<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1996 Commission File Number 1-11437
-----------------
LOCKHEED MARTIN CORPORATION
----------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-1893632
- - -------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6801 Rockledge Drive, Bethesda, MD 20817
- - ------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 897-6000
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of July 31, 1996
-------------------------------- ---------------------------------
Common Stock, $1 par value 200,105,208
1 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 1996
INDEX
<TABLE>
<CAPTION>
Page No.
Part I. Financial Information
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statement of Earnings-
Three Months and Six Months Ended June 30, 1996 and 1995 ........................... 3
Condensed Consolidated Statement of Cash Flows-
Six Months Ended June 30, 1996 and 1995 ............................................. 4
Condensed Consolidated Balance Sheet-
June 30, 1996 and December 31, 1995 ................................................ 5
Notes to Condensed Consolidated Financial Statements ................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................... 16
Part II. Other Information
Item 1. Legal Proceedings ................................................................ 25
Item 4. Submission of Matters to a Vote of Security Holders .............................. 27
Item 6. Exhibits and Reports on Form 8-K ................................................ 28
Signatures ................................................................................. 32
Exhibit 11. Computation of Earnings Per Common Share ...................................... 33
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges ............................. 35
Exhibit 27. Financial Data Schedule
</TABLE>
2 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
(In millions, except per share data)
<S> <C> <C> <C> <C>
Net sales $7,076 $5,606 $12,185 $11,251
Costs and expenses:
Cost of sales 6,383 5,136 11,020 10,326
Merger related and consolidation
expenses - 525 - 690
------ ------ ------- -------
Earnings (loss) from operations 693 (55) 1,165 235
Other income and expenses, net 1 42 31 64
------ ------ ------- -------
694 (13) 1,196 299
Interest expense 189 73 260 152
------ ------ ------- -------
Earnings (loss) before income taxes 505 (86) 936 147
Income tax expense (benefit) 206 (33) 365 63
------ ------ ------- -------
Net earnings (loss) $ 299 $ (53) $ 571 $ 84
====== ====== ======= =======
Earnings (loss) per common share:
Assuming no dilution $ 1.50 $ (.36) $ 2.85 $ .28
====== ====== ======= =======
Assuming full dilution $ 1.33 $ * $ 2.55 $ *
====== ====== ======= =======
Cash dividends declared per common share $ .40 $ .35 $ .80 $ .64
====== ====== ======= =======
</TABLE>
* Anti-dilutive
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1996 1995
---- ----
(In millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 571 $ 84
Adjustments to reconcile earnings to net cash
provided by operating activities:
Merger related and consolidation expenses
-Provision - 690
-Payments (145) (92)
Depreciation and amortization 533 465
Changes in operating assets and liabilities (552) (888)
------- -----
Net cash provided by operating activities 407 259
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to properties, net of purchased
operations (347) (269)
Business combination with Loral Corporation (7,313) -
Other acquisitions and investments (33) (148)
------- -----
Net cash used for investing activities (7,693) (417)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) related to debt 7,159 (105)
Issuances of common shares 50 26
Common stock dividends (156) (125)
Preferred stock dividends (30) (30)
------- -----
Net cash provided by (used for) financing
activities 7,023 (234)
------- -----
Net decrease in cash and cash equivalents (263) (392)
Cash and cash equivalents at beginning of period 653 639
------- -----
Cash and cash equivalents at end of period $ 390 $ 247
======= =====
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(In millions)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 390 $ 653
Receivables 5,428 3,876
Inventories 3,057 2,804
Deferred income taxes 999 580
Other current assets 364 264
------- -------
Total current assets 10,238 8,177
Property, plant and equipment 4,311 3,165
Intangible assets related to contracts and
programs acquired 2,206 1,808
Cost in excess of net assets acquired 10,568 2,817
Other assets 3,005 1,681
------- -------
$30,328 $17,648
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,498 $ -
Accounts payable 941 787
Customer advances and amounts in excess
of costs incurred 1,944 1,570
Salaries, benefits and payroll taxes 841 567
Income taxes 628 292
Current maturities of long-term debt 175 722
Other current liabilities 2,292 1,353
------- -------
Total current liabilities 8,319 5,291
Long-term debt 11,086 3,010
Post-retirement benefit liabilities 2,502 1,778
Other liabilities 1,509 1,136
Stockholders' equity:
Series A preferred stock, $50 liquidation
preference per share 1,000 1,000
Common stock, $1 par value per share 199 199
Additional paid-in capital 761 683
Retained earnings 5,223 4,838
Unearned ESOP shares (271) (287)
------- -------
6,912 6,433
------- -------
$30,328 $17,648
======= =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Lockheed Martin Corporation (the Corporation) has continued to
follow the accounting policies set forth in the consolidated financial
statements filed with the Securities and Exchange Commission (SEC) on March 13,
1996 in its 1995 Annual Report on Form 10-K. In the opinion of management, the
interim financial information provided herein reflects all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the results of operations for the interim periods. The results of operations
for the three months and six months ended June 30, 1996 are not necessarily
indicative of the results to be expected for the full year.
