<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
FEBRUARY 21, 1995
------------------------
LOCKHEED CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 1-2193 95-0941880
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
4500 PARK GRANADA BLVD. 91399
CALABASAS, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 876-2000
------------------------
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
===============================================================================
<PAGE> 2
ITEM 5. OTHER EVENTS
A. Financial Statements
On February 21, 1995, Lockheed Corporation (the "company" or "Lockheed")
issued its audited financial statements for the fiscal year ended December 25,
1994, which are included in this Form 8-K. These financial statements will be
included in a Form 10-K to be filed with the Securities and Exchange Commission
within 90 days of the company's fiscal year end.
SELECTED FINANCIAL DATA
The following unaudited summary compares selected financial data for the
last ten years. Certain reclassifications and restatements have been made to
prior years' data on pages 2 and 3 to conform to the 1994 presentation,
including realignment of business segments and reclassification of operations
subsequently discontinued by the company. Aeronautical Systems reflects the
purchase of Lockheed Fort Worth Company (LFWC) in 1993. 1992 reflects the
adoption of Statement of Financial Accounting Standards No. 106. Electronic
Systems reflects the purchase of Sanders and CalComp in 1986. Returns refer to
continuing operations before accounting change. Returns and trading turnover are
calculated using average balances as a base. Dividend yield represents the
annual dividend rate divided by year-end stock price.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
------ ------ ------ ----- ----- ----- ------ ------ ----- -----
(IN MILLIONS, EXCEPT PERCENTAGES, RATIOS, AND PER-SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Sales ($):
Aeronautical Systems............ 6,573 6,010 2,957 2,635 2,722 2,944 3,566 4,455 4,264 4,017
Missiles and Space Systems...... 3,608 4,238 4,587 4,859 5,116 4,780 4,706 4,614 4,448 4,277
Electronic Systems.............. 1,650 1,396 1,289 1,122 963 1,107 1,256 1,226 429 105
Technology Services............. 1,299 1,427 1,267 1,193 1,157 1,060 905 783 801 824
------ ------ ------ ----- ----- ----- ------ ------ ----- -----
Total sales............... 13,130 13,071 10,100 9,809 9,958 9,891 10,433 11,078 9,942 9,223
====== ====== ====== ===== ===== ===== ====== ====== ===== =====
Program profits ($):
Aeronautical Systems............ 509 465 193 153 110 (365) 231 371 454 434
Missiles and Space Systems...... 266 348 401 360 379 368 364 364 310 273
Electronic Systems.............. 47 (1) 32 21 28 26 71 43 (6) (8)
Technology Services............. 33 32 18 42 44 24 34 36 23 27
------ ------ ------ ----- ----- ----- ------ ------ ----- -----
Total program profits..... 855 844 644 576 561 53 700 814 781 726
====== ====== ====== ===== ===== ===== ====== ====== ===== =====
Program profit margins (%):
Aeronautical Systems............ 7.7 7.7 6.5 5.8 4.0 6.5 8.3 10.6 10.8
Missiles and Space Systems...... 7.4 8.2 8.7 7.4 7.4 7.7 7.7 7.9 7.0 6.4
Electronic Systems.............. 2.8 2.5 1.9 2.9 2.3 5.7 3.5
Technology Services............. 2.5 2.2 1.4 3.5 3.8 2.3 3.8 4.6 2.9 3.3
Consolidated program profit
margins....................... 6.5 6.5 6.4 5.9 5.6 0.5 6.7 7.3 7.9 7.9
Interest expense ($).............. 156 168 119 118 138 86 92 104 65 53
Earnings ($):
Continuing operations before
accounting change............. 445 422 348 308 335 6 458 438 421 398
Net earnings (loss)............. 445 422 (283) 308 335 2 624 421 408 401
Earnings per share ($):
Continuing operations before
accounting change............. 7.00 6.70 5.65 4.86 5.30 .10 7.61 6.67 6.38 6.06
Net earnings (loss)............. 7.00 6.70 (4.58) 4.86 5.30 .03 10.37 6.41 6.18 6.10
Dividends per share ($)........... 2.24 2.12 2.09 1.95 1.80 1.75 1.55 1.30 0.95 0.75
Average number of common and
common equivalent shares
outstanding..................... 63.6 62.9 61.7 63.4 63.2 62.6 60.2 65.7 66.0 65.7
Common shares outstanding at
year-end........................ 63.2 62.7 61.1 62.8 63.2 63.2 59.3 62.7 65.6 65.2
Return on common equity (%)....... 17.0 18.8 15.3 12.8 15.3 0.3 20.1 22.2 24.9 29.9
Return on assets (%).............. 4.9 5.3 5.1 4.6 4.9 0.1 7.0 7.0 8.0 10.4
Dividend payout ratio............. 0.3 0.3 0.4 0.4 0.3 17.5 0.2 0.2 0.1 0.1
</TABLE>
2
<PAGE> 3
SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PERCENTAGES, NUMBER OF EMPLOYEES, RATIOS, AND PER-SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
AT YEAR-END
Cash and cash
equivalents($).... 452 147 294 266 372 86 269 40 72 64
Accounts
receivable($)..... 1,732 1,644 1,590 1,590 1,880 1,786 1,816 1,868 1,558 1,550
Inventories($)...... 1,631 1,699 1,178 1,352 1,187 1,266 1,067 1,069 1,098 928
Property, plant, and
equipment($):
Cost, net of
depreciation and
amortization.... 1,806 1,950 1,882 1,839 1,859 1,903 1,858 1,828 1,758 1,284
Depreciation for
the year........ 299 328 294 284 319 328 318 292 233 175
Additions during
the year........ 240 321 327 312 340 399 371 408 461 435
Total assets($)..... 9,113 8,961 7,024 6,617 6,860 6,792 6,643 6,460 6,133 4,328
Capitalization($):
Debt
Short-term...... 14 21 30 29 40 19 47 11 7 4
Long-term
including
current
portion....... 2,143 2,168 1,220 1,172 1,482 1,367 906 1,377 1,742 762
ESOP
guarantee..... 382 407 431 452 472 490
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total debt...... 2,539 2,596 1,681 1,653 1,994 1,876 953 1,388 1,749 766
Common
stockholders'
equity.......... 2,807 2,443 2,042 2,503 2,309 2,062 2,476 2,087 1,866 1,511
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total
capitalization... 5,346 5,039 3,723 4,156 4,303 3,938 3,429 3,475 3,615 2,277
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Percentage of total
capitalization
represented by(%):
Total debt........ 47 52 45 40 46 48 28 40 48 34
Total debt,
ex-ESOP......... 40 43 34 29 35 35
Debt, net of
cash............ 43 50 40 36 41 46 22 39 47 32
Debt, ex-ESOP, net
of cash......... 35 42 28 24 29 34
OTHER DATA
Funded
sign-ups($)....... 12,139 17,371* 10,205 10,972 10,441 9,627 9,426 9,807 9,451 8,828
Funded backlog at
year-end($)....... 12,165 13,156 8,856 8,751 7,588 7,106 7,369 8,376 9,649 8,815
Negotiated backlog
at year-end($).... 25,595 28,852 19,428 17,072 15,204 13,042 9,747 12,543 17,732 17,721
Company-sponsored
research and
development
(including bid and
proposal cost and
development
cost-sharing)($)... 442 449 420 384 450 506 503 506 441 399
Customer-sponsored
research and
development($).... 2,836 3,134 3,102 3,282 3,750 3,715 3,456 2,946 2,701 2,946
Number of
employees......... 82,500 83,500 71,700 72,300 73,000 82,500 85,600 97,200 94,200 84,500
MARKET DATA AT
FISCAL YEAR-END
Stock price per
common share($)... 71.75 69.38 56.88 44.00 33.63 39.00 42.75 36.75 50.63 48.00
Book value per
common share($)... 44.41 38.96 33.42 39.86 36.53 32.63 41.75 33.29 28.45 23.17
Market value($)..... 4,535 4,350 3,475 2,763 2,125 2,465 2,535 2,304 3,321 3,130
Market to book
ratio............. 1.6 1.8 1.7 1.1 0.9 1.2 1.0 1.1 1.8 2.1
Price to earnings
ratio............. 10.3 10.4 10.1 9.1 6.3 390.0 5.6 5.5 7.9 7.9
Dividend yield(%)... 3.1 3.1 3.7 4.5 5.4 4.6 3.7 3.8 2.0 1.7
Annual trading
volume............ 34.3 27.0 29.5 66.3 30.2 71.9 60.9 114.5 88.4 66.5
Annual trading
turnover(x)....... 0.5 0.4 0.5 1.1 0.5 1.2 1.0 1.8 1.4 1.0
</TABLE>
- ---------------
* Includes acquisition of existing funded backlog of LFWC of approximately $7
billion at acquisition date.
3
<PAGE> 4
FINANCIAL ANALYSIS
The following unaudited analysis, comparing data from 1994, 1993, and 1992,
is intended to be read in conjunction with the audited financial statements
beginning on page 13. A broader, ten-year perspective may be obtained from the
tables of Selected Financial Data appearing on pages 2 and 3.
RESULTS OF OPERATIONS
CONSOLIDATED SALES AND PROGRAM PROFITS
Consolidated sales in 1994 of $13.1 billion were relatively unchanged from
1993. Increases in Aeronautical and Electronic Systems sales were offset by
decreases in Missiles and Space Systems and Technology Services sales. The 29
percent sales increase from 1992 to 1993 reflects the 1993 acquisition of
Lockheed Fort Worth Company (LFWC), the former tactical military aircraft
business of General Dynamics Corporation. Sales to the U.S. government totalled
73 percent of 1994 sales compared to 77 percent in 1993. Defense sales to the
U.S. government remained constant at 64 percent of total sales in 1994 and 1993
versus 67 percent in 1992. Sales to foreign governments increased to 16 percent
in 1994 compared to 13 percent and eight percent in 1993 and 1992, respectively.
Sales made to foreign governments through the U.S. government are included in
sales to foreign governments. Sales to commercial customers increased slightly
to 11 percent of total sales. The table below illustrates the changing customer
mix.
<TABLE>
<CAPTION>
SALES BY CUSTOMER 1994 1993 1992
-------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
U.S. government
Defense............................................... 64 % 64 % 67 %
Nondefense............................................ 9 13 15
---- ---- ----
73 77 82
Foreign governments..................................... 16 13 8
Commercial.............................................. 11 10 10
---- ---- ----
100 % 100 % 100 %
==== ==== ====
</TABLE>
Total program profits increased slightly in 1994 following an increase of
31 percent in 1993 from 1992 levels. Program profit margins were 6.5 percent in
1994 and 1993, and 6.4 percent in 1992. In 1994 program profit improvements in
Aeronautical Systems and Electronic Systems programs were offset in part by
charges against income for two programs in Missiles and Space Systems discussed
below. Program profit improvements in 1993 from 1992 primarily reflected the
LFWC acquisition.
Operations by business segment are discussed beginning on page 5.
INTEREST EXPENSE
Interest expense decreased in 1994 compared to 1993 due to lower average
outstanding balances offset in part by a slightly higher average effective
interest rate. Interest expense in 1993 was significantly higher than in 1992
due the higher debt incurred to finance the purchase of LFWC in 1993.
OTHER INCOME (DEDUCTIONS), NET
The results for 1994 reflect net other deductions of $4 million compared to
negligible net other income in 1993. The 1994 net amount was affected by higher
miscellaneous other deductions including merger related costs. Net other income
in 1992 reflected higher interest income from the temporary investment of excess
cash.
PROVISION FOR INCOME TAXES
The provision for income taxes in 1994 was lower than in 1993 reflecting a
lower effective tax rate (36 percent versus 38 percent). The decrease in the
effective tax rate was primarily due to interest received
4
<PAGE> 5
from adjustments to tax payments on long-term contracts and revisions to prior
years' estimated income tax liabilities, offset in part by a nondeductible fine
discussed in Note 10 to the consolidated financial statements. Income tax
expense was higher in 1993 than in 1992 reflecting the higher pretax earnings
and a higher effective tax rate (38 percent versus 37 percent). The higher tax
rate was primarily due to the settlement of certain tax issues outstanding from
prior periods for a higher amount than had been accrued and a nondeductible
amount related to intangible asset amortization from the acquisition of LFWC.
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The five percent earnings increase in 1994 was primarily due to the higher
program profits, lower interest expense and lower provision for income taxes
offset by higher net other deductions. The per share earnings increase of four
percent was affected by a higher average number of shares and equivalents
outstanding in 1994. Earnings in 1993 increased 21 percent compared with 1992
due to the higher program profits, partly offset by higher interest expense,
lower other income and higher income tax expense.
If inflation were taken into account, earnings would differ from the
reported results due to the recognition of additional depreciation expense.
Contracts in the aerospace industry generally reflect the impact of anticipated
inflation in the selling price, and often contain price escalation clauses that
protect against abnormal inflation. In the case of depreciation, however,
regulations that determine U.S. government contract revenues do not allow
inflation-adjusted depreciation to be taken into account. Therefore, earnings
would have been lower than reported if inflation had been considered. Income
taxes would not have been adjusted because tax laws do not permit deductions of
such additional inflationary cost. Inflation rates in the United States have
been relatively low in recent years.
