FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 1-11437
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LOCKHEED MARTIN CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1893632
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6801 ROCKLEDGE DRIVE, BETHESDA, MD 20817
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (301) 897-6000
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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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 OCTOBER 15, 1998
- -------------------------- ----------------------------------
COMMON STOCK, $1 PAR VALUE 196,256,267
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
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INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Earnings -
Three Months and Nine Months Ended September 30, 1998 and 1997..................... 3
Condensed Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1998 and 1997...................................... 4
Condensed Consolidated Balance Sheet -
September 30, 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.......................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 23
Item 6. Exhibits and Reports on Form 8-K............................................. 23
Signatures.............................................................................. 25
Exhibit 3 Bylaws of Lockheed Martin Corporation, as amended
Exhibit 10(g) Form of Long-Term Incentive Performance Award Agreement
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
2
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ------------ -------------
(In millions, except per share data)
Net sales $6,349 $6,619 $19,086 $20,191
Cost of sales 5,653 5,942 17,135 18,221
------ ------ ------- -------
Earnings from operations 696 677 1,951 1,970
Other income and expenses, net 34 70 105 143
------ ------ ------- -------
730 747 2,056 2,113
Interest expense 221 213 655 615
------ ------ ------- -------
Earnings before income taxes 509 534 1,401 1,498
Income tax expense 191 203 525 569
------ ------ ------- -------
Net earnings $ 318 $ 331 $ 876 $ 929
====== ====== ======= =======
Earnings per common share:
Basic $ 1.69 $ 1.70 $ 4.67 $ 4.78
====== ====== ======= =======
Diluted $ 1.67 $ 1.51 $ 4.61 $ 4.28
====== ====== ======= =======
Cash dividends declared per common share $ .40 $ .40 $ 1.20 $ 1.20
====== ====== ======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1998 1997
------------ ------------
(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 876 $ 929
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 744 780
Changes in operating assets and liabilities (913) (1,478)
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Net cash provided by operating activities 707 231
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to properties, net of purchased operations (477) (535)
Divestiture of L-3 Companies -- 464
Divestiture of Armament Systems and Defense Systems -- 450
Other acquisition, investment and divestiture activities 127 (70)
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Net cash (used for) provided by investing activities (350) 309
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 699 (98)
Net repayments related to long-term debt (651) (133)
Issuances of common stock 58 71
Common stock dividends (229) (225)
Preferred stock dividends -- (45)
Final settlement for redemption of preferred stock (51) --
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Net cash used for financing activities (174) (430)
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Net increase in cash and cash equivalents 183 110
Cash and cash equivalents at beginning of period -- --
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Cash and cash equivalents at end of period $ 183 $ 110
===== =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
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LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
1998 1997
--------------- ---------------
(In millions)
ASSETS
Current assets:
Cash and cash equivalents $ 183 $ --
Receivables 5,127 5,009
Inventories 4,340 3,144
Deferred income taxes 1,196 1,256
Other current assets 768 696
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Total current assets 11,614 10,105
Property, plant and equipment 3,608 3,669
Intangible assets related to contracts and programs acquired 1,461 1,566
Cost in excess of net assets acquired 9,664 9,856
Other assets 3,415 3,165
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$29,762 $28,361
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,077 $ 1,234
Customer advances and amounts in excess of costs incurred 4,308 3,644
Salaries, benefits and payroll taxes 931 924
Income taxes 661 364
Short-term borrowings 1,193 494
Current maturities of long-term debt 579 876
Other current liabilities 1,373 1,653
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Total current liabilities 10,122 9,189
Long-term debt 10,183 10,528
Post-retirement benefit liabilities 1,958 1,982
Other liabilities 1,491 1,486
Stockholders' equity:
Common stock, $1 par value per share 195 194
Additional paid-in capital 194 25
Retained earnings 5,812 5,173
Unearned ESOP shares (193) (216)
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Total stockholders' equity 6,008 5,176
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$29,762 $28,361
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See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 and nine months ended September 30,
1998 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 1998 presentation.
NOTE 2 - TRANSACTION AGREEMENT WITH COMSAT CORPORATION
On September 20, 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 (the Merger). The Merger Agreement
has been approved by the respective Boards of Directors of the Corporation and
Comsat. In connection with the first phase of this transaction, the Corporation
commenced a cash tender offer (the Tender Offer) on September 25, 1998, to
purchase up to 49 percent of the outstanding shares of common stock of Comsat on
the date of the purchase at a price of $45.50 per share, with an estimated value
of $1.3 billion. The second phase of the transaction, which will result in
consummation of the Merger, will be accomplished by an exchange of 0.5 shares of
Lockheed Martin common stock for each share of Comsat common stock at an
estimated value of $1.4 billion.
