Space & Strategic Missiles............................. $1,670 $1,852
Aeronautics............................................ 1,299 1,768
Information & Technology Services...................... 1,093 1,035
Electronics............................................ 867 810
Energy, Materials and Other............................ 180 179
--------- ---------
$5,109 $5,644
========= =========
Operating Profit:
Space & Strategic Missiles............................. $ 226 $ 181
Aeronautics............................................ 108 140
Information & Technology Services...................... 51 47
Electronics............................................ 94 89
Energy, Materials and Other............................ 23 (145)
--------- ---------
$ 502 $ 312
========= =========
Net sales of the Space & Strategic Missiles segment decreased by ten percent
in the first quarter of 1996 from the comparable 1995 first quarter period.
The primary reasons for this decline were the timing of Atlas launches (one in
the first quarter of 1996 compared to four in the first quarter of 1995) and
reduced production volume on the Trident fleet ballistic missile program.
Operating profit was 25 percent higher in 1996 compared with 1995 as a result
of timing of the recognition of award fees on certain space programs and
higher operating margins related to the MILSTAR communications satellite
program, the Trident program and various classified programs. The impact of
these margin improvements was somewhat offset by the reduced number of Atlas
launches in 1996 versus 1995 as discussed previously.
First quarter 1996 Aeronautics net sales decreased approximately 27 percent
from the comparable 1995 period. This decrease was principally the result of
fewer deliveries of F-16 fighter aircraft and the completion during 1995 of P-
3 maritime patrol aircraft deliveries to the Republic of Korea. Operating
profit for the first quarter of 1996 decreased by 23 percent from 1995,
essentially mirroring the net sales decreases.
In the first quarter of 1996, net sales in the Information & Technology
Services segment increased by six percent over the comparable 1995 period,
primarily due to increases in commercial product sales and various classified
activities. Operating profit in 1996 increased by seven percent over that of
1995, reflecting timing of award fee recognition and improvements in margin
performance.
First quarter 1996 Electronics segment net sales increased by seven percent
over the comparable 1995 period, primarily due to increases in volume in
several programs, the transition of certain programs from development to
production status and the inclusion of the results of operations of the former
aircraft controls business of General Electric Company, which the Corporation
acquired in the fourth quarter of 1995. Operating profit increased by six
percent in 1996 compared to 1995, essentially reflecting the net sales
variances discussed previously.
13
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--(CONTINUED)
Net sales for the first quarter of 1996 in the Energy, Materials and Other
segment were comparable to the same period in 1995. Operating profit in the
first quarter of 1995 reflected the impact of the $165 million charge for
merger related expenses discussed above. Excluding this impact, operating
profit for this segment was slightly higher in 1996 versus 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1996, approximately $139 million of cash was
used for operating activities, compared with $186 million provided by
operating activities during the first quarter of 1995. The primary reason for
this fluctuation was the payment of $229 million of federal and foreign income
taxes in 1996 as compared to $7 million in 1995. Net cash used for investing
activities during the first quarter of 1996 was $156 million, compared to $268
million during 1995. This variance was principally the result of the payment
of $121 million by the Materials subsidiary to acquire the assets of the
construction aggregates business of Dravo Corporation in 1995. Net cash used
for financing activities was $202 million in 1996 versus $44 million in 1995.
The Corporation repaid approximately $375 million of fixed-rate Notes Payable
which matured during the first quarter of 1996. An additional $300 million of
long-term debt will mature during the remainder of 1996. The Corporation
issued commercial paper in March 1996 for temporary working capital purposes,
closing out the quarter with $253 million outstanding at March 31, 1996.
Total debt, including short-term borrowings, amounted to approximately 35
percent of total capitalization at March 31, 1996, a reduction from the 37
percent reported at December 31, 1995. 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. Additionally, the
Corporation assumed approximately $1.9 billion of long-term debt obligations
of the former Loral Corporation. Consequently, the Corporation's debt to
capitalization ratio increased to approximately 67 percent upon the
consummation of the Loral Transaction. The Corporation's ratio of earnings to
fixed charges for the quarter ended March 31, 1996 was 6.0; this ratio will
decrease significantly due to the impact of increased interest expense which
will be incurred on the additional debt issued in connection with the Loral
Transaction.
