LMT

Business Context and Reporting Period

This Form 10-Q covers the quarter ended March 31, 1995, for Lockheed Martin Corporation. The reporting period is defined by the consummation of the "Business Combination" on March 15, 1995, where Lockheed Corporation and Martin Marietta Corporation merged into a new holding company. The financial statements for the prior year (1994) have been restated to reflect the combined entity using the pooling of interests method.

Key Financial Metrics

Note: Q1 1995 results include a $165 million pre-tax charge for merger-related expenses. Q1 1994 results included a $118 million gain from the Martin Marietta Materials IPO and a $37 million after-tax charge for an accounting change regarding the ESOP.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 12% to $5.64 billion, driven primarily by the Space and Strategic Missiles segment (up 27%) due to the acquisition of General Dynamics' Space Systems division and increased Atlas launch services.
• Profit Decline: Earnings from operations dropped 28% to $290 million. This decline is primarily attributable to the $165 million merger-related expense recorded in Q1 1995, which was absent in the prior year.
• One-Time Items: Other income decreased significantly from $123 million in 1994 to $22 million in 1995, largely due to the absence of the $118 million gain from the Materials IPO recorded in 1994.
• Cash Flow: Operating cash flow decreased to $186 million from $300 million, impacted by changes in operating assets and liabilities. Investing activities used $268 million in 1995 (vs. provided $73 million in 1994) due to acquisitions (including Dravo) and capital expenditures.

Outlook, Risks, and Management Commentary

• Merger Integration: Management estimates total merger and integration costs could reach $850 million, with a significant portion charged to earnings. Cash payments for Q1 merger expenses are expected to occur primarily in Q2 1995.
• Liquidity: The company holds $513 million in cash and has a new $1.5 billion revolving credit facility. Management expects internal funds and financing resources to be sufficient for operations and debt service.
• Segment Performance: Aeronautics earnings rose 50% due to F-16 support and F-22 activities. Conversely, the Electronics segment saw an 11% sales decline and 30% earnings drop due to program delays and the completion of Patriot subcontract activities.
• Legal and Environmental Risks:
  • FCPA Investigation: Lockheed is negotiating an Administrative Settlement Agreement regarding a plea to conspiracy to violate the Foreign Corrupt Practices Act; failure to settle could lead to suspension or debarment.
  • Environmental Liabilities: Significant costs are estimated for groundwater remediation in Burbank, CA ($90 million under EPA decree; $155 million under state order). A liability of approximately $250 million has been recorded for environmental matters.
  • Other Proceedings: Various investigations are ongoing, including a False Claims Act suit (trial scheduled for Jan 1996) and inquiries into hazardous waste disposal and cost pricing data.

Investor Verification Checklist

• Verify the timing and total amount of remaining merger-related cash payments expected in Q2 1995.
• Confirm the status of the Administrative Settlement Agreement regarding the FCPA plea and potential debarment risks.
• Monitor the progress of the Burbank, CA environmental remediation projects and potential cost overruns beyond the estimated $245 million.
• Review the impact of the $165 million merger charge on the true underlying operating margin of the combined entity.
• Assess the resolution of the pending False Claims Act litigation and other government investigations into cost and pricing data.