The consummation of the Tender Offer is subject to, among other things, the
approval of the Merger by the stockholders of Comsat and certain regulatory
approvals. This first phase of the transaction is expected to close in the first
half of 1999 and, upon closing, the Corporation will account for its investment
in Comsat under the equity method of accounting. Consummation of the Merger is
subject to, among other things, the enactment of legislation necessary to allow
Lockheed Martin to acquire the remaining shares of Comsat common stock and
certain additional regulatory approvals. The Merger is expected to be completed
by the end of 1999 and, upon consummation, will be accounted for under the
purchase method of accounting. If the Tender Offer is consummated but the
necessary legislation is not enacted or the additional regulatory approvals are
not obtained, each as required for consummation of the Merger, 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
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 have 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
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LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
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. During the second
quarter of 1998, the final determination of the closing net worth of the
businesses exchanged was completed, resulting in a payment of $51 million from
the Corporation to MRA Systems, Inc. (formerly LMT Sub). This final settlement
payment did not impact the gain previously recorded on the transaction.
Subsequently, the remainder of the cash included in the transaction was
refinanced with a note for $210 million, due November 17, 2002 and bearing
interest at 5.73%, from Lockheed Martin to MRA Systems, Inc.
Basic earnings per share were computed based on net earnings, less the
dividend requirement for preferred stock for the 1997 periods. The weighted
average number of common shares outstanding during the period 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 dilutive effect of stock options based on the treasury stock
method and, for the 1997 periods, by the assumed conversion of preferred stock.
The following table sets forth the computations of basic and diluted earnings
per share:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- --------------
(In millions, except per share data)
Net earnings applicable to common stock:
- ----------------------------------------
Net earnings $ 318 $ 331 $ 876 $ 929
Dividends on preferred stock - (15) - (45)
------ ------ ------ ------
Net earnings applicable to common stock for basic
earnings per share 318 316 876 884
Dividends on preferred stock - 15 - 45
------ ------ ------ ------
Net earnings applicable to common stock for diluted
earnings per share $ 318 $ 331 $ 876 $ 929
====== ====== ====== ======
Average common shares outstanding:
- ---------------------------------
Average number of common shares outstanding for
basic earnings per share 188.6 185.9 187.7 184.9
Assumed conversion of the Series A preferred stock - 28.9 - 28.9
Dilutive stock options based on the treasury stock
method 2.0 2.8 2.4 3.1
------ ------ ------ ------
Average number of common shares outstanding for
diluted earnings per share 190.6 217.6 190.1 216.9
====== ====== ====== ======
7
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- --------------
(In millions, except per share data)
Basic earnings per share:
- ------------------------
Net earnings $1.69 $1.78 $4.67 $5.02
Dividends on preferred stock - (.08) - (.24)
----- ----- ------- -----
Earnings per share $1.69 $1.70 $4.67 $4.78
===== ===== ======= =====
Diluted earnings per share:
- --------------------------
Net earnings $1.67 $1.51 $4.61 $4.28
===== ===== ======= =====
On October 22, 1998, the Board of Directors of the Corporation authorized a
two-for-one split of the Corporation's common stock. The stock split will be in
the form of a stock dividend; therefore, stockholders of record on December 1,
1998, will receive one additional share for each share of the Corporation's
common stock held. The new shares will be issued on December 31, 1998.
Subsequent to the consummation of the stock split, all references to shares of
common stock and per share amounts will be restated to reflect the stock split.
This will result in modification of the exchange ratio contemplated by the
Merger Agreement between the Corporation and Comsat from 0.5 shares of Lockheed
Martin common stock for each share of Comsat common stock, as previously
announced, to one share of Lockheed Martin common stock for each share of Comsat
common stock.
In addition, the Corporation's Board of Directors approved an increase to the
cash dividend per share of common stock to $.44 per share, or $1.76 annually, on
a pre-stock split basis. The increased dividend will be effective for dividends
declared beginning in the fourth quarter of 1998.
NOTE 4 - INVENTORIES
September 30, December 31,
1998 1997
-------------- ---------------
(In millions)
Work in process, primarily related to long-term
contracts and programs in progress $ 6,230 $ 5,155
Less customer advances and progress payments (2,496) (2,805)
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3,734 2,350
Other inventories 606 794
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$ 4,340 $ 3,144
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Included in work in process are approximately $725 million and $490 million of
advances as of September 30, 1998 and December 31, 1997, respectively, to
foreign subcontractors, Khrunichev Enterprise and R D AMROSS, a joint venture
between Pratt & Whitney and NPO Energomash, for the manufacture of launch
vehicles and related launch services.
8
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
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. The Corporation has
now entered a follow-on consent decree with the EPA which obligates 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. The results of these studies will
determine the extent of the Corporation's clean-up obligation, if any, with
respect to perchlorates.
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.
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
potentially
9
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
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. Though the Defense Contract
Audit Agency has questioned certain elements of the Corporation's practices with
respect to the aforementioned agreement, no formal action has been initiated,
and it is management's opinion that the treatment of these environmental costs
is appropriate and consistent with the terms of such agreement. 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 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 included, but were 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.