The Corporation's current Credit Facilities consist of a $5 billion 364-day
unsecured revolving credit facility and a $5 billion five-year unsecured
revolving credit facility. In connection with the establishment of the Credit
Facilities, the Corporation and Loral each terminated their previously
existing revolving credit facilities.
The Corporation anticipates refinancing a portion of the indebtedness
incurred in connection with the Loral Transaction in the long-term markets by
the end of 1996. On March 25, 1996, the Corporation filed a shelf registration
statement with the Securities and Exchange Commission for the offering of up
to $5 billion in debt securities which may be issued from time to time by the
Corporation. The shelf registration statement became effective on May 10,
1996. The debt securities will be fully and unconditionally guaranteed by
Tactical Systems. The debt securities and the guarantees will be unsecured
obligations of the Corporation and Tactical Systems, respectively. The net
proceeds from the sale of the debt securities offered by the Corporation will
be added to the general funds of the Corporation and will be available to
repay debt incurred in connection with the Loral Transaction and for general
corporate purposes. The Corporation's ability to issue debt securities at any
given time is dependent, among other things, upon market conditions.
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. At the closing date for the
Loral Transaction, those agreements supported approximately $100 million of
deferred gains. The amounts of deferred gains are subject to change as
interest rates fluctuate. These agreements are expected to be closed in
connection
14
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--(CONTINUED)
with the Corporation's issuance of long-term debt obligations, and any gains
or losses at closing will be deferred and recognized as adjustments to
interest expense over the terms of the related debt obligations.
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 has announced that decisions related to the integration of
its operations resulting from the Loral Transaction are expected to be reached
by the end of the third quarter of 1996.
The Corporation held cash and cash equivalent balances of $156 million and
$653 million at March 31, 1996 and December 31, 1995, respectively.
Stockholders' equity at the end of March 1996 was approximately $6.7 billion,
a $223 million increase from the balance at the end of 1995. The increase was
principally due to the first quarter 1996 earnings net of dividends paid and
the issuance of new shares upon exercise of employee stock options. Cash
dividends per common share for the first quarter of 1996 were increased 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 will be paid for each of the
next two quarters in 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. The Corporation has disclosed that it expects to divest of
certain non-strategic businesses and other assets.
OTHER MATTERS
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
15
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--(CONTINUED)
Results of 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 through of this
Form 10-Q and "Note 2--Business Combination with Loral Corporation" and "Note
5--Commitments and Contingencies" of the Notes to Unaudited Condensed
Consolidated Financial Statements on pages through and pages through
, respectively, of the Unaudited Condensed Consolidated Financial Statements
included in this Form 10-Q.
16
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 foreign government 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 by the Corporation.
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).
As the result of the consummation of the Loral Transaction, subject to
certain limited exceptions, the Corporation became responsible for liabilities
arising out of legal and environmental proceedings pertaining to the Loral
Corporation businesses acquired by the Corporation. On July 7, 1995, Loral
Corporation was served with a subpoena issued by the United States Attorney
for the Eastern District of New York seeking documents relating to a number of
programs conducted at Loral Corporation's Defense Systems-East (Great Neck,
New York) operations. These operations now form a part of Tactical Systems.