NET EARNINGS (LOSS)
Net earnings in 1994 and 1993 reflect the items discussed above. The net
loss in 1992 was caused by the effect of a change in accounting principle
related to the company's adoption of the accrual method of accounting for
retiree medical costs required by Statement of Financial Accounting Standards
No. 106 (SFAS 106). The company's 1994 adoption of Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" (SFAS 112), and its 1992 adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109), did not have a
significant impact.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
AERONAUTICAL SYSTEMS
Aeronautical Systems sales increased nine percent in 1994, and more than
doubled in 1993 reflecting the acquisition of LFWC effective February 28, 1993.
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Sales
Fighter aircraft programs...................................... $4,039 $3,661 $ 363
Airlift aircraft programs...................................... 1,258 915 1,169
Aircraft modification and maintenance programs................. 525 517 538
Other aircraft programs and support activities................. 751 917 887
------ ------ ------
Total....................................................... $6,573 $6,010 $2,957
====== ====== ======
Program profits.................................................. $ 509 $ 465 $ 193
====== ====== ======
</TABLE>
Sales in fighter aircraft programs increased 10 percent in 1994 as a result
of higher F-22 and F-16 program revenues. F-16 fighter program revenues in 1994
compared to 1993 increased slightly while deliveries decreased (146 in 1994
versus 168 in 1993) reflecting changes in customer mix. The large increase in
1993 revenues compared to 1992 was primarily due to the acquisition of LFWC.
5
<PAGE> 6
Airlift aircraft program revenues increased 38 percent in 1994 due to
greater deliveries of C-130 aircraft (40 versus 30). The lower airlift aircraft
program revenues in 1993 reflect fewer deliveries in 1993 compared to the 35
aircraft delivered in 1992.
Revenues from aircraft modification and maintenance programs in 1994 were
relatively unchanged. The increases in military modification and maintenance
revenues were substantially offset by decreased sales in commercial modification
and maintenance programs. In 1993, both military and commercial aircraft
modification and maintenance revenues were lower than those reported in 1992.
Revenues from other aircraft programs and support activities were lower in
1994 compared to 1993 due to the absence of P-3 maritime patrol aircraft
deliveries compared to two deliveries in 1993. The decrease in 1994 also
reflects the absence of S-3 patrol aircraft upgrade sales due to completion of
the upgrade program in 1993. The increase in 1993 revenues compared with 1992
revenues reflects the delivery of two P-3 aircraft in 1993 compared to one in
1992, and higher S-3 upgrade sales offset by lower other programs and spares
sales.
Program profits in Aeronautical Systems in 1994 were nine percent higher
than 1993 reflecting the sales variances described above, improved performance
in C-130 programs and higher profit margins in special programs at LFWC offset
in part by a $25 million fine and civil settlement relating to charges contained
in a federal indictment (see Note 10 to the consolidated financial statements)
and higher spending on the development of an improved version of the C-130
aircraft (C-130J) than in 1993.
In addition, 1993 was significantly affected by the following third quarter
nonrecurring items. The company and the U.S. Navy settled their dispute relating
to the P-7A aircraft development program resulting in the reversal of
approximately $90 million of pretax losses recognized on this program in 1989.
Also, the company recorded a charge to program profits of $30 million resulting
from the closure of its wide-body commercial aircraft modification and
maintenance operation at Norton Air Force Base. Finally, the company recorded a
$35 million charge to program profits representing an excess of expected costs
over anticipated sales proceeds related to its Aeronautical Systems properties
in Burbank, California.
The program profits in 1993 were double the 1992 amount reflecting the LFWC
acquisition, sales variances described above, improved profit margins in most
areas, and the absence in 1993 of negative cost adjustments reflected in certain
programs in 1992, offset in part by lower profit in C-130 aircraft programs
reflecting fewer deliveries and a change in customer mix and higher spending on
the C-130J. Program profits for 1993 were also affected by the nonrecurring
items discussed above and intangible asset amortization of $84 million related
to the purchase of LFWC.
MISSILES AND SPACE SYSTEMS
Missiles and Space Systems sales continued to decline in 1994 following
declines experienced in 1993.
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Sales
Space and other programs....................................... $2,049 $2,378 $2,655
Fleet ballistic missiles....................................... 1,093 1,281 1,503
Other missile systems.......................................... 466 579 429
------ ------ ------
Total....................................................... $3,608 $4,238 $4,587
====== ====== ======
Program profits.................................................. $ 266 $ 348 $ 401
====== ====== ======
</TABLE>
Revenues from space and other programs decreased 14 percent in 1994 and 10
percent in 1993 reflecting lower activity in various classified space programs
and lower revenues resulting from the termination of the Follow-on Early Warning
System program. Partially offsetting the 1993 sales decline were higher sales
from the Milstar military communications satellite program.
Trident II fleet ballistic missiles sales continued to decline in 1994
compared with 1993 reflecting decreased production contract requirements.
Trident II sales decreased in 1993 due to the completion of the development
portion of the program and transition to production.
6
<PAGE> 7
Other missile systems programs reflected lower sales in 1994 primarily due
to lower revenues resulting from the termination of the Advanced Solid Rocket
Motor program. Sales from other missile systems were higher in 1993 compared
with 1992 due to the Theater High Altitude Area Defense (THAAD) program.
Program profits in Missiles and Space Systems continued to decline in 1994
reflecting the decreased sales, a charge of $22 million related to the
cancellation and final settlement on the Mobile Satellite Antenna subcontract
and charges during 1994 totalling $43 million related to a military air command,
control and communication program for a foreign government. The declines and
charges were partially offset by performance incentives recognized in 1994 for
the Milstar, fleet ballistic missiles, and certain space systems programs.
The lower program profits in 1993 compared to 1992 also reflected the
impact of the lower sales volume as well as negative cost adjustments on several
programs and the absence in 1993 of significant amounts of reliability incentive
fees from the Trident II program recognized in 1992. The declines were partially
offset by higher operating profit margins in most other programs and the initial
recognition of profits related to the Iridium commercial satellite program.
ELECTRONIC SYSTEMS
Sales in Electronic Systems were 18 percent and 8 percent higher in 1994
and 1993, respectively.
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Sales
Defense electronics programs................................... $ 588 $ 619 $ 622
Commercial product manufacturing............................... 498 388 413
Commercial distribution activities............................. 564 389 254
------ ------ ------
Total....................................................... $1,650 $1,396 $1,289
====== ====== ======
Program profits (loss)........................................... $ 47 $ (1) $ 32
====== ====== ======
</TABLE>
Defense electronics program revenues in 1994 were $31 million lower than
the $619 million reported in 1993, a five percent decrease. Decreased revenues
from countermeasures and antisubmarine warfare systems were partly offset by
increases in defense, information, and avionics systems. Revenues from defense
electronics in 1993 were approximately level with 1992 revenues reflecting
increases in countermeasures, information and avionics systems offset by
decreases in defense and surveillance systems programs.
Sales from commercial product manufacturing increased 28 percent in 1994
due to increased revenues from contract manufacturing activities. Sales from
commercial product manufacturing dipped six percent in 1993 primarily due to
weakness and competitive pricing pressures in the computer peripherals market.
Commercial distribution activities continued to grow in 1994 showing a 45
percent increase. Sales from this activity increased 53 percent in 1993 compared
to 1992. These increases reflect growth in the Access Graphics business.
Electronic Systems recognized a program profit of $47 million in 1994
compared to a slight program loss in 1993. The profit in 1994 reflects improved
performance in defense electronics programs and commercial product manufacturing
operations. The program loss in 1993 compared to a program profit in 1992 was
primarily due to significant operating losses at Calcomp due to market weakness
and pricing pressures as well as charges related to downsizing.
In addition, Electronic Systems program profits were negatively affected in
1993 when the company recognized an expense for future environmental remediation
costs that are expected to be allocated to the company's commercial business.
See Notes 1 and 10 to the consolidated financial statements for additional
information on the company's accounting policies related to environmental
matters and the status of environmental matters now before the company.
7
<PAGE> 8
TECHNOLOGY SERVICES
Technology services sales decreased nine percent in 1994 following a 13
percent increase in 1993.
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Sales
Space shuttle processing services.............................. $ 549 $ 609 $ 600
Engineering and scientific services............................ 287 335 349
State and municipal government services........................ 202 180 88
Other services................................................. 261 303 230
------ ------ ------
Total....................................................... $1,299 $1,427 $1,267
====== ====== ======
Program profits.................................................. $ 33 $ 32 $ 18
====== ====== ======
</TABLE>
Space shuttle processing revenues decreased ten percent in 1994. In 1993,
revenues were up approximately two percent. These variations reflect
fluctuations in levels of activity and cost reduction efforts in support of
space shuttle operations as NASA continues to review its budget, streamline
processes and vary the number of launches each year.
Sales from engineering and scientific services in 1994 and 1993 were down
from prior years. Decreases in support contracts for various NASA sites were
partly offset by increases in revenues from environmental services.
Revenues in 1994 from state and municipal government services were higher
compared to 1993 due to increased contract effort in children and family
services programs. Revenues from all other programs remained stable in 1994. In
1993, revenues in this line of business more than doubled due to expansion of
children and family services and transportation systems and services.
Other services revenues decreased approximately 14 percent in 1994
reflecting decreases in contract field support services and airport management.
Increases in 1993 reflected higher levels of contract field support services
provided to the military.
Program profits increased slightly in 1994. Program profits were positively
affected by improved performance in space shuttle processing services, contract
field support services, and various state and municipal government services.
Another positive factor was the commencement during the fourth quarter of 1994
of the environmental services management contract at the Idaho National
Engineering Laboratories (INEL). Program profits were negatively impacted by
higher business development costs at the company's Lockheed Air Terminal
subsidiary.
Program profits were substantially higher in 1993 compared to 1992
reflecting improved performance on contract field support programs and in
airport management and consulting operations, as well as a reduction in accrued
future retiree medical costs due to reduced employment levels.
FINANCIAL CONDITION
LIQUIDITY AND CASH FLOWS
Liquidity continued to be provided by cash generated from operating
activities. Net cash provided by operating activities was $774 million and $795
million during 1994 and 1993, respectively. Both years primarily reflect
earnings plus depreciation and amortization, partly offset in 1994 by higher
working capital requirements.
At year end 1994, a portion of certain progress billings at LFWC that were
withheld by agreement with a U.S. government customer had been reduced to
approximately $94 million from approximately $167 million at year end 1993.
These billings are being withheld pending resolution of issues pertaining to
LFWC's manufacturing cost allocation system. The withheld amounts are expected
to be further reduced during 1995.
8
<PAGE> 9
Additions to property, plant, and equipment were $240 million in 1994,
compared to $321 million and $327 million in 1993 and 1992, respectively.
Depreciation expense (excluding amortization expense) was $299 million, $328
million, and $294 million for the three fiscal years ended 1994, 1993, and 1992.
The company continually monitors its capital spending in relation to current and
anticipated business needs. As circumstances dictate, facilities are added,
consolidated, disposed of, or modernized.
In the third quarter of 1994, the company disclosed that, as a part of its
downsizing activity and continuing review of property, plant, and equipment
requirements, it had been focusing attention on its Lockheed Missiles and Space
Company located predominately in Sunnyvale, California, and its commercial
aircraft maintenance facility at Tucson, Arizona. Although at that time no
action had been approved and no specific dollar effect could be reasonably
determined, management stated its belief that the net impact of a restructuring
charge at the Lockheed Missiles and Space Company would be in the range of $200
million before tax, absent any effect from the proposed business combination
with Martin Marietta Corporation. In view of the fact that the proposed business
combination is proceeding and a meeting of shareholders to approve the business
combination has been scheduled, no further decision to reorganize the Sunnyvale
facilities has been made pending consolidation plans of the combined company.
With respect to the Tucson facilities, management stated its belief that
the associated costs, if a decision were made to close the facility, would be
less than $40 million before tax. Improvements in the market for commercial
aircraft maintenance and the company's ability to sign up a number of new
contracts for the facility have caused management to view this facility as a
viable operation and integral to the continued success of the aircraft
maintenance line of business. Therefore, closure of this facility is not
currently being contemplated.
The company is holding and preparing for sale the excess property,
primarily in Burbank, California, resulting from a reorganization of its
Aeronautical Systems business in 1989. In view of changing market values for
real estate and uncertainty regarding the timing of availability of the
properties for sale, the sales value of the properties will continue to be
subject to change.
The cash inflow associated with the exercise of stock options in 1994
totalled $24 million compared to $71 million in 1993. The 1994 exercises
resulted in the issuance of approximately 500,000 shares of the company's stock.
Cash dividends amounted to $2.24, $2.12, and $2.09 per share in 1994, 1993,
and 1992, respectively.
CAPITAL RESOURCES
Total debt, including the guarantee of salaried ESOP obligations, decreased
slightly to $2,539 million in 1994 from $2,596 million in 1993. Approximately
$277 million of long-term debt becomes due and payable in 1995.