Note 2 - Business Combination with Loral Corporation
On January 7, 1996, the Corporation and its wholly-owned subsidiary, LAC
Acquisition Corporation (LAC), entered into an Agreement and Plan of Merger (the
Loral Merger Agreement) with Loral Corporation (Loral) pursuant to which LAC
agreed to purchase all of the issued and outstanding shares of common stock of
Loral (together with the associated preferred stock purchase rights) for an
aggregate consideration of $38 per share in cash (the Tender Offer). The Tender
Offer was made as part of a series of transactions that resulted in (i) the
distribution to stockholders of Loral immediately prior to the consummation of
the Tender Offer of shares of capital stock in Loral Space & Communications,
Ltd. (Loral SpaceCom), a newly-formed company, which now owns and manages
substantially all of Loral's former space and satellite telecommunications
interests, and (ii) the acquisition by the Corporation of Loral's defense
electronics and systems integration businesses (the Loral Transaction).
In accordance with the terms of the Tender Offer and the Loral Merger Agreement,
on April 23, 1996, LAC purchased approximately 94.5 percent of the outstanding
shares of common stock of Loral. Subsequent to the consummation of the Tender
Offer, on April 29, 1996, LAC merged with and into Loral and each remaining
share of common stock of Loral not owned by LAC was converted into the right to
receive $38. Each outstanding share of common stock of LAC was converted into
shares of common stock of Loral, and Loral changed its name to Lockheed Martin
Tactical Systems, Inc. (Tactical Systems). As a result of these transactions,
Tactical Systems became a wholly-owned subsidiary of the Corporation. The
operations of Tactical Systems have been included in the results of operations
of the Corporation from April 1, 1996.
6 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The total purchase price paid for Tactical Systems, net of cash balances
acquired, was approximately $7.3 billion.
The Loral Transaction has been accounted for using the purchase method of
accounting. Preliminary purchase accounting adjustments have been recorded to
allocate the purchase price to assets acquired and liabilities assumed,
resulting in approximately $7.9 billion of cost in excess of net assets acquired
being recorded (which will be amortized ratably over a 40-year period). Such
adjustments are subject to change resulting from the completion of future
analyses. The Corporation expects to complete and announce its plans for
integration and any consolidation activities by the end of 1996.
In connection with the above transactions, the Corporation acquired shares of
preferred stock of Loral SpaceCom that are convertible into 20 percent of Loral
SpaceCom's common stock on a fully diluted basis. The Corporation's ownership
of the preferred stock of Loral SpaceCom is subject to certain limitations and
restrictions set forth in the terms and conditions of the preferred stock and in
agreements between the Corporation and Loral SpaceCom. The Corporation has
recorded its investment in Loral SpaceCom at approximately $460 million.
The following unaudited pro forma combined earnings data presents the results
of operations of the Corporation and Tactical Systems for the six months ended
June 30, 1996 and 1995, with pro forma adjustments as if the Loral Transaction
had been consummated as of the beginning of the periods presented. This pro
forma combined earnings data does not purport to be indicative of results of
operations that would have resulted if the Loral Transaction had occurred on the
applicable dates indicated above. Moreover, this data is not intended to be
indicative of future results of operations.
<TABLE>
<CAPTION>
Lockheed Tactical Pro Forma Pro Forma
Martin Systems(a) Adjustments Combined
-------- --------- ----------- ---------
(In millions, except per share data)
<S> <C> <C> <C> <C>
Six Months Ended June 30, 1996
Net sales $12,185 $1,403 $(43)(c) $ 13,545
Net earnings 571 126 (120)(d) 577
Earnings per common share:
Assuming no dilution 2.85 N/A N/A 2.88
Assuming full dilution 2.55 N/A N/A 2.58
</TABLE>
7 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
Lockheed Tactical Pro Forma Pro Forma
Martin Systems Adjustments Combined
-------- -------- ----------- ----------
(In millions, except per share data)
<S> <C> <C> <C> <C>
Six Months Ended June 30, 1995
Net sales $11,251 $3,223 $ (87)(c) $14,387
Net earnings 84(b) 172 (240)(d) 16
Earnings (loss) per common share:
Assuming no dilution .28 N/A N/A (.07)
Assuming full dilution * N/A N/A *
</TABLE>
(a) Financial data presented represents the operating results of Tactical
Systems for the first quarter of 1996. The operating results of Tactical
Systems for the second quarter of 1996 have been included in the Lockheed
Martin financial data.
(b) Net earnings includes the effect of the Corporation's merger related and
consolidation expenses recorded in 1995 related to the formation of
Lockheed Martin. The after-tax effect of these charges was $436 million,
or $1.96 per common share assuming full dilution.
* Anti-dilutive. Calculated earnings per common share were $.38 for Lockheed
Martin and $.07 for Pro Forma Combined, respectively.
The unaudited pro forma adjustments described below are based upon preliminary
estimates and certain assumptions that management of the Corporation believes
are reasonable in the circumstances. Such adjustments are subject to change
resulting from the completion of future analyses.
(c) To eliminate intercompany sales.
(d) To record the amortization of estimated intangible assets and additional
estimated interest expense resulting from the Loral Transaction, net of
the effects of income taxes.
The funds for the consummation of the Loral Transaction were provided through
the issuance of commercial paper by the Corporation and through borrowings under
revolving credit facilities (the Credit Facilities) with a syndicate of
commercial banks. The Credit Facilities
8 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
consisted of a 364-day unsecured revolving credit facility in the amount of $5
billion (the Short-Term Facility) and a 5-year unsecured revolving credit
facility in the amount of $5 billion (the 5-Year Facility). In connection with
the establishment of the Credit Facilities, the Corporation and Loral each
terminated their previously existing revolving credit facilities. Approximately
$6 billion of commercial paper was issued and approximately $1 billion was
borrowed under the 5-Year Facility to finance the Loral Transaction on the
closing date. During the second quarter of 1996, the Corporation issued $5
billion in debt securities (see Note 4). The net proceeds from the sale of the
debt securities were used to repay the $1 billion borrowed under the 5-Year
Facility and to reduce the amount of commercial paper outstanding. On July 26,
1996, the Corporation terminated the Short-Term Facility.