Tactical Systems has been provided minimal information concerning the focus of
the investigation, but it appears to arise from anonymous complaints provided
to the United States Government by employees about testing and quality control
matters. Tactical Systems is unaware of any such issues and is cooperating in
the investigation.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders on April 25, 1996, the stockholders of
Lockheed Martin Corporation:
--Elected the following individuals to the Board of Directors for one-year
terms expiring in 1997:
VOTES CAST FOR VOTES WITHHELD
-------------- --------------
Norman R. Augustine.......................... 170,862,168 2,340,617
Marcus C. Bennett............................ 170,986,881 2,215,904
Lynne V. Cheney.............................. 171,021,762 2,181,023
Vance D. Coffman............................. 170,982,572 2,220,213
Houston I. Fluornoy.......................... 171,088,256 2,114,529
James F. Gibbons............................. 171,162,115 2,040,670
Edward E. Hood, Jr........................... 171,105,536 2,097,249
Caleb B. Hurtt............................... 170,980,976 2,221,809
Gwendolyn S. King............................ 171,025,555 2,177,230
Vincent N. Marafino.......................... 170,873,889 2,328,896
Eugene F. Murphy............................. 169,818,144 3,384,641
Allen E. Murray.............................. 171,083,097 2,119,688
Frank Savage................................. 171,144,204 2,058,581
Daniel M. Tellep............................. 170,904,357 2,298,428
Carlisle A. H. Trost......................... 171,075,601 2,127,184
James R. Ukropina............................ 171,162,820 2,039,965
Douglas C. Yearley........................... 171,156,724 2,046,061
17
LOCKHEED MARTIN CORPORATION
PART II--OTHER INFORMATION--(CONTINUED)
--Ratified the appointment of Ernst & Young LLP, independent auditors, to
audit the consolidated financial statements of the Corporation for fiscal
year 1996. There were 171,656,084 votes for the appointment, 1,160,754
votes against the appointment and 909,212 abstentions.
--Ratified management's proposal for the adoption of the Lockheed Martin
Deferred Management Incentive Compensation Plan. There were 163,690,616
votes for the proposal, 7,941,803 votes against the proposal and 2,093,631
abstentions.
--Rejected a stockholder proposal which recommended that the Corporation
endorse the Coalition for Environmentally Responsible Economies'
principles for Corporate environmental accountability. There were
13,659,963 votes for the proposal, 136,553,561 votes against the proposal,
14,549,267 abstentions and 8,963,259 broker non-votes.
All resolutions, comments and recommendations concerning the proposals were
set forth in the Corporation's definitive Proxy Statement dated March 18,
1996.
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 ended March 31, 1996 and 1995.
2. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of Earnings
to Fixed Charges for the three months ended March 31, 1996.
3. Exhibit 27. Financial Data Schedule for the three months ended March 31,
1996.
(b) REPORTS ON FORM 8-K FILED IN THE FIRST QUARTER OF 1996
1. Current report on Form 8-K filed on January 12, 1996
Item 5. Other Events
The registrant filed information concerning the definitive Agreement and
Plan of Merger dated January 7, 1996 among the registrant, Loral
Corporation (Loral) and LAC Acquisition Corporation, providing for the
transactions that would result in Loral becoming a subsidiary of the
registrant and the spin-off by Loral of shares of stock in Loral Space &
Communications Ltd., a newly formed corporation which would own
substantially all of the space and satellite telecommunications interests
of Loral.
(c) REPORTS ON FORM 8-K FILED SUBSEQUENT TO THE FIRST QUARTER OF 1996
1. Current report on Form 8-K filed on April 5, 1996
Item 5. Other Events
The registrant filed a copy of Lockheed Martin Corporation Procedure No.
CPS-704, which pertains to consultants to Lockheed Martin Corporation.
2. Current report on Form 8-K filed on May 2, 1996
Item 2. Acquisition or Disposition of Assets
The registrant filed information regarding consummation of the
transactions contemplated by the definitive Agreement and Plan of Merger
dated January 7, 1996 among the registrant, Loral Corporation and LAC
Acquisition Corporation.
18
LOCKHEED MARTIN CORPORATION
PART II--OTHER INFORMATION--(CONTINUED)
Item 5. Other Events
The registrant filed information concerning the businesses of Lockheed
Martin Tactical Systems, Inc., a wholly-owned subsidiary of the registrant
which consists of the businesses of Loral Corporation which were acquired
by the registrant.
Item 7. Financial Statements and Exhibits
--Audited Consolidated Financial Statements of Loral Corporation and
Subsidiaries--Retained Business (Tactical Systems) as of March 31, 1995
and 1994, and for each of the three years then ended, and related
Management's Discussion and Analysis of Results of Operations and
Financial Condition.