On February 27, 1998, the Corporation received a cure notice alleging that
certain actions taken by the Corporation were conditions endangering performance
of the Pit 9 contract. The notice advised that, unless these conditions were
cured within 30 days, the contract might be terminated for default. The
Corporation believed (and continues to believe) that termination for default was
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. On June 1, 1998, despite the
Corporation's reply, the DOE, through Lockheed Martin Idaho Technologies Company
(LMITCO), its management contractor, terminated the Pit 9 contract for default.
On that 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. The Government has not yet responded to the suit.
Additionally, on July 21, 1998, the Corporation withdrew the REA previously
submitted to the DOE in March 1997 and replaced it with a certified REA. This
action resulted from the DOE's dissatisfaction with the uncertified nature of
the original 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. It is
anticipated that the DOE will require several months to consider this certified
REA. On August 11, 1998, LMITCO, at the DOE's direction, filed suit against the
Corporation in U.S. Federal District Court in Boise, Idaho, seeking recovery of
approximately $54 million previously paid by LMITCO to the Corporation under the
Pit 9 contract. The
10
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Corporation intends to resist this action while continuing to pursue its
certified REA. The parties in both lawsuits have obtained extensions of time to
file their respective responses to complaints included therein; such responses
are expected to be filed during the fourth quarter of 1998. The Corporation
continues to assert its position in the litigation while continuing efforts to
resolve the dispute through non-litigation means.
NOTE 6 - OTHER
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 (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 would become a wholly-
owned subsidiary of Lockheed Martin. The Merger Agreement provided for its
termination, and therefore termination of the Merger, by action of the Board of
Directors of either the Corporation or Northrop Grumman if the Merger had not
been consummated by March 31, 1998. In July 1998, the Board of Directors of
Lockheed Martin terminated the Merger Agreement, thereby terminating the Merger.
In March 1997, the Corporation executed a definitive agreement valued at
approximately $525 million to reposition 10 non-core business units as a new
independent company, L-3 Communications Corporation (L-3), in which the
Corporation retained a 34.9 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. During May 1998, L-3 completed
an Initial Public Offering resulting in the issuance of an additional 6.9
million shares of its common stock to the public. This transaction resulted in a
reduction in the Corporation's ownership to approximately 25 percent, and the
recognition of a pretax gain of $18 million in other income and expenses. The
gain increased net earnings by $12 million, or $.06 per diluted share.
In September 1998, the Corporation recorded an adjustment in the Space &
Strategic Missiles segment which resulted from a significant improvement in the
Atlas II launch vehicle program related to the retirement of program and
technical risk based upon a current evaluation of the program's historical
performance. This change in estimate increased pretax earnings by $120 million,
net of state income taxes, and increased net earnings by $78 million, or $.41
per diluted share.
Commercial paper borrowings of approximately $2.2 billion were outstanding at
September 30, 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. During May 1998, the Corporation increased the amount of its
short-term revolving credit facility, which matures on May 28, 1999, from $1.5
billion to $2.5 billion. The Corporation's long-term revolving credit facility
in the amount of $3.5 billion, which matures on December 20, 2001, remains
unchanged.
The Corporation's total interest payments were $550 million and $498 million
for the nine months ended September 30, 1998 and 1997, respectively.
The Corporation's federal and foreign income tax payments, net of refunds
received, were $155 million and $909 million for the nine months ended
September 30, 1998 and 1997, respectively.
11
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
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 month and nine month periods ended September 30, 1998 and 1997.
In June 1997, the Financial Accounting Standards Board (FASB) 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 in the process of analyzing and assessing the impact of this SOP, and plans
to adopt effective January 1, 1999. Although the adoption of this SOP is
expected to affect the timing of future cash flows under contracts with the U.S.
Government, management does not currently expect its adoption will have a
material effect on the Corporation's consolidated results of operations, cash
flows or 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
and financial reporting related to 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. SOP No. 98-5 is effective for fiscal years
beginning after December 15, 1998. Management currently estimates that the
amount of the after-tax cumulative effect adjustment to be recognized upon the
adoption of the SOP will be between $300 million and $400 million. The
Corporation is continuing to analyze and assess the timing of the adoption and
its impact on the Corporation's consolidated results of operations and financial
position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 provides authoritative
guidance on accounting and financial reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. The
Statement 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, as further defined
in the Statement. SFAS No. 133 requires adoption no later than January 1, 2000,
but early adoption is allowed, and initial application must be as of the
beginning of a fiscal quarter. Additionally, the Statement
12
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
cannot be applied retroactively to prior periods. At adoption, existing hedging
relationships must be designated anew and documented pursuant to the provisions
of the Statement. The Corporation is currently 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.
13
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TRANSACTION AGREEMENT WITH COMSAT CORPORATION
On September 20, 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 (the Merger). The Merger Agreement
has been approved by the respective Boards of Directors of the Corporation and
Comsat. In connection with the first phase of this transaction, the Corporation
commenced a cash tender offer (the Tender Offer) on September 25, 1998, to
purchase up to 49 percent of the outstanding shares of common stock of Comsat on
the date of purchase at a price of $45.50 per share, with an estimated value of
$1.3 billion. The second phase of the transaction, which will result in
consummation of the Merger, will be accomplished by an exchange of 0.5 shares of
Lockheed Martin common stock for each share of Comsat common stock at an
estimated value of $1.4 billion.