In connection with the Loral Transaction, the Corporation assumed the
obligations of Loral as guarantor under the Revolving Credit Agreement of
Globalstar, L.P. (the Globalstar Revolving Credit Agreement), an affiliate of
Loral SpaceCom, and the parties to the Globalstar Revolving Credit Agreement
released Loral from its prior guarantee. The maximum principal amount of loans
to Globalstar, L.P. that are guaranteed by the Corporation is $250 million,
subject to the assumption by certain of the Globalstar partners of a portion of
the Corporation's obligations as guarantor.
<TABLE>
<CAPTION>
Note 3 - Inventories
June 30, December 31,
1996 1995
------- -------
(In millions)
<S> <C> <C>
Work in process, primarily on long-term
contracts and programs in progress $ 4,741 $ 3,721
Less customer advances and progress payments (2,607) (1,772)
------- -------
2,134 1,949
Other inventories 923 855
------- -------
$ 3,057 $ 2,804
======= =======
</TABLE>
Note 4 - Debt
During the second quarter of 1996, the Corporation issued $5 billion of long-
term fixed rate debt securities, the entire amount registered under the
Corporation's shelf registration statement which became effective on May 10,
1996. These Notes and Debentures range in maturity from two years to 40 years,
with interest rates ranging from 6.55% to 7.75%. The registered holder of each
40-year Debenture may elect, between March 1 and April 1, 2008, to have the
Debenture, or some portion thereof, repaid by the Corporation on May 1, 2008.
The debt securities are guaranteed by Tactical Systems (see Note 5).
9 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
In February 1996, the Corporation entered into interest rate hedging agreements
to offset a portion of its exposure to rising interest rates related to the
anticipated long-term financings. These agreements were closed in the second
quarter of 1996 in connection with the Corporation's issuance of its long-term
debt securities. The Corporation realized a gain of approximately $150 million
on the closing of these agreements, which has been deferred and is being
amortized and recognized as an adjustment to interest expense over the terms of
the related debt obligations.
At the effective date of the Loral Transaction, the Corporation assumed
approximately $1.9 billion of debt obligations of the former Loral Corporation.
Commercial paper borrowings of approximately $3.5 billion were outstanding at
June 30, 1996. Approximately $2 billion of these borrowings were classified as
long-term debt in the Corporation's consolidated condensed balance sheet, based
on management's ability and intention to maintain this debt outstanding for at
least one year.
Each bank's obligation to make loans under the 5-Year Facility is subject to,
among other things, compliance by the Corporation with various representations,
warranties, covenants and agreements, including but not limited to covenants
limiting the ability of the Corporation and certain of its subsidiaries to
encumber their assets and a covenant not to exceed a maximum leverage ratio.
The Corporation's total interest payments were $228 million and $138 million for
the six months ended June 30, 1996 and 1995, respectively.
Note 5 - Summarized Consolidating Financial Information
The $5 billion of debt obligations issued by the Corporation in the second
quarter of 1996 are guaranteed by Tactical Systems. In accordance with SEC
disclosure requirements, summarized consolidating financial information follows:
<TABLE>
<CAPTION>
Non-
Lockheed Tactical Guarantor
Martin(a) Systems(b) Entities Eliminations Consolidated
--------- ---------- -------- ------------ ------------
(In millions)
<S> <C> <C> <C> <C> <C>
Earnings Data
- - -------------
For the three months ended June 30, 1996
Net sales $ 4,800 $ 87 $ 2,615 $ (426) $ 7,076
Earnings from operations 587 14 107 (15) 693
Net earnings (loss) 299 90 (15) (75) 299
</TABLE>
10 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
Non-
Lockheed Tactical Guarantor
Martin(a) Systems(b) Entities Eliminations Consolidated
--------- ---------- -------- ------------ ------------
(In millions)
<S> <C> <C> <C> <C> <C>
Earnings Data (continued)
- - -------------------------
For the three months ended June 30, 1995
Net sales $ 4,633 $ - $ 1,099 $ (126) $ 5,606
Earnings (loss) from operations (126) - 87 (16) (55)
Net earnings (loss) (53) - 78 (78) (53)
For the six months ended June 30, 1996
Net sales $ 9,116 $ 87 $ 3,624 $ (642) $ 12,185
Earnings from operations 956 14 229 (34) 1,165
Net earnings 571 90 57 (147) 571
For the six months ended June 30, 1995
Net sales $ 9,459 $ - $ 2,058 $ (266) $ 11,251
Earnings from operations 114 - 141 (20) 235
Net earnings 84 - 135 (135) 84
Cash Flows Data
- - ---------------
For the six months ended June 30, 1996
Net cash provided by (used for):
Operating activities $ 199 $ 52 $ 156 $ - $ 407
Investing activities (7,347) (231) (115) - (7,693)
Financing activities 6,799 144 80 - 7,023
------- ------- ------- ------- --------
Net increase (decrease) in cash
and cash equivalents (349) (35) 121 - (263)
Cash and cash equivalents:
Beginning of period 401 39 213 - 653
------- ------- ------- ------- --------
End of period $ 52 $ 4 $ 334 $ - $ 390
======= ======= ======= ======= ========
</TABLE>
11 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
Non-
Lockheed Tactical Guarantor
Martin(a) Systems(b) Entities Eliminations Consolidated
--------- ---------- -------- ------------ ------------
(In millions)
<S> <C> <C> <C> <C> <C>
Cash Flows Data (continued)
- - ---------------------------
For the six months ended June 30, 1995
Net cash provided by (used for): $ 107 $ - $ 152 $ - $ 259
Operating activities (226) - (191) - (417)
Investing activities
Financing activities (236) - 2 - (234)
------- ------ ------- -------- -------
Net decrease in cash
and cash equivalents (355) - (37) - (392)
Cash and cash equivalents:
Beginning of period
End of period 652 - (13) - 639
------- ------ ------- -------- -------
$ 297 $ - $ (50) $ - $ 247
======= ====== ======= ======== =======
Balance Sheet Data
- - ------------------
As of June 30, 1996
