LMT

Business Context and Reporting Period

This Form 10-Q covers Lockheed Martin Corporation for the quarter ended March 31, 1996. The reporting period is dominated by the announcement and subsequent consummation of the acquisition of Loral Corporation's defense electronics and systems integration businesses (Tactical Systems) for approximately $7 billion. The transaction, finalized in late April 1996, involved a cash tender offer and the spin-off of Loral's space and satellite telecommunications interests into Loral Space & Communications, Ltd., in which Lockheed Martin acquired a 20% interest.

Key Financial Metrics

Note: Q1 1995 results included a $165 million pretax charge for merger-related expenses related to the 1995 formation of Lockheed Martin.

Material Changes vs. Prior Period

• Revenue: Net sales decreased 9% to $5.1 billion, driven by a 27% drop in Aeronautics (fewer F-16 deliveries) and a 10% drop in Space & Strategic Missiles (timing of Atlas launches). These were partially offset by growth in Information & Technology Services and Electronics.
• Profitability: Operating profit increased significantly to $472 million from $290 million. On an adjusted basis (excluding the 1995 merger charge), operating profit grew 5% year-over-year. Net earnings more than doubled to $272 million, primarily due to the absence of the 1995 non-recurring merger charge.
• Cash Flow: Operating cash flow swung from a $186 million inflow in 1995 to a $139 million outflow in 1996. This was primarily due to a $229 million payment of federal and foreign income taxes in 1996 compared to only $7 million in 1995.
• Liquidity: Cash balances declined from $653 million at year-end 1995 to $156 million at March 31, 1996, reflecting tax payments and debt repayments.

Guidance, Outlook, and Risks

• Acquisition Financing: The Loral Transaction was financed via $6 billion in commercial paper and $1 billion in revolving credit facilities. Management anticipates refinancing a portion of this debt in long-term markets by the end of 1996. A shelf registration for up to $5 billion in debt securities became effective in May 1996.
• Debt Impact: Upon consummation of the Loral deal, the debt-to-capitalization ratio is projected to rise to approximately 67%. The ratio of earnings to fixed charges is expected to decrease significantly due to increased interest expense.
• Backlog: Undelivered orders increased 3% to approximately $42.5 billion, with $7 billion in new orders received during the quarter.
• Contingencies: The company faces environmental liabilities, including a $50 million EPA consent decree and an estimated $155 million for additional cleanup in Burbank, California. A total liability of approximately $285 million has been recorded for environmental matters. The company also assumed legal proceedings related to Loral, including an investigation into quality control matters.
• Dividends: Cash dividends per common share were increased to $0.40 for the quarter, a rate expected to continue for the next two quarters of 1996.

Investor Verification Checklist

• Verify the final terms and closing date of the Loral Corporation acquisition (Tactical Systems) and the resulting pro forma financial impact.
• Confirm the status of the $5 billion shelf registration for debt securities and the timeline for refinancing the commercial paper used to fund the acquisition.
• Monitor the progress of environmental remediation costs in Burbank, California, and potential recoveries from insurance or government contracts.
• Review the integration plan for Loral's defense electronics business, with decisions expected by the end of Q3 1996.
• Assess the impact of the increased debt load on the company's credit rating and cost of capital.