Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 1999
Business Overview: A major defense and aerospace contractor operating in four principal segments: Space & Strategic Missiles, Electronics, Aeronautics, and Information & Services. The company is currently engaged in a two-phase merger agreement with COMSAT Corporation, valued at approximately $2.7 billion, pending regulatory and legislative approvals.
Key Financial Metrics
| Metric (in millions) | Q2 1999 | Q2 1998 | 6 Months 1999 | 6 Months 1998 |
|---|---|---|---|---|
| Net Sales | $6,203 | $6,520 | $12,391 | $12,737 |
| Operating Profit | $134 | $679 | $750 | $1,326 |
| Net (Loss) Earnings | $(41) | $289 | $(128) | $558 |
| Diluted EPS | $(0.11) | $0.76 | $(0.34) | $1.47 |
| Cash Flow from Operations | N/A | N/A | $(176) | $(80) |
| Total Debt (Short + Long Term) | $11,034 | N/A | N/A | N/A |
| Cash and Equivalents | $0 | N/A | N/A | N/A |
Note: Total Debt calculated as Short-term borrowings ($704M) + Current maturities of long-term debt ($346M) + Long-term debt ($9,984M) as of June 30, 1999.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 5% in Q2 and 3% for the six months ended June 30, 1999, compared to 1998. The Space & Strategic Missiles segment saw a 26% sales drop in Q2, primarily due to the Titan IV launch failure and volume decreases in military satellite programs.
- Profitability Collapse: Operating profit fell 80% in Q2 and 43% year-to-date. This was driven by significant negative adjustments in the Aeronautics and Space segments.
- Net Loss: The company reported a net loss of $41 million in Q2 and $128 million for the six months, contrasting with net earnings of $289 million and $558 million in the respective 1998 periods.
- Accounting Change: Adoption of SOP No. 98-5 regarding start-up activities resulted in a cumulative effect charge of $355 million (net of tax) for the six months ended June 30, 1999.
- Liquidity: Cash and cash equivalents dropped from $285 million at year-end 1998 to $0 at June 30, 1999, due to increased working capital requirements and operating cash outflows.
Guidance, Outlook, and Risks
Management Commentary and Unusual Items
- C-130J Program: Recorded $210 million in negative adjustments in the Aeronautics segment due to cost growth and reduced production rates.
- Titan IV Program: Recorded $90 million in negative adjustments in the Space segment following a launch failure on April 30, 1999, and revised fee estimates.
- L-3 Communications Sale: Recognized a $114 million pretax gain from the sale of L-3 shares, partially offsetting the net loss.
- COMSAT Merger: The merger remains subject to FCC approval and Congressional satellite reform legislation. The COMSAT shareholder vote was rescheduled to August 20, 1999.
- Outlook Revision: On June 9, 1999, management announced a substantial reduction in earnings and cash flow outlook for the remainder of 1999 and 2000 following a financial review.
Risks and Contingencies
- Legal Proceedings: Multiple class-action lawsuits filed by shareholders alleging securities fraud following the June 9, 1999 outlook revision. Additionally, a grand jury subpoena was issued regarding a 1990 international radar sale.
- DOE Pit 9 Contract: Ongoing litigation with the Department of Energy regarding a terminated waste remediation contract; the company is seeking equitable adjustment for unanticipated costs.
- Environmental Liabilities: Estimated expenditures of approximately $220 million for environmental remediation in Burbank and Redlands, California, with potential for additional exposure.
- Year 2000 Compliance: Estimated total costs under $80 million; management believes risks are mitigated but acknowledges potential for isolated disruptions.
- F-22 Funding: Risk of funding omission for initial production of the F-22 fighter aircraft in the House defense budget, though management expects restoration in conference committee.
Investor Verification Checklist
- COMSAT Merger Status: Verify the outcome of the August 20, 1999, COMSAT shareholder vote and the status of FCC/Congressional approvals required for the transaction.
- Program Adjustments: Confirm the long-term impact of the C-130J and Titan IV cost adjustments on future margins and backlog.
- Liquidity Position: Monitor cash flow generation given the zero cash balance at June 30, 1999, and the reliance on commercial paper and credit facilities.
- Legal Exposure: Track the progress of the shareholder class-action lawsuits and the DOE Pit 9 litigation.
- Debt Ratings: Check for updates on the senior long-term debt rating, which was placed under review by rating agencies following the June 9, 1999, outlook revision.