Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 1999
Business Overview: A major defense and aerospace contractor. Effective October 1, 1999, the company realigned its operations into four principal segments: Systems Integration, Space Systems, Aeronautical Systems, and Technology Services, with a fifth "Corporate and Other" segment.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Sep 30, 1999 | 9 Months Ended Sep 30, 1999 | 9 Months Ended Sep 30, 1998 |
|---|---|---|---|
| Net Sales | $6,157 | $18,548 | $19,086 |
| Operating Profit | $558 | $1,308 | $2,056 |
| Net Earnings | $217 | $89 | $876 |
| Diluted EPS | $0.57 | $0.23 | $2.30 |
| Operating Cash Flow (9mo) | $383 (1999) vs $707 (1998) | ||
| Total Debt (Short + Long Term) | $12,033 (Sep 30, 1999) | ||
| Cash & Equivalents | $0 (Sep 30, 1999) vs $285 (Dec 31, 1998) |
Margin Analysis: Operating margin for the nine months ended September 30, 1999, was approximately 7.1% ($1,308 / $18,548), a significant decline from the 10.8% margin in the comparable 1998 period.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 3% year-over-year for the nine-month period ($18.5B vs $19.1B). This was driven primarily by volume decreases in the Space Systems and Aeronautical Systems segments.
- Profitability Drop: Operating profit fell 36% year-over-year ($1.3B vs $2.1B). Net earnings plummeted 90% ($89M vs $876M).
- Accounting Change Impact: The adoption of SOP No. 98-5 regarding start-up costs resulted in a one-time cumulative effect charge of $355 million (pre-tax), reducing net earnings by $355 million for the nine-month period.
- Program Adjustments: Significant negative adjustments were recorded in Q2 1999:
- Aeronautical Systems: $210 million charge related to the C-130J program (cost growth and production rate reduction).
- Space Systems: $90 million charge related to the Titan IV program (launch failure and fee adjustments).
- Liquidity Shift: Cash and cash equivalents dropped to zero by period end, largely due to the $1.2 billion cash tender offer for 49% of COMSAT Corporation and capital expenditures.
Guidance, Outlook, and Risks
COMSAT Merger
Lockheed Martin completed a $1.2 billion tender offer for 49% of COMSAT in September 1999. The full merger (Phase 2) is contingent upon federal legislation to remove ownership restrictions. While the Senate passed necessary legislation, the House passed a version with differences that could adversely affect COMSAT. If the merger is not completed by September 18, 2000, either party may terminate the agreement.
Strategic Review and Divestitures
The company announced a strategic review resulting in a new organizational structure. Management is evaluating the divestiture of non-core businesses (including commercial IT and state/local government services). Preliminary estimates suggest potential one-time earnings decreases of approximately $1 billion, but potential cash proceeds exceeding $1 billion to repay debt.
Legal and Contingencies
- Pit 9 Litigation: Ongoing dispute with the U.S. Department of Energy (DOE) regarding a $180 million waste remediation contract. The DOE terminated the contract for default; Lockheed Martin is litigating to overturn this and seeking equitable adjustment. The DOE's contractor is also suing Lockheed Martin for $54 million.
- Environmental: Estimated remediation costs of $140 million (Redlands, CA) and $70 million (Burbank, CA) are recognized. A liability of $230 million is recorded for other environmental matters.
- Year 2000: Management estimates total compliance costs will be less than $80 million, with approximately $70 million already expended. The company believes it is prepared, though risks regarding third-party vendors remain.
Outlook
Management anticipates that cash flow from operations, temporary investments, and financing resources will be sufficient to meet requirements for the next twelve months. The company plans to issue approximately $2.0 billion in debt securities to repay commercial paper.
Investor Verification Checklist
- COMSAT Legislation Status: Verify the final status of the federal legislation required to complete the COMSAT merger and whether the House/Senate conference committee resolved the differences regarding COMSAT's business viability.
- Divestiture Timeline: Confirm the timing and valuation of the planned divestitures of non-core businesses to assess the impact on future earnings and debt reduction.
- Pit 9 Litigation Outcome: Monitor the U.S. Court of Federal Claims proceedings regarding the DOE contract termination and the potential financial exposure of the $54 million counter-suit.
- Debt Refinancing: Track the execution of the planned $2.0 billion debt offering and the company's ability to refinance commercial paper at favorable rates.
- Program Performance: Review future updates on the C-130J and Titan IV programs to ensure cost growth and production issues are contained and do not require further adjustments.