Most of Lockheed's debt at the end of 1994 and 1993 was in the form of
publicly issued fixed-rate notes. Total debt including ESOP represented
approximately 47 percent and 52 percent of total capitalization at year-end 1994
and 1993, respectively. Total debt excluding ESOP (ex-ESOP) was 40 percent and
43 percent of total capitalization for the same respective periods. The
calculation of the debt ratio ex-ESOP reflects the fact that the assets of the
salaried ESOP trust, not reflected on the company's balance sheet, are available
for the service and repayment of the ESOP obligations guaranteed by the company.
The "net debt" ratio consists of total debt, net of cash, as a percentage
of total capitalization. Using this approach, the measures were 43 percent at
December 1994 and 50 percent at December 1993. Ex-ESOP, the amounts were 35
percent and 42 percent, respectively.
At December 25, 1994, the company had available a committed credit line
aggregating $1 billion from a group of domestic and foreign banks. Generally,
these lines are maintained to back up the company's commercial paper borrowings.
There were no commercial paper borrowings, nor any borrowings outstanding under
the committed lines, at year-end.
9
<PAGE> 10
The company receives advances on certain contracts and uses them to finance
the inventories required to complete the contracted work. The amount of such
advances in excess of costs incurred on these contracts was $448 million at
December 25, 1994, and was mostly related to contracts with foreign government
and commercial customers. These funds may be used for working capital
requirements and other general corporate purposes until needed to complete the
contracts.
Cash on hand and temporarily invested, internally generated funds, and
available financing resources are sufficient to meet anticipated operating and
debt service requirements and discretionary investment needs.
Stockholders' equity at December 25, 1994 was $2,807 million, up 15 percent
from the previous year-end. The increase reflects the retention of earnings in
excess of cash dividends paid, the issuance of new shares upon the exercise of
employee stock options, and accounting benefits related to the salaried ESOP
(the reduction of guaranteed debt and certain tax benefits).
OTHER MATTERS
COMPANY-SPONSORED RESEARCH AND DEVELOPMENT
In 1994, approximately $442 million was expended on company-sponsored
research and development, which is slightly less than the $449 million expended
in 1993. The amount in 1994 includes approximately $64 million spent on
development efforts for the next generation of the Hercules transport aircraft,
the C-130J. The company continually monitors its research and development effort
to assure an appropriate level of spending in relation to expected future
benefits. Company-sponsored research and development is necessary to support the
company's technologies and maintain its competitive position in the aerospace
and electronics industries.
BACKLOG
Funded backlog consists of unfilled firm orders for the company's products
for which funding has been both authorized and appropriated by the customer
(Congress, in the case of U.S. government customers). Negotiated (total) backlog
includes firm orders for which funding has not been appropriated.
The following table shows funded backlog by major category for the
company's two largest segments, and totals for the other two segments, at the
end of each of the last three years:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Aeronautical Systems
Fighter aircraft programs.................... $ 4,908 $ 6,229 $ 286
Airlift aircraft programs.................... 797 1,283 891
Aircraft modification and maintenance
programs.................................. 470 460 504
Other aircraft programs and support
activities................................ 1,350 1,361 1,599
------- ------- ------
7,525 9,333 3,280
Missiles and Space Systems
Fleet ballistic missiles..................... 1,580 1,423 2,389
Other missile systems........................ 157 90 317
Space and other programs..................... 1,765 1,273 1,605
------- ------- ------
3,502 2,786 4,311
Electronic Systems............................. 733 732 870
Technology Services............................ 405 305 395
------- ------- ------
$12,165 $13,156 $8,856
======= ======= ======
</TABLE>
Funded backlog was eight percent lower in 1994 compared to 1993. Decreases
in Aeronautical Systems programs were partially offset by increases in Missiles
and Space Systems and Technology Services programs.
10
<PAGE> 11
In 1993, funded backlog increased nearly 50 percent compared to 1992 due to
increases in Aeronautical Systems reflecting the acquisition of LFWC and its
existing backlog.
In Aeronautical Systems, funded backlog decreased 19 percent in 1994. The
fighter aircraft backlog decreased significantly, primarily reflecting
deliveries to the U.S. government without the addition of new U.S. government
orders. The decrease in the airlift aircraft backlog in 1994 is due to a
reduction in the number of aircraft ordered by the U.S. government. In 1994,
aircraft modification and maintenance and other aircraft program and support
activities remained stable compared to 1993. In 1993, the nearly-triple increase
in backlog was primarily attributable to the addition of LFWC's F-16 program and
its one-third share of the F-22 fighter program.
Although the funded backlog in Missiles and Space Systems increased 26
percent in 1994, it is 19 percent lower than the funded backlog at the end of
1992. Missiles and Space Systems programs continue to experience reductions in
funding and, in some cases, terminations by various government customers. Funded
backlog was lower at the end of 1993 reflecting delayed funding in several
programs. Delayed funding of the Trident II in 1993 was obtained in 1994 and is
reflected in the 1994 numbers. Other missile systems programs show an increase
primarily due to additional funding on the THAAD defensive missile development
program as that program nears its first flight test. Most of the other space
programs reflect moderate increases in funding in 1994 compared to 1993, the
most notable of which is the Milstar program.
In Electronic Systems, funded backlog in 1994 remained relatively constant
with the results from 1993. Moderate increases in the funded backlog for various
commercial electronic programs were offset by moderate decreases in various
defense electronics programs. Funded backlog for 1993 was 16 percent lower than
1992 reflecting decreases in defense electronics programs offset in part by
increases in commercial programs and surveillance systems and avionics programs.
The funded backlog for Technology Services increased approximately 33
percent in 1994 compared to 1993. The difference reflects increased funding for
various environmental programs plus higher NASA shuttle support and other
engineering support activities. The funding for contract field support services
remained the same in 1994. Funded backlog in 1993 was down from 1992 due to
lower backlog of contract field support services, and timing differences in NASA
funding of space shuttle processing and engineering and scientific support
activities.
The figures above do not include negotiated but unfunded amounts. Total
negotiated backlog, both funded and unfunded, amounted to $25.6 billion in 1994,
$28.9 billion in 1993, and $19.4 billion in 1992. The items affecting 1994
funded backlog discussed previously were also the primary reasons for the
decrease in the 1994 total negotiated backlog. The negotiated backlog increase
in 1993 was principally due to the addition of LFWC to the Aeronautical Systems
segment. Offsetting this increase were reductions in certain space programs in
the Missiles and Space Systems segment.
As in previous years, a substantial portion of unfunded backlog is related
to programs for the U.S. government and is dependent on future governmental
appropriations for funding.
DEFENSE INDUSTRY ENVIRONMENT
In recent years, significant changes in the global political climate have
redefined the needs of the Department of Defense (DOD). New requirements
emphasize a smaller, more technologically superior military, and the industrial
base to support it. In addition, initiatives to reduce the federal budget
deficit have placed increased downward pressure on defense budget levels.
Defense budgets have been declining in real terms (after accounting for
inflation) since 1985. Industry analysts continue to generally expect defense
spending to decline through the latter part of the decade and then hold constant
in real terms at a reduced level, but the ultimate outcome is uncertain. Reduced
budget levels, rapidly changing customer requirements, and increased competition
are expected for the defense industry in the years to come.
11
<PAGE> 12
The U.S. defense budget has a major impact on Lockheed's business base. In
1994, 64 percent of the company's sales were to DOD customers. The company
provides a wide variety of products and services, and Lockheed's major programs
have generally been well supported thus far during the budget decline. The
company is a leader in advanced technologies, research and development, and
limited production-rate manufacturing, all of which have been emphasized during
the ongoing debate over the focus of future defense spending. However,
uncertainty remains over the size and shape of future defense budgets and their
impact on specific programs.
The company has been focusing attention and resources on its most promising
businesses and opportunities in both defense and nondefense markets, and has
been reviewing its strategic options in light of the anticipated continuation of
decreases in military spending and the accelerated consolidation in the
aerospace/defense industry.
In defense markets, the company achieved significant milestones on the
C-130J airlift program and won an initial contract with the United Kingdom Royal
Air Force. Also, the company continues to demonstrate excellent performance on
U.S. government and foreign military programs such as the F-16, Trident II fleet
ballistic missile, and the Milstar communication satellite. Cost reduction
efforts and the continuous monitoring and adjustment of employment levels have
maintained the profitable position of these cornerstone product lines.
In nondefense markets, Lockheed has made significant progress in capturing
new business. The expanding commercial space market holds potential for new
business and is one in which Lockheed has initiated a presence through, among
others its joint venture relationship with Khrunichev Enterprise and NPO Energia
in Russia for space launch services, and its investment in Space Imaging
Incorporated for high resolution space-based photographs of the earth. Also, the
company made significant progress in the environmental lines of business with a
major contract award at the Idaho National Engineering Laboratories.
On August 29, 1994, Lockheed entered into a definitive agreement to combine
with Martin Marietta Corporation in a merger of equals, subject to the approval
of the shareholders of each company. This business combination, expected to be
completed in the first quarter of 1995 on a tax-free basis and without
additional financing, should reduce dependence on any single program and the
associated risks of program cancellations and is expected to offer opportunities
for improved efficiencies, to preserve critical elements of the national defense
industrial base of Lockheed, and to expand access to commercial, civil, and
international markets.
If the combination is not approved by the shareholders, a Confidentiality
and Standstill Agreement entered into by Lockheed and Martin Marietta
Corporation on March 29, 1994 protects the confidentiality of any information
provided by one company to the other and limits the ability of each party for
three years to acquire any voting securities or assets of, or solicit proxies
with respect to, the other party.
ENVIRONMENTAL MATTERS
The company is involved in a number of proceedings and potential
proceedings relating to environmental matters. These matters and their impact on
the company are discussed in Note 10 to the consolidated financial statements.
As described in Note 10, a substantial portion of currently anticipated
environmental expenditures will be reflected in the company's sales and costs of
sales pursuant to U.S. government agreement or regulation. However, a timing
difference in cash flows is expected between incurrence of certain of the costs
related to the Burbank cleanup and allocation of these costs as part of the
company's general and administrative expense. At the end of 1994, expenditures
that had been made but not yet allocated amounted to approximately $80 million.
This timing difference is expected to increase through the end of 1995 before
declining in subsequent years.
12
<PAGE> 13
LOCKHEED CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(IN MILLIONS, EXCEPT PER-SHARE
DATA)
<S> <C> <C> <C>
Sales
Aeronautical Systems........................................ $ 6,573 $ 6,010 $ 2,957
Missiles and Space Systems.................................. 3,608 4,238 4,587
Electronic Systems.......................................... 1,650 1,396 1,289
Technology Services......................................... 1,299 1,427 1,267
------- ------- -------
Total sales......................................... 13,130 13,071 10,100
Costs and expenses............................................ 12,275 12,227 9,456
------- ------- -------
Program profits
Aeronautical Systems........................................ 509 465 193
Missiles and Space Systems.................................. 266 348 401
Electronic Systems.......................................... 47 (1) 32
Technology Services......................................... 33 32 18
------- ------- -------
Total program profits............................... 855 844 644
Interest expense.............................................. (156) (168) (119)
Other income (deductions), net................................ (4) 24
------- ------- -------
Earnings before income taxes and cumulative effect of change
in accounting principle..................................... 695 676 549
Provision for income taxes.................................... 250 254 201
------- ------- -------
Earnings before cumulative effect of change in accounting
principle................................................... 445 422 348
Cumulative effect of change in accounting principle for
retiree medical benefits, net of tax........................ (631)
------- ------- -------
Net earnings (loss)......................................... $ 445 $ 422 $ (283)
======= ======= =======
Earnings per share
Before cumulative effect of change in accounting
principle................................................ $ 7.00 $ 6.70 $ 5.65
Cumulative effect of change in accounting principle......... (10.23)
------- ------- -------
Net earnings (loss) per share............................... $ 7.00 $ 6.70 $ (4.58)
======= ======= =======
Average number of common and common equivalent shares
outstanding................................................. 63.6 62.9 61.7
Number of common shares outstanding at year-end............... 63.2 62.7 61.1
</TABLE>
See accompanying notes.
13
<PAGE> 14
LOCKHEED CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1994 1993 1992
----- ------- -----
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss).............................................. $ 445 $ 422 $(283)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities:
Cumulative effect of change in accounting principle, net of
tax....................................................... 631
Depreciation and amortization............................... 485 498 355
Changes in operating assets and liabilities:
Accounts receivable....................................... (96) 232 (23)
Gross inventories......................................... 663 498 292
Accounts payable.......................................... 44 5 89
Salaries and related items................................ (21) (41) (31)
Income taxes.............................................. (95) 18 (15)
Customer advances and progress payments................... (746) (824) (238)
Other, net................................................ 95 (13) (192)
----- ------- -----
Net cash provided by operating activities................... 774 795 585
----- ------- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant, and equipment...................... (240) (321) (327)
Purchase of Lockheed Fort Worth Company.......................... (1,521)
Purchases of marketable securities............................... (200)
Proceeds from sales of marketable securities..................... 210
Costs related to property held for sale.......................... (44) (26) (22)
Decrease (increase) in finance and other long-term receivables... 16 8 (11)
Other, net....................................................... (53) 41 (47)
----- ------- -----
Net cash used for investing activities...................... (321) (1,819) (397)
----- ------- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term borrowings................................ (7) (9) (2)
Borrowings of long-term debt..................................... 37 1,581 341
Repayments of long-term debt..................................... (61) (634) (294)
Purchases of treasury shares..................................... (101)
Cash dividends................................................... (141) (132) (128)
Proceeds from stock options exercised............................ 24 71 24
----- ------- -----
Net cash provided by (used for) financing activities........ (148) 877 (160)
----- ------- -----
Increase (decrease) in cash and cash equivalents................. 305 (147) 28
Cash and cash equivalents, beginning of year..................... 147 294 266
----- ------- -----
Cash and cash equivalents, end of year........................... $ 452 $ 147 $ 294
===== ======= =====
Supplemental Disclosure Information
Cash paid during the year for
Interest.................................................... $ 152 $ 165 $ 101
Income taxes................................................ 378 230 219
</TABLE>
See accompanying notes.
