UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED March 31, 2000 COMMISSION FILE NUMBER 1-11437
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LOCKHEED MARTIN CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1893632
- ----------------------------------- -------------------------------
(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
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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, 2000
- ----------------------------- ---------------------------------
COMMON STOCK, $1 PAR VALUE 400,252,924
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
____________
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Statement of Operations-
Three Months Ended March 31, 2000 and 1999 .................... 3
Unaudited Condensed Consolidated Statement of Cash Flows-
Three Months Ended March 31, 2000 and 1999 .................... 4
Unaudited Condensed Consolidated Balance Sheet-
March 31, 2000 and December 31, 1999 .......................... 5
Notes to Unaudited Condensed Consolidated
Financial Statements .......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 14
Item 3. Quantitative and Qualitative Disclosure of Market Risk
(included in Item 2. under the caption "Other Matters")
Part II. Other Information
Item 1. Legal Proceedings...................................... 25
Item 4. Submission of Matters to a Vote of Security Holders.... 26
Item 6. Exhibits and Reports on Form 8-K....................... 27
Signatures.......................................................... 29
Exhibit 10 Lockheed Martin Corporation Directors Equity Plan,
as amended May 1, 2000
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
2
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Operations
Three Months Ended
March 31,
2000 1999
-------- --------
(In millions, except per share data)
Net sales $5,562 $6,188
Cost of sales 5,249 5,701
-------- --------
Earnings from operations 313 487
Other income and expenses, net 13 129
-------- --------
326 616
Interest expense 227 192
-------- --------
Earnings before income taxes and cumulative
effect of change in accounting 99 424
Income tax expense 45 156
-------- --------
Earnings before cumulative effect of change
in accounting 54 268
Cumulative effect of change in accounting -- (355)
-------- --------
Net earnings (loss) $ 54 $ (87)
======== ========
Earnings (loss) per common share:
- ---------------------------------
Basic:
Before cumulative effect of change in accounting $ .14 $ .70
Cumulative effect of change in accounting -- (.93)
-------- --------
$ .14 $ (.23)
======== ========
Diluted:
Before cumulative effect of change in accounting $ .14 $ .70
Cumulative effect of change in accounting -- (.93)
-------- --------
$ .14 $ (.23)
======== ========
Cash dividends declared per common share $ .11 $ .22
======== ========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Cash Flows
Three Months Ended
March 31,
2000 1999
-------- --------
(In millions)
Operating Activities:
Earnings before cumulative effect of change in accounting $ 54 $ 268
Adjustments to reconcile earnings to net cash provided
by operating activities:
Depreciation and amortization 231 230
Changes in operating assets and liabilities 197 (651)
-------- --------
Net cash provided by (used for) operating activities 482 (153)
-------- --------
Investing Activities:
Expenditures for property, plant and equipment (84) (131)
Sale of shares in L-3 Communications -- 182
Other (30) --
-------- --------
Net cash (used for) provided by investing activities (114) 51
-------- --------
Financing Activities:
Net (decrease) increase in short-term borrowings (234) 120
Net repayments related to long-term debt (13) (181)
Issuances of common stock 1 8
Common stock dividends (44) (87)
-------- --------
Net cash used for financing activities (290) (140)
-------- --------
Net increase (decrease) in cash and cash equivalents 78 (242)
Cash and cash equivalents at beginning of period 455 285
-------- --------
Cash and cash equivalents at end of period $ 533 $ 43
======== ========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
Lockheed Martin Corporation
Unaudited Condensed Consolidated Balance Sheet
March 31, December 31,
2000 1999
------------ ---------------
(In millions)
Assets
Current assets:
Cash and cash equivalents $ 533 $ 455
Receivables 4,332 4,348
Inventories 3,782 4,051
Deferred income taxes 1,192 1,237
Other current assets 620 605
------------ ---------------
Total current assets 10,459 10,696
Property, plant and equipment 3,586 3,634
Investments in equity securities 2,295 2,210
Intangible assets related to contracts and programs acquired 1,220 1,259
Cost in excess of net assets acquired 9,095 9,162
Other assets 2,948 3,051
------------ ---------------
$29,603 $30,012
============ ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 930 $ 1,228
Customer advances and amounts in excess of costs incurred 4,419 4,655
Salaries, benefits and payroll taxes 936 941
Income taxes 40 51
Short-term borrowings 241 475
Current maturities of long-term debt 52 52
Other current liabilities 1,679 1,410
------------ ---------------
Total current liabilities 8,297 8,812
Long-term debt 11,411 11,427
Post-retirement benefit liabilities 1,807 1,805
Other liabilities 1,613 1,607
Stockholders' equity:
Common stock, $1 par value per share 400 398
Additional paid-in capital 266 222
Retained earnings 5,911 5,901
Unearned ESOP shares (142) (150)
Accumulated other comprehensive income (loss) 40 (10)
------------ ---------------
Total stockholders' equity 6,475 6,361
------------ ---------------
$29,603 $30,012
============ ===============
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2000
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States 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 included in its 1999
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
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, 2000 are not
necessarily indicative of results to be expected for the full year. Certain
amounts presented for prior periods have been reclassified to conform with the
2000 presentation.
NOTE 2 -- TRANSACTION AGREEMENT WITH COMSAT CORPORATION
In September 1998, the Corporation and COMSAT Corporation (COMSAT) announced
that they had entered into an Agreement and Plan of Merger (the Merger
Agreement) to combine the companies in a two-phase transaction with a total
estimated value of approximately $2.7 billion at the date of the announcement
(the Merger). Subsequent to obtaining all regulatory approvals necessary for
the first phase of the transaction and approval of the Merger by the
stockholders of COMSAT, the Corporation completed a cash tender offer (the
Tender Offer) on September 18, 1999. The total value of this phase of the
transaction was $1.2 billion, and such amount is included in investments in
equity securities in the Unaudited Condensed Consolidated Balance Sheet at March
31, 2000. The Corporation accounts for its 49 percent investment in COMSAT under
the equity method of accounting.
The second phase of the transaction, which will result in consummation of the
Merger, is to be accomplished by an exchange of one share of Lockheed Martin
common stock for each remaining share of COMSAT common stock. Federal
legislation to remove existing restrictions on ownership of COMSAT voting stock
was signed into law on March 17, 2000. In connection with actions necessary to
consummate the second phase of the transaction, the Corporation filed separate
notification and report forms under the Hart-Scott-Rodino Antitrust Improvement
Act (HSR Act) with the Federal Trade Commission (FTC) and the U.S. Department of
Justice (DOJ) in the first quarter of 2000 regarding the Corporation's
acquisition of minority interests in two businesses held by COMSAT. On April 22,
2000, the waiting period under the HSR Act with respect to these acquisitions
expired.
The Corporation must also obtain certain regulatory approvals from the Federal
Communications Commission (FCC) before the Merger can occur. On March 23, 2000,
the Corporation and COMSAT filed applications with the FCC seeking authority for
the transfer of control of various FCC authorizations held by COMSAT to a
wholly-owned subsidiary of Lockheed Martin. The period for submission of
opposition and other comments (and responses thereto) currently is scheduled to
end on May 26, 2000. There is no set time frame for the FCC to issue its
decision following receipt of comments and there is no assurance as to the
timing or whether the FCC will provide the requisite approvals. If the Merger is
not completed on or before September 18, 2000, under the terms of the Merger
Agreement, Lockheed Martin or COMSAT could terminate the Merger Agreement or
elect not to exercise this
6
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
right, or both parties could agree to extend this date. If consummated, the
Merger will be accounted for under the purchase method of accounting. In
addition, the Corporation intends to combine the operations of Lockheed Martin
Global Telecommunications and COMSAT. If the Merger is not consummated, the
Corporation will not be able to achieve all of its objectives with respect to
the COMSAT transaction and will be unable to exercise control over COMSAT.