Current assets - Public $ 6,299 $ 511 $ 3,428 $ - $10,238
- Affiliated (c) 806 25 236 (1,067) -
Noncurrent assets - Public 8,639 643 10,808 - 20,090
- Affiliated (c) 9,211 9,921 4,530 (23,662) -
Current liabilities - Public 4,735 97 3,487 - 8,319
- Affiliated (c) 503 526 38 (1,067) -
Long-term debt 9,744 1,204 138 - 11,086
Other noncurrent liabilities
- Public 3,061 932 18 - 4,011
- Affiliated (c) - - - - -
Equity 6,912 8,341 15,321 (23,662) 6,912
</TABLE>
12 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
Non-
Lockheed Tactical Guarantor
Martin(a) Systems(b) Entities Eliminations Consolidated
--------- ---------- -------- ------------ ------------
(In millions)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (continued)
- - ------------------------------
As of December 31, 1995
Current assets - Public $6,484 $ - $1,693 $ - $8,177
- Affiliated (c) 262 - 448 (710) -
Noncurrent assets - Public 8,281 - 1,190 - 9,471
- Affiliated (c) 1,999 - 4,597 (6,596) -
Current liabilities - Public 4,430 - 861 - 5,291
- Affiliated (c) 448 - 262 (710) -
Long-term debt 2,863 - 147 - 3,010
Other noncurrent liabilities
- Public 2,852 - 62 - 2,914
- Affiliated (c) - - - - -
Equity 6,433 - 6,596 (6,596) 6,433
</TABLE>
(a) Data is related to the parent company only.
(b) Data is related to Tactical Systems, Inc. only and pertains to
operations from April 1, 1996.
(c) Amounts represent activity with Lockheed Martin affiliated companies.
Note 6 - Contingencies
The Corporation or its subsidiaries are parties to or have property subject to
litigation and other proceedings, including matters arising under provisions
relating to the protection of the environment, that have the potential to affect
the results of the Corporation's operations or its financial position. These
matters include the following items which were disclosed in the consolidated
financial statements in the Corporation's 1995 Annual Report on Form 10-K.
In 1991, the Corporation entered into a consent decree with the U.S.
Environmental Protection Agency (EPA) relating to certain property in Burbank,
California, which obligates the Corporation to design and construct facilities
to monitor, extract, and treat groundwater and
13 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
operate and maintain such facilities for approximately eight years. The
Corporation estimates that expenditures required to comply with the terms of the
consent decree over the remaining term of the project will be approximately $50
million.
The Corporation 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 derived from initial remediation activities, the
Corporation estimates the anticipated cost 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 is likely to change as
work progresses and additional experience is gained.
In addition, the Corporation is involved in many other proceedings and potential
proceedings relating to environmental matters, including disposal of hazardous
wastes and soil and water contamination. The extent of the Corporation's
financial exposure cannot in all cases be reasonably estimated at this time. A
liability of approximately $335 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 referenced above are being allocated to the
Corporation's operations as general and administrative costs 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
Corporation's products and services. As a result, a substantial portion of the
expenditures will be reflected in the Corporation's sales and cost of sales
pursuant to U.S. Government agreement or regulation. The Corporation has
recorded an asset for the portion of these costs that are probable of future
recovery in pricing of the Corporation'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 the Corporation is pursuing as required by agreement and
U.S. Government regulation. Any such recoveries, when received, would reduce the
Corporation's liability as well as the allocated amounts to be included in the
Corporation's U.S. Government sales and cost of sales.
The Corporation or its subsidiaries are parties to or have property subject to
litigation and other proceedings, including matters arising under provisions
relating to the protection of the environment, in addition to those described
above. In the opinion of management and counsel, the probability is remote that
the outcome of litigation and proceedings will have a material adverse effect on
the results of the Corporation's operations or its financial position.
14 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Note 7 - Other
During the second quarter of 1996, the Corporation's Board of Directors
terminated the systematic common stock repurchase plan which had been
established to counter the future dilutive effect of common stock issued by the
Corporation under its 1995 Omnibus Performance Award Plan. A separate program
authorized in 1995 for the repurchase of up to nine million common shares to
counter the dilutive effect of common stock issued under the Corporation's other
benefit and compensation programs and for other purposes related to such plans
remains in effect. No common shares have been repurchased by the Corporation
during 1996.
During the first quarter of 1995, the Corporation recorded a pretax charge of
$165 million for merger related expenses in connection with the formation of the
Corporation. During the second quarter of 1995, the Corporation recorded a
pretax charge of $525 million in conjunction with a corporate-wide consolidation
plan under which the Corporation would close certain facilities and laboratories
and eliminate duplicative field offices in the U.S. and abroad, eliminating up
to approximately 12,000 positions. The charge represented the portion of the
accrued costs and net realizable value adjustments that were not probable of
recovery. The after-tax effect of these charges was $436 million, or $1.96 per
share assuming full dilution. As of June 30, 1996, cumulative merger related
and consolidation expenditures were approximately $350 million which primarily
relate to the formation of the Corporation, the elimination of positions and the
closure of foreign and domestic marketing offices.
