LMT

Business Context and Reporting Period

This Form 10-Q covers Lockheed Martin Corporation for the quarter and nine months ended September 30, 1996. The reporting period is significantly impacted by the consummation of the acquisition of Loral Corporation's defense electronics and systems integration businesses (renamed Tactical Systems) on April 29, 1996. The transaction, valued at approximately $7.3 billion net of cash, was financed through commercial paper and debt issuance. The company reorganized into five reportable segments: Space & Strategic Missiles, Aeronautics, Electronics, C3I & Systems Integration, and Information, Energy and Other.

Key Financial Metrics

Debt Structure: Total debt represents approximately 63% of total capitalization. This includes $5 billion in new long-term fixed-rate debt issued in Q2 1996 and approximately $2.8 billion in commercial paper outstanding as of September 30, 1996.

Material Changes Versus Prior Period

• Revenue Growth: Net sales increased 14% year-over-year, driven primarily by the inclusion of Tactical Systems operations starting April 1, 1996. The Electronics and C3I & Systems Integration segments saw significant sales increases due to this acquisition.
• Profitability: Operating profit surged 147% to $1.84 billion. This increase is largely attributable to the Loral acquisition and the absence of the $690 million in merger-related and consolidation expenses recorded in the first half of 1995. Excluding these 1995 charges, operating profit increased 27%.
• Segment Performance:
  • Space & Strategic Missiles: Sales decreased slightly due to timing of Atlas launches and reduced Trident production, but operating profit increased 42% due to award fees and improved margins.
  • Aeronautics: Sales decreased 19% due to fewer aircraft deliveries (C-130, P-3, F-16), resulting in a 10% decline in operating profit.
  • Electronics & C3I: Significant growth in both sales and profit due to the Loral acquisition.
• Balance Sheet: Total assets increased from $17.6 billion to $30.3 billion, reflecting the acquisition. Goodwill ("Cost in excess of net assets acquired") increased to $10.5 billion.

Guidance, Outlook, and Risks

• Divestitures and Debt Reduction: Management plans to divest non-core businesses to reduce debt. The company announced the sale of its Armament Systems and Defense Systems units to General Dynamics for $450 million, expected to close by year-end. Additionally, the company completed an exchange offer to distribute its 81% interest in Martin Marietta Materials, Inc., anticipating a $350 million gain in Q4 1996.
• Integration: The company expects to complete integration and consolidation plans related to the Loral transaction by the end of 1996.
• Environmental Contingencies: Significant liabilities exist regarding environmental cleanup at the Burbank, California facility. Estimated costs include $50 million for EPA consent decree compliance and $155 million for additional abatement. A $67 million settlement was reached with local residents in August 1996, though new litigation has emerged.
• Contract Risks: The company faces schedule delays and cost issues on a $180 million fixed-price contract with the Department of Energy for waste cleanup at the Idaho National Engineering Laboratory.
• Forward-Looking Statements: The filing includes standard disclaimers regarding risks related to government contracts, competition, and the integration of acquired businesses.

Investor Verification Checklist

• Debt Servicing: Verify the company's ability to service the increased debt load ($12 billion total) and the impact of interest rate swaps on future cash flows.
• Integration Synergies: Monitor the realization of cost savings and revenue synergies from the Loral acquisition as integration concludes in Q4 1996.
• Environmental Liabilities: Track the status of the Burbank litigation and the accuracy of the $205 million total estimated cleanup cost.
• Divestiture Gains: Confirm the recognition of the anticipated $350 million gain from the Martin Marietta Materials distribution and the $450 million sale to General Dynamics.
• Backlog: Review the $49.1 billion backlog to ensure it supports future revenue growth, particularly in the Aeronautics segment where sales declined.