The consummation of the Tender Offer is subject to, among other things, the
approval of the Merger by the stockholders of Comsat and certain regulatory
approvals. This first phase of the transaction is expected to close in the first
half of 1999 and, upon closing, the Corporation will account for its investment
in Comsat under the equity method of accounting. Consummation of the Merger is
subject to, among other things, the enactment of legislation necessary to allow
Lockheed Martin to acquire the remaining shares of Comsat common stock and
certain additional regulatory approvals. The Merger is expected to be completed
by the end of 1999 and, upon consummation, will be accounted for under the
purchase method of accounting. If the Tender Offer is consummated but the
necessary legislation is not enacted or the additional regulatory approvals are
not obtained, each as required for consummation of the Merger, 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.
FORMATION OF GLOBAL TELECOMMUNICATIONS SUBSIDIARY
On August 11, 1998, the Corporation announced the formation of Lockheed Martin
Global Telecommunications, Inc. (Global Telecommunications), a wholly-owned
subsidiary of the Corporation. Global Telecommunications will combine several
existing joint ventures and elements of the Corporation under a dedicated
management team focused on capturing a greater portion of the worldwide network
services market. In its announcement, the Corporation indicated that the
following operations will be included in Global Telecommunications: Lockheed
Martin Intersputnik, Ltd., a strategic venture with Moscow-based Intersputnik
that is scheduled to deploy its first satellite in 1999; Astrolink TM
International Ltd., a strategic venture that will provide global interactive
multimedia services using next-generation broadband satellite technology;
Communications Systems, which markets commercial satellite communications
systems capabilities; the elements of Lockheed Martin Management & Data Systems
and Lockheed Martin Western Development Laboratories that provide commercial
communications capabilities; and Satco (Asia), LLC, a joint venture with GE
Americom that is scheduled to launch a satellite next year that will serve
broadcasters in the Asia-Pacific region. Additionally, the Corporation intends
to include in Global Telecommunications the operations of Comsat upon
consummation of the Tender Offer and the Merger.
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 Series A preferred stock, which was originally issued to GE in
14
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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. During the second quarter of 1998, the final determination
of the closing net worth of the businesses exchanged was completed, resulting
in a payment of $51 million from the Corporation to MRA Systems, Inc. (formerly
LMT Sub). This final settlement payment did not impact the gain previously
recorded on the transaction. Subsequently, the remainder of the cash included
in the transaction was refinanced with a note for $210 million, due
November 17, 2002 and bearing interest at 5.73%, from Lockheed Martin to MRA
Systems, Inc.
The debt incurred to finance the GE Transaction resulted in an increase in the
Corporation's leverage ratio. In anticipation of this increase, 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. Following the termination of the
Northrop Grumman merger agreement, Lockheed Martin has negotiated a further
amendment to the leverage restrictions under its credit facilities so as to be
in compliance with these restrictions subsequent to June 30, 1998.
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 third quarter of 1998 were $6.3 billion, a four
percent decrease from the $6.6 billion recorded for the comparable period in
1997. Consolidated net sales for the nine months ended September 30, 1998 were
$19.1 billion, a five percent decrease from the $20.2 billion reported for the
same period in 1997. The 1997 results include the operations of two non-core
commercial businesses divested to General Electric Company in November 1997, the
operations of L-3 Communications Corporation (L-3), which was repositioned as an
independent company effective March 30, 1997, and the operations of the
Corporation's Commercial Electronics business unit which was divested in the
first quarter of 1998. Excluding the effects of these divested operations, net
sales both for the quarter and for the nine months ended September 30, 1998
would have increased by three percent over comparable 1997 results. The
Corporation's operating profit (earnings before interest and taxes) for the
third quarter of 1998 was $730 million as compared to $747 million for the
comparable 1997 period. The Corporation's operating profit for the nine months
ended September 30, 1998 was $2.06 billion as compared to $2.11 billion for the
comparable 1997 period. Excluding the impact of the divested operations
described above, operating profit both for the quarter and for the nine months
ended September 30, 1998 would have remained consistent with the comparable 1997
amounts.
Net earnings for the third quarter of 1998 were $318 million, a four percent
decrease from reported third quarter 1997 net earnings of $331 million. The
Corporation's diluted earnings per share reported for the
15
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
third quarter of 1998 was $1.67, an 11 percent increase from third quarter 1997
diluted earnings per share of $1.51. Net earnings for the nine months ended
September 30, 1998 were $876 million, a six percent decrease from reported net
earnings of $929 million for the comparable 1997 period. The Corporation's
diluted earnings per share for the nine months ended September 30, 1998 was
$4.61, an eight percent increase from the comparable 1997 diluted earnings per
share of $4.28. The 1998 earnings per share amounts reflect the impact of the
fourth quarter 1997 redemption of the Corporation's Series A preferred stock
formerly held by GE. The effective income tax rate for the third quarter and
nine months ended September 30, 1998 was 37.5 percent as compared to 38 percent
for the third quarter and nine months ended September 30, 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 $43.9
billion at September 30, 1998, versus $47.1 billion reported at December 31,
1997. The Corporation received orders for approximately $17.1 billion in new
and follow-on business, which were more than offset by sales during the first
nine months of 1998.
