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, 1998 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) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AS OF APRIL 30, 1998
- -------------------------- ----------------------------------
COMMON STOCK, $1 PAR VALUE 195,539,792
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Earnings -
Three Months Ended March 31, 1998 and 1997................................3
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1998 and 1997................................4
Condensed Consolidated Balance Sheet -
March 31, 1998 and December 31, 1997......................................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....................................................16
Item 4. Submission of Matters to a Vote of Security Holders..................16
Item 6. Exhibits and Reports on Form 8-K.....................................17
Signatures....................................................................18
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges...............19
Exhibit 27. Financial Data Schedule.........................................20
2
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
---------------- ------------------
(In millions, except per share data)
Net sales $6,217 $6,674
Cost of sales 5,599 6,018
------ ------
Earnings from operations 618 656
Other income and expenses, net 29 21
------ ------
647 677
Interest expense 213 201
------ ------
Earnings before income taxes 434 476
Income tax expense 165 186
------ ------
Net earnings $ 269 $ 290
====== ======
Earnings per common share:
Basic $ 1.44 $ 1.49
====== ======
Diluted $ 1.42 $ 1.35
====== ======
Cash dividends declared per common share $ .40 $ .40
====== ======
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,
1998 1997
-------- --------
(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 269 $ 290
Adjustments to reconcile net earnings to net cash (used for)
provided by operating activities:
Depreciation and amortization 253 311
Changes in operating assets and liabilities (745) (534)
-------- --------
Net cash (used for) provided by operating activities (223) 67
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to properties, net of purchased operations (128) (180)
Divestiture of Armament Systems and Defense Systems -- 450
Other acquisition, investment and divestiture activities 57 (67)
Other 25 40
-------- --------
Net cash (used for) provided by investing activities (46) 243
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 638 (219)
Net repayments related to long-term debt (325) (11)
Issuances of common stock, net 34 12
Common stock dividends (78) (77)
Preferred stock dividends -- (15)
-------- --------
Net cash provided by (used for) financing activities 269 (310)
-------- --------
Net increase (decrease) in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period -- --
-------- --------
Cash and cash equivalents at end of period $ -- $ --
======== ========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, December 31,
1998 1997
---------- -------------
(In millions)
ASSETS
Current assets:
Receivables $ 5,462 $ 5,009
Inventories 3,621 3,144
Deferred income taxes 1,261 1,256
Other current assets 805 696
------- -------
Total current assets 11,149 10,105
Property, plant and equipment 3,606 3,669
Intangible assets related to contracts and
programs acquired 1,530 1,566
Cost in excess of net assets acquired 9,766 9,856
Other assets 3,325 3,165
------- -------
$29,376 $28,361
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,082 $ 1,234
Customer advances and amounts in excess of
costs incurred 3,907 3,644
Salaries, benefits and payroll taxes 919 924
Income taxes 602 364
Short-term borrowings 1,132 494
Current maturities of long-term debt 585 876
Other current liabilities 1,784 1,653
------- -------
Total current liabilities 10,011 9,189
Long-term debt 10,494 10,528
Post-retirement benefit liabilities 1,958 1,982
Other liabilities 1,477 1,486
Stockholders' equity:
Common stock, $1 par value per share 195 194
Additional paid-in capital 91 25
Retained earnings 5,357 5,173
Unearned ESOP shares (207) (216)
------- -------
Total stockholders' equity 5,436 5,176
------- -------
$29,376 $28,361
======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(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 (Lockheed Martin or the
Corporation) has continued to follow the accounting policies set forth in the
consolidated financial statements filed with the Securities and Exchange
Commission on March 19, 1998 in its 1997 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 ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full year. Certain
amounts presented for prior periods have been reclassified to conform with the
1998 presentation.
Note 2 - TRANSACTION AGREEMENT WITH NORTHROP GRUMMAN CORPORATION
On July 3, 1997, the Corporation and Northrop Grumman Corporation (Northrop
Grumman) announced that they had entered into an Agreement and Plan of Merger
(the Merger Agreement) to combine the companies in a transaction with a total
estimated value at the announcement date of approximately $11.6 billion,
including Northrop Grumman debt to be assumed by the Corporation of
approximately $3.1 billion (the Merger). Under the terms of the Merger
Agreement, which was approved by the respective Boards of Directors of the
Corporation and Northrop Grumman, Northrop Grumman stockholders will receive
1.1923 shares of Lockheed Martin common stock for each share of Northrop Grumman
common stock. On February 26, 1998, the stockholders of the Corporation approved
the issuance of shares of Lockheed Martin common stock in connection with the
Merger. In addition, the Corporation's stockholders approved an amendment to
Lockheed Martin's charter to increase the number of authorized shares of
Lockheed Martin common stock from 750 million to 1.5 billion. Also on February
26, 1998, the stockholders of Northrop Grumman approved the Merger Agreement
pursuant to which Northrop Grumman is to become a wholly-owned subsidiary of
Lockheed Martin.