The Corporation's federal and foreign income tax payments were approximately
$610 million and $154 million for the six months ended June 30, 1996 and 1995,
respectively.
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", effective January 1, 1996. SFAS No. 121 requires
that certain long-lived assets to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Additionally, SFAS No. 121 requires that
certain long-lived assets to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The adoption of this standard did not
have a material effect on the Corporation's consolidated earnings and financial
condition.
On July 26, 1996, Martin Marietta Materials, Inc. (Materials) filed a
registration statement with the SEC outlining a split-off plan for the 81
percent interest in Materials currently owned by the Corporation. The proposed
split-off would be achieved through an exchange offer whereby the Corporation's
stockholders would be given an opportunity to exchange some or all of their
Lockheed Martin common stock for Materials common stock currently held by the
Corporation. The exchange rate will not be set until immediately prior to the
mailing of the Offering Circular-Prospectus pertaining to the exchange offer.
The split-off, which is expected to be completed by the end of 1996 on a tax-
free basis, is dependent, among other things, on market conditions. The
Corporation anticipates that the completion of the split-off will result in the
recognition of a gain.
15 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS COMBINATION WITH LORAL CORPORATION
On January 7, 1996, the Corporation and its wholly-owned subsidiary, LAC
Acquisition Corporation (LAC) entered into an Agreement and Plan of Merger (the
Loral Merger Agreement) with Loral Corporation (Loral) pursuant to which LAC
agreed to purchase all of the issued and outstanding shares of common stock of
Loral (together with the associated preferred stock purchase rights) for an
aggregate consideration of $38 per share in cash (the Tender Offer). The Tender
Offer was made as part of a series of transactions that resulted in (i) the
distribution, to stockholders of Loral immediately prior to the consummation of
the Tender Offer, of shares of capital stock in Loral Space & Communications,
Ltd. (Loral SpaceCom), a newly-formed company which now owns and manages
substantially all of Loral's former space and satellite telecommunications
interests, and (ii) the acquisition by the Corporation of Loral's defense
electronics and systems integration businesses (the Loral Transaction).
In accordance with the terms of the Tender Offer and the Loral Merger Agreement,
on April 23, 1996, LAC purchased approximately 94.5 percent of the outstanding
shares of common stock of Loral. Subsequent to the consummation of the Tender
Offer, on April 29, 1996, LAC merged with and into Loral, and each remaining
share of common stock of Loral not owned by LAC was converted into the right to
receive $38. Each outstanding share of LAC was converted into shares of common
stock of Loral, and Loral changed its name to Lockheed Martin Tactical Systems,
Inc. (Tactical Systems). As a result of these transactions, Tactical Systems
became a wholly-owned subsidiary of the Corporation. The operations of Tactical
Systems have been included in the results of operations of the Corporation from
April 1, 1996. The total purchase price paid for Tactical Systems, net of cash
balances acquired, was approximately $7.3 billion.
The Loral Transaction has been accounted for using the purchase method of
accounting. Preliminary purchase accounting adjustments have been recorded to
allocate the purchase price to assets acquired and liabilities assumed,
resulting in approximately $7.9 billion of cost in excess of net assets acquired
being recorded (which will be amortized ratably over a 40-year period). Such
adjustments are subject to change upon the completion of future analyses. The
Corporation expects to complete and announce its plans for integration and any
consolidation activities by the end of 1996.
In connection with the above transactions, the Corporation acquired shares of
preferred stock of Loral SpaceCom that are convertible into 20 percent of Loral
SpaceCom's common stock on a fully diluted basis. The Corporation's ownership
of the preferred stock of Loral SpaceCom is subject to certain limitations and
restrictions set forth in the terms and conditions of the preferred stock and in
agreements between the Corporation and Loral SpaceCom. The Corporation has
recorded its investment in Loral SpaceCom at approximately $460 million.
16 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The funds for the consummation of the Loral Transaction were provided through
the issuance of commercial paper by the Corporation and through borrowings under
revolving credit facilities (the Credit Facilities) with a syndicate of
commercial banks. The Credit Facilities consisted of a 364-day unsecured
revolving credit facility in the amount of $5 billion (the Short-Term Facility)
and a 5-year unsecured revolving credit facility in the amount of $5 billion
(the 5-Year Facility). Approximately $6 billion of commercial paper was issued
and approximately $1 billion was borrowed under the 5-Year Facility to finance
the Loral Transaction on the closing date. During the second quarter of 1996,
the Corporation issued $5 billion in debt securities (see Liquidity and Capital
Resources section below). The net proceeds from the sale of the debt securities
were used to repay the $1 billion borrowed under the 5-Year Facility and to
reduce the amount of commercial paper outstanding. On July 26, 1996, the
Corporation terminated the $5 billion Short-Term Facility.
RESULTS OF OPERATIONS
The Corporation's operating cycle is long-term and involves various types of
production contracts and varying production delivery schedules. Accordingly,
results of a particular quarter, or quarter-to-quarter comparisons of recorded
sales and profits, may not be indicative of future operating results. The
following comparative analysis should be viewed in this context.
The consolidated results of operations for the Corporation for both the quarter
and six months ended June 30, 1996 include the operations of Tactical Systems
from April 1, 1996. The operations of Tactical Systems have been reflected in
the Information & Technology Services and Electronics segments.