The following table displays third quarter and year-to-date net sales and
operating profit for the Corporation's business segments.
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------------- -------------------- --------------- ---------------
(In millions)
Net Sales:
Space & Strategic Missiles $1,714 $1,944 $ 5,626 $ 5,828
Electronics 1,708 1,699 5,176 5,192
Information & Services 1,237 1,631 3,731 4,958
Aeronautics 1,638 1,294 4,370 4,100
Energy and Other 52 51 183 113
------ ------ ------- -------
$6,349 $6,619 $19,086 $20,191
====== ====== ======= =======
Operating Profit:
Space & Strategic Missiles $ 261 $ 310 $ 762 $ 874
Electronics 226 169 549 435
Information & Services 39 46 165 224
Aeronautics 171 152 474 439
Energy and Other 33 70 106 141
------ ------ ------- -------
$ 730 $ 747 $ 2,056 $ 2,113
====== ====== ======= =======
Effective January 1, 1998, management responsibility for United Space
Alliance, a limited liability company owned by the Corporation and The Boeing
Company, 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 decreased by 12 percent
and three percent for the quarter and nine months ended September 30, 1998,
respectively, from the comparable 1997 periods. These decreases were primarily
attributable to reduced launch vehicle activities in the third quarter versus
the prior
16
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
year period as well as a decrease in Trident fleet ballistic missile program
activities. These factors also contributed to the decrease in operating profit
of 16 percent and 13 percent for the quarter and nine months ended September 30,
1998, respectively, from the comparable 1997 periods. However, these decreases
were partially offset by an adjustment recorded in the third quarter of 1998
totaling $120 million, net of state income taxes, which resulted from a
significant improvement in the Atlas II launch vehicle program related to the
retirement of program and technical risk based upon a current evaluation of the
program's historical performance.
Net sales of the Electronics segment remained relatively consistent for the
quarter and nine months ended September 30, 1998 as compared to the same periods
in 1997. Excluding the net sales of the Commercial Electronics business unit
divested in the first quarter of 1998, net sales for the quarter and nine months
ended September 30, 1998 would have increased by four percent and three percent,
respectively, from the comparable 1997 amounts. These increases were principally
the result of increased production deliveries of postal systems equipment.
Operating profit for the quarter and nine months ended September 30, 1998
increased significantly as compared to the respective 1997 amounts, primarily
due to performance improvements across many of the segment's programs. In
addition, third quarter 1998 operating profit was impacted by a favorable
arbitration resolution.
Net sales of the Information & Services segment for the quarter and nine
months ended September 30, 1998 decreased by 24 percent and 25 percent,
respectively, from the comparable 1997 periods. Excluding the 1997 net sales of
the non-core businesses divested to L-3 and GE, net sales for the third quarter
1998 would have decreased by three percent as compared to the same period in
1997. Net sales for the nine months ended September 30, 1998, excluding the net
sales of the divested businesses, would have remained relatively stable in
comparison to the comparable 1997 period. Sales volume increases in certain
technology services programs and welfare and family services programs were
offset by reduced activities resulting from maturing programs in both 1998
periods. Operating profit for the quarter and nine months ended September 30,
1998 decreased by 15 percent and 26 percent from the comparable 1997 periods,
respectively. These percentage decreases would have remained relatively
consistent after excluding the 1997 operating profit from divested entities.
These decreases primarily resulted from adverse performance in the segment's
commercial product lines.
Net sales of the Aeronautics segment for the third quarter of 1998 increased
significantly from the comparable 1997 period due principally to increases in
deliveries of F-16 fighter aircraft and C-130 airlift aircraft. Net sales for
the nine months ended September 30, 1998 increased by seven percent as compared
to the same 1997 period as a result of the aforementioned third quarter 1998
sales activity. In addition, the 1997 net sales amounts include the operations
of the segment's Aerostructures business unit which was divested to GE during
the fourth quarter of 1997. Operating profit for the third quarter and nine
months ended September 30, 1998 increased by 13 percent and eight percent,
respectively, as compared to the same periods in 1997. Excluding the operations
of the Aerostructures business unit, operating profit would have increased by 27
percent and 17 percent for the third quarter and nine months ended September 30,
1998, respectively. These increases were principally due to the increase in
aircraft deliveries noted above.