On March 23, 1998, the Department of Justice filed a lawsuit in U.S. District
Court for the District of Columbia seeking to block the proposed Merger,
alleging that the Merger threatens to substantially lessen competition in
violation of Section 7 of the Clayton Act. On April 10, 1998, the Corporation
and Northrop Grumman filed their joint response to the lawsuit which emphasized
that the Merger, after considering certain divestitures proposed by the
companies, will not have adverse competitive effects. A trial date has been set
for September 8, 1998.
The transaction, if consummated, will be accounted for using the purchase
method of accounting. In anticipation of the Merger, the Corporation is
increasing the amount of its one-year revolving credit facility from $1.5
billion to $2.5 billion. The operations of Northrop Grumman are expected to be
reported in the Electronics, Information & Services, Aeronautics, and Energy and
Other segments.
Note 3 - EARNINGS PER SHARE
Effective December 31, 1997, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." Accordingly, all
prior period earnings per share data presented has been restated to conform to
the provisions of the new standard.
In November 1997, Lockheed Martin exchanged all of the outstanding capital
stock of its wholly-owned subsidiary, LMT Sub, for all of the outstanding Series
A preferred stock held by General Electric Company (GE) and certain subsidiaries
of GE. The Series A preferred stock, which was originally issued to GE in
connection with the acquisition of GE's aerospace businesses in 1993, was
convertible into approximately 29 million shares of Lockheed Martin common
stock. LMT Sub was composed of two non-core commercial business units which
contributed approximately five percent of the Corporation's 1997 net sales,
Lockheed Martin's investment in a telecommunications partnership,
6
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
and approximately $1.6 billion in cash, which was initially financed through the
issuance of commercial paper; however, $1.4 billion was subsequently refinanced
with a note, due November 17, 2002 and bearing interest at 6.04%, from Lockheed
Martin to LMT Sub. The remainder is expected to be refinanced in the second
quarter of 1998 with a note from Lockheed Martin to LMT Sub on substantially
similar terms following final determination of the closing net worth of the
businesses exchanged.
Basic earnings per share were computed based on net earnings, less the
dividend requirement for preferred stock for the 1997 period. The weighted
average number of common shares outstanding during the quarter was used in this
calculation. Diluted earnings per share were computed based on net earnings, and
the weighted average number of common shares outstanding was increased, for this
calculation, by the assumed conversion of preferred stock for the 1997 period
and by the dilutive effect of stock options based on the treasury stock method.
The following table sets forth the computations of basic and diluted earnings
per share:
Three Months Ended
March 31,
1998 1997
------ ------
(In millions, except per share data)
Net earnings applicable to common stock:
- ----------------------------------------
Net earnings $ 269 $ 290
Dividends on preferred stock -- (15)
------ ------
Net earnings applicable to common stock for
basic earnings per share 269 275
Dividends on preferred stock -- 15
------ ------
Net earnings applicable to common stock for
diluted earnings per share $ 269 $ 290
====== ======
Average common shares outstanding:
- ----------------------------------
Average number of common shares outstanding
for basic earnings per share 186.9 184.5
Assumed conversion of the Series A preferred stock -- 28.9
Dilutive stock options - based on the treasury stock
method 2.8 2.1
------ ------
Average number of common shares outstanding
for diluted earnings per share 189.7 215.5
====== ======
Basic earnings per share:
- -------------------------
Net earnings $ 1.44 $ 1.57
Dividends on preferred stock -- (.08)
------ ------
Earnings per share $ 1.44 $ 1.49
====== ======
Diluted earnings per share:
- ---------------------------
Net earnings $ 1.42 $ 1.35
====== ======
7
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Note 4 - INVENTORIES
March 31, December 31,
1998 1997
---------- -------------
(In millions)
Work in process, primarily related to long-term
contracts and programs in progress $ 5,547 $ 5,155
Less customer advances and progress payments (2,601) (2,805)
------- -------
2,946 2,350
Other inventories 675 794
------- -------
$ 3,621 $ 3,144
======= =======
Note 5 - CONTINGENCIES
The Corporation or its subsidiaries are parties to or have property subject to
litigation and other proceedings, including matters arising under provisions
relating to the protection of the environment. In the opinion of management and
in-house counsel, the probability is remote that the outcome of these matters
will have a material adverse effect on the Corporation's consolidated results of
operations or financial position. These matters include the following items:
Environmental matters -- In 1991, the Corporation entered into a consent
decree with the U.S. Environmental Protection Agency (EPA) relating to certain
property in Burbank, California, which obligated the Corporation to design and
construct facilities to monitor, extract, and treat groundwater, and to operate
and maintain such facilities for approximately eight years. A second consent
decree is being finalized which will obligate the Corporation to fund the
continued operation and maintenance of these facilities through the year 2018.