Consolidated net sales for the second quarter of 1996 were $7.1 billion, which
represents a 26 percent increase from the $5.6 billion recorded for the
comparable period of 1995. Consolidated net sales for the six months ended June
30, 1996 were $12.2 billion, an eight percent increase over the $11.3 billion
reported for the same period in 1995. Increases in the Information & Technology
Services and Electronics segments, which are due principally to the inclusion of
the results of operations of Tactical Systems as discussed above, more than
offset the decrease in sales in the Aeronautics segment.
The Corporation's operating profit (earnings before interest and taxes) for the
second quarter of 1996 was $694 million versus a loss of $13 million as reported
for the comparable period in 1995. During the second quarter of 1995, the
Corporation recorded a pretax charge of $525 million in conjunction with a
corporate-wide consolidation plan under which the Corporation would close
certain facilities and laboratories and eliminate duplicative field offices in
the U.S. and abroad. Excluding the effect of this charge in 1995, operating
profit for the second quarter of 1996 increased by 36 percent from the
comparable 1995 period. Operating profit for the six months ended June 30, 1996
was $1,196 million versus $299 million as reported for the comparable period in
1995. The 1995 period includes the effect of the consolidation charge discussed
above as well as a $165 million pretax charge taken in the first quarter of 1995
for
17 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
merger related expenses. Excluding the effect of these charges in 1995,
operating profit for the six months ended June 30, 1996 increased by 21 percent
from the comparable 1995 period. As was the case with net sales, increases in
the Information & Technology Services and Electronics segments, which are due
principally to the inclusion of the results of operations of Tactical Systems
from April 1, 1996, more than offset the decrease reported in the Aeronautics
segment.
Net earnings for the second quarter of 1996 were $299 million, or $1.33 per
common share assuming full dilution. The Corporation recorded a net loss for
the second quarter of 1995 of $53 million due to the after-tax effect of the
consolidation charge identified above. Excluding the effect of this
nonrecurring charge in 1995, net earnings for the second quarter of 1995 would
have been $273 million, or $1.22 per common share assuming full dilution. Net
earnings for the six months ended June 30, 1996 were $571 million, or $2.55 per
common share assuming full dilution. Net earnings for the six months ended June
30, 1995 of $84 million include the after-tax effects of the merger related and
consolidation expenses described above. Excluding the effect of these charges
in 1995, net earnings and earnings per common share assuming full dilution would
have been $520 million and $2.34 per share, respectively.
The effective income tax rates for the quarter and six months ended June 30,
1996 were approximately 41 percent and 39 percent, respectively. Excluding the
effect of the merger related and consolidation expenses recorded during 1995,
the comparable effective income tax rate for the quarter and six months ended
June 30, 1995 was 38 percent. The effective rates for each period were higher
than the statutory corporate federal income tax rate principally due to the
nondeductibility for tax purposes of certain costs in excess of net assets
acquired associated with acquisition activities.
The Corporation's backlog of undelivered orders at June 30, 1996 was
approximately $50.9 billion, a 24 percent increase from the $41.1 billion
reported at December 31, 1995, primarily due to the addition of the backlog
related to Tactical Systems.
The following table displays second quarter and year-to-date net sales for the
Corporation's business segments.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
Net Sales:
Space & Strategic Missiles $ 1,994 $ 1,895 $ 3,664 $ 3,747
Aeronautics 1,201 1,474 2,500 3,242
Information & Technology Services 1,537 1,160 2,630 2,195
Electronics 2,098 834 2,965 1,650
Energy, Materials and Other 246 243 426 417
------- ------- ------- ------
$ 7,076 $ 5,606 $12,185 $11,251
======= ======= ======= =======
</TABLE>
18 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The following table displays the pretax impact of the merger related and
consolidation expenses reflected in operating profit for the quarter and six
months ended June 30, 1995 as identified to each segment.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
------------------ ----------------
<S> <C> <C>
(In millions)
Merger Related and Consolidation
Expenses:
Space & Strategic Missiles $ 263 $ 263
Aeronautics 138 138
Information & Technology Services 24 24
Electronics 93 93
Energy, Materials and Other 7 172
------ ------
$ 525 $ 690
====== ======
</TABLE>
The following table depicts second quarter and year-to-date operating profit,
excluding 1995 merger related and consolidation expenses, for the Corporation's
business segments. The subsequent discussion of significant operating results
of each business segment excludes the effect of these nonrecurring expenses.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
Operating Profit, Excluding 1995 Merger
Related and Consolidation Expenses:
Space & Strategic Missiles $ 279 $ 166 $ 505 $ 347
Aeronautics 122 134 230 274
Information & Technology Services 95 61 146 108
Electronics 155 85 249 173
Energy, Materials and Other 43 66 66 87
----- ----- ------ -----
$ 694 $ 512 $1,196 $ 989
===== ===== ====== =====
</TABLE>
Second quarter Space & Strategic Missiles net sales increased five percent in
1996 compared to 1995. Much of this increase was attributable to increases in
commercial satellite sales volume and in classified program activity. These
increases were somewhat offset by the reduced number of Atlas launches (two
launches in the second quarter of 1996 compared to three
19 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
launches in the corresponding 1995 period) and by reduced fleet ballistic
missile production volume. Year-to-date 1996 net sales, however, have decreased
slightly compared with the prior year, primarily because of the timing of Atlas
launches (three launches in 1996 compared to six launches in 1995). Second
quarter and year-to-date 1996 operating profit increased by 68 percent and 46
percent, respectively, compared to the corresponding 1995 periods, principally
as a result of timing of the recognition of award fees on certain space programs
and from increased volume and improved margins on certain military space
programs.