Net sales of the Energy and Other segment for the third quarter of 1998
increased slightly as compared to 1997. Net sales for the nine months ended
September 30, 1998 increased significantly from the comparable 1997 period due
to an increase in environmental systems activities. Operating profit for the
third quarter and nine months ended September 30, 1998 decreased significantly
from the comparable 1997 periods due to the recognition of a gain in the third
quarter of 1997 from the sale of a portion of the Corporation's real estate
portfolio. In 1994, the Corporation was awarded a $180 million fixed price
contract by the U.S. Department
17
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 included, but
were 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.
On February 27, 1998, the Corporation received a cure notice alleging that
certain actions taken by the Corporation were conditions endangering performance
of the Pit 9 contract. The notice advised that, unless these conditions were
cured within 30 days, the contract might be terminated for default. The
Corporation believed (and continues to believe) that termination for default was
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. On June 1, 1998, despite the
Corporation's reply, the DOE, through Lockheed Martin Idaho Technologies Company
(LMITCO), its management contractor, terminated the Pit 9 contract for default.
On that 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. The Government has not yet responded to the suit.
Additionally, on July 21, 1998, the Corporation withdrew the REA previously
submitted to the DOE in March 1997 and replaced it with a certified REA. This
action resulted from the DOE's dissatisfaction with the uncertified nature of
the original 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. It is
anticipated that the DOE will require several months to consider this certified
REA. On August 11, 1998, LMITCO, at the DOE's direction, filed suit against the
Corporation in U.S. Federal District Court in Boise, Idaho, seeking recovery of
approximately $54 million previously paid by LMITCO to the Corporation under the
Pit 9 contract. The Corporation intends to resist this action while continuing
to pursue its certified REA. The parties in both lawsuits have obtained
extensions of time to file their respective responses to complaints included
therein; such responses are expected to be filed during the fourth quarter of
1998. The Corporation continues to assert its position in the litigation while
continuing efforts to resolve the dispute through non-litigation means.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1998, $707 million of cash was provided by
operating activities, compared to $231 million during the comparable 1997
period. This fluctuation resulted principally from decreased working capital
requirements. Net cash used for investing activities for the nine months ended
September 30, 1998 was $350 million as compared to $309 million provided by
investing activities during the corresponding 1997 period. The 1997 amount
included the receipt of $450 million from General Dynamics Corporation related
to the sale of the Corporation's Armament Systems and Defense Systems operations
and $464 million from the divestiture of the L-3 operations. The remaining
difference between
18
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
the periods relates to other acquisition and divestiture activities. Net cash
used by financing activities was $174 million during the nine months ended
September 30, 1998 versus $430 million used for financing activities in the
comparable 1997 period. The fluctuation between periods was primarily due to a
$48 million increase, net of noncash acquisition activities, in the
Corporation's total debt position during 1998 versus a $231 million net decrease
in total debt during the comparable 1997 period.
Commercial paper borrowings of approximately $2.2 billion were outstanding at
September 30, 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. During May 1998, the Corporation increased the amount of its
short-term revolving credit facility, which matures on May 28, 1999, from $1.5
billion to $2.5 billion. The Corporation's long-term revolving credit facility
in the amount of $3.5 billion, which matures on December 20, 2001, remains
unchanged. The $699 million increase in short-term borrowings was utilized to
finance working capital requirements. Total debt, including short-term
borrowings, amounted to approximately 67 percent of total capitalization at
September 30, 1998, a reduction from the nearly 70 percent reported at December
31, 1997. The increase in stockholders' equity for the nine months ended
September 30, 1998 resulted from net earnings for the period and employee stock
option, ESOP and other stock activities, offset by dividends totaling $229
million.
On October 22, 1998, the Board of Directors of the Corporation authorized a
two-for-one split of the Corporation's common stock. The stock split will be in
the form of a stock dividend; therefore, stockholders of record on December 1,
1998, will receive one additional share for each share of the Corporation's
common stock held. The new shares will be issued on December 31, 1998.
Subsequent to the consummation of the stock split, all references to shares of
common stock and per share amounts will be restated to reflect the stock split.
This will result in modification of the exchange ratio contemplated by the
Merger Agreement between the Corporation and Comsat from 0.5 shares of Lockheed
Martin common stock for each share of Comsat common stock, as previously
announced, to one share of Lockheed Martin common stock for each share of Comsat
common stock.
In addition, the Corporation's Board of Directors approved an increase to the
cash dividend per share of common stock to $.44 per share, or $1.76 annually, on
a pre-stock split basis. The increased dividend will be effective for dividends
declared beginning in the fourth quarter of 1998.
The Corporation actively seeks to finance its business in a manner that
preserves financial flexibility while minimizing borrowing costs to the extent
practicable. To achieve this objective, management continually reviews changing
financial, market and economic conditions with a view toward managing the types,
amounts and maturities of the Corporation's indebtedness. From time to time, the
Corporation may refinance existing indebtedness, vary its mix of variable rate
and fixed rate debt and the maturities of that debt, or seek alternative sources
of financial support for its cash and operational needs.
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 invest in its core
businesses and reduce debt, 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.
19
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
YEAR 2000 ISSUES
Like most companies, Lockheed Martin is affected by Year 2000 issues.