The Corporation estimates that expenditures required to comply with the consent
decrees over their remaining terms will be approximately $110 million.
The Corporation has also been operating under a cleanup and abatement order
from the California Regional Water Quality Control Board (the Regional Board)
affecting its facilities in Burbank, California. This order requires site
assessment and action to abate groundwater contamination by a combination of
groundwater and soil cleanup and treatment. Based on experience derived from
initial remediation activities, the Corporation estimates the anticipated costs
of these actions in excess of the requirements under the EPA consent decrees to
approximate $60 million over the remaining term of the project.
The Corporation is responding to three administrative orders issued by the
Regional Board in connection with the Corporation's former Lockheed Propulsion
Company facilities in Redlands, California. Under the orders, the Corporation
is investigating the impact and potential remediation of regional groundwater
contamination by perchlorates and chlorinated solvents. The Regional Board has
approved the Corporation's plan to maintain public water supplies with respect
to chlorinated solvents during this work, and the Corporation is negotiating
with local water purveyors to implement this plan, as well as to address water
supply concerns relative to perchlorate contamination. The Corporation
estimates that expenditures required to implement work currently approved will
be approximately $110 million. Finally, the Corporation is coordinating with
the U.S. Air Force, which is conducting preliminary studies of the potential
health effects of exposure to perchlorates in connection with several sites
across the country, including the Redlands site.
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 $260 million for those cases in which an estimate of
financial exposure can be determined has been recorded.
8
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Under an agreement with the U.S. Government, the Burbank groundwater treatment
and soil remediation expenditures referenced above are being allocated to the
Corporation's operations as general and administrative costs and, under existing
government regulations, these and other environmental expenditures related to
U.S. Government business, after deducting any recoveries from insurance or other
responsible parties, are allowable in establishing the prices of the
Corporation's products and services. As a result, a substantial portion of the
expenditures are being reflected in the Corporation's sales and cost of sales
pursuant to U.S. Government agreement or regulation. The Corporation has
recorded an asset for the portion of these costs that are probable of future
recovery in pricing of the Corporation's products and services for U.S.
Government business. The portion that is expected to be allocated to commercial
business has been reflected in cost of sales. The recorded amounts do not
reflect the possible future recovery of portions of the environmental costs
through insurance policy coverage or from other potentially responsible parties,
which the Corporation is pursuing as required by agreement and U.S. Government
regulation. Any such recoveries, when received, would reduce the Corporation's
liability as well as the allocated amounts to be included in the Corporation's
U.S. Government sales and cost of sales.
Waste remediation contract -- In 1994, the Corporation was awarded a $180
million fixed price contract by the U.S. Department of Energy (DOE) for the
Phase II design, construction and limited test of remediation facilities, and
the Phase III full remediation of waste found in Pit 9, located on the Idaho
National Engineering and Environmental Laboratory reservation. The Corporation
has incurred significant unanticipated costs and scheduling issues due to
complex technical and contractual matters which threaten the viability of the
overall Pit 9 program. Management completed its investigation to identify and
quantify the overall effect of these matters, and summarized its findings in a
request for equitable adjustment (REA) which was delivered to the DOE on March
31, 1997. The provisions of the REA include, but are not limited to, the
recovery of a portion of unanticipated costs incurred by the Corporation and the
restructuring of the contract to provide for a more equitable sharing of the
risks associated with the Pit 9 project. The Corporation wrote a series of
letters to the DOE seeking technical direction, including an accurate inventory
of the Pit 9 contents. No direction was provided. To better focus the
Corporation's management resources on resolving these issues, the management and
reporting structure of the Pit 9 program were changed in September 1997;
however, the Corporation has been unsuccessful in reaching any agreements with
the DOE on cost recovery or other contract restructuring matters. Starting in
May 1997, the Corporation reduced work activities at the Pit 9 site. The
Corporation continues to wait for technical direction from the DOE and is in the
process of preparing a certifiable claim.
On February 27, 1998, the Corporation received a cure notice alleging that
certain actions taken by the Corporation are conditions endangering performance
of the Pit 9 contract. The notice advised that, unless these conditions were
cured within 30 days, the contract may be terminated for default. The
Corporation believes that termination for default is neither permissible under
the Pit 9 contract nor warranted under the circumstances and, on April 13, 1998,
submitted its reply to the cure notice setting forth its rationale for these
positions. The Corporation's efforts to engage the DOE in discussions are
continuing but remain inconclusive.
