LMT

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 1998
Business Overview: The Corporation provides products and services primarily under contracts with the United States Government. Key segments include Space & Strategic Missiles, Electronics, Information & Services, Aeronautics, and Energy and Other.

Key Financial Metrics

Liquidity: Cash and cash equivalents totaled $183 million as of September 30, 1998. The company maintains a $2.5 billion short-term revolving credit facility and a $3.5 billion long-term revolving credit facility.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 4% in Q3 and 5% for the nine months ended September 30, 1998, compared to 1997. This decline is primarily attributed to the divestiture of non-core businesses (L-3 Communications, Commercial Electronics, and businesses transferred to GE) in 1997 and early 1998. Excluding these divestitures, sales would have increased by 3%.
• Earnings Per Share Growth: Despite lower net earnings ($318M vs $331M in Q3), diluted EPS increased 11% to $1.67. This was driven by the redemption of Series A preferred stock held by GE in late 1997, which reduced the dividend requirement and share count dilution.
• Segment Performance:
  • Aeronautics: Sales and operating profit increased significantly due to higher deliveries of F-16 and C-130 aircraft.
  • Electronics: Operating profit increased significantly due to performance improvements and a favorable arbitration resolution.
  • Space & Strategic Missiles: Sales and profit decreased due to reduced launch vehicle and Trident missile activities, partially offset by a $120 million pre-tax gain from the retirement of technical risk on the Atlas II program.
  • Information & Services: Sales and profit declined, largely due to the absence of divested non-core businesses and adverse performance in commercial product lines.
• Cash Flow: Operating cash flow improved significantly to $707 million for the nine months ended September 30, 1998, compared to $231 million in the prior year, driven by decreased working capital requirements.

Guidance, Outlook, Risks, and Unusual Items

• Comsat Merger: On September 20, 1998, Lockheed Martin announced a two-phase merger with Comsat Corporation valued at approximately $2.7 billion. The first phase involves a $1.3 billion cash tender offer for up to 49% of Comsat stock. The second phase involves a stock exchange. Completion is expected by the end of 1999, subject to regulatory and legislative approvals.
• Stock Split and Dividend: The Board authorized a two-for-one stock split (effective December 31, 1998) and increased the quarterly cash dividend to $0.44 per share (pre-split basis).
• Legal Contingencies (Pit 9): The DOE terminated a $180 million waste remediation contract (Pit 9) for default in June 1998. Lockheed Martin has filed a lawsuit challenging the termination and submitted a certified request for equitable adjustment. LMITCO (DOE contractor) has sued Lockheed Martin seeking recovery of $54 million. The outcome is uncertain.
• Environmental Liabilities: The company has recorded approximately $260 million for environmental matters where exposure can be estimated, including groundwater treatment in Burbank and Redlands, California. Total estimated future expenditures for known decrees and orders are approximately $280 million.
• CalComp Restructuring: The majority-owned subsidiary CalComp expects to record non-cash charges of approximately $60 million to $95 million in the fourth quarter of 1998 related to asset impairments and divestitures.
• Year 2000 Compliance: The company is actively managing Year 2000 compliance. Management believes costs will not materially impact financial results as they are allowable under government contracts.

Investor Verification Checklist

• Comsat Merger Status: Verify progress on regulatory approvals and the cash tender offer for Comsat, as failure to consummate could impact strategic objectives.
• Pit 9 Litigation: Monitor the status of the lawsuit against the DOE and the certified request for equitable adjustment, as a loss could result in significant costs.
• CalComp Charges: Confirm the magnitude of the anticipated $60M-$95M non-cash charges in Q4 1998 and the potential for additional charges if the funding relationship with CalComp is terminated.
• Atlas II Risk Retirement: Assess the sustainability of the $120 million pre-tax gain recorded in Q3 related to the Atlas II program risk retirement.
• Debt Levels: Review the impact of the Comsat transaction on leverage ratios, noting that total debt was 67% of capitalization as of September 30, 1998.