--Unaudited Consolidated Financial Statements of Loral Corporation and
Subsidiaries--Retained Business (Tactical Systems) as of December 31, 1995
and March 31, 1995, and for the nine months ended December 31, 1995, and
1994, and related Management's Discussion and Analysis of Results of
Operations and Financial Condition.
--Unaudited Pro Forma Combined Condensed Financial Statements as of
December 31, 1995 and for the fiscal year then ended, and related Notes to
Unaudited Pro Forma Combined Condensed Financial Statements.
3. Current report on Form 8-K filed on May 7, 1996 by Lockheed Martin
Tactical Systems, Inc., a wholly-owned subsidiary of the Corporation
Item 1. - Changes in Control of the Registrant
Lockheed Martin Tactical Systems, Inc. (Tactical Systems), as successor
corporation to Loral Corporation, filed information regarding consummation
of the transactions contemplated by the definitive Agreement and Plan of
Merger among Loral Corporation, Lockheed Martin Corporation and LAC
Acquisition Corporation.
Item 5. Other Events
Tactical Systems filed information concerning applications made to the
Securities and Exchange Commission (SEC) to delist Loral Corporation's
common stock and debt securities. In addition, Tactical Systems indicated
it anticipates no longer filing information with the SEC under the
Securities Exchange Act of 1934.
4. Current report on Form 8-K/A filed on May 8, 1996
The Form 8-K filed on May 2, 1996 was amended to add unaudited selected
quarterly financial data of Loral Corporation and Subsidiaries--Retained
Business (Tactical Systems) and to incorporate exhibits previously filed by
Loral Corporation.
19
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)
/s/ Robert E. Rulon
Date: May 15, 1996 By: _________________________________
ROBERT E. RULON
VICE PRESIDENT AND CONTROLLER
(CHIEF ACCOUNTING OFFICER)
20
EXHIBIT 11
LOCKHEED MARTIN CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---------- ----------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
ASSUMING NO DILUTION:
Average number of common shares outstanding........... 189.3 188.5
========== ==========
Net earnings.......................................... $ 272 $ 137
Less: Preferred stock dividends..................... (15) (15)
---------- ----------
Net earnings applicable to common stock............... $ 257 $ 122
========== ==========
Earnings per common share............................. $ 1.35 $ .65
========== ==========
ASSUMING FULL DILUTION:
Average number of common shares outstanding........... 189.3 188.5
Dilutive stock options-based on the treasury stock
method using the March 31
market prices, if higher than average market price... 4.5 3.1
Assumed conversion of the Convertible Series A
Preferred Stock from the date of issuance............ 28.9 28.9
---------- ----------
222.7 220.5
========== ==========
Net earnings.......................................... $ 272 $ 137
========== ==========
Earnings per common share............................. $ 1.22 $ .62
========== ==========
EXHIBIT 12
LOCKHEED MARTIN CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE QUARTER ENDED MARCH 31, 1996
(IN MILLIONS, EXCEPT RATIO)
EARNINGS:
Net earnings.............................................................. $272
Income tax expense........................................................ 159
Interest expense.......................................................... 71
Amortization of debt premium and discount, net............................ (1)
Portion of rents representative of an interest factor..................... 15
----
Adjusted earnings before taxes and fixed charges.......................... $516
====
FIXED CHARGES:
Interest expense.......................................................... $ 71
Amortization of debt premium and discount, net............................ (1)
Portion of rents representative of an interest factor..................... 15
Capitalized interest...................................................... 1
----
Total fixed charges....................................................... $ 86
====
RATIO OF EARNINGS TO FIXED CHARGES........................................ 6.0
====
5
1,000,000
3-MOS
DEC-31-1996
JAN-01-1996
MAR-31-1996
156
0
4,130
0
2,862
8,020
8,147
5,031
17,682
5,229
3,003
0
1,000
199
5,457
17,682
5,109
5,109
4,637
4,637
30
0
71
431
159
272
0
0
0
272
1.35
1.22