NOTE 3 --EARNINGS PER SHARE
Basic and diluted earnings (loss) per share were computed based on net
earnings (loss). The weighted average number of common shares outstanding during
the period was used in the calculation of basic earnings (loss) per share, and
this number of shares was increased by the dilutive effect of stock options
based on the treasury stock method in the calculation of diluted earnings (loss)
per share.
The following table sets forth the computations of basic and diluted earnings
(loss) per share:
Three Months Ended
March 31,
2000 1999
------ ------
(In millions, except per share data)
Net earnings (loss) for basic and diluted earnings per share:
- --------------------------------------------------------------
Earnings before cumulative effect of change in accounting $ 54 $ 268
Cumulative effect of change in accounting -- (355)
------ ------
Net earnings (loss) $ 54 $ (87)
====== ======
Average common shares outstanding:
- ----------------------------------
Average number of common shares outstanding for basic
computations 387.1 380.3
Dilutive stock options based on the treasury stock method .4 2.3
------ ------
Average number of common shares outstanding for diluted
computations 387.5 382.6
====== ======
Earnings (loss) per common share:
- ---------------------------------
Basic:
Before cumulative effect of change in accounting $ .14 $ .70
Cumulative effect of change in accounting -- (.93)
------ ------
$ .14 $ (.23)
====== ======
Diluted:
Before cumulative effect of change in accounting $ .14 $ .70
Cumulative effect of change in accounting -- (.93)
------ ------
$ .14 $ (.23)
====== ======
7
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
NOTE 4 -- INVENTORIES
March 31, December 31,
2000 1999
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(In millions)
Work in process, commercial launch vehicles $ 1,437 $ 1,514
Work in process, primarily related to other long-term
contracts and programs in progress 3,769 3,879
Less customer advances and progress payments (1,846) (1,848)
------- -------
3,360 3,545
Other inventories 422 506
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$ 3,782 $ 4,051
======= =======
Commercial launch vehicle inventories at March 31, 2000 and December 31, 1999
included amounts advanced to Russian manufacturers, Khrunichev State Research
and Production Space Center and RD AMROSS, a joint venture between Pratt &
Whitney and NPO Energomash, of approximately $895 million and $903 million,
respectively, for the manufacture of launch vehicles and related launch
services. Work in process inventories related to commercial launch vehicles
also included costs for launch vehicles, both under contract and not under
contract, including unamortized deferred costs related to the commercial Atlas
and the Evolved Expendable Launch Vehicle (Atlas V) programs.
Work in process inventories related to other long-term contracts and programs
in progress included unamortized deferred costs for aircraft not under contract
related to the Corporation's C-130J program. Such unamortized deferred costs at
March 31, 2000 and December 31, 1999 were $124 million and $150 million,
respectively.
NOTE 5 -- COMMITMENTS AND 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 - The Corporation is responding to three administrative
orders issued by the California Regional Water Quality Control Board (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 investigation, 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 $140 million. The Corporation is also
coordinating with the U.S. Air Force, which is conducting preliminary studies of
the potential
8
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
health effects of exposure to perchlorates in connection with several sites
across the country, including the Redlands site. The results of these studies
indicate that current efforts with water purveyors regarding perchlorate issues
are appropriate; however, the Corporation currently cannot project the extent of
its ultimate clean-up obligation, if any, with respect to perchlorates.
The Corporation entered into a consent decree with the U.S. Environmental
Protection Agency (EPA) in 1991 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. The Corporation entered into a
follow-on consent decree in 1998 which obligates the Corporation to fund the
continued operation and maintenance of these facilities through the year 2018;
however, the responsibility for the actual operations of these facilities will
be assumed by the city of Burbank late in 2000. The Corporation has also been
operating under a cleanup and abatement order from the Regional Board affecting
its facilities and former 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. Also as a result of
its former operations at the Burbank facilities, the Corporation is
participating as one of several parties under administrative orders from the EPA
to design, build and operate a groundwater treatment system in Glendale,
California as part of the San Fernando Superfund site that includes Burbank.
The city of Glendale is ultimately expected to assume responsibility for the
operations of the Glendale treatment plant. Under an agreement reached with the
U.S. Government and filed with the U.S. District Court in January 2000 (the
Agreement), the Corporation was reimbursed approximately $100 million in the
first quarter of 2000 for past expenditures for certain remediation activities
related to the Burbank and Glendale properties. Also under the Agreement, an
amount equal to approximately 50 percent of future expenditures for certain
remediation activities will be reimbursed by the U.S. Government as a
responsible party under the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA). The Corporation estimates that total expenditures
required over the remaining terms of the consent decrees and the Regional Board
order related to the Burbank property, and the administrative orders related to
the city of Glendale, net of the effects of the Agreement, will be
approximately $50 million.
The Corporation is involved in other proceedings and potential proceedings
relating to environmental matters, including disposal of hazardous wastes and
soil and water contamination. The extent of the Corporation's financial
exposure cannot in all cases be reasonably estimated at this time. In addition
to the amounts with respect to the Redlands and Burbank properties and the city
of Glendale described above, a liability of approximately $200 million for the
other cases in which an estimate of financial exposure can be determined has
been recorded.
Under an agreement with the U.S. Government in 1990, 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 potentially 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. Although the Defense Contract Audit Agency has questioned certain
elements of the Corporation's practices with respect to the aforementioned
agreement, it is management's opinion that the treatment of these environmental
costs is appropriate and consistent with the terms of such agreement.
Currently, Lockheed Martin is in
9
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
discussions with the U.S. Government regarding the Corporation's October 4, 1999
request for the issuance of a final decision regarding the propriety of the
Corporation's U.S. Government accounting practices for the treatment of
environmental costs.
The Corporation has recorded an asset for the portion of environmental 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 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
incurred significant unanticipated costs and scheduling issues due to complex
technical and contractual matters which threatened the viability of the overall
Pit 9 program. Based on an investigation by management to identify and quantify
the overall effect of these matters, the Corporation submitted a request for
equitable adjustment (REA) to the DOE in March 1997 that sought, among other
things, 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 has been unsuccessful in reaching any agreements with the DOE on
cost recovery or other contract restructuring matters.
In June 1998, the DOE, through Lockheed Martin Idaho Technologies Company
(LMITCO), its management contractor, terminated the Pit 9 contract for default.
On the same date, the Corporation filed a lawsuit against the DOE in the U.S.
Court of Federal Claims in Washington, D.C., challenging and seeking to overturn
the default termination. In addition, in July 1998, the Corporation withdrew
the REA previously submitted to the DOE and replaced it with a certified REA.