Accordingly, all of the Corporation's business units are actively involved in
its Year 2000 Compliance Program (the Program). This Program has been designed
to minimize risk to the Corporation's business units and its customers using a
standard six-phase industry approach. The six phases include: Awareness,
Assessment, Renovation, Validation, Implementation and Post-Implementation. The
Corporation has completed its assessments which address both internal and
external (customer products and deliverables) systems. In many of the
Corporation's business units, renovation work is well underway and validation
testing has begun relative to internal systems. In the area of customer
products and deliverables, numerous contracts have been reviewed and customers
notified if Year 2000 issues were identified. Renovation of these products,
where requested and funded by the customer, is in process or planned.
Lockheed Martin has developed a plan to achieve its overall goal of Year 2000
readiness in advance of the century change. During 1998, much of the renovation
and validation testing will be completed, and 1999 will be used to address late
availability of vendor or government furnished equipment, planned replacement
systems and overflow validation testing. Based on information available at this
time, management believes that the costs to implement the Program will not have
a material impact on the Corporation's consolidated results of operations, cash
flows or financial position in any period. Such costs are allowable in
establishing prices for the Corporation's products and services under contracts
with the U.S. Government, and therefore are being reflected in the Corporation's
sales and cost of sales.
The costs to implement and the time frame contemplated by the Program are
based on management's best estimates, which were derived utilizing numerous
assumptions related to future events, including each vendor's ability to modify
proprietary software, unanticipated issues identified in the ongoing compliance
review, and other similar uncertainties. There can be no guarantee that these
estimates of costs or timing, or that the objectives of the Program, will be
achieved. However, the Corporation continues to monitor activities related to
the Program through program reviews and internal audits designed to ensure Year
2000 readiness, and management currently believes that activities to date are
consistent with the Program's design. Contingency and crisis plans are being
prepared and will be implemented if necessary.
In addition, as part of the Program, formal communication with the
Corporation's suppliers, customers and other support services has been
initiated. Interfaces to external suppliers and customers (including banks and
U.S. Government customers) have been included in assessments and validation
testing. Also, certain systems utilized by the Corporation include embedded
vendor products for which responsibility for Year 2000 compliance rests with the
respective vendor. The Corporation does not have control over these third
parties and, as a result, cannot currently estimate to what extent future
operating results may be adversely affected by the failure of these third
parties to successfully address their Year 2000 issues. However, the
Corporation's Program includes actions designed to identify and minimize any
third party exposures and management believes that, based on third party
exposures identified to date, Program activities are consistent with its design.
OTHER MATTERS
On October 27, 1998, CalComp Technology, Inc. (CalComp), a majority-owned
public subsidiary of the Corporation, made a decision to divest certain of its
nonstrategic businesses. As a result of this decision, CalComp has announced
that it will recognize a non-cash charge approximating $60 million in the fourth
quarter of 1998 to reduce the carrying value of the net assets of these
businesses to their fair value. CalComp
20
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
also has announced that it is evaluating the business strategy for its
continuing operations, and currently expects to record non-cash charges of
approximately $30 million to $35 million in the fourth quarter of 1998 related
to the impairment of certain long-lived assets. These charges will be reflected
in the Corporation's consolidated financial statements in the fourth quarter.
The Corporation has been reviewing its relationship with CalComp. This review,
which has not been completed, has included assessments of CalComp's business
strategy and proposed operating plans, CalComp's role in the Corporation's
overall business strategy, and the Corporation's role as the primary source of
financing for CalComp's operations. If, upon completion of this review, the
Corporation should adopt a plan to terminate its role as a funding source or
otherwise reduce its involvement with CalComp, significant charges in addition
to those described in the preceding paragraph would likely be recognized by the
Corporation in its consolidated financial statements at the time of plan
adoption. These charges, which could range from $60 million to $100 million
based on the preliminary data available, would be associated with the value of
the Corporation's investment and estimated costs related to the specific actions
required by the plan.
The Corporation is currently engaged in its normal long-term business planning
process, and, as such, all major lines of business and related strategies are
being evaluated. The Launch Vehicle line of business includes the existing
commercial Atlas, Athena and Air Force Titan products; the development of a new
family of Evolved Expendable Launch Vehicles (EELV); and providing launch
services through Lockheed Krunichev Energia International, Inc. and R D AMROSS,
a joint venture between Pratt & Whitney and NPO Energomash. This particular
business strategy review includes an evaluation of marketing strategy,
international economic and political risk and an assessment of the impact of the
recent Air Force EELV launch services award on the Corporation's investment in
this line of business. Financial effects, if any, which result from this review
will be addressed in the fourth quarter of 1998.
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" and "Note 16 - Commitments and Contingencies"
of the Notes to the
21
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Consolidated Financial Statements on pages 31 through 32 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 14 through 22 of this Form 10-Q, and "Note 2 - Transaction
Agreement with Comsat Corporation," "Note 3 - Earnings Per Share," "Note 5 -
Contingencies" and "Note 6 - Other" of the Notes to Unaudited Condensed
Consolidated Financial Statements on page 6, pages 6 through 8, pages 9 through
11 and pages 11 through 13, respectively, of the Unaudited Condensed
Consolidated Financial Statements included in this Form 10-Q.
