LMT

Lockheed Martin Corp. Q1 1999 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the three-month period ended March 31, 1999. Lockheed Martin Corporation operates in four principal segments: Space & Strategic Missiles, Electronics, Aeronautics, and Information & Services. The reporting period reflects the impact of a two-for-one stock split effected on December 31, 1998, and the adoption of new accounting standards effective January 1, 1999.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss vs. Profit: The company reported a net loss of $87 million compared to net earnings of $269 million in Q1 1998. This reversal was primarily driven by a one-time cumulative effect of a change in accounting principle (SOP 98-5) totaling $355 million.
• Operating Profit Decline: Operating profit decreased 5% to $616 million. This decline was partially offset by a $114 million pretax gain from the sale of L-3 Communications shares.
• Segment Performance:
  • Space & Strategic Missiles: Sales down 15% and operating profit down $142 million, impacted by a $15 million THAAD program penalty and reduced commercial satellite volume.
  • Aeronautics: Sales up 14% and operating profit up 12%, driven by increased C-130J deliveries.
  • Electronics: Sales up 3% and operating profit up 8%, aided by postal program volume.
• Liquidity: Cash and cash equivalents dropped from $285 million at year-end 1998 to $43 million at March 31, 1999, due to operating cash usage and dividend payments.

Outlook, Risks, and Unusual Items

• Accounting Changes: Adoption of SOP 98-5 required expensing of start-up costs previously capitalized, resulting in a $355 million charge. Adoption of SOP 98-1 and 97-3 had no material impact.
• COMSAT Merger: The proposed $2.7 billion merger with COMSAT is pending regulatory approval (FCC, DOJ) and Congressional legislation. The tender offer is subject to a September 18, 1999 deadline. Moody's downgraded the company's debt rating from A3 to Baa1 in March 1999 due to this transaction.
• Launch Failures (Subsequent Events): Two launch failures occurred in April 1999 (Titan IV and Athena). The Titan IV failure is estimated to cost approximately $40 million. An independent panel has been formed to review program management and quality control.
• Contingencies:
  • DOE Pit 9 Contract: The company is litigating a default termination of a $180 million waste remediation contract with the U.S. Department of Energy. A separate suit by the DOE seeks recovery of $54 million.
  • Environmental: Estimated expenditures for environmental remediation (Burbank and Redlands sites) total approximately $220 million, with an additional $240 million liability recorded for other cases.
• Year 2000 Compliance: The company estimates total program costs at $80 million, with 70% expended by March 31, 1999. Validation and implementation phases are approximately 94% complete.

Investor Verification Checklist

• Verify the status of the COMSAT merger, specifically FCC approval and Congressional satellite reform legislation.
• Monitor the resolution of the DOE Pit 9 litigation and potential financial exposure beyond the recorded liability.
• Assess the long-term impact of the April 1999 Titan IV and Athena launch failures on the Space & Strategic Missiles segment backlog and profitability.
• Review the company's ability to refinance its $2.5 billion short-term revolving credit facility maturing May 28, 1999.
• Confirm the timeline for the completion of Year 2000 compliance validation and implementation.