Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2000
Key Context: The period was defined by the consummation of the merger with COMSAT Corporation (August 2000), the decision to divest the Aerospace Electronics Systems (AES) business to BAE Systems, and the sale of Lockheed Martin Control Systems. The company reorganized its segments to report Global Telecommunications separately.
Key Financial Metrics
| Metric (in millions) | Q3 2000 | Q3 1999 | 9M 2000 | 9M 1999 |
|---|---|---|---|---|
| Net Sales | $5,960 | $6,157 | $17,734 | $18,548 |
| Operating Profit (Loss) | $(26) | $558 | $625 | $1,308 |
| Net (Loss) Earnings | $(704) | $217 | $(608) | $89 |
| Diluted EPS (Loss) | $(1.74) | $0.57 | $(1.54) | $0.23 |
| Cash from Operations (9M) | $1,745 | $383 | ||
| Cash & Equivalents (End of Period) | ||||
| Total Debt (Short + Long Term) | $11,844 | $12,354 | ||
| Stockholders' Equity |
Note: Debt figures calculated from Balance Sheet (Short-term borrowings + Current maturities of long-term debt + Long-term debt).
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 3% in Q3 and 4% for the nine months ended September 30, 2000, compared to 1999. Decreases in Systems Integration, Space Systems, and Aeronautical Systems offset growth in Global Telecommunications.
- Operating Profit Collapse: Operating profit dropped from $558 million in Q3 1999 to a loss of $26 million in Q3 2000. For the nine-month period, operating profit fell 52% to $625 million.
- Net Loss: The company reported a net loss of $704 million for Q3 2000 and $608 million for the nine-month period, contrasting with net earnings of $217 million and $89 million in the comparable 1999 periods.
- Cash Flow Improvement: Despite the net loss, cash provided by operating activities surged to $1.745 billion for the nine months ended September 30, 2000, compared to $383 million in 1999, driven by a $500 million advance from the UAE for F-16 aircraft and working capital improvements.
- Debt Reduction: Total debt decreased by approximately $110 million during the first nine months of 2000 due to net repayments of commercial paper and long-term debt, partially offset by debt assumed in the COMSAT merger.
Guidance, Outlook, and Unusual Items
Unusual and Nonrecurring Items
The reported losses were heavily impacted by significant nonrecurring items:
- AES Impairment Loss: A $755 million pre-tax impairment loss (approx. $980 million after-tax impact) was recorded in Q3 2000 related to the decision to sell the Aerospace Electronics Systems business to BAE Systems.
- Control Systems Gain: A $302 million pre-tax gain (approx. $180 million after-tax) was recognized from the sale of Lockheed Martin Control Systems to BAE Systems in September 2000.
- Globalstar Guarantee: A $141 million charge (approx. $91 million after-tax) was recorded in Q2 2000 related to the guarantee of Globalstar Telecommunications debt.
- COMSAT Merger: The merger added approximately $1.3 billion in stock-based consideration and $380 million in assumed debt. COMSAT operations were consolidated starting August 1, 2000.
Adjusted Performance
Excluding nonrecurring items, management indicated operating profit for Q3 2000 would have been $457 million (down 10% from Q3 1999) and $1.21 billion for the nine months (up 4% from 1999). Adjusted diluted EPS would have been $0.28 for Q3 and $0.70 for the nine months.
Outlook and Risks
- Divestitures: The AES sale is expected to close in Q4 2000, generating net cash proceeds of $1.2–$1.3 billion. The company continues to evaluate divestitures of non-core environmental and government services units.
- Backlog: Undelivered orders stood at $55.9 billion, up from $45.9 billion at year-end 1999, driven by $9.5 billion in new F-16 orders.
- Legal & Contingencies: Significant litigation remains regarding the DOE Pit 9 waste remediation contract (terminated for default in 1998). Environmental remediation costs for Redlands and Burbank facilities are estimated at $95 million and $25 million (net of government reimbursement), respectively.
- Market Risks: Exposure to Russian launch quotas for Proton vehicles and competitive pressures in commercial launch and satellite markets.
Investor Verification Checklist
- AES Transaction Closing: Verify the final closing date and net cash proceeds of the $1.67 billion sale to BAE Systems, as the $755 million impairment loss is subject to change.
- Globalstar Recovery: Monitor the status of the $150 million receivable from Globalstar Telecommunications, which remains uncertain.
- DOE Pit 9 Litigation: Track developments in the lawsuit against the U.S. Department of Federal Claims regarding the $180 million waste remediation contract.
- COMSAT Integration: Assess the financial performance of the newly consolidated Global Telecommunications segment and the amortization of the $2.0 billion in purchase accounting adjustments.
- UAE F-16 Contract: Confirm the drawdown of the $2 billion letter of credit and the utilization of the $500 million advance payment received.