14
<PAGE> 15
LOCKHEED CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
1994 1993
------ ------
(DOLLAR FIGURES
IN
MILLIONS, EXCEPT
PER-SHARE DATA)
<S> <C> <C>
Current assets
Cash and cash equivalents................................................ $ 452 $ 147
Accounts receivable...................................................... 1,732 1,644
Inventories.............................................................. 1,631 1,699
Deferred tax assets, net................................................. 123
Other current assets..................................................... 204 350
------ ------
Total current assets............................................. 4,142 3,840
Property, plant, and equipment, at cost
Land..................................................................... 94 93
Buildings, structures, and leasehold improvements........................ 1,611 1,686
Machinery and equipment.................................................. 2,641 2,812
------ ------
4,346 4,591
Less accumulated depreciation and amortization........................... 2,540 2,641
------ ------
Net property, plant, and equipment............................... 1,806 1,950
Noncurrent assets
Intangible assets related to tactical aircraft programs acquired (net of
accumulated amortization of $184 in 1994 and $84 in 1993)............. 1,326 1,425
Excess of purchase price over fair value of assets acquired (net of
accumulated amortization of $237 in 1994 and $204 in 1993)............ 757 782
Other noncurrent assets.................................................. 1,082 964
------ ------
$9,113 $8,961
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings.................................................... $ 14 $ 21
Accounts payable......................................................... 885 841
Salaries and related items............................................... 334 355
Deferred tax liabilities, net............................................ 44
Customers' advances in excess of related costs........................... 448 606
Current portion of long-term debt........................................ 277 28
Current portion of accumulated retiree medical benefit obligation........ 155 155
Other current liabilities................................................ 617 483
------ ------
Total current liabilities........................................ 2,730 2,533
Long-term debt............................................................. 2,248 2,547
Accumulated retiree medical benefit obligation............................. 893 942
Other long-term liabilities................................................ 435 496
Commitments and contingencies
Stockholders' equity
Preferred stock..........................................................
Common stock, $1 par value, 100,000,000 shares authorized;
73,007,724 shares issued (72,471,642 in 1993)......................... 73 73
Additional capital....................................................... 828 804
Retained earnings........................................................ 2,742 2,427
Treasury shares, at cost (9,775,996 shares).............................. (454) (454)
Guarantee of ESOP obligations............................................ (382) (407)
------ ------
Total stockholders' equity....................................... 2,807 2,443
------ ------
$9,113 $8,961
====== ======
</TABLE>
See accompanying notes.
15
<PAGE> 16
LOCKHEED CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
GUARANTEE
COMMON ADDITIONAL RETAINED TREASURY OF ESOP
STOCK CAPITAL EARNINGS SHARES OBLIGATIONS TOTAL
------ ---------- -------- -------- ----------- ------
(IN MILLIONS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
At December 29, 1991..................... $ 70 $712 $2,526 $ (353) $(452) $2,503
Earnings before cumulative effect of
change in accounting principle...... 348 348
Cumulative effect of change in
accounting principle, net of tax.... (631) (631)
Reduction of ESOP obligations
guaranteed.......................... 21 21
Tax benefits from dividends paid to
ESOP on unallocated shares.......... 6 6
Stock options exercised................ 1 23 24
Dividends declared on common stock
($2.09 per share)................... (128) (128)
Treasury shares purchased.............. (101) (101)
------ ---------- -------- -------- ----------- ------
At December 27, 1992..................... 71 735 2,121 (454) (431) 2,042
Net earnings........................... 422 422
Reduction of ESOP obligations
guaranteed.......................... 24 24
Tax benefits from dividends paid to
ESOP on unallocated shares and stock
options exercised................... 16 16
Stock options exercised................ 2 69 71
Dividends declared on common stock
($2.12 per share)................... (132) (132)
------ ---------- -------- -------- ----------- ------
At December 26, 1993..................... 73 804 2,427 (454) (407) 2,443
Net earnings........................... 445 445
Reduction of ESOP obligations
guaranteed.......................... 25 25
Tax benefits from dividends paid to
ESOP on unallocated shares and stock
options exercised................... 11 11
Stock options exercised................ 24 24
Dividends declared on common stock
($2.24 per share)................... (141) (141)
------ ---------- -------- -------- ----------- ------
At December 25, 1994..................... $ 73 $828 $2,742 $ (454) $(382) $2,807
====== ======= ====== ====== ======== ======
</TABLE>
See accompanying notes.
16
<PAGE> 17
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation -- The consolidated financial statements for the
years ended December 25, 1994, December 26, 1993, and December 27, 1992, include
the accounts of wholly owned and majority-owned subsidiaries. The accounts of
Lockheed Finance Corporation (LFC), a wholly owned finance company subsidiary,
are included in the consolidated financial statements. LFC's assets, revenues,
and earnings are immaterial and therefore not separately disclosed. Because
LFC's business differs significantly from the rest of Lockheed's operations,
LFC's results of operations are presented as a component of other income
(deductions), net.
Effective February 28, 1993, the company acquired Lockheed Fort Worth
Company (LFWC), formerly the tactical military aircraft business (Fort Worth
Division) of General Dynamics Corporation, for approximately $1.5 billion in
cash, plus the assumption of certain liabilities related to the business. The
acquisition was accounted for as a purchase, and financed by intermediate and
long-term borrowings. The excess of the purchase price over the fair value of
the net assets acquired represented intangible assets related to the aircraft
programs acquired and amounted to approximately $1.5 billion. The operating
results of LFWC since February 28, 1993, are reported in the company's
Aeronautical Systems segment.
Certain reclassifications have been made to the 1993 and 1992 data to
conform to the 1994 presentation.
Cash and cash equivalents -- The company considers securities purchased
within three months of their date of maturity to be cash equivalents. Due to the
short maturity of these instruments, carrying value on the company's
consolidated balance sheet approximates fair value. Under Lockheed's cash
management system, certain divisions' and subsidiaries' cash accounts reflect
credit balances to the extent checks written have not been presented for
payment. The amounts of these credit balances included in accounts payable were
$171 million at December 25, 1994, and $154 million at December 26, 1993.
Inventories -- Inventories are stated at the lower of cost or estimated net
realizable value. In the case of materials and spare parts, cost represents
average cost.
Work-in-process inventory includes direct production costs, allocable
operating overhead, and, except for commercial contracts and programs, general
and administrative expenses.
Inventories are primarily attributable to long-term contracts or programs
on which the related operating cycles are longer than one year. In accordance
with industry practice, these inventories are included in current assets.
Property, plant, and equipment -- Depreciation is provided on most plant
and equipment using declining balance methods of depreciation during the first
half of the estimated useful lives of the assets; thereafter, straight-line
depreciation is used. Estimated useful lives generally range from eight years to
33 years for buildings and structures and two years to 20 years for machinery
and equipment. Leasehold improvements are amortized over the useful lives of the
related assets or the terms of the leases, whichever is shorter.
Intangible assets related to tactical aircraft programs
acquired -- Intangible assets related to the acquisition of LFWC are amortized
on a straight-line basis over an estimated period of benefit of fifteen years.
Excess of purchase price over fair value of net assets acquired -- The
excess of purchase price over fair value of net assets of acquired businesses is
amortized on a straight-line basis over the estimated periods of benefit. Such
periods do not exceed 40 years.
Sales and earnings -- Sales under cost-reimbursement-type contracts are
recorded as costs are incurred. Applicable estimated profits are included in
sales in the proportion that incurred costs bear to total estimated costs. Sales
and anticipated profits under certain fixed-price contracts that require
substantial performance over a long period of time before deliveries begin are
accounted for under the percentage-of-completion (cost-
17
<PAGE> 18
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to-cost) method. Under all other contracts, sales are recorded at delivery or on
completion of specified tasks, as applicable, and estimated contract profits are
taken into earnings in proportion to recorded sales.
Some contracts include provisions for adjusting prices to reflect
specification changes and other matters. For accounting purposes, estimates of
such adjustments are used in recording sales and costs and expenses. Incentives
or penalties applicable to performance on contracts are considered in estimating
sales and profit rates and are recorded when there is sufficient information to
assess anticipated contract performance. When the adjustments are ultimately
determined, any changes from the estimates are reflected in earnings.
Any anticipated losses on contracts or programs are charged to earnings
when identified.
Research and development costs -- Company-sponsored research and
development costs (shown in Selected Financial Data on pages 2 and 3) primarily
include research and development and bid and proposal effort related to
government products and services. Except for certain arrangements described
below, these costs are generally included as part of the general and
administrative costs that are allocated among all contracts and programs under
U.S. government contractual arrangements. Company-sponsored product development
costs not otherwise allocable are charged to expense when incurred. Under
certain arrangements in which a customer shares in product development costs,
the company's portion of such costs is expensed as incurred. Customer-sponsored
research and development costs incurred pursuant to contracts are accounted for
as program costs.
Environmental matters -- The company records a liability for environmental
matters when it is probable that a liability has been incurred and the amount
can be reasonably estimated. A substantial portion of the costs are expected to
be reflected in sales and costs of sales pursuant to U.S. government agreement
or regulation. At the time a liability is recorded for future environmental
costs, an asset is recorded for the probable future recovery of the portion of
those costs in pricing U.S. government business. With the exception of
applicable amounts representing current assets and liabilities, these amounts
are included in other noncurrent assets and other long-term liabilities. The
portion of those costs expected to be allocated to commercial business is
reflected in cost of sales at the time the liability is established.
Earnings per share -- Earnings per share are computed from the weighted
average number of common shares, including common share equivalents, outstanding
during each year. In general, this computation assumes that dilutive stock
options were exercised and the resulting proceeds were used to purchase
outstanding common stock. When there is no material difference between the
computations of primary and fully diluted earnings per share, only the primary
number is presented.
NOTE 2 -- PROPOSED BUSINESS COMBINATION WITH MARTIN MARIETTA CORPORATION
On August 29, 1994 Lockheed and Martin Marietta Corporation (Martin
Marietta) entered into a definitive agreement to combine the two corporations
through an exchange of stock, whereby each share of Lockheed common stock will
be exchanged for 1.63 shares of common stock of a new company, Lockheed Martin
Corporation (Lockheed Martin). The combination is subject to government
antitrust review and on December 22, 1994, Lockheed, Martin Marietta, and
Lockheed Martin executed an Agreement Containing Consent Order (Consent Order)
with the Federal Trade Commission (FTC) staff. On January 11, 1995, the FTC
announced it would not challenge the combination based upon the Consent Order,
which it provisionally accepted subject to final review at the end of a public
comment period. The combination is scheduled to be consummated in the first
quarter of 1995, subject to approval by the stockholders of Lockheed and Martin
Marietta.
18
<PAGE> 19
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proposed business combination is expected to be accounted for as a
pooling of interests under Accounting Principles Board Opinion No. 16, "Business
Combinations." Under this accounting method, the reported balance sheet amounts
and results of operations of Lockheed and Martin Marietta will be combined and
conformed, as appropriate, for the year in which the business combination occurs
as well as for all prior periods. The following presents unaudited pro forma
financial results for fiscal years 1994, 1993, and 1992 for Lockheed Martin
Corporation as if the business combination had occurred. The unaudited pro forma
results of operations are not necessarily indicative of actual or future results
of operations that would have occurred or will occur upon consummation of the
business combination and do not reflect any transaction expenses and
restructuring charges which may result from the business combination.