The certified REA is similar in substance to the REA previously submitted, but
its certification, based upon more detailed factual and contractual analysis,
raises its status to that of a formal claim. In August 1998, LMITCO, at the
DOE's direction, filed suit against the Corporation in U.S. District Court in
Boise, Idaho, seeking, among other things, recovery of approximately $54 million
previously paid by LMITCO to the Corporation under the Pit 9 contract. The
Corporation is defending this action while continuing to pursue its certified
REA. Discovery has been ongoing since August 2, 1999. In October 1999, the
U.S. Court of Federal Claims stayed the DOE's motion to dismiss the
Corporation's lawsuit, finding that the Court has jurisdiction. The Court
ordered discovery to commence and gave leave to the DOE to convert its motion to
dismiss to a motion for summary judgment if supported by discovery. The
Corporation continues to assert its position in the litigation while continuing
its efforts to resolve the dispute through non-litigation means.
NOTE 6 -- INFORMATION ON BUSINESS SEGMENTS
The Corporation implemented a new organizational structure, effective October
1, 1999, that realigns its core lines of business into four principal business
segments. The four principal business segments include Systems Integration,
Space Systems, Aeronautical Systems and
10
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
Technology Services. All other activities of the Corporation fall within the
Corporate and Other segment. Additionally, the Corporation announced on April
24, 2000 the reassignment of the Management & Data Systems business unit from
the Systems Integration segment to the Space Systems segment. Prior period
amounts have been adjusted to conform with the above changes in organizational
structure.
Three Months Ended
March 31,
2000 1999
------ ------
Selected Financial Data by Business Segment (In millions)
Net sales
- ---------
Systems Integration $2,099 $2,264
Space Systems 1,644 1,858
Aeronautical Systems 1,036 1,420
Technology Services 464 448
Corporate and Other 319 198
------ ------
$5,562 $6,188
====== ======
Operating profit (loss)
- -----------------------
Systems Integration $ 171 $ 170
Space Systems 82 162
Aeronautical Systems 79 164
Technology Services 26 32
Corporate and Other (32) 88
------ ------
$ 326 $ 616
====== ======
Intersegment revenue(a)
- -----------------------
Systems Integration $ 111 $ 121
Space Systems 27 26
Aeronautical Systems 18 21
Technology Services 166 152
Corporate and Other 15 15
------ ------
$ 337 $ 335
====== ======
(a) Intercompany transactions between segments are eliminated in consolidation, and excluded from
the net sales and operating profit (loss) amounts presented above.
NOTE 7 -- OTHER
In February 2000, the Corporation and Loral Space & Communications Ltd. (Loral
Space) filed certain notices under the HSR Act with the FTC and the DOJ in
connection with the Corporation's plan to convert its 45.9 million shares of
Loral Space Series A Preferred Stock (the Preferred Stock) into an equal number
of shares of Loral Space common stock. Effective March 31, 2000, the
Corporation exercised its right to convert the Preferred Stock. Its ownership
of 45.9 million shares of Loral Space common stock represents an approximate 16
percent interest in Loral Space, or 13 percent on a diluted basis. Subsequent
to conversion, the Corporation began accounting for its investment as an
available-for-sale investment. Accordingly, as of March 31, 2000, the
investment in Loral Space was adjusted to reflect its current market value, and
an
11
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
unrealized gain, net of income taxes, of approximately $54 million was included
in stockholders' equity as a component of other comprehensive income.
Also in February 2000, the Corporation and Loral Space entered into an
agreement which will facilitate the Corporation's ability to divest its interest
in Loral Space, but in no case earlier than mid-May 2000. In connection with
this agreement, in April 2000, Loral Space filed a registration statement with
the Securities and Exchange Commission to register for sale the common shares
owned by the Corporation. Loral Space has advised the Corporation that such
registration statement will become effective in May 2000.
In February 1999, the Corporation sold 4.5 million of its shares in L-3
Communications Holdings, Inc. (L-3) as part of a secondary public offering by L-
3. This transaction resulted in a reduction in the Corporation's ownership to
approximately seven percent and the recognition of a pretax gain of $114 million
which is reflected in other income and expenses. The gain increased net
earnings by $74 million, or $.19 per diluted share. After this transaction was
consummated, the Corporation began accounting for its remaining investment in L-
3 as an available-for-sale investment. Accordingly, as of March 31, 1999, the
investment in L-3 was adjusted to reflect its current market value, and an
unrealized gain, net of income taxes, of approximately $42 million was included
in stockholders' equity as a component of other comprehensive income. In
October 1999, the Corporation sold its remaining interest in L-3 and
reclassified to net earnings $30 million of unrealized gains previously recorded
as comprehensive income.
The components of comprehensive income for the three months ended March 31,
2000 and 1999 consisted of the following:
Three Months Ended
March 31,
2000 1999
-------- -------
(In millions)
Net earnings (loss) $ 54 $ (87)
Other comprehensive income:
Net foreign currency translation adjustments -- 7
Net unrealized gain 50 42
-------- -------
50 49
-------- -------
Comprehensive income $ 104 $ (38)
======== =======
In the fourth quarter of 1998, the Corporation recorded a nonrecurring and
unusual pretax charge, net of state income tax benefits, of $233 million related
to actions surrounding the decision to fund a timely non-bankruptcy shutdown of
the business of CalComp Technology, Inc. (CalComp), a majority-owned subsidiary.
Approximately 10 percent of the original charge was reversed in 1999. As of
March 31, 2000, CalComp had, among other actions, consummated sales of
substantially all of its assets, terminated substantially all of its work force,
and initiated the corporate dissolution process under the applicable state
statutes and, for its foreign subsidiaries, foreign government statutes. While
uncertainty remains concerning the resolution of matters in dispute or
litigation, management believes that the remaining amount recorded is adequate
to provide for resolution of these matters and to complete the dissolution
process.
12
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
The Corporation's total interest payments were $94 million and $99 million for
the three months ended March 31, 2000 and 1999, respectively.
The Corporation received net federal and foreign income tax refunds of $25
million and made net federal and foreign income tax payments of $63 million in
the three months ended March 31, 2000 and 1999, respectively.
New accounting pronouncements adopted -- Effective January 1, 1999, the
Corporation adopted the American Institute of Certified Public Accountants'
Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP requires that, at the effective date of adoption, costs of
start-up activities previously capitalized be expensed and reported as a
cumulative effect of a change in accounting principle, and further requires that
such costs subsequent to adoption be expensed as incurred. The adoption of SOP
No. 98-5 resulted in the recognition of a cumulative effect adjustment which
reduced net earnings for the first quarter of 1999 by $355 million, or $.93 per
diluted share. The cumulative effect adjustment was recorded net of income tax
benefits of $227 million, and was primarily composed of approximately $560
million of costs which were included in inventories as of December 31, 1998.
New accounting pronouncement to be adopted -- In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires the recognition of all derivatives as either assets or
liabilities in the Consolidated Balance Sheet, and the periodic measurement of
those instruments at fair value. The classification of gains and losses
resulting from changes in the fair values of derivatives is dependent on the
intended use of the derivative and its resulting designation. In general, these
provisions of the Statement could result in a greater degree of income statement
volatility than current accounting practice. At adoption, existing hedging
relationships must be designated anew and documented pursuant to the provisions
of the Statement. The Corporation does not intend to adopt SFAS No. 133, as
amended, prior to the required date of January 1, 2001. The Corporation is
continuing its process of analyzing and assessing the impact that the adoption
of SFAS No. 133 is expected to have on its consolidated results of operations,
cash flows and financial position, but has not yet reached any conclusions.