Note 6 - OTHER
In March 1997, the Corporation executed a definitive agreement valued at
approximately $525 million to reposition 10 non-core business units as a new
independent company, L-3 Communications Corporation, in which the Corporation
retained a 34.9 percent ownership interest at closing. These business units,
primarily composed of high-technology, product-oriented companies, contributed
approximately two percent of the Corporation's net sales during the three month
period ended March 31, 1997. The transaction, which closed on April 30, 1997
with an effective date of March 30, 1997, did not have a material impact on the
Corporation's earnings.
Commercial paper borrowings of approximately $2.1 billion were outstanding at
March 31, 1998. Of this amount, $1 billion has been classified as long-term debt
in the Corporation's condensed consolidated balance sheet based on management's
ability and intention to maintain this debt outstanding for at least one year.
9
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The Corporation's total interest payments were $127 million and $101 million
for the three months ended March 31, 1998 and 1997, respectively.
The Corporation's net refund of federal and foreign income taxes was $49
million for the three months ended March 31, 1998, and tax payments were $264
million for the three months ended March 31, 1997.
Effective January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for reporting and
disclosure of comprehensive income, which is composed of net earnings and
certain items of other comprehensive income as defined in the Statement, for all
periods presented; however, the adoption of SFAS No. 130 had no impact on the
Corporation's net earnings or stockholders' equity. The components of other
comprehensive income, both individually and in the aggregate, were not material
for the three months ended March 31, 1998 and 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way in which publicly-held companies report
financial and descriptive information about their operating segments in
financial statements for both interim and annual periods. The Statement also
requires additional disclosures with respect to products and services,
geographic areas of operation and major customers. The Statement is effective
for fiscal years beginning after December 15, 1997; however, application is not
required for interim periods in 1998. The adoption of SFAS No. 131 will have no
impact on the number or composition of the Corporation's reported business
segments, or on its consolidated results of operations, cash flows or financial
position, but is expected to increase the level of disclosure of segment
information.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP is effective
for fiscal years beginning after December 15, 1998, and will require the
capitalization of certain costs incurred in connection with developing or
obtaining software for internal use after the date of adoption. The Corporation
is currently analyzing and assessing the impact that the adoption of this
SOP is expected to have on its consolidated results of operations, cash
flows and financial position.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 provides authoritative guidance on
accounting for and financial reporting of start-up costs and organization costs.
This SOP requires that, at the effective date of adoption, the expensing of
costs of start-up activities and organization costs previously capitalized
be reported as a cumulative effect of a change in accounting principle, and
further requires that such costs incurred subsequent to adoption be expensed.
SOP No. 98-5 is effective for fiscal years beginning after December 15, 1998,
though earlier application is encouraged. The Corporation is currently analyzing
and assessing the impact that the adoption of this SOP is expected to have on
its consolidated results of operations and financial position.
10
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TRANSACTION AGREEMENT WITH NORTHROP GRUMMAN CORPORATION
On July 3, 1997, the Corporation and Northrop Grumman Corporation (Northrop
Grumman) announced that they had entered into an Agreement and Plan of Merger
(the Merger Agreement) to combine the companies in a transaction with a total
estimated value at the announcement date of approximately $11.6 billion,
including Northrop Grumman debt to be assumed by the Corporation of
approximately $3.1 billion (the Merger). Under the terms of the Merger
Agreement, which was approved by the respective Boards of Directors of the
Corporation and Northrop Grumman, Northrop Grumman stockholders will receive
1.1923 shares of Lockheed Martin common stock for each share of Northrop Grumman
common stock. On February 26, 1998, the stockholders of the Corporation approved
the issuance of shares of Lockheed Martin common stock in connection with the
Merger. In addition, the Corporation's stockholders approved an amendment to
Lockheed Martin's charter to increase the number of authorized shares of
Lockheed Martin common stock from 750 million to 1.5 billion. Also on February
26, 1998, the stockholders of Northrop Grumman approved the Merger Agreement
pursuant to which Northrop Grumman is to become a wholly-owned subsidiary of
Lockheed Martin.
On March 23, 1998, the Department of Justice filed a lawsuit in U.S. District
Court for the District of Columbia seeking to block the proposed Merger,
alleging that the Merger threatens to substantially lessen competition in
violation of Section 7 of the Clayton Act. On April 10, 1998, the Corporation
and Northrop Grumman filed their joint response to the lawsuit, which emphasized
that the Merger, after considering certain divestitures proposed by the
companies, will not have adverse competitive effects. A trial date has been set
for September 8, 1998.