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT
PER-SHARE DATA)
<S> <C> <C> <C>
Net Sales..................................... $22,915 $22,376 $15,925
Earnings before cumulative effect of
accounting changes.......................... 1,061 865 678
Net earnings (loss)........................... 1,061 865 (382)
Net Earnings (loss) per common share:
Assuming no dilution:
Before cumulative effect of accounting
changes................................ 5.01 4.16 3.46
Net earnings (loss)...................... 5.01 4.16 (1.95)
Assuming full dilution:
Before cumulative effect of accounting
changes................................ 4.61 3.91 3.46
Net earnings (loss)...................... 4.61 3.91 (1.95)
</TABLE>
NOTE 3 -- OTHER INCOME (DEDUCTIONS), NET
Other income (deductions), net consisted of the following components:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Interest income....................................... $ 19 $ 14 $ 38
Earnings before income taxes of Lockheed Finance
Corporation......................................... 6 6
Other................................................. (23) (20) (20)
---- ---- ----
$ (4) $ $ 24
==== ==== ====
</TABLE>
19
<PAGE> 20
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following components:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
U.S. government, primarily on long-term contracts.......... $ 556 $ 521
Commercial and foreign government
Long-term contracts...................................... 105 48
Other.................................................... 314 336
Unbilled costs and accrued profits, primarily related to
U.S. government and foreign government contracts......... 757 739
------ ------
$1,732 $1,644
====== ======
</TABLE>
Unbilled costs and accrued profits consisted primarily of revenues on
long-term contracts that had been recognized for accounting purposes but not yet
billed to customers. Of this total at December 25, 1994, it is expected that
approximately $661 million will be billed within 90 days. The remaining amount
of unbilled costs and accrued profits represent amounts related to Lockheed's
estimate of contract price adjustments that are expected to be billed and
collected on completion of negotiations.
NOTE 5 -- INVENTORIES
Inventories consisted of the following components:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
Work in process, primarily on long-term contracts or
programs................................................. $2,737 $3,166
Materials and spare parts.................................. 254 310
Advances to subcontractors................................. 171 394
Finished goods............................................. 148 105
------ ------
3,310 3,975
Less customer advances and progress payments............... 1,679 2,276
------ ------
$1,631 $1,699
====== ======
</TABLE>
A substantial portion of inventories was applicable to U.S. government
contracts. Under contractual arrangements whereby Lockheed receives progress
payments from the U.S. government, title to inventories identified with the
related contracts is vested in the government.
Inventories do not include any significant amounts of unamortized tooling,
learning curve and other deferred costs, claims, or other similar items whose
recovery is uncertain.
An analysis of general and administrative costs follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Included in work in process-beginning of
period......................................... $ 372 $ 215 $ 186
Incurred during the year......................... 1,069 1,113 913
Charged to costs and expenses during the year.... (1,114) (956) (884)
------- ------ -----
Included in work in process-end of period........ $ 327 $ 372 $ 215
======= ====== =====
</TABLE>
Included in costs and expenses in 1994, 1993, and 1992, were general and
administrative costs of approximately $107 million, $110 million, and $102
million, respectively, incurred by business units whose sales were principally
not under government contracts.
20
<PAGE> 21
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAXES
The provision for income taxes consisted of the following components:
<TABLE>
<CAPTION>
1994 1993 1992
----- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current U.S. federal................................. $ 381 $ 83 $210
Foreign.............................................. 3 5 7
Deferred U.S. federal................................ (134) 166 (16)
----- ---- ----
$ 250 $254 $201
===== ==== ====
</TABLE>
All of the pretax earnings shown in the company's consolidated statement of
earnings were included in the computation of the provision for U.S. federal
income tax. For the approximate amounts of foreign pretax income, see Note 12.
Net provisions for state taxes on income are included in general and
administrative expenses which, as explained in Note 5, are primarily allocable
to government contracts. Such state taxes were $27 million in 1994, $30 million
in 1993, and $43 million in 1992.
The following is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the federal
statutory tax rate on earnings before income taxes and cumulative effect of
change in accounting principle:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Computed income taxes using statutory tax rate
(35% in 1994 and 1993, 34% in 1992)................. $243 $237 $187
Increases (reductions) from:
Amortization of purchase costs...................... 17 16 13
Revisions to prior years' estimated income tax
liabilities...................................... (15) 16 5
Other, net.......................................... 5 (15) (4)
---- ---- ----
$250 $254 $201
==== ==== ====
</TABLE>
Under Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes," deferred income tax assets and liabilities on the
consolidated balance sheet reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. SFAS 109 requires a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The company has no deferred tax
assets which require a valuation allowance.
21
<PAGE> 22
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets and liabilities consisted of the following components:
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1994 1993
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets related to:
Accumulated retiree medical benefit obligation... $367 $384
Accrued compensation and benefits................ 159 140
Other............................................ 30 14
---- ----
556 538
---- ----
Deferred tax liabilities related to:
Acquired intangible assets....................... 287 257
Contract costing methods......................... 67 170
Depreciation methods............................. 79 85
Debt settlement costs............................ 37
---- ----
433 549
---- ----
Net deferred tax assets (liabilities)............ $123 $(11)
==== ====
</TABLE>
NOTE 7 -- EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The company maintains contributory 401(k) savings plans for salaried
employees (the Salaried Plan) and hourly employees (the Hourly Plans) which
cover substantially all employees.
The Salaried Plan
In 1989, a leveraged Employee Stock Ownership Plan (ESOP) was created and
incorporated into the Salaried Plan. The ESOP purchased approximately 10.7
million shares of Lockheed stock with the proceeds from a $500 million note
issue which is guaranteed by Lockheed (see Note 9). These shares are held in a
suspense account in a salaried ESOP trust until allocated to participants as
described below.
Under provisions of the Salaried Plan, employees' eligible contributions
are matched by the company at a 60 percent rate. The company's matching
obligation is accounted for as compensation and was $103 million in 1994, $104
million in 1993, and $91 million in 1992. Since January 1992, one half of the
company match has consisted of cash contributions to employee-selected
investment options (including Lockheed stock) and one half of the company match
has consisted of Lockheed stock. The Lockheed stock portion of the matching
obligation is fulfilled, in part, with stock allocated from the suspense account
(approximately 710,000 shares per year based upon the debt repayment schedule)
through the year 2004. The balance of the stock portion of the matching
obligation is fulfilled through purchases of Lockheed stock from retiring
participants or on the open market. Approximately 3,000, 77,000, and 184,000
shares of Lockheed stock were purchased on the open market by the salaried ESOP
trust in 1994, 1993, and 1992, respectively. The salaried ESOP trust also sold
on the open market approximately 519,000, 110,000 and 285,000 shares purchased
from retirees in 1994, 1993, and 1992, respectively.
Company payments to the salaried ESOP trust for the stock portion of the
matching obligation consist of dividends on the unallocated shares, and an
amount sufficient to fully service the ESOP debt and meet the company's matching
obligation to employees that is not otherwise covered through the allocation of
suspense account shares.
22
<PAGE> 23
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1994 and 1993, compensation expense accrued and dividends on unallocated
shares exceeded the amount required to fully service the ESOP debt and fulfill
the company's matching obligation by approximately $4 million and $2 million,
respectively. These amounts were recognized as additions to the company's other
income (deductions), net. In 1992, the company paid an amount in excess of
compensation expense accrued and dividends on unallocated shares. These
additional payments were recognized as additions to Lockheed's interest expense.
The amount varied in each year due to changes in the market value of company
stock allocated from the suspense account. The impact of the ESOP on the company
also includes special tax benefits on dividends paid on allocated and
unallocated ESOP shares. These various items are reflected in components of the
company's consolidated statement of earnings or as direct increases to the
company's retained earnings. The aggregate of these items resulted in a net
favorable effect to the company of about $15 million, $12 million, and $6
million in 1994, 1993, and 1992, respectively.
The salaried ESOP trust requirements and the company's payments are shown
in the following table:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
ESOP trust requirements:
Debt service (including interest of $33 million in
1994, $35 million in 1993, and $38 million in
1992).............................................. $59 $59 $59
Purchase of additional shares (required to meet
company matching obligation)....................... 4 8 12
--- --- ---
$63 $67 $71
=== === ===
Met by:
Dividends on unallocated shares....................... $16 $17 $18
Company matching funds (Lockheed stock portion)....... 51 52 45
Amounts recognized as additions to Lockheed's interest
expense (other income)............................. (4) (2) 8
--- --- ---
$63 $67 $71
=== === ===
</TABLE>
The Hourly Plans
In 1990, ESOPs were created and incorporated into the Hourly Plans. The
company matches 60 percent of a participating employee's eligible contribution
to the Hourly Plans through payments to an ESOP trust. The company's match
consists of Lockheed stock purchased by the ESOPs on the open market and from
retiring participants. The company's required match, which is reported as
compensation, was $12 million in 1994, $15 million in 1993, and $16 million in
1992. Approximately 81,000, 123,000, and 311,000 shares were purchased on the
open market to provide the company match in 1994, 1993, and 1992, respectively.
In 1994, the hourly ESOP trust sold on the open market approximately 51,000
shares purchased from retirees.
ESOP Ownership of the Company's Stock
The salaried and hourly ESOP trusts held approximately 15 million issued
and outstanding shares of the company's stock at December 25, 1994, and
approximately 16 million shares at December 26, 1993 and December 27, 1992,
representing about 24 percent, 26 percent, and 26 percent of the total shares
outstanding, respectively. The 15 million shares held at December 25, 1994
consisted of approximately 8 million allocated shares and 7 million unallocated
shares, including an insignificant number of unallocated shares committed to be
allocated after year-end. For earnings per share calculations, all shares held
by the ESOP trusts are included as outstanding shares.
23
<PAGE> 24
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dividends on Allocated Shares
Dividends paid to the salaried and hourly ESOP trusts on the allocated
shares are paid by check annually by the ESOP trusts to the participants based
upon the number of shares allocated to each participant.
DEFINED BENEFIT PLANS
Most employees are covered by Lockheed-sponsored contributory or
noncontributory defined benefit pension plans. Normal retirement age is 65, but
provision is made for earlier retirement. Benefits for salaried plans are
generally based on salary and years of service, while those for hourly plans are
based on negotiated benefits and years of service. Substantially all benefits
are paid from funds previously provided to trustees. Lockheed's funding policy
is to make contributions that are consistent with U.S. government cost
allowability and Internal Revenue Service deductibility requirements, subject to
the full-funding limits of the Employee Retirement Income Security Act of 1974
(ERISA). When any Lockheed funded plan exceeds the full-funding limits of ERISA,
no contribution is made to that plan.
In addition, Lockheed has certain supplemental retirement and other benefit
plans which are not material. During 1994, Lockheed established a trust intended
to be used for payment of these benefits. Benefits paid by the trust on
Lockheed's behalf are charged against liabilities previously accrued. The assets
held by the trust do not qualify as plan assets under Statement of Financial
Accounting Standards No. 87 (SFAS 87) and the plans continue to be unfunded for
purposes of ERISA.
Net pension cost for 1994, 1993 and 1992, as determined by SFAS 87, was
$118 million, $110 million, and $76 million, respectively, as shown in the
following table:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the
period........................................... $ 245 $ 221 $ 176
Interest cost on projected benefit obligation...... 531 534 439
Actual return on plan assets....................... 78 (856) (358)
Net amortization and deferral...................... (733) 214 (178)
Employee contributions............................. (3) (3) (3)
----- ----- -----
$ 118 $ 110 $ 76
===== ===== =====
</TABLE>
24
<PAGE> 25
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The increase in net pension cost in 1993 from 1992 reflects costs
associated with the assumed obligations related to the Fort Worth Division of
General Dynamics.
An analysis of the status of the plans follows:
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1994 1993
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Plan assets, at fair value...................... $7,819 $8,322
====== ======
Actuarial present value of benefit obligations
Vested benefits............................... $6,065 $6,696
Nonvested benefits............................ 65 77
------ ------
Accumulated benefit obligation.................. 6,130 6,773
Effect of projected future salary increases..... 586 844
------ ------
Projected benefit obligation.................... 6,716 7,617
------ ------
Plan assets in excess of projected benefit
obligation.................................... $1,103 $ 705
====== ======
Consisting of:
Unrecognized net asset existing at the date of
initial application of SFAS 87............. $ 336 $ 422
Unrecognized prior service cost............... (227) (242)
Unrecognized net gain......................... 846 308
Prepaid pension expense....................... 148 217
------ ------
$1,103 $ 705
====== ======
</TABLE>
At December 25, 1994 and December 26, 1993, approximately 49 percent and 48
percent, respectively, of the plan assets were equity securities and the rest
were primarily fixed income securities. The actuarial determinations were based
on various assumptions as illustrated in the following table. Net pension costs
in 1994, 1993, and 1992 were based on assumptions in effect at the end of the
respective preceding year-end. Benefit obligations as of each year-end were
based on assumptions in effect as of those dates.
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Discount rate on benefit obligations................ 8.5% 7.0% 8.0%
Average of full-career compensation increases for
those employees whose benefits are affected by
compensation levels............................... 6.0% 6.0% 7.0%
Expected long-term rate of return on plan assets.... 8.0% 8.0% 8.0%
</TABLE>
As required by SFAS 87, the projected benefit obligation includes the
effect of projected future salary increases, but not the effect of projected
future credited service. The excess of plan assets over the projected benefit
obligation will be required to fund the plans' continuing benefit obligations
that will result from, among other things, future credited service. The change
in this excess in 1994 from 1993 resulted from a decrease in the accumulated
benefit obligation primarily due to the higher discount rate, offset, in part,
by benefit payments in 1994.