NOTE 8 -- SUBSEQUENT EVENT
On April 27, 2000, the Corporation announced that it had reached a definitive
agreement to sell Lockheed Martin Control Systems to BAE SYSTEMS North America
for $510 million in cash. Consummation of the transaction is conditioned upon
regulatory review under the HSR Act and other antitrust laws, and by the
Committee on Foreign Investment in the U.S. under the Defense Production Act of
1950. If consummated, this transaction is expected to close in the second or
third quarter of 2000 and result in a pretax gain of $300 million to $350
million, or $150 million to $200 million on an after-tax basis.
13
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 2000
STRATEGIC AND ORGANIZATIONAL REVIEW
In September 1999, Lockheed Martin announced the results to date of its
strategic and organizational review that began in June 1999. As a result of
this review, the Corporation has implemented a new organizational structure (as
more fully described in "Note 6 -- Information on Business Segments" of the
Notes to Unaudited Condensed Consolidated Financial Statements), and announced
plans to evaluate the repositioning of certain businesses to maximize their
value and growth potential and the divestiture of certain non-core business
units.
The Corporation is continuing to evaluate alternatives relative to maximizing
the value of two business units that serve the commercial information technology
markets, including Lockheed Martin's internal information technology needs.
These units have been identified by management as having high growth potential,
but are distinct from the Corporation's core business segments. The
Corporation may seek to maximize the value of these business units through
strategic partnerships or joint ventures, or by accessing public equity markets,
although the outcome of those efforts cannot be predicted.
In connection with its decision to evaluate the divestiture of certain non-
core business units, the Corporation announced on April 27, 2000 that it had
reached a definitive agreement to sell Lockheed Martin Control Systems (Control
Systems) to BAE SYSTEMS North America for $510 million in cash. Consummation of
the transaction is conditioned upon regulatory review under the Hart-Scott-
Rodino Antitrust Improvement Act (HSR Act) and other antitrust laws, and by the
Committee on Foreign Investment in the U.S. under the Defense Production Act of
1950. If consummated, this transaction is expected to close in the second or
third quarter of 2000 and result in a pretax gain of $300 million to $350
million, or $150 million to $200 million on an after tax basis. The transaction
is also expected to generate net proceeds of $325 million to $375 million after
related transaction costs and tax payments.
The Corporation is continuing its evaluation of the divestiture, subject to
appropriate valuation, negotiation and approval, of certain other business units
in the aerospace electronics, environmental management, and state and local
government services lines of business. On a combined basis, net sales in the
first quarter of 2000 related to Control Systems and the other business units
being evaluated for divestiture totaled $367 million. Based on preliminary
data, including Control Systems and assuming that the remaining potential
divestiture transactions are approved by the Corporation's Board of Directors
and ultimately consummated in the future, management estimates that the
potential one-time effects, if combined, could result in a net loss on
disposition of approximately $850 million, primarily non-cash. However, the
potential net proceeds from these transactions, if consummated, could also
generate in excess of $1.5 billion in cash, after transaction costs and
associated tax payments, that will be used to reduce debt. Financial effects
that may result, if any, would be recorded when the transactions are consummated
or when losses can be estimated. Other than the Control Systems transaction
discussed above, management cannot predict the timing of the potential
divestitures, the amount of proceeds that may ultimately be realized or whether
any or all of the potential transactions will take place.
In a further development related to the strategic and organizational review,
the Corporation announced in January 2000 its plans to streamline the
Aeronautical Systems and Space Systems segments. These plans provide for the
consolidation of multiple business units into one focused company in each
segment, and the integration of certain operational and administrative
activities
14
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
within each segment. Management expects these actions to result in future cost
savings for the Corporation.
In line with our continuing efforts to strategically align the Corporation's
businesses and core competencies, the Corporation announced on April 24, 2000
the reassignment of the Management & Data Systems business unit from the Systems
Integration segment to the Space Systems segment. This move is intended to
enable the Corporation to take advantage of synergies within Space Systems to
meet the needs of its Department of Defense and intelligence community
customers.
On an ongoing basis, the Corporation will continue to explore the sale of
various investment holdings and surplus real estate, review its businesses to
identify ways to improve organizational effectiveness and performance, and
clarify and focus on its core business strategy.
TRANSACTION AGREEMENT WITH COMSAT CORPORATION
In September 1998, the Corporation and COMSAT Corporation (COMSAT) announced
that they had entered into an Agreement and Plan of Merger (the Merger
Agreement) to combine the companies in a two-phase transaction with a total
estimated value of approximately $2.7 billion at the date of the announcement
(the Merger). Subsequent to obtaining all regulatory approvals necessary for the
first phase of the transaction and approval of the Merger by the stockholders of
COMSAT, the Corporation completed a cash tender offer (the Tender Offer) on
September 18, 1999. The total value of this phase of the transaction was $1.2
billion, and such amount is included in investments in equity securities in the
Unaudited Condensed Consolidated Balance Sheet at March 31, 2000. The
Corporation accounts for its 49 percent investment in COMSAT under the equity
method of accounting.
The second phase of the transaction, which will result in consummation of the
Merger, is to be accomplished by an exchange of one share of Lockheed Martin
common stock for each remaining share of COMSAT common stock. Federal
legislation to remove existing restrictions on ownership of COMSAT voting stock
was signed into law on March 17, 2000. In connection with actions necessary to
consummate the second phase of the transaction, the Corporation filed separate
notification and report forms under the HSR Act with the Federal Trade
Commission (FTC) and the U.S. Department of Justice (DOJ) in the first quarter
of 2000 regarding the Corporation's acquisition of minority interests in two
businesses held by COMSAT. On April 22, 2000, the waiting period under the HSR
Act with respect to these acquisitions expired.
The Corporation must also obtain certain regulatory approvals from the Federal
Communications Commission (FCC) before the Merger can occur. On March 23, 2000,
the Corporation and COMSAT filed applications with the FCC seeking authority for
the transfer of control of various FCC authorizations held by COMSAT to a
wholly-owned subsidiary of Lockheed Martin. The period for submission of
opposition and other comments (and responses thereto) currently is scheduled to
end on May 26, 2000. There is no set time frame for the FCC to issue its
decision following receipt of comments and there is no assurance as to the
timing or whether the FCC will provide the requisite approvals. If the Merger is
not completed on or before September 18, 2000, under the terms of the Merger
Agreement, Lockheed Martin or COMSAT could terminate the Merger Agreement or
both parties could agree to extend this date. If consummated, the Merger will be
15
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
accounted for under the purchase method of accounting. If the Merger is not
consummated, the Corporation will not be able to achieve all of its objectives
with respect to the COMSAT transaction and will be unable to exercise control
over COMSAT.
The market value of the Corporation's investment in COMSAT at March 31, 2000
was approximately $535 million based on the closing price of its shares on the
New York Stock Exchange on that date. The price of COMSAT's common stock is
closely aligned with the price of Lockheed Martin's common stock and may not
reflect the price at which COMSAT's common stock might trade absent the Merger
Agreement.
The Corporation intends to combine the operations of Lockheed Martin Global
Telecommunications (LMGT) and COMSAT upon consummation of the Merger. Given the
substantial investment necessary for the growth of the global telecommunications
services business, support from strategic partners for LMGT may be sought and
public equity markets may be accessed to raise capital, although the Corporation
cannot predict the outcome of these efforts.
