LMT

Lockheed Martin Corp. Q1 1998 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the three-month period ended March 31, 1998. Lockheed Martin Corporation is a major defense contractor currently navigating a significant corporate transformation. The most critical business event is the pending merger with Northrop Grumman Corporation, valued at approximately $11.6 billion, which faces a Department of Justice antitrust lawsuit filed on March 23, 1998, with a trial set for September 8, 1998. Additionally, the company recently completed a transaction with General Electric (GE) in November 1997, exchanging non-core commercial businesses for GE's Series A preferred stock.

Key Financial Metrics

Liquidity: Commercial paper borrowings totaled approximately $2.1 billion at March 31, 1998. The company increased its one-year revolving credit facility from $1.5 billion to $2.5 billion in anticipation of the Northrop Grumman merger.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 7% year-over-year. Management attributes this primarily to the divestiture of commercial businesses to GE and L-3 Communications. Excluding these divestitures, sales would have increased 1%.
• Profitability: Operating profit decreased 4% to $647 million. However, diluted earnings per share increased 5% to $1.42, driven by the retirement of GE's preferred stock which reduced the dividend requirement.
• Cash Flow Reversal: Operating cash flow swung from a $67 million inflow in Q1 1997 to a $223 million outflow in Q1 1998. This was caused by increased working capital requirements for aircraft and space programs. Investing cash flow also turned negative ($46 million used) compared to a $243 million inflow in 1997, which had included a $450 million divestiture gain.
• Segment Performance:
  • Space & Strategic Missiles: Sales flat; operating profit down 16% due to lack of award fees recognized in 1997.
  • Information & Services: Sales down 26% and profit down 28%, largely due to the L-3 divestiture.
  • Aeronautics: Sales slightly down; operating profit up 19% due to improved margins on C-130 and F-16 programs.

Outlook, Risks, and Contingencies

• Merger Uncertainty: The Northrop Grumman merger is subject to a DOJ antitrust challenge. The company is negotiating amendments to credit facility leverage restrictions to remain compliant if the merger does not close by June 30, 1998.
• Pit 9 Contract Dispute: The company faces significant risks regarding a $180 million DOE contract for waste remediation at the Idaho National Engineering and Environmental Laboratory. The company incurred unanticipated costs and received a "cure notice" in February 1998 alleging conditions endangering performance. The company is preparing a claim for equitable adjustment but has not reached an agreement with the DOE.
• Environmental Liabilities: The company has recorded a liability of approximately $260 million for environmental matters, including groundwater remediation in Burbank and Redlands, California. Estimated future expenditures for these specific decrees total approximately $280 million ($110M + $60M + $110M).
• Legal Proceedings: In addition to the DOJ antitrust suit, the company is cooperating with a grand jury subpoena regarding government contract performance at a former Unisys facility.

Investor Verification Checklist

• Verify the status of the Department of Justice antitrust lawsuit against the Northrop Grumman merger and the likelihood of required divestitures.
• Monitor the resolution of the DOE "cure notice" and the potential for contract termination or cost recovery on the Pit 9 remediation project.
• Assess the impact of the $223 million operating cash outflow on the company's ability to service its $12.2 billion debt load without the merger closing.
• Review the timeline for the September 8, 1998 trial date and potential impacts on capital allocation plans.
• Confirm the final terms of the credit facility leverage ratio amendments required after June 30, 1998.