LMT

Lockheed Martin Corp. 10-Q Summary: Quarter Ended September 30, 1995

Business Context and Reporting Period

This Form 10-Q covers the three and nine months ended September 30, 1995, for Lockheed Martin Corporation. The reporting period follows the March 15, 1995, merger of Lockheed Corporation and Martin Marietta Corporation, accounted for as a pooling of interests. The company operates primarily under long-term contracts with the U.S. government across segments including Space and Strategic Missiles, Aeronautics, Information and Technology Services, Electronics, and Energy/Materials.

Key Financial Metrics

Operating Margins: Operating margin for the nine months was approximately 4.4% ($744M / $16,801M). The effective income tax rate was 39.3%.

Material Changes vs. Prior Period

• Revenue: Nine-month net sales increased 3% to $16.8 billion from $16.3 billion in 1994. The increase was driven by the Space and Strategic Missiles segment, offset by declines in Electronics.
• Profitability: Earnings from operations decreased 42% to $744 million from $1.298 billion in 1994. This decline is primarily due to $690 million in merger-related and consolidation charges ($525 million for consolidation, $165 million for merger fees). Excluding these charges, operating earnings would have been approximately 10% higher than the prior year.
• Cash Flow: Net cash provided by operating activities dropped significantly to $619 million from $1.277 billion in 1994, attributed to lower earnings and cash outlays for consolidation expenses.
• Liquidity: Cash and cash equivalents decreased from $639 million at year-end 1994 to $122 million at September 30, 1995, due to operating cash outflows, debt repayments, and dividends.

Guidance, Outlook, and Risks

Consolidation Plan: In June 1995, the company announced a corporate-wide consolidation plan expected to yield $1.8 billion in annual savings. The plan involves closing 12 facilities and eliminating 12,000 positions over five years, with a total implementation cost of approximately $1.7 billion. A substantial portion of these costs is expected to be recovered through future pricing of U.S. government contracts.

Outlook: Management states that quarterly results may not be indicative of future performance due to the long-term nature of production contracts. Cash on hand and financing resources are deemed sufficient to meet operating, consolidation, and debt service requirements.

Risks and Contingencies:

• Environmental: Significant liabilities exist for groundwater and soil remediation at the Burbank, California facility. Estimated costs include $90 million for EPA consent decree compliance and $155 million for additional cleanup actions. A liability of approximately $250 million has been recorded for cases where exposure can be estimated.
• Legal: The company faces various litigation, including a civil suit regarding government contract compliance (trial rescheduled to September 1996) and a wastewater discharge complaint in Arizona alleging up to $2.5 million in penalties.

Investor Verification Checklist

• Verify the recoverability of the $1.7 billion consolidation plan costs through future government contract pricing.
• Monitor the progress and cost estimates of the Burbank environmental remediation projects, specifically the $155 million estimate for actions beyond the EPA consent decree.
• Assess the impact of the $690 million in one-time charges on the true underlying operating performance of the merged entity.
• Review the cash burn rate given the drop in operating cash flow and the reduction in cash reserves to $122 million.
• Confirm the status of the pending civil suit (Newsham v. Lockheed) and the Arizona wastewater complaint.