RESULTS OF OPERATIONS
Consolidated Results of Operations
The Corporation's operating cycle is long-term and involves many types of
production contracts with varying production delivery schedules. Accordingly,
results of a particular quarter, or quarter-to-quarter comparisons of recorded
sales and profits, may not be indicative of future operating results. The
following comparative analysis should be viewed in this context.
The Corporation's consolidated net sales for the first quarter of 2000 were
$5.6 billion, a decrease of ten percent from the $6.2 billion recorded for the
comparable period in 1999. The net sales increases in the Technology Services
and Corporate and Other segments were more than offset by decreases in the
remaining segments. The Corporation's operating profit (earnings before interest
and taxes) for the first quarter 2000 was approximately $326 million, a decrease
of 47 percent from the $616 million recorded in the comparable 1999 period. The
reported amounts for the two years presented include the financial impacts of
various nonrecurring and unusual items, the details of which are described
below. Excluding the effects of these nonrecurring and unusual items for each
year, operating profit for first quarter 2000 would have decreased by 37 percent
compared to first quarter 1999. Operating profit in all segments, except Systems
Integration, declined in the first quarter of 2000 as compared to the first
quarter of 1999. For a more detailed discussion of the operating results of the
business segments, see "Discussion of Business Segments" below.
Operating profit in the first quarter of 2000 included the effects of
nonrecurring and unusual items which on a combined basis, net of state income
taxes, increased operating profit by $10 million. These items included a net
gain of $16 million associated with the sale of surplus real estate and losses
of $6 million associated with other portfolio shaping actions. Operating profit
in the first quarter of 1999 included the effect of a nonrecurring and unusual
item which, net of state income taxes, increased operating profit by $114
million. This item resulted from the sale of 4.5 million shares of stock in L-3
Communications Holdings, Inc. (L-3) in a secondary offering of L-3's common
stock.
16
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
The Corporation's reported net earnings for the first quarter of 2000 were $54
million as compared to the first quarter 1999 net loss of $87 million. The
combined after-tax effects of the first quarter of 2000 nonrecurring and unusual
items discussed above included $10 million related to net gains on the sale of
surplus real estate and $4 million in losses associated with other portfolio
shaping actions. On a combined basis, these nonrecurring and unusual items
increased first quarter 2000 net earnings by $6 million, or $.02 per diluted
share. The after-tax effects of the nonrecurring and unusual items in the first
quarter of 1999 discussed above included $74 million related to the gain on the
sale of the Corporation's remaining interest in L-3. Nonrecurring and unusual
items for 1999 also included the effects of the Corporation's adoption of
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities,"
effective January 1, 1999, which resulted in the recognition of a cumulative
effect adjustment that reduced net earnings by $355 million. On a combined
basis, these nonrecurring and unusual items decreased first quarter 1999 net
earnings by $281 million, or $.74 per diluted share.
The Corporation reported diluted earnings (loss) per share of $.14 and $(.23)
for the first quarter of 2000 and 1999, respectively. If the nonrecurring and
unusual items described above were excluded from the calculation of earnings per
share, diluted earnings per share for the first quarter of 2000 and 1999 would
have been $.12 and $.51, respectively.
The Corporation's backlog of undelivered orders was approximately $46.6
billion at March 31, 2000 as compared to $45.9 billion reported at December 31,
1999. The Corporation received orders for approximately $6.3 billion in new and
follow-on business during the first quarter of 2000 that were substantially
offset by sales during the period. Significant new orders received during the
quarter principally related to a $1.3 billion Israeli F-16 fighter aircraft
contract award and an order for two Italian C-130J airlift aircraft. However,
several significant orders received by the Corporation are not included in the
first quarter 2000 ending backlog. These include the F-16 fighter aircraft
orders for the United Arab Emirates (UAE) and Greece, worth approximately $6.4
billion and $1.6 billion, respectively, as well as two recently announced U.S.
C-130J airlift aircraft orders. The aforementioned orders are expected to be
recorded later in 2000, pending various governmental approvals.
In connection with the UAE's order for F-16 fighter aircraft discussed above,
the Corporation is in the process of establishing a letter of credit related to
advance payments to be received under the contract. The Corporation expects the
letter of credit to be in place in the second quarter of 2000.
Discussion of Business Segments
As discussed previously, the Corporation has implemented a new organizational
structure, effective October 1, 1999, that realigns its core lines of business
into four principal business segments. The four principal business segments are
Systems Integration, Space Systems, Aeronautical Systems, and Technology
Services. All other activities of the Corporation fall within the Corporate and
Other segment. Additionally, the Corporation announced on April 24, 2000 the
reassignment of the Management & Data Systems business unit from the Systems
Integration segment to the Space Systems segment. The following discussion of
the results of operations of the Corporation's business segments reflects the
new organizational structure based on information in "Note 6 -- Information on
Business Segments" of the Notes to Unaudited
17
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
Condensed Consolidated Financial Statements included in this Form 10-Q,
including the financial data in the tables under the headings "Net sales" and
"Operating profit (loss )."
In addition, the following table displays the pretax impact of the
nonrecurring and unusual items discussed earlier and the related effects on each
segment's operating profit (loss) for each of the two periods presented:
Three Months Ended
March 31,
2000 1999
----- -----
(In millions)
Nonrecurring and Unusual Items Profit (Loss):
Consolidated Effects
Sales of surplus real estate $ 16 $ --
Divestitures and other portfolio shaping items (6) --
Sale of remaining interest in L-3 -- 114
----- -----
$ 10 $114
===== =====
Segment Effects
Systems Integration $ -- $ --
Space Systems 17 --
Aeronautical Systems -- --
Technology Services (6) --
Corporate and Other (1) 114
----- -----
$ 10 $114
===== =====
In an effort to make the following discussion of significant operating results
of each business segment more understandable, the effects of these nonrecurring
and unusual items discussed earlier have been excluded. The Space Systems and
Aeronautical Systems segments generally include programs that are substantially
larger in terms of sales and operating results than those included in the other
segments. Accordingly, due to the significant number of smaller programs in the
Systems Integration and Technology Services segments, the impacts of performance
by individual programs typically are not as material to these segments' overall
results of operations.
Systems Integration
Net sales of the Systems Integration segment decreased by seven percent in
first quarter 2000 compared to the first quarter 1999. Approximately 55 percent
of the decrease in 2000 was attributable to reduced volume in postal systems
activities. Net sales also decreased $55 million due to a decline in volume on
the segment's aerospace electronic systems businesses. The remaining decrease is
primarily attributable to timing of revenue related to tactical training systems
in the United Kingdom.
Operating profit for the segment increased by one percent in the first quarter
of 2000 compared to the same period in 1999. The first quarter 2000 increase is
mainly attributable to the absence in 2000 of $35 million in charges related to
the Theater High Altitude Area Defense (THAAD) missile program incurred in the
first quarter of 1999. These charges included a $15 million performance penalty
for the failure to intercept the target during a test firing as well as a $20
million provision for further potential exposure related to this program. These
increases were
18
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
partially offset by an approximate $34 million decrease related to the volume
declines in postal systems and aerospace electronics activities discussed in the
preceding paragraph as well declines in certain missile defense programs due to
performance issues.
Space Systems
Net sales of the Space Systems segment decreased by 12 percent in the first
quarter of 2000 compared to the first quarter 1999. Approximately 67 percent of
the 2000 decline in sales was attributable to a reduction in launch vehicle
activity. Declines in the Proton commercial launch vehicle program were due to
the timing of launches, which more than offset increases in the Atlas commercial
launch vehicle program. A decline in volume related to military satellites,
classified programs, and reconnaissance system activities, partially offset by
increased activities in commercial satellites, contributed another $60 million
to the current year decline.