22
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Corporation is primarily engaged in providing products and services under
contracts with the United States Government and, to a lesser degree, under
direct foreign sales contracts, some of which are funded by the United States
Government. All such contracts are subject to extensive legal and regulatory
requirements and, from time to time, agencies of the United States Government
investigate whether the Corporation's operations are being conducted in
accordance with these requirements. United States Government investigations of
the Corporation, whether relating to these Government 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 United States Government
contracting. The Corporation is also a party to or has its property subject to
various other litigation and proceedings, including matters arising under
provisions relating to the protection of the environment (collectively,
proceedings).
The Corporation has previously reported a continuing United States Government
investigation into allegations of fraud related to the obtaining and performance
of certain LANTIRN program contracts. These allegations were first made in qui
tam complaints filed against the Corporation and unsealed on July 16, 1996. In
connection with its investigation, in September 1998, the United States
Government served 10 employees with grand jury subpoenas issued by the United
States District Court for the Middle District of Florida. The Corporation is
cooperating in the investigation.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1. Exhibit 3 Bylaws of Lockheed Martin Corporation, as amended.
2. Exhibit 10(a) Agreement and Plan of Merger, dated as of September 18,
1998, among Lockheed Martin Corporation, Deneb Corporation
and COMSAT Corporation, incorporated by reference from the
Schedule 14D-1 filed by the Corporation on September 25,
1998, in respect of the Common Stock of COMSAT Corporation.
3. Exhibit 10(b) Registration Rights Agreement, dated as of September 18,
1998, between COMSAT Corporation and Lockheed Martin
Corporation, incorporated by reference from the Schedule
14D-1 filed by the Corporation on September 25, 1998, in
respect of the Common Stock of COMSAT Corporation.
4. Exhibit 10(c) Shareholders Agreement, dated as of September 18,
1998, between COMSAT Corporation and Lockheed Martin
Corporation, incorporated by reference from the Schedule
14D-1 filed by the Corporation on September 25, 1998, in
respect of the Common Stock of COMSAT Corporation.
5. Exhibit 10(d) Carrier Acquisition Agreement, dated as of September 18,
1998, by and among COMSAT Corporation, Lockheed Martin
Corporation, Regulus, LLC and COMSAT Government Systems,
Inc., incorporated by reference from the Schedule 14D-1
filed by the Corporation on September 25, 1998, in respect
of the Common Stock of COMSAT Corporation.
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LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION (continued)
6. Exhibit 10(e) Confidentiality Agreements, dated August 5, 1997,
between COMSAT Corporation and Lockheed Martin Corporation,
incorporated by reference from the Schedule 14D-1 filed by
the Corporation on September 25, 1998, in respect of the
Common Stock of COMSAT Corporation.
7. Exhibit 10(f) Offer to Purchase, dated September 25, 1998, incorporated
by reference from the Schedule 14D-1 filed by the
Corporation on September 25, 1998, in respect of the Common
Stock of COMSAT Corporation.
8. Exhibit 10(g) Form of Long-Term Incentive Performance Award Agreement.
9. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of
Earnings to Fixed Charges for the nine months ended
September 30, 1998.
10. Exhibit 27. Financial Data Schedule for the nine months ended
September 30, 1998.
(b) Reports on Form 8-K filed in the third quarter of 1998.
1. Current report on Form 8-K filed on July 17, 1998.
Item 5. Other Events
On July 17, 1998, the registrant filed information concerning the
termination of the Agreement and Plan of Merger dated July 2, 1997 among the
registrant, a wholly-owned subsidiary of the registrant and Northrop Grumman
Corporation.
2. Current report on Form 8-K filed on September 21, 1998 (as amended by a
Form 8-K/A filed on September 25,1998).
Item 5. Other Events
The registrant filed information concerning an Agreement and Plan of
Merger dated as of September 18, 1998 among the registrant, Deneb Corporation
(a wholly-owned subsidiary of the registrant) and Comsat Corporation.
(c) Reports on Form 8-K filed subsequent to the third quarter of 1998.
1. Current report on Form 8-K filed on October 27, 1998.
Item 5. Other Events
The registrant filed information concerning its declaration of a two-for-
one stock split of the Corporation's common stock in the form of a stock
dividend and the related impact of the stock split on the exchange ratio
contemplated in the Corporation's transaction with Comsat Corporation.
Item 7. Financial Statements and Exhibits
- Lockheed Martin Corporation Press Release dated October 22, 1998.
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LOCKHEED MARTIN CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOCKHEED MARTIN CORPORATION
---------------------------
(Registrant)
Date: November 2, 1998 by: /s/ Todd J. Kallman
------------------------------- --------------------------------
Todd J. Kallman
Vice President and Controller
(Chief Accounting Officer)
25