LMT

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 1996, for Lockheed Martin Corporation. The reporting period is significantly impacted by the consummation of the acquisition of Loral Corporation's defense electronics and systems integration businesses (renamed Lockheed Martin Tactical Systems, Inc.) on April 29, 1996. Operations of Tactical Systems are included in the results from April 1, 1996. The company is also in the process of splitting off its 81% interest in Martin Marietta Materials, Inc., expected to be completed by the end of 1996.

Key Financial Metrics

Debt Structure: Total debt represents approximately 65% of total capitalization as of June 30, 1996, up from 37% at year-end 1995. This increase is primarily due to $7.3 billion in debt incurred to finance the Loral acquisition, including $5 billion in new long-term fixed-rate debt securities issued in Q2 1996 and approximately $3.5 billion in commercial paper outstanding.

Material Changes vs. Prior Period

• Revenue Growth: Net sales for the six months ended June 30, 1996, increased 8% to $12.2 billion from $11.3 billion in 1995. The second quarter saw a 26% increase to $7.1 billion, driven principally by the inclusion of Tactical Systems.
• Profitability Turnaround: Net earnings for the six months ended June 30, 1996, were $571 million, compared to $84 million in 1995. The 1995 period included $690 million in pretax merger-related and consolidation charges. Excluding these non-recurring charges, operating profit increased 21% year-over-year.
• Segment Performance:
  • Electronics & IT Services: Significant sales and profit increases due to the Loral acquisition.
  • Aeronautics: Sales decreased 23% year-to-date due to fewer F-16 and C-130 deliveries, though operating margins improved.
  • Space & Strategic Missiles: Operating profit increased 46% year-to-date due to award fee recognition and improved margins.
• Backlog: Undelivered orders increased 24% to $50.9 billion, largely due to the addition of Tactical Systems backlog.

Outlook, Risks, and Contingencies

• Integration Plans: Management expects to complete and announce integration and consolidation plans for the Loral Transaction by the end of 1996.
• Debt Reduction Strategy: The company anticipates generating cash to reduce debt through the split-off of Martin Marietta Materials (expected to recognize a gain) and potential divestitures of other non-core businesses.
• Legal and Environmental Contingencies:
  • Environmental: Estimated costs for groundwater and soil remediation in Burbank, California, are approximately $205 million ($50 million under EPA consent decree and $155 million under state order). A liability of $335 million has been recorded for other environmental matters where exposure can be estimated.
  • Litigation: The company faces various investigations and proceedings, including a qui tam complaint regarding cost accounting on LANTIRN contracts (seeking $140 million) and investigations by the DoD and NASA regarding charging issues and contract compliance. Management believes the probability of a material adverse effect is remote.
• Forward-Looking Risks: Results are subject to risks associated with government contracts, competition, and the successful integration of acquired businesses.

Investor Verification Checklist

• Verify the final purchase accounting adjustments for the Loral Transaction, specifically the $7.9 billion recorded as cost in excess of net assets acquired and its 40-year amortization schedule.
• Monitor the progress of the Martin Marietta Materials split-off and the anticipated gain recognition.
• Track the company's ability to service its increased debt load (65% of capitalization) and the execution of its debt reduction plan.
• Review updates on the Burbank environmental remediation costs and potential recoveries from insurance or government pricing.
• Assess the impact of ongoing government investigations (LANTIRN, Hellfire missile, NASA contracts) on future contract awards and potential penalties.