Operating profit for the segment decreased by 60 percent in the first quarter
of 2000 from the comparable 1999 period. Approximately 45 percent of the
segment's 2000 operating profit decrease resulted from lower volume in military
satellites and classified activities as well as decreased commercial satellite
performance. Additionally, approximately $35 million of the decrease was due to
market and pricing pressures related to the Atlas program. An adjustment related
to a more conservative assessment of future program performance on the Titan IV
program and expensing of start-up costs associated with the EELV program, offset
by increases in Atlas launch volume, comprised the remainder of the first
quarter 2000 decline.
Aeronautical Systems
Net sales of the Aeronautical Systems segment decreased by 27 percent in the
first quarter of 2000 from the comparable period in 1999. An approximate 50
percent reduction in sales and deliveries of F-16 fighter aircraft and C-130J
airlift aircraft accounted for approximately $380 million of the current year
decline in net sales. Reduction in sales on other tactical aircraft programs
comprised the remainder of the first quarter 2000 decline.
Operating profit for the segment decreased by 52 percent in the first quarter
of 2000 from the comparable 1999 period. Approximately 50 percent of the 2000
decline in operating profit was attributable to the Corporation's fourth quarter
1999 decision not to record profit on C-130J airlift aircraft deliveries, as a
result of changes in estimates due to cost growth and reduced production rates,
until further favorable progress occurs in terms of orders and cost. The
aforementioned reductions in F-16 fighter aircraft deliveries and declines in
volume on other tactical aircraft programs contributed approximately $35 million
to the decrease in first quarter 2000 operating profit, with the remainder of
the decrease caused by reduced activities on various other military aircraft
programs.
Technology Services
Net sales of the Technology Services segment increased by four percent in the
first quarter of 2000 from the comparable 1999 period. Approximately $15 million
of the increase in the first quarter 2000 net sales resulted from increased
volume on various federal technology services programs, primarily the
Consolidated Space Operations Contract. Increased net sales in the segment's
aircraft maintenance and logistics lines of business were offset by a decline in
volume on certain energy related contracts due to program maturity.
19
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
Operating profit for the segment remained consistent in the first quarter of
2000 from the first quarter of 1999. In the first quarter of 2000, an increase
of approximately $8 million in operating profits on various federal technology
services programs as well as from the segment's aircraft maintenance and
logistics lines of business was entirely offset by lower profit on certain
energy-related contracts and the effects of the divestiture of Lockheed Martin
Hanford Company in the fourth quarter of 1999.
Corporate and Other
Net sales of the Corporate and Other segment increased by 61 percent in the
first quarter of 2000 compared to the first quarter of 1999. Approximately 70
percent of the 2000 increase in net sales is attributable to the operations of
LMGT and was primarily associated with the recognition of revenue on a Proton
launch vehicle, which successfully launched the ACeS 1 satellite in the first
quarter of 2000. Additionally, increased volume related to state and municipal
services and information technology outsourcing programs contributed
approximately $30 million to the first quarter increase in net sales, with the
remainder of the increase due to certain international services activities. The
absence in 2000 of sales attributable to Lockheed Martin Information Management
Systems' Communications Industry Services line of business and the Corporation's
commercial graphics company, Real 3D, which were divested in the fourth quarter
of 1999, had negligible effects on the change in first quarter 2000 net sales.
Operating profit for the first quarter 2000 decreased $5 million from the
comparable 1999 period. Operating profit for 2000 was adversely affected by
approximately $15 million of negative adjustments, primarily related to
performance on an information technology-outsourcing contract and a state and
municipal services contract. These decreases were partially offset by lower
start-up and other operating expenses for LMGT. The absence in first quarter
2000 of losses associated with the Real 3D operating unit were offset by the
absence in the first quarter 2000 of a favorable adjustment recorded by the
segment's Communications Industry Services line of business in the first quarter
of 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2000, $482 million of cash was provided by
operating activities, compared to $153 million used for operating activities
during the first quarter of 1999. This fluctuation was primarily attributable
to accelerated payments received in the first quarter of 2000 on certain
aircraft and space systems programs as a result of exceeding performance
expectations, and reimbursements in connection with the remediation agreement
related to the Burbank and Glendale properties discussed in "Note 5--
Commitments and Contingencies." Net cash used for investing activities during
the first quarter of 2000 was $114 million as compared to $51 million provided
by investing activities during the first quarter of 1999. The 2000 amount
includes approximately $84 million in cash used for additions to property, plant
and equipment and approximately $30 million of net cash used for additional
investments in Astrolink International, LLC and other acquisition and
divestiture activities. The 1999 amount includes the receipt of $182 million of
proceeds from the sale of L-3 common stock mentioned previously, which was
partially offset by $131 million used for additions to property, plant and
equipment. Net cash used for financing activities in the first quarter of 2000
was $290 million as compared to $140 million during first quarter 1999. The
variance between periods was primarily due to an approximate $250 million
decrease in the Corporation's total debt position, net of acquired debt,
20
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
during the first quarter of 2000 versus a decrease in total debt of $61 million
during the first quarter of 1999.
Total debt, including short-term borrowings, decreased by approximately $250
million during the first quarter of 2000 from approximately $12 billion at
December 31, 1999. This decrease was primarily attributable to net repayments of
short-term debt of approximately $234 million. The Corporation's long-term debt
is primarily in the form of publicly issued, fixed-rate notes and debentures. At
the end of the first quarter of 2000, the Corporation held cash and cash
equivalents of $533 million, a portion of which were used to pay down its
commercial paper borrowings in April 2000. Total stockholders' equity was $6.5
billion at March 31, 2000, an increase of approximately $114 million from the
December 31, 1999 balance. This increase resulted from 2000 net earnings of $54
million, employee stock option and ESOP activities of $54 million, and other
comprehensive income of $50 million, partially offset by payment of dividends of
$44 million. As a result of the above factors, the Corporation's debt to total
capitalization ratio decreased from 65 percent at December 31, 1999 to 64
percent at March 31, 2000.
Commercial paper borrowings outstanding at March 31, 2000 were approximately
$241 million and are supported by a short-term revolving credit facility in the
amount of $1 billion which expires on May 28, 2000, and a long-term revolving
credit facility in the amount of $3.5 billion which expires on December 20,
2001. No borrowings were outstanding under these credit facilities at March 31,
2000. Following the Corporation's issuance of $3 billion in long-term debt
securities in the fourth quarter of 1999 and based on a current assessment of
its available financial resources, the Corporation has determined not to renew
its $1 billion short-term revolving credit facility and may terminate this
credit facility in advance of its expiration. The Corporation will establish
a letter of credit related to the sale of F-16 fighter aircraft to the UAE
discussed previously.
In March 2000, the Corporation filed a shelf registration with the Securities
and Exchange Commission to provide for the issuance of up to $1 billion in debt
securities. The registration statement was declared effective on April 14, 2000.
Were the Corporation to issue debt securities under this shelf registration, it
would expect to use the net proceeds for general corporate purposes. These
purposes may include repayment of debt, working capital needs, capital
expenditures, acquisitions and any other general corporate purpose.
