LMT

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 1997
Context: The company is a major defense contractor undergoing significant structural changes, including the integration of Loral Corporation (acquired in 1996) and the divestiture of non-core assets. The period is defined by two major pending transactions: a proposed merger with Northrop Grumman and an asset exchange with General Electric (GE).

Key Financial Metrics

Note: Operating cash flow for the nine months ended Sep 30, 1996 was $1,320 million. Free cash flow is calculated as Operating Cash Flow less Additions to properties ($535 million for 9M 1997).

Material Changes vs. Prior Period

• Revenue: Q3 1997 net sales decreased 6% to $6.6 billion compared to Q3 1996. However, excluding divestitures (Martin Marietta Materials, Armament Systems, Defense Systems, and L-3 Communications), sales would have increased 1%. Nine-month sales increased 5% to $20.2 billion, driven by the full-year inclusion of Loral Tactical Systems operations.
• Profitability: Q3 operating profit rose slightly to $747 million (including other income) from $736 million. Excluding divestitures, operating profit increased over 10%. Nine-month operating profit increased to $2.1 billion from $1.9 billion.
• Cash Flow: Operating cash flow dropped significantly to $231 million for the nine months ended Sep 30, 1997, compared to $1.32 billion in the prior year. This decline is attributed to increased cash flow requirements for aircraft and space programs and changes in operating assets/liabilities.
• Debt Structure: Total debt decreased slightly as a percentage of total capitalization (60% vs. 63% at year-end 1996) due to net debt repayments of $231 million and an increase in stockholders' equity.

Guidance, Outlook, Risks, and Unusual Items

Major Transactions

• Northrop Grumman Merger: Announced July 3, 1997. Estimated value of $11.6 billion (including $3.1 billion debt assumption). Expected to close Q1 1998. Subject to shareholder and regulatory approval.
• GE Transaction: Announced November 3, 1997. Lockheed Martin will exchange Series A preferred stock held by GE (convertible to ~29M shares, ~$2.8B value) for a new subsidiary containing two non-core commercial units, a telecom partnership investment, and ~$1.6 billion cash. Expected to close Q4 1997. Management anticipates a tax-free gain exceeding $300 million.

Risks and Contingencies

• DOE Pit 9 Contract: A $180 million fixed-price waste remediation contract faces significant unanticipated costs and scheduling issues. Lockheed Martin submitted a Request for Equitable Adjustment (REA) to the DOE in March 1997; no agreement has been reached. Work activities have been reduced pending resolution.
• Environmental Liabilities: Significant ongoing remediation costs in Burbank and Redlands, California. Estimated future expenditures include ~$110 million for EPA consent decrees, ~$70 million for Regional Board orders in Burbank, and ~$110 million for Redlands groundwater issues. A liability of ~$260 million is recorded for estimable cases.
• Legal Proceedings: Grand jury subpoenas issued regarding parking meter procurement (DC) and allegations of fraud in LANTIRN program contracts (Florida).

Management Commentary

Management notes that results for a particular quarter may not be indicative of future results due to the long-term nature of production contracts. The company expects cash on hand and financing resources to be sufficient to meet operating and debt service requirements.

Investor Verification Checklist

• Merger Approval: Verify the status of shareholder and regulatory approvals for the Northrop Grumman merger and the GE asset exchange.
• DOE Pit 9 Resolution: Monitor the outcome of the Request for Equitable Adjustment (REA) with the Department of Energy, as unresolved costs could materially impact profitability.
• Environmental Costs: Track actual expenditures against the estimated $260 million+ liability for environmental remediation, particularly in California.
• Cash Flow Trends: Assess the sustainability of operating cash flows given the significant drop from $1.32 billion (9M 1996) to $231 million (9M 1997) and the upcoming cash outlay for the GE transaction.
• Debt Ratings: Confirm the impact of the Northrop and GE transactions on the company's senior long-term debt ratings, which are currently under review.