Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1998
Business Overview: A highly diversified global enterprise formed in 1995 by the merger of Martin Marietta and Lockheed. The company researches, designs, develops, manufactures, and integrates advanced technology products and services, primarily for the U.S. Government (70% of 1998 net sales). Operations are organized into five sectors: Space & Strategic Missiles, Electronics, Aeronautics, Information & Services, and Energy & Environment.
Key Financial Metrics
Note: Specific consolidated revenue, profit, cash flow, and margin figures are incorporated by reference to the 1998 Annual Report to Shareholders and are not explicitly stated in the provided text.
- Backlog: Total negotiated backlog was $45.3 billion at December 31, 1998, down from $47.1 billion in 1997.
- Backlog Composition: Approximately 59.2% ($26.8 billion) is not expected to be filled within one year.
- Segment Backlog (1998): Space & Strategic Missiles ($16.1B), Electronics ($10.6B), Aeronautics ($10.6B), Information & Services ($7.8B), Energy & Other ($0.226B).
- Market Capitalization: Approximately $14.5 billion (voting stock held by non-affiliates) as of January 31, 1999.
- Shares Outstanding: 393,414,606 shares as of January 31, 1999.
- Dividends: $0.82 per share paid in 1998 (following a 2-for-1 stock split in December 1998).
- Employees: Approximately 165,000 as of December 31, 1998.
- IR&D Spending: Approximately $1.1 billion in 1998.
Material Changes and Operational Highlights
- COMSAT Transaction: Entered a two-phase agreement in September 1998 to acquire COMSAT Corporation (estimated value $2.7 billion). Phase 1 involves a cash tender offer for up to 49% of shares; Phase 2 involves a merger. Completion is contingent on regulatory approvals (FCC, DOJ) and federal legislation.
- Telecommunications Restructuring: Formed Lockheed Martin Global Telecommunications, Inc. (LMGT) in August 1998 to consolidate global telecom assets. Effective January 1999, specific assets and investments were transferred to LMGT.
- Program Delays and Issues:
- Space: Titan II and IV launches delayed following a mission failure in August 1998; Proton launches delayed due to payload issues. THAAD system failed an intercept test in 1998.
- Electronics: Manufacturing defects in traveling wave tube amplifiers (TWTAs) led to grounding and repair of five satellites, delaying launches into 1999.
- Aeronautics: C-130J deliveries fell short of 1998 plans due to FAA certification delays regarding ice removal systems. F-22 program met flight test criteria, securing initial production contracts.
- Information & Services: Agreed to divest communications industry services business (North American Numbering Plan administrator) in December 1998. Initiated non-bankruptcy shutdown of majority-owned subsidiary CalComp Technology, Inc.
- Environmental Liabilities: Recorded a liability of approximately $460 million for environmental remediation, including $220 million for former Burbank and Redlands facilities.
Outlook, Risks, and Contingencies
- Regulatory and Legislative Risks: The COMSAT merger faces significant uncertainty regarding FCC regulations and the need for Congress to amend the Communications Satellite Act of 1962. If legislation is not enacted or approvals are not obtained, the merger may not occur in 1999.
- Government Dependency: 70% of net sales are to the U.S. Government. Business is sensitive to budgetary constraints, policy changes, and the availability of Congressional appropriations. Many contracts are cost-reimbursement type, which carry lower profit margins and performance risks.
- Legal Proceedings:
- Securities Litigation: Multiple class-action lawsuits filed in January 1999 alleging violations of the Securities Exchange Act of 1934 regarding stock price inflation between August and December 1998. Management believes allegations are without merit.
- Pit 9 Dispute: Ongoing litigation with the Department of Energy (DOE) regarding a terminated contract for waste remediation at the Idaho National Engineering and Environmental Laboratory. DOE seeks recovery of ~$54 million; Lockheed Martin has filed a certified request for equitable adjustment.
- Government Investigations: Cooperating with grand jury subpoenas and investigations regarding former Unisys facilities, the LANTIRN program, and space operations contracts.
- Environmental Contingencies: Potential liability for environmental remediation at third-party sites could exceed recorded amounts if other responsible parties fail to pay their share, though management deems a material adverse effect remote.
Investor Verification Checklist
- COMSAT Merger Status: Verify progress on FCC approval and the status of federal satellite reform legislation required to close the transaction.
- Backlog Quality: Review the breakdown of funded vs. unfunded backlog, noting that 59.2% is not expected to be filled within one year.
- Program Performance: Monitor the operational status of Titan launch vehicles, the resolution of TWTA satellite defects, and the schedule for C-130J deliveries.
- Legal Exposure: Track the outcome of the Pit 9 litigation with the DOE and the status of the securities class-action lawsuits filed in early 1999.
- Environmental Costs: Assess the adequacy of the $460 million environmental accrual against potential future remediation costs at third-party sites.
- Divestitures: Confirm the completion of the CalComp shutdown and the divestiture of the communications industry services business.