The company has no present intention of terminating any of its pension
plans. However, if a qualified defined benefit pension plan is terminated, the
company would be required to vest all participants and purchase annuities with
plan assets to meet the accumulated benefit obligation for such participants. At
December 25, 1994, the cost to purchase annuities to satisfy the accumulated
benefit obligation of Lockheed's qualified defined benefit plans would be in
excess of $7.9 billion, compared to the $6.1 billion of accumulated benefit
obligation reflected on the first table above. The main salaried retirement plan
provides that, after satisfaction of the accumulated benefit obligation and
payment of federal excise taxes and federal and state
25
<PAGE> 26
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
income taxes, any remaining plan assets would, in the event of plan termination
within five years following a change in control of the company, be transferred
to a trust and applied to the payment of certain other employee benefits
otherwise payable to employees and retirees (e.g. retiree medical benefits). To
the extent that contributions to a defined benefit plan were reimbursed under
U.S. government contracts, any remaining surplus amounts at the time of plan
termination are subject to equitable sharing under an agreement with the
government.
RETIREE MEDICAL PLANS
Lockheed currently provides medical benefits under a contributory group
medical plan for certain early (pre-65) retirees and under a noncontributory
group Medicare supplement plan for certain retirees aged 65 and over (post-65).
Under the accrual accounting methods of Statement of Financial Accounting
Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits
Other Than Pensions," the present value of the actuarially determined expected
future cost of providing medical benefits is attributed to each year of employee
service. The service and interest cost recognized each year is added to the
accumulated retiree medical benefit obligation.
Net retiree medical benefit costs as determined under SFAS 106 are shown in
the following table:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits accrued during the year...... $ 24 $ 24 $ 18
Interest cost on accumulated retiree medical benefit
obligation.......................................... 81 84 76
Actual return on plan assets.......................... (1) (5) (2)
Net amortization and deferral......................... (13) (1) (1)
---- ---- ----
$ 91 $102 $ 91
==== ==== ====
</TABLE>
The 1993 net retiree medical benefit costs reflect the assumption of
benefit obligations for certain employees and retirees of the former Fort Worth
Division of General Dynamics Corporation.
Lockheed has implemented funding approaches to help manage future retiree
medical costs. A Voluntary Employees' Beneficiary Association (VEBA) trust was
established and began receiving funding in 1991, and other trusts established
under Internal Revenue Service (IRS) regulations began receiving funding in
1992. At December 25, 1994, these trusts held $149 million in assets, of which
49 and 52 percent respectively in 1994 and 1993 were equity securities and the
rest were primarily fixed income securities. The funded amounts are allowable
under government contracts in the pricing of the company's products and services
and are deductible in the year of contribution under IRS regulations. Earnings
on trust assets operate as a reduction to annual SFAS 106 costs.
Upon adopting SFAS 106 effective the beginning of fiscal 1992, Lockheed
elected to record the transition obligation (present value of future retiree
medical benefits attributed to years prior to 1992) on the immediate recognition
basis. This resulted in a charge to 1992 earnings for the cumulative effect of
the accounting change of $631 million, or $10.23 per share, after recognition of
the deferred tax benefit of $325 million associated with this transition
obligation.
26
<PAGE> 27
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under SFAS 106, actual medical benefit payments to retirees reduce
Lockheed's accumulated retiree medical benefit obligation, and any trust funding
reduces the unfunded portion of this obligation on the company's consolidated
balance sheet. An analysis of the status of the retiree medical benefit plans
follows:
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1994 1993
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Plan assets at fair value.......................... $ 149 $ 113
====== ======
Actuarial present value of benefit obligation:
Retirees......................................... $ 790 $ 726
Employees eligible to retire..................... 171 233
Employees not eligible to retire................. 209 309
------ ------
Accumulated retiree medical benefit obligation..... 1,170 1,268
Unrecognized net loss.............................. (6) (58)
Unrecognized prior service cost.................... 51
------ ------
Net unfunded retiree medical benefit obligation.... $1,066 $1,097
====== ======
</TABLE>
Actuarial determinations were based on various assumptions as illustrated
in the following table. Net retiree medical costs for 1994, 1993, and 1992 were
based on assumptions in effect at the end of the respective preceding years.
Benefit obligations as of the end of each year reflect assumptions in effect as
of those dates.
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Discount rate.......................................... 8.5% 7.0% 8.25%
Expected long-term rate of return on plan assets....... 8.0% 8.0% 8.0%
Range of medical trend rates:
Initial:
pre-65 retirees................................... 11.0% 13.0% 13.0%
post-65 retirees.................................. 6.0% 9.0% 10.0%
Ultimate (20 years and after):
pre-65 retirees................................... 5.0% 5.0% 6.0%
post-65 retirees.................................. 2.0% 2.0% 2.0%
</TABLE>
An increase of one percentage point in the assumed medical trend rates
would result in an accumulated retiree medical benefit obligation of $1.3
billion at December 25, 1994, and a 1994 net retiree medical benefit cost of
approximately $94 million. The company believes that the cost containment
features it has previously adopted and the funding approaches under way will
allow it to effectively manage its retiree medical expenses, but it will
continue to monitor the costs of retiree medical benefits and may further modify
the plans if circumstances warrant.
The decline in the accumulated retiree medical benefit obligation from 1993
to 1994 was primarily due to the higher discount rate at year-end 1994, offset,
in part, by the effect of earlier than expected retirements.
POSTEMPLOYMENT BENEFITS
In November 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for
Postemployment Benefits." This statement establishes standards for accounting
for benefits to former or inactive employees after employment, other than
retirement benefits. Lockheed's adoption of SFAS 112 in 1994 did not have a
significant effect on the company's financial statements.
27
<PAGE> 28
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- LEASES
Total rental expenses under operating leases, net of immaterial amounts of
sublease rentals and contingent rentals, were $99 million, $112 million, and
$114 million for 1994, 1993, and 1992, respectively.
Future minimum lease commitments at December 25, 1994, for all operating
leases that have a remaining term of more than one year were $422 million ($83
million in 1995, $71 million in 1996, $54 million in 1997, $49 million in 1998,
$44 million in 1999, and $121 million in later years).
Substantially all real estate leases contain renewal options ranging from
one year to 10 years. Certain major plant facilities and equipment are furnished
by the U.S. government under short-term or cancelable arrangements.
NOTE 9 -- DEBT
At December 25, 1994, the company had a loan agreement (the 1994 Agreement)
with a group of domestic and foreign banks. The agreement makes available $1
billion through September 15, 1999. The primary purpose of the agreement is to
back up the company's commercial paper borrowings. There were no borrowings
outstanding under the 1994 Agreement and no commercial paper borrowings
outstanding, at December 25, 1994.
Borrowings under the 1994 Agreement would be unsecured and bear interest,
at the company's option, at rates based on the Eurodollar rate or a bank base
rate (as defined). The 1994 Agreement contains financial covenants relating to
equity and debt, and provisions which relate to certain changes in control. In
conjunction with the completion of the proposed business combination with Martin
Marietta, the 1994 Agreement will be terminated and replaced with a new credit
facility for the Lockheed Martin Corporation.
Long-term debt consisted of the following components:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
Variable-rate notes due 1995.............................. $ 200 $ 200
Fixed-rate notes due 1995 to 2004......................... 140 140
4 7/8% notes due 1996..................................... 275 275
5.65% notes due 1997...................................... 100 100
5 7/8% notes due 1998..................................... 300 300
9 3/8% notes due 1999..................................... 300 300
6 3/4% notes due 2003..................................... 300 300
9% notes due 2022......................................... 200 200
7 7/8% notes due 2023..................................... 300 300
Obligations under long-term capital leases................ 16 17
Other obligations......................................... 12 36
------ ------
2,143 2,168
Guarantee of ESOP obligations............................. 382 407
------ ------
2,525 2,575
Less portion due within one year.......................... 277 28
------ ------
$2,248 $2,547
====== ======
</TABLE>
All of the notes contain covenants relating to debt, and provisions which
relate to certain changes in control. The company will take necessary actions to
ensure that the proposed business combination with Martin Marietta does not
violate provisions related to changes in control.
28
<PAGE> 29
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 9 3/8% notes due in 1999 stipulate that, in the event of both a
"designated event" and a related "rating decline" occurring within a specified
period of time, holders of the notes may require Lockheed to redeem the notes
and pay accrued interest. In general, a "designated event" occurs when any one
of certain ownership, control, or capitalization changes takes place. A "rating
decline" occurs when the ratings assigned to Lockheed debt are reduced below
investment-grade levels.
The variable-rate notes due in 1995 are unsecured and bear interest at
rates based on the Eurodollar rate.
The fixed-rate notes due in 1995 to 2004 are unsecured, were issued in
various denominations with various maturity dates, and bear interest at fixed
rates ranging from 4.55 percent to 8.34 percent.
Lockheed's leveraged ESOP (see Note 7) borrowed $500 million through a
private placement of notes in 1989. These notes bear interest at fixed rates
ranging from 8.27 percent to 8.41 percent, and are being repaid in quarterly
installments over terms ending in 2004. The ESOP note agreement stipulates that,
in the event that the ratings assigned to Lockheed's long-term senior unsecured
debt are below investment grade, holders of the notes may require Lockheed to
purchase the notes and pay accrued interest. These notes are obligations of the
ESOP but guaranteed by Lockheed and, in accordance with financial accounting
standards, are reported as debt on Lockheed's balance sheet, with a
corresponding offset to stockholders' equity. As the ESOP notes are repaid, the
amount guaranteed decreases, as do the amounts reported as Lockheed debt and
offsetting stockholders' equity. While the amount guaranteed affects Lockheed's
consolidated balance sheet, the issuance of the guarantee and the subsequent
reductions in its amount were not cash transactions and, accordingly, are not
reflected on the consolidated statement of cash flows.
Lockheed Finance Corporation (LFC) has a $155 million line of credit with a
group of banks. The agreement limits borrowings to an amount reduced by the
balance outstanding ($37 million at December 25, 1994) of LFC notes and leases
receivable sold to the banks with certain recourse provisions.
The company's long-term debt maturities, including those of LFC and the
guaranteed ESOP obligations, for the five years following December 25, 1994,
are: $277 million in 1995; $307 million in 1996; $162 million in 1997; $374
million in 1998; and $350 million in 1999.
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" and No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments," require the
disclosure of the fair value of financial instruments, both assets and
liabilities recognized and not recognized on the consolidated balance sheet, for
which it is practicable to estimate fair value. Unless otherwise indicated
elsewhere in the notes to the consolidated financial statements, the carrying
value of the company's financial instruments approximates fair value. The
estimated fair values of the company's long-term debt instruments at December
25, 1994, aggregated $2,491 million, compared with a carrying amount of $2,525
million on the consolidated balance sheet. The fair values were estimated based
on quoted market prices for those instruments publicly traded. For privately
placed debt, the fair values were estimated based on the quoted market prices
for the same or similar issues, or on current rates offered to the company for
debt of the same remaining maturities.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
Environmental Matters -- In March 1991, the company entered into a consent
decree with the U.S. Environmental Protection Agency (EPA) relating to certain
property in Burbank, California, which obligates the company to design and
construct facilities to monitor, extract, and treat groundwater and operate and
maintain such facilities for approximately eight years. The company currently
estimates that expenditures required to comply with the terms of the consent
decree over the remaining term of the project will be approximately $90 million.
29
<PAGE> 30
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The company has also been operating under a cleanup and abatement order
from the California Regional Water Quality Control Board affecting its
facilities in Burbank, California. This order requires site assessment and
action to abate groundwater contamination by a combination of groundwater and
soil cleanup and treatment. Based on experience being derived from initial
remediation activities, the company currently estimates the anticipated costs of
these actions in excess of the requirements under the EPA consent decree to
approximate $155 million over the remaining term of the project; however, this
estimate will be subject to changes as work progresses and as additional
experience is gained.
The company is also involved in several other proceedings and potential
proceedings relating to environmental matters, including disposal of hazardous
wastes and soil and water contamination. The company has not incurred any
material costs relating to the environmental matters. The extent of the
company's financial exposure cannot in all cases be reasonably estimated at this
time. A liability of approximately $65 million for those cases in which an
estimate of financial exposure can be determined has been recorded.
Under an agreement with the U.S. government, the Burbank groundwater
treatment and soil remediation expenditures are being allocated to all of the
company's operations as general and administrative costs (see Note 1), and under
existing government regulations these and other environmental expenditures
related to U.S. government business, after deducting any recoveries from
insurance or other responsible parties, are allowable in establishing the prices
of the company's products and services. As a result, a substantial portion of
the expenditures will be reflected in the company's sales and costs of sales
pursuant to U.S. government agreement or regulation. The company has recorded a
liability for probable future environmental costs as discussed above, and has
recorded an asset for probable future recovery of the portion of these costs in
pricing of the company's products and services for U.S. government business. The
portion that is expected to be allocated to commercial business has been
reflected in cost of sales. The recorded amounts do not reflect the possible
recovery of portions of the environmental costs through insurance policy
coverage or from other potentially responsible parties to the contamination,
which Lockheed is pursuing as required by agreement and U.S. government
regulation. Any such recoveries, when received, would reduce the company's
liability as well as the allocated amounts to be included in the company's U.S.
government sales and cost of sales.