Second quarter and year-to-date 1996 Aeronautics net sales decreased 19 percent
and 23 percent, respectively, from the comparable 1995 amounts. These decreases
resulted from fewer deliveries of F-16 fighter aircraft and C-130 airlift
aircraft, as well as the completion during 1995 of P-3 maritime patrol aircraft
deliveries to the Republic of Korea. Operating profit for second quarter and
year-to-date 1996 decreased by nine percent and 16 percent, respectively, from
the comparable 1995 amounts as a result of the volume decreases noted above.
However, operating margins in both 1996 periods improved over the corresponding
1995 periods.
Information & Technology Services net sales and operating profit for the second
quarter and year-to-date 1996 increased significantly from the comparable 1995
amounts due to the inclusion of the operations of certain Tactical Systems
companies from April 1, 1996. Net sales for the second quarter and year-to-date
1996, excluding the effect of Tactical Systems in 1996, increased by two percent
and four percent, respectively, over the comparable 1995 amounts. These
increases were principally the result of increased sales volume for commercial
products and various classified activities. Second quarter and year-to-date 1996
operating profit, excluding the effect of Tactical Systems in 1996, were 13
percent and five percent lower, respectively, than the corresponding 1995
amounts. These decreases were primarily attributable to lower margins on
commercial products due to competitive pressures.
Net sales and operating profit of Electronics for the second quarter and year-
to-date 1996 also increased significantly from the comparable 1995 amounts due
to the inclusion of the operations of certain Tactical Systems companies from
April 1, 1996. Second quarter and year-to-date 1996 net sales, excluding the
effect of Tactical Systems in 1996, were eight percent and seven percent higher,
respectively, than the comparable 1995 amounts. These increases were primarily
due to increases in volume in several programs and the inclusion of the results
of operations of the former aircraft controls business of General Electric
Company, which the Corporation acquired in the fourth quarter of 1995.
Operating profits for the second quarter and year-to-date 1996 periods,
excluding the effect of Tactical Systems in 1996, were comparable with the
corresponding 1995 periods, as the sales volume increases discussed above were
offset by reductions in royalty income activities resulting from certain patent
expirations.
20 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Net sales for the second quarter and year-to-date 1996 in the Energy, Materials
and Other segment were comparable to the same periods in 1995. Operating profit
for this segment was slightly lower for both the second quarter and the year-
to-date period due to the timing of award fees on various management contracts.
The Corporation has a $180 million fixed-price contract with DOE to clean up
contaminated waste found in Pit 9, located on the Idaho National Engineering
Laboratory reservation. The program is experiencing schedule delays and
technical and cost issues including, among other things, the design and
construction/acquisition of processing facilities and equipment. The Corporation
is currently involved in discussions with DOE on these contract issues.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1996, approximately $407 million of cash was
provided by operating activities, compared with $259 million during the same
period in 1995. Increases in cash generated from operations in the first six
months of 1996 more than offset increased interest and income tax payments made
during that period. The increase in cash used for investing activities during
the first six months of 1996 was primarily due to the payment of approximately
$7.3 billion in connection with the Loral Transaction. Net cash provided by
financing activities was $7 billion in the first six months of 1996, principally
reflecting the issuance of debt to finance the Loral Transaction, versus $234
million used for financing activities for the same period of 1995.
Total debt, including short-term borrowings, amounted to approximately 65
percent of total capitalization at June 30, 1996, an increase from the 37
percent reported at December 31, 1995. As previously discussed, in connection
with the consummation of the Loral Transaction, approximately $7 billion of debt
was incurred through the issuance of commercial paper by the Corporation and
through borrowings under the 5-Year Facility. During the second quarter of 1996,
the Corporation issued $5 billion of long-term debt securities, the entire
amount registered under the Corporation's shelf registration statement which
became effective on May 10, 1996. The net proceeds from the sale of the debt
securities were used to repay the $1 billion borrowed under the 5-Year Facility
and to reduce the amount of commercial paper outstanding. These Notes and
Debentures range in maturity from two years to 40 years, with interest rates
ranging from 6.55% to 7.75%. The debt securities are guaranteed by Tactical
Systems.
At the effective date of the Loral Transaction, the Corporation assumed
approximately $1.9 billion of debt obligations of the former Loral Corporation.
21 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Commercial paper borrowings of approximately $3.5 billion were outstanding at
June 30, 1996. Approximately $2 billion of these borrowings were classified as
long-term debt in the Corporation's consolidated condensed balance sheet, based
on management's ability and intention to maintain this debt outstanding for at
least one year.
In February 1996, the Corporation entered into interest rate hedging agreements
to offset a portion of its exposure to rising interest rates related to the
anticipated long-term financings. These agreements were closed in the second
quarter of 1996 in connection with the Corporation's issuance of its long-term
debt securities. The Corporation realized a gain of approximately $150 million
on the closing of these agreements, which has been deferred and is being
amortized and recognized as an adjustment to interest expense over the terms of
the related debt obligations.
In connection with the Loral Transaction, the Corporation assumed the
obligations of Loral as guarantor under the Revolving Credit Agreement of
Globalstar, L.P. (the Globalstar Revolving Credit Agreement), an affiliate of
Loral SpaceCom, and the parties to the Globalstar Revolving Credit Agreement
released Loral from its prior guarantee. The maximum principal amount of loans
to Globalstar, L.P. that are guaranteed by the Corporation is $250 million,
subject to the assumption by certain of the Globalstar partners of a portion of
the Corporation's obligations as guarantor.
