LMT

Lockheed Martin Corp. 10-Q Summary: Quarter Ended June 30, 1997

Business Context and Reporting Period

This Form 10-Q covers the three and six months ended June 30, 1997. Lockheed Martin Corporation (LMT) is a major defense contractor. The reporting period is significantly impacted by the integration of the Loral Corporation acquisition (completed in 1996) and the divestiture of non-core assets, including Martin Marietta Materials, Armament Systems, and the formation of L-3 Communications. On July 3, 1997, LMT announced a merger agreement with Northrop Grumman Corporation valued at approximately $11.6 billion.

Key Financial Metrics

Liquidity and Debt: Cash and cash equivalents were $0 at June 30, 1997. Total debt (short-term and long-term) was approximately $11.1 billion. Commercial paper borrowings totaled $2.2 billion. Debt represented 60% of total capitalization, down from 63% at year-end 1996. Net cash used for operating activities was $37 million for the six months ended June 30, 1997, compared to $407 million provided in the prior year period.

Material Changes vs. Prior Period

• Sales: Q2 1997 sales decreased 3% year-over-year due to divestitures (Materials, Armament Systems, L-3). Excluding these, sales would have increased 6%. Six-month sales increased 11% due to the full-year inclusion of Loral Tactical Systems operations.
• Profitability: Operating profit was flat in Q2 ($689M vs $694M) but increased 14% for the six-month period ($1,366M vs $1,196M). Adjusted for divestitures and acquisitions, operating profit increased 8% in Q2 and 13% for the six months.
• Cash Flow: Operating cash flow turned negative ($37M used) compared to positive ($407M provided) in 1996, primarily due to increased cash requirements on aircraft programs. Investing cash flow was positive ($506M provided) in 1997 due to proceeds from asset sales, contrasting with a massive outflow ($7.7B used) in 1996 driven by the Loral acquisition.

Outlook, Risks, and Contingencies

• Merger: The proposed merger with Northrop Grumman is subject to shareholder and regulatory approval, expected to close in late 1997 or early 1998. It is anticipated to qualify for pooling-of-interests accounting.
• Backlog: Undelivered orders were $48.1 billion at June 30, 1997, down from $50.4 billion at year-end 1996, reflecting recent divestitures. New orders totaled $13.1 billion in the first six months.
• Legal and Environmental:
  • Pit 9 Remediation: Significant unanticipated costs and scheduling issues exist for a $180M DOE contract. An equitable adjustment request was submitted; no agreement reached. Work activities reduced pending DOE direction.
  • Environmental Liabilities: Estimated costs for Burbank, CA groundwater treatment are $110M (EPA) and $90M (State). A liability of $340M is recorded for other environmental cases.
  • Legal Proceedings: Multiple grand jury and DoD IG subpoenas received in July 1997 regarding accounting treatments of contract payments and the Milan Army Ammunition Plant (post-divestiture).

Investor Verification Checklist

• Verify the status of the Northrop Grumman merger approval and potential accounting treatment (pooling vs. purchase).
• Monitor the resolution of the DOE Pit 9 contract dispute and potential cost recovery.
• Review the outcome of the grand jury subpoenas regarding contract payment accounting and the Milan Army Ammunition Plant.
• Assess the impact of the $37 million operating cash outflow on future debt reduction plans.
• Confirm the timeline for the integration of Loral Tactical Systems and the impact on future margins.