LMT

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2000
Business Overview: A major defense and aerospace contractor operating through four principal segments: Systems Integration, Space Systems, Aeronautical Systems, and Technology Services. The company is in the process of completing a two-phase merger with COMSAT Corporation, which was consummated on August 3, 2000, shortly after the reporting period.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Improvement: The company returned to profitability in Q2 2000 ($42M net earnings) compared to a net loss of $41M in Q2 1999. This turnaround was driven by the absence of significant negative adjustments recorded in 1999 related to the C-130J and Titan IV programs.
• Operating Profit Surge: Operating profit for Q2 2000 ($325M) more than doubled compared to Q2 1999 ($134M). Excluding nonrecurring items, operating profit increased 18% quarter-over-quarter.
• Cash Flow Reversal: Operating cash flow swung from a use of $176M in the first six months of 1999 to a generation of $1,598M in the first six months of 2000. This was primarily due to a $900M advance payment from the United Arab Emirates for F-16 aircraft and $100M in environmental remediation reimbursements.
• Debt Reduction: Total debt decreased by approximately $490M during the first six months of 2000, primarily through net repayments of short-term debt.

Guidance, Outlook, Risks, and Unusual Items

Unusual Items and Contingencies

• Globalstar Guarantee Charge: In Q2 2000, the company recorded a nonrecurring charge of $141M (pretax) after paying $150M to satisfy a guarantee on Globalstar Telecommunications' debt. This reduced net earnings by $91M.
• CalComp Reversal: A favorable adjustment of $33M (pretax) was recorded due to the reversal of a portion of a previously recorded charge related to the shutdown of CalComp Technology, Inc.
• COMSAT Merger: The merger with COMSAT was completed on August 3, 2000. The total purchase price was approximately $2.6 billion. Preliminary purchase accounting adjustments of $2.3 billion are expected to be recorded in Q3 2000.

Subsequent Events and Divestitures

• AES Divestiture: On July 13, 2000, the company agreed to sell its Aerospace Electronics Systems (AES) business to BAE Systems for $1.67 billion. The company expects to record a pretax impairment loss of approximately $750 million (approx. $1 billion after-tax) in Q3 2000.
• Control Systems Divestiture: An agreement was reached to sell Lockheed Martin Control Systems to BAE Systems for $510 million, expected to generate a pretax gain of $300 million.

Risks and Outlook

• Backlog: Undelivered orders stood at $57.1 billion as of June 30, 2000, up from $45.9 billion at year-end 1999, driven largely by $8.9 billion in new F-16 orders.
• Legal Proceedings: The company faces ongoing litigation regarding environmental remediation (Redlands, Burbank, Glendale) and a race discrimination class action lawsuit. Management believes the probability of a material adverse effect is remote.
• Market Risk: Exposure to interest rate and foreign currency exchange rate fluctuations is managed but deemed not material.

Investor Verification Checklist

• COMSAT Integration: Verify the final purchase accounting adjustments and the impact of COMSAT's operations on Q3 and Q4 2000 results.
• Impairment Losses: Confirm the final magnitude of the impairment loss associated with the AES divestiture to BAE Systems, currently estimated at $750M pretax.
• Globalstar Recovery: Monitor the status of the $150M receivable from Globalstar, as the form and timing of repayment remain uncertain.
• Environmental Liabilities: Track the resolution of the Redlands perchlorate contamination and the Pit 9 waste remediation dispute with the DOE, which could impact future costs.
• UAE F-16 Contract: Verify the utilization of the $900M cash advance received from the UAE for subcontractor payments and contract fulfillment.