The Corporation actively seeks to finance its business in a manner that
preserves financial flexibility while minimizing borrowing costs to the extent
practicable. The Corporation's management continually reviews the changing
financial, market and economic conditions to manage the types, amounts and
maturities of the Corporation's indebtedness. Periodically, the Corporation may
refinance existing indebtedness, vary its mix of variable rate and fixed rate
debt, or seek alternative financing sources for its cash and operational needs.
Cash and cash equivalents including temporary investments, internally
generated cash flow from operations and other available financing resources are
expected to be sufficient to meet anticipated operating, capital expenditure and
debt service requirements and discretionary investment needs during the next
twelve months. Consistent with the Corporation's desire to generate cash to
reduce debt and invest in its core businesses, management anticipates that,
subject to prevailing financial, market and economic conditions, the Corporation
may continue to divest certain non-core businesses, passive equity investments
and surplus properties.
21
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
In February 2000, the Corporation and Loral Space & Communications Ltd. (Loral
Space) filed certain notices under the HSR Act with the FTC and the DOJ in
connection with the Corporation's plan to convert its 45.9 million shares of
Loral Space Series A Preferred Stock (the Preferred Stock) into an equal number
of shares of Loral Space common stock. Effective March 31, 2000, the
Corporation exercised its right to convert the Preferred Stock. Its ownership
of 45.9 million shares of Loral Space common stock represents an approximate 16
percent interest in Loral Space, or 13 percent on a diluted basis.
Also in February 2000, the Corporation and Loral Space entered into an
agreement which will facilitate the Corporation's ability to divest its interest
in Loral Space, but in no case earlier than mid-May 2000. In connection with
this agreement, in April 2000, Loral Space filed a registration statement with
the Securities and Exchange Commission to register for possible sale the common
shares owned by the Corporation. Loral Space has advised the Corporation that
such registration statement will become effective in May 2000. The Corporation
expects to divest its shares of Loral Space; however, the timing of such
divestitures and the related amount of cash received will depend on market
conditions.
OTHER MATTERS
The Corporation's primary exposure to market risk relates to interest rates
and foreign currency exchange rates. Financial instruments held by the
Corporation which are subject to interest rate risk principally include variable
rate commercial paper and fixed rate long-term debt. The Corporation's long-term
debt obligations are generally not callable until maturity. The Corporation may
use interest rate swaps to manage its exposure to fluctuations in interest
rates; however, there were no such agreements outstanding at March 31, 2000.
Based on its portfolio of variable rate short-term debt and fixed rate long-term
debt outstanding at March 31, 2000, the Corporation's exposure to interest rate
risk is not material.
The Corporation uses forward exchange contracts to manage its exposure to
fluctuations in foreign exchange rates. These contracts are designated as
qualifying hedges of firm commitments or specific anticipated transactions, and
related gains and losses on the contracts are recognized in income when the
hedged transaction occurs. At March 31, 2000, the amounts of forward exchange
contracts outstanding, as well as the amounts of gains and losses recorded
during the first quarter of 2000, were not material. Based on the above, the
Corporation's exposure to foreign currency exchange risk is not material. The
Corporation does not hold or issue derivative financial instruments for trading
purposes.
As more fully described in "Note 5 - Commitments and Contingencies" of the
Notes to Unaudited Condensed Consolidated Financial Statements, the Corporation
is continuing to pursue recovery of a significant portion of the unanticipated
costs incurred in connection with the $180 million fixed price contract with the
U.S. Department of Energy (DOE) for the remediation of waste found in Pit 9.
The Corporation has been unsuccessful to date in reaching any agreements with
the DOE on cost recovery or other contract restructuring matters. In 1998, the
management contractor for the project, a wholly-owned subsidiary of the
Corporation, at the DOE's direction, terminated the Pit 9 contract for default.
At the same time, the Corporation filed a lawsuit seeking to overturn the
default termination. Subsequently, the Corporation took actions to raise the
status of its request for equitable adjustment to a formal claim. Also in 1998,
the management contractor, again at the DOE's direction, filed suit against the
Corporation seeking recovery of approximately $54 million previously paid to the
Corporation under the Pit 9
22
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
contract. The Corporation is defending this action in which discovery has been
pending since August 1999. In October 1999, the U.S. Court of Federal Claims
stayed the DOE's motion to dismiss the Corporation's lawsuit, finding that the
Court has jurisdiction. The Court ordered discovery to commence and gave leave
to the DOE to convert its motion to dismiss to a motion for summary judgment if
supported by discovery. The Corporation continues to assert its position in the
litigation while continuing its efforts to resolve the dispute through non-
litigation means.
As more fully described in Management's Discussion and Analysis in Lockheed
Martin's 1999 Annual Report on Form 10-K, the Corporation is involved in two
joint ventures with Russian government-owned space firms. The operations of
these joint ventures include marketing Proton launch services, which are subject
to a U.S.-imposed quota on the number of Russian launches of U.S. built
satellites into certain orbits. The majority of customer advances received for
Proton launch vehicle services is forwarded to a launch vehicle manufacturer in
Russia. Significant portions of these advances would be required to be refunded
to customers if launch services were not provided within the contracted time
frame. At March 31, 2000, approximately $698 million related to launches not
yet provided was included in customer advances and amounts in excess of costs
incurred, and approximately $851 million of payments to the Russian manufacturer
for launches not yet provided was included in inventories. At March 31, 2000, no
portion of the customer advances was associated with launches in excess of the
quota, and approximately $254 million of the $851 million of payments to the
aforementioned Russian manufacturer were associated with launches in excess of
the number currently allowed under the quota. Through March 31, 2000, launch
services provided through these joint ventures have been in accordance with
contract terms. With respect to the quota, the Corporation's ability to achieve
certain of its business objectives related to launch services, satellite
manufacture and telecommunications market penetration could be impaired if the
limit on the number of launches imposed by the quota is not raised or
eliminated. Management is working to achieve a favorable resolution to raise or
eliminate the limitation on the number of Russian launches covered by the quota.
Also as more fully described in Management's Discussion and Analysis in its
Form 10-K, the Corporation is involved in agreements with RD AMROSS, a Russian
manufacturer of booster engines, for the development and purchase, subject to
certain conditions, of up to 101 RD-180 booster engines for use in two models of
the Corporation's Atlas launch vehicles. Terms of the agreements call for
payments to be made to RD AMROSS upon the achievement of certain milestones in
the development and manufacturing processes. Included in inventories at March
31, 2000 and December 31, 1999 were payments made under these agreements of
approximately $44 million and $55 million, respectively.
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
23
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
anticipated costs of capital investments and planned dispositions. Our
operations are necessarily subject to various risks and uncertainties and,
therefore, actual outcomes are dependent upon many factors, including, without
limitation, our successful performance of internal plans and reorganization
efforts; the timely outcome of agency actions required in order to consummate
the transaction with COMSAT; government customers' budgetary constraints and the
timing of awards and contracts; customer changes in short-range and long-range
plans; domestic and international competition in the defense, space and
commercial areas; continued development and acceptance of new products; timing
and customer acceptance of product delivery and launches; product performance;
performance issues with the U.S. Government, key suppliers and subcontractors;
government import and export policies; termination of government contracts; the
outcome of political and legal processes; the outcome of contingencies,
including completion of acquisitions and divestitures, litigation and
environmental remediation; legal, financial, and governmental risks related to
international transactions and global needs for military and commercial aircraft
and electronic systems and support; as well as other economic, political and
technological risks and uncertainties. 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 the "Transaction Agreement with
COMSAT Corporation", the discussion of "Competition and Risk" and the discussion
of "Government Contracts and Regulations" on pages 3 through 6, pages 23 through
26 and pages 26 through 28, respectively, of the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (Form 10-K); "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 14 through 24 of this Form 10-Q; and "Note 2 -- Transaction Agreement with
COMSAT Corporation," "Note 5 -- Commitments and Contingencies," "Note 7 --
Other" and "Note 8 -- Subsequent Event" of the Notes to Unaudited Condensed
Consolidated Financial Statements on pages 6 through 7, pages 8 through 10,
pages 11 through 13 and page 13, respectively, of the Unaudited Condensed
Consolidated Financial Statements included in this Form 10-Q.