Other Matters -- Lockheed and its directors are defendants in five class
action lawsuits related to the company's proposed business combination with
Martin Marietta Corporation. The plaintiffs' complaints include allegations that
the company's directors breached fiduciary duties to the company's shareholders
by approving the business combination and claims relating to Lockheed's plea
agreement (described below) and payment of $24.8 million in fines and civil
settlements to the United States in that action. An oral agreement in principle
was reached with counsel for the plaintiffs on January 30, 1995 with respect to
the terms of a proposed settlement of all claims in these lawsuits.
The agreement in principle, which is subject to the execution and delivery
of a mutually-satisfactory stipulation of settlement (Stipulation), contemplates
a settlement subject to Court approval involving the following elements: (a)
Lockheed Martin would agree, subject to any restrictions imposed by Maryland
law, to pay a regular quarterly dividend of $0.40 (rather than $0.35, as
otherwise contemplated) per share on each outstanding share of Lockheed Martin
Common Stock for each of the first three quarters after consummation of the
business combination and approval of the settlement in which net income
(excluding non-recurring restructure costs and extraordinary charges and
transaction expenses) is sufficient to pay such a dividend; (b) the provisions
of Section 6.7 of the Agreement and Plan of Reorganization dated August 29,
1994, among Lockheed Martin, Martin Marietta, and Lockheed (Reorganization
Agreement) would be amended to permit either Lockheed or Martin Marietta to
initiate discussions with third parties regarding business combination
transactions if either company's Board of Directors, upon written advice of
counsel, has determined that it is in the best interests of such company's
stockholders to initiate such discussions; (c) the termination fee specified in
Section 8.2 of the Reorganization Agreement would be reduced from $100 million
to $50 million; (d) the
30
<PAGE> 31
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Joint Proxy Statement/Prospectus related to the business combination would
reflect certain additional disclosures proposed by counsel for plaintiffs; (e)
in part as a result of the pendency of the plaintiffs' actions, Lockheed would
agree to strengthen its policies and procedures to help to insure compliance
with the Foreign Corrupt Practices Act; and (f) Lockheed Martin would agree to
the payment of $6 million in counsel fees and expenses to plaintiffs' counsel
with interest from the date plaintiffs' counsel delivers to defendants' counsel
a draft of the Stipulation.
It is contemplated that the proposed settlement will be expressly
conditioned upon (i) the business combination being consummated substantially on
the terms set forth in the Reorganization Agreement, (ii) Lockheed and Martin
Marietta receiving evidence satisfactory to them that the provisions of the
proposed settlement will not result in the pooling of interests method of
accounting for the business combination being unavailable under the requirements
of APB No. 16; (iii) certification of the stockholder classes (for the purpose
of obtaining approval of the Stipulation and entry of an appropriate judgment);
(iv) court approval of the Stipulation; and (v) final dismissal of the actions
with prejudice and release of the claims asserted in such actions with
prejudice. On February 7, 1995, Lockheed, Martin Marietta, and Lockheed Martin
made the amendments to Sections 6.7 and 8.2 of the Reorganization Agreement
contemplated by the terms of the proposed settlement.
Lockheed and the Lockheed directors have denied, and continue to deny, that
they have committed any violations of law, and they have agreed in principle to
the proposed settlement in order to eliminate the burden and expense of further
litigation and to facilitate the consummation of a transaction that they believe
to be in the best interests of the stockholders of Lockheed. If the proposed
settlement described above is not consummated, Lockheed and the Lockheed
directors intend to contest the claims asserted against them in these lawsuits.
On June 22, 1994, an indictment was returned by a federal grand jury
sitting in Atlanta, Georgia, against Lockheed and two of its employees. The
indictment charged that Lockheed and the two employees, one of whom was a
regional vice president of one of Lockheed's subsidiaries and the other a
divisional director of sales for the Middle East and North Africa, violated the
Foreign Corrupt Practices Act (FCPA), conspired to violate the FCPA, conspired
to commit wire fraud, and impaired and impeded agencies of the United States
Department of Defense. The indictment related to allegations that Lockheed
retained a sales and marketing consultant in Egypt who was a member of the
Egyptian Parliament, and that the consultant received retainer payments and a $1
million contract termination payment in connection with the sale by Lockheed of
three C-130 Hercules Aircraft, in violation of the FCPA.
By letter dated August 18, 1994, the Acting Assistant Secretary, Department
of State, Bureau of Political-Military Affairs (State Department) advised
Lockheed that it would be the State Department's policy prospectively to deny
defense-related export privileges to Lockheed Aeronautical Systems Company
(LASC), a division of Lockheed. The State Department, referring to Sections 38,
39 and 42 of the Arms Export Control Act (22 U.S.C. Sections 2778, 2779 and
2791) announced that its action arose from the June 22, 1994, indictment
discussed above. The State Department announced that its action is confined to
LASC and does not affect any other divisions or subsidiaries of Lockheed,
although it is possible that the State Department could expand its action in the
future to cover Lockheed or other divisions of Lockheed or Lockheed Martin or
any of its divisions. Moreover, the State Department announced that the action
does not apply to any approvals granted to LASC's programs before June 22, 1994,
but rather to future export license applications. Lockheed may seek exceptions
to the announced policy on a case-by-case basis at the discretion of the State
Department, Office of Defense Controls, which must consider United States
foreign policy and national security interests, as well as law enforcement
concerns. There is no stated time frame within which the State Department must
review an exception request. Lockheed has submitted written exception requests
on several major aircraft programs. The State Department has granted these
requests in a timely manner consistent with Lockheed's business plans, with no
request pending for more than ninety days. There can be no
31
<PAGE> 32
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assurances as to how long the State Department will take to review any future
exception requests or whether any other exceptions will be granted.
On January 27, 1995, Lockheed and the United States of America entered into
a plea agreement pursuant to which Lockheed agreed to plead guilty to one count
of conspiring to violate the bribery provisions of the FCPA and conspiring to
falsify its books, records and accounts. All other counts of the indictment
referred to above were dismissed. To the knowledge of Lockheed, no directors or
executive officers of Lockheed have been or will be indicted in connection with
this matter. Lockheed agreed to pay the U.S. Government $24.8 million, which was
reflected as a charge against earnings in the fourth quarter of 1994, consisting
of a fine of $21.8 million and a civil settlement of $3 million. The United
States Attorney's Office stated that Lockheed fully cooperated in its efforts to
gather documents and in making witnesses available during the course of the
investigation. The plea agreement does not preclude the possibility that the
Department of Defense, the State Department, or the Securities and Exchange
Commission may take further action against Lockheed or Lockheed Martin or any of
their divisions as a result of Lockheed's guilty plea, which could include the
possibility of suspension or debarment from future government contracting.
Lockheed is cooperating with these regulatory agencies to satisfy their
concerns. Lockheed is also in the process of reviewing its relationships with
all sales and marketing international consultants to assure compliance with its
policies.
Lockheed Missiles & Space Company, Inc., a subsidiary of Lockheed, is a
defendant in a civil suit in the United States District Court for the Northern
District of California brought under the so-called qui tam provisions of the
Civil False Claims Act, which permit an individual to bring suit in the name of
the government and share in any recovery received. The suit, captioned United
States ex rel. Margaret A. Newsham and Martin Overbeek Bloem v. Lockheed
Missiles and Space Company, Inc., was filed in 1988. The complaint sets forth
numerous allegations of improper conduct by Lockheed and seeks unspecified
damages. The Department of Justice conducted a thorough investigation of the
matter after the complaint was filed and has declined to intervene in the case.
It is entirely possible that some of the issues being pursued by plaintiffs will
be tried to a jury. However, the company believes the litigation to be without
merit and intends to aggressively defend its position.
A number of other lawsuits and administrative proceedings are pending
against the company and its subsidiaries. Management believes the lawsuits and
administrative proceedings are either without merit or if decided adversely,
would be covered by insurance or by contract or would not be of material
significance.
The company has entered into standby letter of credit agreements and other
arrangements with financial institutions primarily relating to the guarantee of
future performance on certain contracts. At December 25, 1994, the company was
contingently liable on outstanding letters of credit, guarantees, and other
arrangements aggregating approximately $434 million.
Lockheed Finance Corporation (LFC) sold certain finance notes and leases
receivable with certain recourse provisions in previous years. At December 25,
1994, the unpaid principal balance of these notes and leases was about $30
million.
At December 25, 1994, LFC had entered into approximately $320 million in
interest rate swap agreements to reduce the impact of changes in interest rates
on its operations. The effect of these agreements is that the aggregate of the
carrying value of LFC's financial instruments approximates their fair market
value. LFC is exposed to credit loss, to the extent of future interest rate
differentials, in the event of nonperformance by the intermediaries to the
interest rate swap agreements. The company does not anticipate nonperformance by
the intermediaries.
32
<PAGE> 33
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- STOCKHOLDERS' EQUITY AND RELATED ITEMS
EMPLOYEE STOCK OPTIONS
Lockheed's 1992 Employee Stock Purchase Program (1992 Program) authorizes
grants of options to purchase up to 3,000,000 shares of the company's authorized
but unissued common stock. Options granted under the 1992 Program and its
predecessors, the 1986 Program and the 1982 Program, can be exercised at a price
not less than the fair market value of the stock on the date that the option is
granted. At December 25, 1994, 2,894,920 shares of the company's common stock
were reserved for stock options granted.
The 1992 Program is composed of two separate stock option plans. The first
plan provides for the grant of incentive stock options. The second plan provides
for the grant of nonstatutory stock options that may, at the discretion of the
board of directors, be accompanied by stock appreciation rights.
The following table summarizes the options exercisable and available for
grant at December 25, 1994:
<TABLE>
<CAPTION>
EXERCISABLE
-------------------------- AVAILABLE
NUMBER PRICE RANGE FOR GRANT
--------- ------------ ---------
<S> <C> <C> <C>
1992 Program........................... 710,300 $42.75-58.81 1,239,150
1986 Program........................... 1,192,383 31.94-55.31
1982 Program........................... 107,987 46.00-47.50
</TABLE>
The following table summarizes the activity under the company's plans
during 1994:
<TABLE>
<CAPTION>
OPTION SHARES
PRICE RANGE UNDER OPTION
------------ ------------
<S> <C> <C>
Outstanding at December 26, 1993.................. $31.94-58.81 2,856,770
Granted......................................... 63.19-64.81 640,500
Terminated...................................... 58.31-64.81 (58,150)
Exercised....................................... 36.63-58.81 (544,200)
------------
Outstanding at December 25, 1994.................. 31.94-64.81 2,894,920
=========
</TABLE>
PREFERRED STOCK
There are 2,500,000 shares of preferred stock, $1 par value, authorized for
issuance. At December 25, 1994, there was no preferred stock outstanding and
1,000,000 shares of preferred stock were reserved for issuance in connection
with the rights described below.
In December 1986, Lockheed adopted a Shareholder Rights Plan and
distributed a dividend of one right for each outstanding share of common stock.
Upon becoming exercisable, each right entitles the holder to purchase one
one-hundredth of a share of Series A Junior Participating Preferred stock
(Series A Preferred), par value $1, at a price of $150, which is subject to
adjustment. Shares of common stock issued by the company subsequent to the
adoption of the plan have had rights attached. The rights are not exercisable
into common stock or transferable apart from the common stock, and no separate
rights certificates will be distributed until ten business days after the public
announcement that a person or group either (i) has acquired, or has obtained the
right to acquire, beneficial ownership of 20 percent or more of the outstanding
common shares, or (ii) has commenced, or announced an intention to make, a
tender offer or exchange offer if, upon consummation, such person or group would
be the beneficial owner of 20 percent or more of the outstanding common shares.
The plan was amended in 1994 by the Board of Directors to exclude the effect of
the proposed business combination with Martin Marietta Corporation.
When such rights become exercisable, as described above, each right will
entitle its holder, other than such person or group referred to above, upon
payment of the exercise price, to receive Lockheed common shares with a deemed
market value of twice such exercise price. Such rights will not be triggered in
the event
33
<PAGE> 34
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of a "qualifying offer" (basically defined as an all cash offer, fully financed,
to acquire a majority of outstanding shares not owned by the offeror, which
meets specified irrevocable criteria), or if the 20 percent acquisition is made
pursuant to a tender or exchange offer for all outstanding common shares which a
majority of the directors of the company deem to be in the best interests of the
company and its stockholders. If there is a merger with an acquirer of 20
percent or more of Lockheed's common stock and Lockheed is not the surviving
corporation, or more than 50 percent of Lockheed's assets, earning power, or
cash flow is transferred or sold, each right will entitle its holder, other than
the acquirer, to receive the acquiring company's common shares with a deemed
market value of twice such exercise price.
All of the rights may be redeemed by the board of directors of the company
at a price of $.05 per right until the earlier of (i) ten business days after
the public announcement that a person or group has acquired beneficial ownership
of 20 percent or more of the outstanding common shares or (ii) December 1996.
After a person or group acquires 20 percent or more of Lockheed's common shares,
the board of directors may redeem the rights only with the concurrence of a
majority of the continuing directors (as defined in the plan). The rights, which
do not have voting rights and are not entitled to dividends, expire in December
1996.