The transaction, if consummated, will be accounted for using the purchase
method of accounting. In anticipation of the Merger, the Corporation is
increasing the amount of its one-year revolving credit facility from $1.5
billion to $2.5 billion. The operations of Northrop Grumman are expected to be
reported in the Electronics, Information & Services, Aeronautics, and Energy and
Other segments.
TRANSACTION AGREEMENT WITH GENERAL ELECTRIC COMPANY
In November 1997, Lockheed Martin exchanged all of the outstanding capital
stock of its wholly-owned subsidiary, LMT Sub, for all of the outstanding Series
A preferred stock held by General Electric Company (GE) and certain subsidiaries
of GE (the GE Transaction). The Series A preferred stock, which was originally
issued to GE in connection with the acquisition of GE's aerospace businesses in
1993, was convertible into approximately 29 million shares of Lockheed Martin
common stock. LMT Sub was composed of two non-core commercial business units
which contributed approximately five percent of the Corporation's 1997 net
sales, Lockheed Martin's investment in a telecommunications partnership, and
approximately $1.6 billion in cash, which was initially financed through the
issuance of commercial paper; however, $1.4 billion was subsequently refinanced
with a note, due November 17, 2002 and bearing interest at 6.04%, from Lockheed
Martin to LMT Sub. The remainder is expected to be refinanced in the second
quarter of 1998 with a note from Lockheed Martin to LMT Sub on substantially
similar terms following final determination of the closing net worth of the
businesses exchanged.
The debt incurred to finance the GE Transaction resulted in an increase in the
Corporation's leverage ratio. In anticipation of this, Lockheed Martin
negotiated an increase in the leverage ratio permitted under its credit
facilities, which support its outstanding commercial paper borrowings, in order
to permit the GE Transaction to take place. As the issuance of the
Corporation's common stock contemplated in connection with the Northrop Grumman
transaction was expected to reduce the leverage ratio, this negotiated increase
was temporary, expiring on June 30, 1998. As it is now anticipated that the
Northrop Grumman transaction will not close before June 30, 1998, Lockheed
Martin is currently negotiating a further amendment to the leverage restrictions
under its credit facilities so as to be in compliance with these restrictions
after June 30, 1998 without regard to whether the Northrop Grumman transaction
is consummated.
11
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 of 1998 were $6.2 billion, a
seven percent decrease from the $6.7 billion recorded for the comparable period
in 1997. The 1997 results include the operations of the two commercial
businesses divested to GE in November 1997 as well as the operations of L-3
Communications Corporation (L-3), which was repositioned as an independent
company effective March 30, 1997 with the Corporation retaining a 34.9 percent
ownership interest at closing. The operations divested to L-3, which primarily
consisted of high-technology, product-oriented companies, contributed
approximately two percent of the Corporation's net sales during the three month
period ended March 31, 1997. Excluding the effects of divested operations, net
sales for the first quarter of 1998 would have increased by one percent over
comparable 1997 results. The Corporation's operating profit (earnings before
interest and taxes) for the first quarter of 1998 was $647 million versus $677
million for the comparable 1997 period. Excluding the impact of divested
operations, operating profit for the first quarter of 1998 would have decreased
by two percent from the comparable 1997 period.
Net earnings for the first quarter of 1998 were $269 million, a seven percent
decrease from reported first quarter 1997 net earnings of $290 million. The
Corporation's diluted earnings per share reported for the first quarter of 1998
was $1.42, a five percent increase from first quarter 1997 diluted earnings per
share of $1.35. The first quarter 1998 earnings per share amount reflects the
effects of the retirement of the Series A preferred stock formerly held by GE.
The effective income tax rate for the first quarter of 1998 was 38 percent as
compared to 39 percent for the first quarter of 1997. The effective rates for
each period were higher than the statutory corporate federal income tax rate
principally due to the nondeductibility for tax purposes of certain costs in
excess of net assets acquired associated with previous acquisition activities.
The Corporation's backlog of undelivered orders was approximately $45.2
billion at March 31, 1998, versus $47.1 billion reported at December 31, 1997.
The Corporation received orders for approximately $4.7 billion in new and
follow-on business during the first three months of 1998.
The following table displays first quarter net sales and operating profit for
the Corporation's business segments.