24
Lockheed Martin Corporation
Part II - Other Information
Item 1. Legal Proceedings
The Corporation is a party to or has property subject to litigation and other
proceedings, including matters arising under provisions relating to the
protection of the environment, both as specifically described below and in the
Corporation's 1999 Annual Report on Form 10-K (Form 10-K), or arising in the
ordinary course of business. In the opinion of management, the probability is
remote that the outcome of any such litigation or other proceedings will have a
material adverse effect on the Corporation's results of operations or financial
position.
The Corporation is primarily engaged in providing products and services under
contracts with the U.S. Government and, to a lesser degree, under direct foreign
sales contracts, some of which are funded by the U.S. Government. These
contracts are subject to extensive legal and regulatory requirements and, from
time to time, agencies of the U.S. Government investigate whether the
Corporation's operations are being conducted in accordance with these
requirements. U.S. Government investigations of the Corporation, whether
relating to these contracts or conducted for other reasons, 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 U.S. Government contracting. U.S. Government
investigations often take years to complete and many result in no adverse action
against the Corporation. For the U.S. Government investigations described in
the Corporation's Form 10-K, it is too early for Lockheed Martin to determine
whether adverse decisions relating to these investigations could ultimately have
a material adverse effect on its results of operations or financial condition.
The following describes new matters not previously disclosed as well as
developments of previously reported matters that have occurred since filing of
the Corporation's Form 10-K. See the "Legal Proceedings" section of the Form
10-K for a description of previously reported matters.
On February 1, 2000, the Corporation received notice that the U.S.
Environmental Protection Agency (EPA) had filed a civil enforcement action
alleging violations of the federal Toxic Substances Control Act (TSCA) at the
Idaho National Engineering and Environmental Laboratory. The complaint, which
seeks a civil penalty of approximately $188 thousand, alleges that Lockheed
Martin Idaho Technologies Company (a wholly-owned subsidiary of the Corporation)
violated provisions of the PCB (polychlorinated biphenyl) Regulations
promulgated by the EPA and TSCA. The Corporation is negotiating this matter
with the EPA.
The Corporation has been cited by the California South Coast Air Quality
Management District (SCAQMD) for allegedly mishandling asbestos-containing
demolition debris at the Corporation's former aircraft manufacturing facilities
in Burbank, California. In a letter dated February 10, 2000, the SCAQMD offered
to settle the Notices of Violation in exchange for a civil penalty of $315
thousand. The Corporation's demolition contractor, who was responsible for the
work, was also cited and has agreed to honor its contractual indemnity to the
Corporation for any penalty ultimately assessed by the SCAQMD.
25
Lockheed Martin Corporation
Part II - Other Information (continued)
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on April 27, 2000, 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 2001 and until their
successors have been duly elected and qualified:
Votes Cast For Votes Withheld
-------------- --------------
Norman R. Augustine 341,556,635 15,412,144
Marcus C. Bennett 342,362,606 14,606,173
Lynne V. Cheney 342,984,894 13,983,885
Vance D. Coffman 339,050,523 17,918,256
James F. Gibbons 343,486,720 13,482,059
Edward E. Hood, Jr. 343,133,851 13,834,928
Caleb B. Hurtt 343,130,265 13,838,514
Gwendolyn S. King 343,006,583 13,962,196
Eugene F. Murphy 343,307,443 13,661,336
Frank Savage 333,363,362 23,605,417
James R. Ukropina 343,367,707 13,601,072
Douglas C. Yearley 343,388,069 13,580,710
. 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, 2000. There were 350,675,809 votes for the
appointment, 4,233,773 votes against the appointment, and 2,059,197
abstentions.
. Ratified a proposal to re-approve performance-based goals under the Lockheed
Martin Corporation 1995 Omnibus Performance Award Plan. There were 334,706,822
votes for the proposal, 18,670,567 votes against the proposal, and 3,591,390
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 21,886,313 votes for the proposal, 284,940,927
votes against the proposal, 4,613,833 abstentions and 45,527,706 non-votes.
. Rejected a stockholder proposal which recommended that the Board of Directors
establish a committee to research and develop criteria for the bidding,
acceptance and implementation of military contracts, and to report the results
of its study to shareholders at the 2001 Annual Meeting of Stockholders. There
were 15,628,573 votes for the proposal, 275,908,898 votes against the
proposal, 19,903,602 abstentions and 45,527,706 non-votes.
26
Lockheed Martin Corporation
Part II - Other Information (continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Exhibit 10. Lockheed Martin Corporation Directors Equity Plan, as
amended May 1, 2000.
2. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of
Earnings to Fixed Charges for the three months ended
March 31, 2000.
3. Exhibit 27. Financial Data Schedule for the three months ended March
31, 2000.
(b) Reports on Form 8-K filed in the first quarter of 2000.
1. Current report on Form 8-K filed on January 31, 2000.
Item 5. Other Events
The Corporation filed information contained in its press
releases dated January 27, 2000 and January 28, 2000. The
January 27, 2000 press release relates to the Corporation's
decision to streamline certain activities in two business
areas. The January 28, 2000 press release relates to the
Corporation's financial performance for fiscal year ended
December 31, 1999 and a reduction in its dividend rate.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated January 27,
2000.
Lockheed Martin Corporation Press Release dated January
28, 2000.
(c) Reports on Form 8-K filed subsequent to the first quarter of 2000.
1. Current report on Form 8-K filed on April 4, 2000.
Item 5. Other Events
The Corporation filed information contained in its press
release dated March 10, 2000 regarding the passage of
Congressional legislation related to the proposed merger with
COMSAT Corporation.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated March 10,
2000.
2. Current report on Form 8-K filed on April 5, 2000.
Item 5. Other Events
27
Lockheed Martin Corporation
Part II - Other Information (continued)
The Corporation filed information contained in its press
release dated April 3, 2000 which announces the selection of
Louis R. Hughes as President and Chief Operating Officer,
effective April 27, 2000.
Item 7. Financial Statements and Exhibits
Lockheed Martin Press Release dated April 3, 2000.
3. Current report on Form 8-K filed on April 28, 1999.
Item 5. Other Events
The Corporation filed information contained in its press
release dated April 25, 2000 concerning its results of
operations for the quarter ended March 31, 2000.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated April 25,
2000.
28
LOCKHEED MARTIN CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOCKHEED MARTIN CORPORATION
---------------------------
(Registrant)
Date: May 5, 2000 by: /s/Christopher E. Kubasik
--------------------------- --------------------------
Christopher E. Kubasik
Vice President and Controller
(Chief Accounting Officer)
29