LMT

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 1998
Business Overview: The Corporation provides products and services primarily under contracts with the United States Government. Key segments include Space & Strategic Missiles, Electronics, Information & Services, Aeronautics, and Energy and Other.

Key Financial Metrics

Liquidity and Debt:
- Total debt (including short-term borrowings) represented approximately 68% of total capitalization at June 30, 1998.
- Commercial paper borrowings outstanding: approximately $2.6 billion.
- Revolving credit facilities: $2.5 billion (one-year) and $3.5 billion (four-year).
- Net cash used for operating activities in the first six months of 1998 was $80 million, compared to $37 million used in the same period in 1997.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 6% year-over-year for both the quarter and six-month periods. This decline is primarily attributed to the divestiture of non-core businesses (L-3 Communications, Commercial Electronics, and businesses transferred to GE) in 1997 and early 1998. Excluding these divestitures, sales would have increased by 3% for the quarter and 2% for the six-month period.
• Earnings Per Share Growth: Despite a 6% decrease in net earnings for the quarter, diluted EPS increased 7% to $1.52. This improvement is largely due to the redemption of Series A preferred stock in late 1997, which reduced the dividend requirement and share count impact.
• Segment Performance:
  • Electronics: Operating profit increased significantly due to performance improvements and the absence of new program development costs.
  • Information & Services: Operating profit decreased 29% due to adverse performance in commercial product lines, even after adjusting for divestitures.
  • Aeronautics: Operating profit increased 6% year-to-date, driven by increased F-16 deliveries and improved margins on the C-130 program.
• Cash Flow: Operating cash flow turned negative ($80 million used) due to increased working capital requirements for aircraft and space programs, contrasting with the prior year's smaller usage.

Guidance, Outlook, Risks, and Unusual Items

• Merger Termination: The Corporation terminated its merger agreement with Northrop Grumman Corporation in July 1998. Consequently, the anticipated equity issuance to reduce leverage did not occur.
• Pit 9 Contract Dispute: The U.S. Department of Energy (DOE) terminated the Corporation's $180 million Pit 9 waste remediation contract for default on June 1, 1998. Lockheed Martin has filed a lawsuit challenging the termination and submitted a certified Request for Equitable Adjustment (REA) to recover costs. The DOE's management contractor has also sued the Corporation to recover approximately $54 million in payments.
• Environmental Contingencies: The Corporation has recorded a liability of approximately $260 million for environmental matters where exposure can be estimated. Additional estimated costs for specific projects (Burbank and Redlands, CA) total approximately $280 million, though a portion is expected to be recoverable through government contract pricing.
• Year 2000 Compliance: The Corporation is actively implementing a Year 2000 Compliance Program. Management believes costs will not materially impact financial results as they are allowable under government contracts, though risks remain regarding third-party vendor compliance.
• Outlook: Management anticipates continuing to divest non-core businesses to generate cash for debt reduction and core business investment. No specific financial guidance for the full year was provided in this filing.

Investor Verification Checklist

• Pit 9 Litigation Status: Monitor the outcome of the lawsuit challenging the DOE's default termination and the status of the certified REA for cost recovery.
• Debt Levels: Verify the impact of the terminated Northrop Grumman merger on the company's leverage ratio and ability to service its $2.6 billion in commercial paper and long-term debt.
• Working Capital Trends: Assess whether the negative operating cash flow ($80 million used) is a temporary fluctuation due to program timing or a structural issue requiring further financing.
• Segment Margins: Review future performance of the Information & Services segment, which showed significant profit declines due to commercial product line issues.
• Environmental Reserves: Confirm if the $260 million recorded liability and additional estimated costs are sufficient given ongoing remediation projects in California and Idaho.