Three Months Ended
March 31,
1998 1997
------ ------
(In millions)
Net Sales:
Space & Strategic Missiles $1,907 $1,898
Electronics 1,698 1,738
Information & Services 1,212 1,647
Aeronautics 1,351 1,359
Energy and Other 49 32
------ ------
$6,217 $6,674
====== ======
12
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Three Months Ended
March 31,
1998 1997
----- -----
(In millions)
Operating Profit:
Space & Strategic Missiles $ 267 $ 319
Electronics 141 131
Information & Services 55 76
Aeronautics 151 127
Energy and Other 33 24
----- -----
$ 647 $ 677
===== =====
Effective January 1, 1998, management responsibility for the Corporation's
United Space Alliance joint venture was reassigned from the Information &
Services segment to the Space & Strategic Missiles segment. Management
reporting of certain other activities was also reassigned among the Space &
Strategic Missiles, Electronics, and Energy and Other segments. Consequently,
1997 operating profit amounts for these segments have been restated to conform
with the 1998 presentation.
Net sales of the Space & Strategic Missiles segment increased slightly in the
first quarter of 1998 from the comparable 1997 first quarter period. An
increase in launch vehicle volume during 1998 was offset by lower Titan and
Fleet Ballistic Missile activity. Operating profit for the first quarter of
1998 decreased by 16 percent as compared to 1997, principally because of the
recognition in the first quarter of 1997 of improved performance and award fees
on the Corporation's Titan launch vehicle program and Trident fleet ballistic
missile program, respectively, partially offset by one additional Atlas launch
in the first quarter of 1998 versus the comparable 1997 period.
First quarter 1998 Electronics segment net sales decreased by two percent
versus the same period in 1997 due to the divestiture of the segment's
Commercial Electronics business unit in the first quarter of 1998. Operating
profit for the first quarter of 1998 increased by eight percent as compared to
1997, resulting from the improvement of operating margins on several programs
and from the absence in 1998 of development costs stemming from investments in
certain new programs.
First quarter 1998 Information & Services segment net sales decreased by 26
percent in the first quarter of 1998 from the comparable 1997 first quarter
period. Excluding the 1997 net sales of the non-core businesses divested to L-3
and GE, net sales for the first quarter of 1998 would have been comparable to
the 1997 amount. First quarter 1998 operating profit decreased by 28 percent
from the comparable 1997 period, due to the exclusion of the businesses
repositioned as L-3, and adverse performance and timing issues related to
commercial product lines.
First quarter 1998 Aeronautics net sales decreased slightly from the
comparable 1997 amounts due principally to the divestiture in late 1997 of the
segment's Aerostructures business unit to GE. Operating profit for the first
quarter of 1998 increased by 19 percent as compared to 1997 as a result of
higher operating margins achieved on the C-130 airlift aircraft and F-16 fighter
aircraft programs.
Net sales and operating profit of the Energy and Other segment for the first
quarter of 1998 increased significantly from the comparable 1997 amounts
primarily due to an increase in environmental systems activities. In 1994, the
Corporation was awarded a $180 million fixed price contract by the U.S.
Department of Energy (DOE) for the Phase II design, construction and limited
test of remediation facilities, and the Phase III full remediation of waste
found in Pit 9, located on the Idaho National Engineering and Environmental
Laboratory reservation. The Corporation has incurred significant unanticipated
costs and scheduling issues due to complex technical and contractual matters
which threaten the viability of the overall Pit 9 program. Management completed
its investigation to identify and quantify the overall effects of these matters,
and has summarized its findings in a request for equitable adjustment (REA)
which was
13
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
delivered to the DOE on March 31, 1997. The provisions of the REA
include, but are not limited to, the recovery of a portion of unanticipated
costs incurred by the Corporation and the restructuring of the contract to
provide for a more equitable sharing of the risks associated with the Pit 9
project. The Corporation wrote a series of letters to the DOE seeking technical
direction, including an accurate inventory of the Pit 9 contents. No direction
was provided. To better focus the Corporation's management resources on
resolving these issues, the management and reporting structure were changed in
September 1997; however, the Corporation has been unsuccessful in reaching any
agreements with the DOE on cost recovery or other contract restructuring
matters. Starting in May 1997, the Corporation reduced work activities at the
Pit 9 site. The Corporation continues to wait for technical direction from the
DOE and is in the process of preparing a certifiable claim.
On February 27, 1998, the Corporation received a cure notice alleging that
certain actions taken by the Corporation are conditions endangering performance
of the Pit 9 contract. The notice advised that, unless these conditions were
cured within 30 days, the contract may be terminated for default. The
Corporation believes that termination for default is neither permissible under
the Pit 9 contract nor warranted under the circumstances and, on April 13, 1998,
submitted its reply to the cure notice, setting forth its rationale for these
positions. The Corporation's efforts to engage the DOE in discussions are
continuing but remain inconclusive.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, $223 million of cash was used for operating
activities, compared to $67 million provided during the first quarter of 1997.