NOTE 12 -- INFORMATION ON INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS,
AND MAJOR CUSTOMERS
Unaudited information on Lockheed's business segments is included in the
Financial Analysis beginning on page 4.
Selected additional information is summarized below:
SELECTED FINANCIAL DATA BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Depreciation and amortization
Aeronautical Systems........................... $ 225 $ 216 $ 106
Missiles and Space Systems..................... 145 164 156
Electronic Systems............................. 67 72 74
Technology Services............................ 14 14 11
Corporate*..................................... 34 32 8
------ ------ ------
Total.................................. $ 485 $ 498 $ 355
====== ====== ======
Expenditures for property, plant, and equipment
Aeronautical Systems........................... $ 89 $ 148 $ 140
Missiles and Space Systems..................... 79 98 133
Electronic Systems............................. 38 35 40
Technology Services............................ 11 10 12
------ ------ ------
Total segments................................. 217 291 325
Corporate...................................... 23 30 2
------ ------ ------
Total.................................. $ 240 $ 321 $ 327
====== ====== ======
Identifiable assets
Aeronautical Systems........................... $4,036 $4,336 $2,109
Missiles and Space Systems..................... 1,755 1,810 2,028
Electronic Systems............................. 1,523 1,468 1,506
Technology Services............................ 385 317 300
------ ------ ------
Total segments................................. 7,699 7,931 5,943
Lockheed Finance Corporation................... 110 112 121
Corporate...................................... 1,304 918 960
------ ------ ------
Total.................................. $9,113 $8,961 $7,024
====== ====== ======
</TABLE>
- ---------------
* Depreciation and amortization applicable to corporate office assets is
allocated to the operating segments.
34
<PAGE> 35
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SELECTED FINANCIAL DATA BY GEOGRAPHIC AREA*
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Sales
United States............................... $12,790 $12,670 $ 9,656
Other....................................... 340 401 444
------- ------- -------
Total............................... $13,130 $13,071 $10,100
======= ======= =======
Program profits
United States............................... $ 836 $ 839 $ 613
Other....................................... 19 5 31
------- ------- -------
Total............................... $ 855 $ 844 $ 644
======= ======= =======
Identifiable assets
United States............................... $ 8,829 $ 8,730 $ 6,777
Other....................................... 284 231 247
------- ------- -------
Total............................... $ 9,113 $ 8,961 $ 7,024
======= ======= =======
</TABLE>
- ---------------
* Defined by the location of Lockheed operations and not necessarily the
locations of customers. Transfers between geographic areas were not material
in any year.
Identifiable assets in each segment or geographic area include the assets
used in Lockheed's operations, and any applicable excess of the purchase price
over the fair value of net assets acquired or intangible assets acquired, as
appropriate. Consistent with Securities and Exchange Commission rules,
identifiable assets are not reduced by identifiable liabilities. Corporate
assets consisted primarily of cash and cash equivalents, property, plant,
equipment, assets related to the probable future recovery of certain
environmental remediation costs, current and deferred tax assets, and
investments.
35
<PAGE> 36
LOCKHEED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SALES BY CUSTOMER CATEGORY
<TABLE>
<CAPTION>
1994 1993 1992
------ ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
U.S. government*
Aeronautical Systems.......................... $4,714 $ 4,477 $2,245
Missiles and Space Systems.................... 3,218 3,846 4,386
Electronic Systems............................ 525 547 507
Technology Services........................... 1,033 1,179 1,103
------ ------- ------
Total................................. $9,490 $10,049 $8,241
====== ======= ======
Foreign governments
Aeronautical Systems.......................... $1,780 $ 1,408 $ 551
Missiles and Space Systems.................... 290 282 172
Electronic Systems............................ 71 81 126
------ ------- ------
Total................................. $2,141 $ 1,771 $ 849
====== ======= ======
Commercial
Aeronautical Systems.......................... $ 79 $ 125 $ 161
Missiles and Space Systems.................... 100 110 29
Electronic Systems............................ 1,054 768 656
Technology Services........................... 266 248 164
------ ------- ------
Total................................. $1,499 $ 1,251 $1,010
====== ======= ======
</TABLE>
- ---------------
* Sales made to foreign governments through the U.S. government are included in
sales to foreign governments.
Export sales were $2,079 million, $1,743 million, and $831 million in 1994,
1993, and 1992, respectively.
NOTE 13 -- SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1994 QUARTERS
----------------------------------
FIRST SECOND THIRD FOURTH*
------ ------ ------ -------
(IN MILLIONS, EXCEPT PER-SHARE
DATA)
<S> <C> <C> <C> <C>
Sales......................................... $3,025 $3,096 $3,165 $ 3,844
Program profits............................... 194 208 219 234
Earnings before income taxes.................. 149 170 182 194
Net earnings.................................. 92 104 112 137
Earnings per share............................ 1.45 1.64 1.76 2.14
</TABLE>
<TABLE>
<CAPTION>
1993 QUARTERS
----------------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------ -------
<S> <C> <C> <C> <C>
Sales......................................... $2,508 $3,349 $3,475 $ 3,739
Program profits............................... 158 200 226 260
Earnings before income taxes.................. 126 149 187 214
Net earnings.................................. 76 94 117 135
Earnings per share............................ 1.22 1.50 1.85 2.13
</TABLE>
- ---------------
* Includes a $25 million reduction in program profits resulting from settlement
of charges contained in a federal indictment, as discussed in Note 10,
partially offset by a $15 million reduction of prior years' estimated income
tax liabilities.
36
<PAGE> 37
THE COMPANY'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management prepared, and is responsible for, the consolidated financial
statements and all related financial information contained in this report. The
consolidated financial statements, which include amounts based on estimates and
judgments, were prepared in accordance with generally accepted accounting
principles appropriate in the circumstances. Other financial information in this
report is consistent with that in the consolidated financial statements.
Management recognizes its responsibilities for conducting the company's
affairs in an ethical and socially responsible manner. The company has written
policy statements covering its business code of ethics which emphasize the
importance of total allegiance to codes of personal and corporate conduct that
leave no latitude for legal infractions or moral improprieties. The importance
of ethical behavior is regularly communicated to all employees through ongoing
education and review programs that are designed to create a strong compliance
environment.
Management maintains an accounting system and related internal controls
which it believes provide reasonable assurance, at appropriate cost, that
transactions are properly executed and recorded, that assets are safeguarded,
and that accountability for assets is maintained. An environment that
establishes an appropriate level of control consciousness is maintained and
monitored and includes examinations by an internal audit staff.
The audit committee of the board of directors is composed of five outside
directors. This committee is convened at least four times a year and frequently
meets separately with representatives of the independent auditors, company
officers, and the internal auditors to review their activities.
The consolidated financial statements have been audited by Ernst & Young
LLP, independent auditors, whose report follows.
37
<PAGE> 38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Lockheed Corporation
We have audited the accompanying consolidated balance sheet of Lockheed
Corporation at December 25, 1994 and December 26, 1993, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 25, 1994. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lockheed Corporation at December 25, 1994 and December 26, 1993, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 25, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 7 to the financial statements, effective December 30,
1991 (the beginning of Lockheed's 1992 fiscal year), the company adopted
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
ERNST & YOUNG LLP
Los Angeles, California
January 31, 1995
38
<PAGE> 39
B. Retirement of K. W. Cannestra
Kenneth W. Cannestra, president of Lockheed's Aeronautical Systems Group
who is expected to serve as president of the Aeronautics Sector of the new
Lockheed Martin Corporation following the consummation of the business
combination with Martin Marietta, will retire in the second quarter. James A.
(Mickey) Blackwell, currently president of Lockheed Aeronautical Systems
Company, a division of Lockheed, has been designated as his successor.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
23 Consent of Ernst & Young LLP, Independent Auditors
99 Amendment dated as of February 7, 1995 to Agreement and Plan of
Reorganization dated as of August 29, 1994 between Lockheed Martin
Corporation, Lockheed Corporation, and Martin Marietta Corporation
</TABLE>
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: February 21, 1995 LOCKHEED CORPORATION
(Registrant)
By: /s/ CAROL R. MARSHALL
------------------------------------
Carol R. Marshall
Vice President and Secretary
40
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-4 No. 33-57645) of Lockheed Martin Corporation and in the related Joint
Proxy Statement/Prospectus of Lockheed Corporation, Martin Marietta Corporation
and Lockheed Martin Corporation of our report dated January 31, 1995, with
respect to the consolidated financial statements of Lockheed Corporation
included in this Current Report (Form 8-K) dated February 21, 1995.
We also consent to the incorporation by reference in the Registration
Statements (Form S-3 Nos. 33-3894, 33-18673, and 33-49327) of Lockheed
Corporation; (Form S-8 No. 33-49347) pertaining to the Lockheed Corporation
Hourly Employee Savings and Stock Investment Plan -- Fort Worth and Abilene
Divisions; (Form S-8 No. 33-49003) pertaining to the Lockheed Corporation 1992
Employee Stock Option Program; (Form S-8 No. 2-78269) pertaining to the Lockheed
Corporation 1982 Employee Stock Purchase Program; (Form S-8 No. 2-64589)
pertaining to the Lockheed Corporation 1977 Employee Stock Purchase Plan; (Form
S-8 No. 33-13205) pertaining to the Lockheed Salaried Employee Savings Plan
Plus, the Lockheed Hourly Employee Savings Plan Plus, and the Lockheed Space
Operations Company Hourly Employee Investment Plan Plus; (Form S-8 No. 33-15575)
pertaining to the Lockheed Corporation 1977 Employee Stock Purchase Plan, the
Lockheed Corporation 1982 Employee Stock Purchase Program, and the Lockheed
Corporation 1986 Employee Stock Purchase Program; and (Form S-8 No. 33-34758)
pertaining to the Lockheed Salaried Employee Savings Plan Plus, the Lockheed
Hourly Employee Savings Plan Plus, and the Lockheed Space Operations Company
Hourly Employee Investment Plan Plus; and the related Prospectuses of our report
dated January 31, 1995, with respect to the consolidated financial statements of
Lockheed Corporation included in this Current Report (Form 8-K) dated February
21, 1995.
ERNST & YOUNG LLP
Los Angeles, California
February 21, 1995
41
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Unaudited
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-25-1994
<PERIOD-START> DEC-27-1993
<PERIOD-END> DEC-25-1994
<EXCHANGE-RATE> 1
<CASH> 452
<SECURITIES> 0
<RECEIVABLES> 1,732
<ALLOWANCES> 0
<INVENTORY> 1,631
<CURRENT-ASSETS> 4,142
<PP&E> 4,346
<DEPRECIATION> 2,540
<TOTAL-ASSETS> 9,113
<CURRENT-LIABILITIES> 2,730
<BONDS> 2,539
<COMMON> 73
0
0
<OTHER-SE> 2,734
<TOTAL-LIABILITY-AND-EQUITY> 9,113
<SALES> 13,130
<TOTAL-REVENUES> 13,130
<CGS> 12,275
<TOTAL-COSTS> 12,275
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> 695
<INCOME-TAX> 250
<INCOME-CONTINUING> 445
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 445
<EPS-PRIMARY> 7.00
<EPS-DILUTED> 6.97
</TABLE>
<PAGE> 1
EXHIBIT 99
AMENDMENT AGREEMENT
Lockheed Martin Corporation (formerly named "Parent Corporation"), a
Maryland corporation ("Lockheed Martin"), Martin Marietta Corporation, a
Maryland corporation ("Martin Marietta"), and Lockheed Corporation, a Delaware
corporation ("Lockheed"), hereby amend the Agreement and Plan of Reorganization
(the "Reorganization Agreement") dated as of August 29, 1994 as follows:
1. The date set forth in Section 8.1(b) is changed from February 15, 1995
to March 31, 1995.
2. The reference to $100 million set forth in the first sentence of
Section 8.2 is changed to $50 million.
3. The first sentence of Section 6.7 is amended and restated as follows:
"Unless and until this Agreement shall have been terminated by either
party pursuant to Section 8.1, neither Martin Marietta nor Lockheed nor any
of their respective officers, directors or agents shall directly or
indirectly, encourage, solicit or initiate discussions or negotiations
with, or engage in negotiations or discussions with, or provide any
nonpublic information to, any corporation, partnership, person or other
entity or group (other than to Martin Marietta or Lockheed or an affiliate
or an associate of either Martin Marietta or Lockheed) concerning any
merger, sale of substantial assets, sale of shares of capital stock or
similar transactions involving Martin Marietta or Lockheed or any of their
respective Subsidiaries or divisions, unless its Board of Directors, upon
written advice of counsel, has determined that it is in the best interests
of such company's stockholders to do so."
Dated as of February 7, 1995
LOCKHEED MARTIN CORPORATION
BY: /s/ LILLIAN M. TRIPPETT
---------------------------
Name: Lillian M. Trippett
Title: Corporate Secretary
MARTIN MARIETTA CORPORATION
BY: /s/ FRANK H. MENAKER, JR.
---------------------------
Name: Frank H. Menaker, Jr.
Title: Vice President
LOCKHEED CORPORATION
BY: /s/ W. T. VINSON
---------------------------
Name: W. T. Vinson
Title: Vice President and
General Counsel
42