This fluctuation resulted principally from increased working capital
requirements related to certain aircraft and space-related programs. Net cash
used for investing activities during the first quarter of 1998 was $46 million,
compared to $243 million provided by investing activities during the first
quarter of 1997. The 1997 amount included the receipt of $450 million from
General Dynamics Corporation from the sale of the Corporation's Armament Systems
and Defense Systems operations. Net cash provided by financing activities was
$269 million in the first quarter of 1998 versus $310 million used for financing
activities in the comparable 1997 period. The variance between periods was
primarily due to a $312 million net increase in the Corporation's total debt
position during the first quarter of 1998 versus a $230 million net decrease in
total debt during the comparable 1997 period.
Commercial paper borrowings of approximately $2.1 billion were outstanding at
March 31, 1998. Of this amount, $1 billion has been classified as long-term
debt in the Corporation's condensed consolidated balance sheet based on
management's ability and intention to maintain this debt outstanding for at
least one year. Total debt, including short-term borrowings, amounted to
approximately 69 percent of total capitalization at March 31, 1998, compared to
nearly 70 percent reported at December 31, 1997. The increase in stockholders'
equity resulted primarily from net earnings for the period of $269 million and
employee stock option and ESOP activity, offset by dividends totaling $78
million.
Cash on hand and temporarily invested, internally generated funds and
available financing resources are expected to be sufficient to meet anticipated
operating and debt service requirements and discretionary investment needs.
Consistent with the Corporation's desire to generate cash to reduce debt,
management anticipates that, subject to prevailing financial, market and
economic conditions, the Corporation may divest other non-core businesses or
surplus properties.
14
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
FORWARD LOOKING STATEMENTS
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). The words "estimate," "anticipate," "project," "intend,"
"expect," and similar expressions are intended to identify forward looking
statements. All forward looking statements involve risks and uncertainties,
including, without limitation, statements and assumptions with respect to future
revenues, program performance and cash flows, the outcome of contingencies
including litigation and environmental remediation, and anticipated costs of
capital investments and planned dispositions. Readers are cautioned not to
place undue reliance on these forward looking statements which speak only as of
the date of this Form 10-Q. The Corporation does not undertake any obligation to
publicly release any revisions to these forward looking statements to reflect
events, circumstances or changes in expectations after the date of this
Form 10-Q, or to reflect the occurrence of unanticipated events. The forward
looking statements in this document are intended to be subject to the safe
harbor protection provided by Sections 27A of the Securities Act and 21E of the
Exchange Act. For a discussion identifying some important factors that could
cause actual results to vary materially from those anticipated in the forward
looking statements, see the Corporation's Securities and Exchange Commission
filings including, but not limited to, the discussion of "Competition and Risk"
and the discussion of "Government Contracts and Regulations" on pages 14 through
17 and pages 18 through 19, respectively, of the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 (Form 10-K); "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 11 through 24 of the 1997 Annual Report, and "Note 1-Summary of
Significant Accounting Policies," "Note 2-Transaction Agreement with Northrop
Grumman Corporation" and "Note 16-Commitments and Contingencies" of the Notes to
Consolidated Financial Statements on pages 31 through 32, pages 32 through 33,
and pages 41 through 42, respectively, of the Audited Consolidated Financial
Statements included in the 1997 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 11 through 15 of this Form 10-Q, and
"Note 2 - Transaction Agreement With Northrop Grumman Corporation,"
"Note 5 - Contingencies" and "Note 6 - Other" of the Notes to Unaudited
Condensed Consolidated Financial Statements on page 6, pages 8 through 9, and
pages 9 through 10, respectively, of the Unaudited Condensed Consolidated
Financial Statements included in this Form 10-Q.
15
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On July 2, 1997, the Corporation and Northrop Grumman Corporation (Northrop
Grumman) entered into an Agreement and Plan of Merger, which was amended on
September 29, 1997 (as so amended, the Agreement), which provides for the merger
of a wholly-owned subsidiary of Lockheed Martin with and into Northrop Grumman,
with Northrop Grumman surviving as a wholly-owned subsidiary of Lockheed Martin
(the Merger). On March 23, 1998, the United States, acting through the
Antitrust Division of the Department of Justice, filed a civil action in the
United States District Court for the District of Columbia against the
Corporation and Northrop Grumman requesting that the Merger be adjudged to
substantially lessen competition in violation of Section 7 of the Clayton Act,
as amended (15 U.S.C. Section 18). The Complaint requests that the Court
permanently enjoin and restrain the Corporation and Northrop Grumman from
carrying out the Agreement or from entering into or carrying out any agreement,
understanding or plan, the effect of which would be to combine the business or
assets of the Corporation and Northrop Grumman. The Complaint also seeks the
costs of the action and such other relief as the Court may deem just and proper.
The Corporation and Northrop Grumman filed an Answer to the Complaint on April
10, 1998. The Court set the matter for trial commencing September 8, 1998 and
has advised the parties that a decision may be expected by year end.
On March 27, 1998, the Corporation was served with a grand jury subpoena
issued by the United States District Court for the Eastern District of New York
seeking documents related to the performance of various government contracts by
the former Unisys Corporation Defense Systems facility at Great Neck, New York.
The Corporation acquired the facility when it acquired Loral Corporation. Loral
Corporation acquired the facility from Unisys Corporation. The Corporation has
cooperated with the Government's investigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders on April 23, 1998, the stockholders of
Lockheed Martin Corporation:
. Elected the following individuals to the Board of Directors to serve as
directors until the Annual Meeting of Stockholders in 1999 and until their
successors have been duly elected and qualified:
Votes Cast For Votes Withheld
-------------- --------------
Norman R. Augustine 167,617,962 2,078,315
Marcus C. Bennett 167,709,819 1,986,458
Lynne V. Cheney 167,663,696 2,032,581
Vance D. Coffman 167,669,874 2,026,403
Houston I. Flournoy 167,665,153 2,031,124
James F. Gibbons 167,621,300 2,074,977
Edward E. Hood, Jr. 167,730,619 1,965,658
Caleb B. Hurtt 167,743,980 1,952,297
Gwendolyn S. King 167,678,138 2,018,139
Vincent N. Marafino 167,569,694 2,126,583
Eugene F. Murphy 167,699,738 1,996,539
Allen E. Murray 167,671,083 2,025,194
Frank Savage 167,649,742 2,046,535
Peter B. Teets 167,727,188 1,969,089
Carlisle A. H. Trost 167,642,727 2,053,550
James R. Ukropina 167,775,372 1,920,905
Douglas C. Yearley 167,769,305 1,926,972
16
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 as of and for the
fiscal year ending December 31, 1998. There were 168,344,183 votes for the
appointment, 795,551 votes against the appointment, and 556,543 abstentions.
. Ratified an amendment to the 1995 Omnibus Performance Award Plan, which
increased the number of common shares authorized for issuance under the plan
by 8.5 million to 20.5 million shares. There were 109,876,089 votes for the
proposal, 58,255,001 votes against the proposal, and 1,565,187 abstentions.
. Rejected a stockholder proposal which recommended that the Board of Directors
take necessary actions to ensure that future outside directors not serve for
more than six years. There were 9,828,380 votes for the proposal, 144,652,590
votes against the proposal, 1,933,028 abstentions and 13,282,279 non-votes.
. Rejected a stockholder proposal which recommended that the Board of Directors
consider refraining in the future from providing pensions or other retirement
benefits to non-employee directors unless such benefits are approved by the
shareholders. There were 50,123,397 votes for the proposal, 104,278,727 votes
against the proposal, 2,008,484 abstentions and 13,285,669 non-votes.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of
Earnings to Fixed Charges for the three months ended
March 31, 1998.
2. Exhibit 27. Financial Data Schedule for the three months ended
March 31, 1998.
(b) Reports on Form 8-K filed in the first quarter of 1998.
1. Current report on Form 8-K filed on January 20, 1998.
Item 5. Other Events
The registrant filed information contained in its press
release dated January 20, 1998 concerning its results of
operations for the year ended December 31, 1997.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated January 20,
1998.
17
LOCKHEED MARTIN CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOCKHEED MARTIN CORPORATION
---------------------------
(Registrant)
Date: May 8, 1998 By: /s/ Todd J. Kallman
---------------- -----------------------------
Todd J. Kallman
Vice President and Controller
(Chief Accounting Officer)
18
Exhibit 12
LOCKHEED MARTIN CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(In millions, except ratio)
EARNINGS:
Net earnings $269
Income tax expense 165
Interest expense 213
Amortization of debt premium and discount, net (1)
Portion of rents representative of an interest factor 13
----
Adjusted earnings before taxes and fixed charges $659
====
FIXED CHARGES:
Interest expense $213
Amortization of debt premium and discount, net (1)
Portion of rents representative of an interest factor 13
Capitalized interest 2
----
Total fixed charges $227
====
RATIO OF EARNINGS TO FIXED CHARGES 2.9
====
5
3-MOS
DEC-31-1998
MAR-31-1998
0
0
5,462
0
3,621
11,149
8,739
5,133
29,376
10,011
10,494
0
0
195
5,241
29,376
6,217
6,217
5,599
5,599
29
0
213
434
165
269
0
0
0
269
1.44
1.42