The Corporation held cash and cash equivalent balances of $390 million and $653
million at June 30, 1996 and December 31, 1995, respectively. Stockholders'
equity at the end of June 30, 1996 was approximately $6.9 billion, a $479
million increase from the balance at the end of 1995. The increase was
principally due to year-to-date 1996 earnings net of dividends paid and the
issuance of new shares upon exercise of employee stock options. Cash dividends
per common share were increased in the first quarter of 1996 from $.35 to $.40
in accordance with the settlement of certain class action lawsuits filed on
behalf of the former shareholders of Lockheed Corporation and Martin Marietta
Corporation. In accordance with the provisions of the settlement, this higher
quarterly dividend rate was paid for the second quarter and will be paid for the
third quarter of 1996.
On July 26, 1996, Martin Marietta Materials, Inc. (Materials) filed a
registration statement with the SEC outlining a split-off plan for the 81
percent interest in Materials currently owned by the Corporation. The proposed
split-off would be achieved through an exchange offer whereby the Corporation's
stockholders would be given an opportunity to exchange some or all of their
Lockheed Martin common stock for Materials common stock currently held by the
Corporation. The exchange rate will not be set until immediately prior to the
mailing of the Offering Circular-Prospectus pertaining to the exchange offer.
The split-off, which is expected to be completed by the end of 1996 on a tax-
free basis, is dependent, among other things, on market conditions. The
Corporation anticipates that the completion of
22 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
the split-off will result in the recognition of a gain. Following the exchange,
and consistent with the Corporation's plan to generate cash to reduce debt,
management anticipates that, subject to prevailing financial, market and
economic conditions, the Corporation will divest other non-core businesses and
will consider making a public offering of shares of Lockheed Martin stock to
further reduce outstanding debt.
The Corporation expects to complete and announce its plans for integration
and any consolidation activities related to the Loral Transaction by the
end of 1996.
Cash on hand and temporarily invested, internally generated funds, and available
financing resources are expected to be sufficient to meet anticipated operating
and debt service requirements and discretionary investment needs.
OTHER MATTERS
During the second quarter of 1996, the Corporation's Board of Directors
terminated the systematic common stock repurchase plan which had been
established to counter the future dilutive effect of common stock issued by the
Corporation under its 1995 Omnibus Performance Award Plan. A separate program
authorized in 1995 for the repurchase of up to nine million common shares to
counter the dilutive effect of common stock issued under the Corporation's other
benefit and compensation programs and for other purposes related to such plans
remains in effect. No common shares have been repurchased by the Corporation
during 1996.
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," effective January 1, 1996. SFAS No. 121 requires that
certain long-lived assets to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Additionally, SFAS No. 121 requires that
certain long-lived assets to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The adoption of this standard did not
have a material effect on the Corporation's consolidated earnings and financial
condition.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All forward looking statements involve risks
and uncertainties. The forward looking statements in this document are intended
to be subject to the safe harbor protection provided by Sections 27A and 21E.
For a discussion identifying some important factors that could cause actual
results to differ materially from those anticipated in the forward looking
statements see the Corporation's Securities and Exchange Commission filings,
including, but not limited to, the
23 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
discussion of "Competition and Risk" and the discussion of "Government Contracts
and Regulations" on pages 10 through 12 and pages 13 through 14, respectively,
of the Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 (Form 10-K); "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 44 through 56 of the
Annual Report and "Note 1 - Summary of Significant Accounting Policies" and
"Note 14 - Commitments and Contingencies" of the Notes to Consolidated Financial
Statements on pages 62 through 63 and 73 through 74, respectively, of the
Audited Consolidated Financial Statements included in the Annual Report and
incorporated by reference into the Form 10-K; and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 16 through
24 of this Form 10-Q and "Note 2 - Business Combination with Loral Corporation"
and "Note 6 - Contingencies" of the Notes to Unaudited Condensed Consolidated
Financial Statements on pages 6 through 9 and pages 13 through 14, respectively,
of the Unaudited Condensed Consolidated Financial Statements included in this
Form 10-Q.
24 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- - --------------------------
The Corporation is primarily engaged in providing products and services under
contracts with the United States Government and, to a lesser degree, under
foreign government contracts, some of which are funded by the United States
Government. All such contracts are subject to extensive legal and regulatory
requirements and, from time to time, agencies of the United States Government
investigate whether the Corporation's operations are being conducted in
accordance with these requirements. Such investigations could result in
administrative, civil or criminal liabilities, including repayments, fines or
penalties being imposed upon the Corporation, or could lead to suspension or
debarment from future government contracting by the Corporation. The
Corporation is also a party to or has its property subject to various other
litigation and proceedings, including matters arising under provisions relating
to the protection of the environment (collectively, proceedings).
On March 1, 1996, a NASA Inspector General's Office subpoena was served on
Lockheed Martin Federal Systems-Owego (Federal Systems) seeking documents
apparently relating to allegations of potential charging issues on a NASA
subcontract pertaining to the provision of computer support on a Space Station
contract.
Reference is made to prior disclosure of a subpoena served upon the Corporation
by the Department of Defense Inspector General's Office (DoD IG) on May 4, 1995,
seeking documents related to the Advanced Concept Center and the Information
Systems and Technologies (IS&T) business which are part of Lockheed Martin
Management & Data Systems. On April 16, 1996, the Department of Justice declined
to intervene in a qui tam Complaint filed in the United States District Court
for the Eastern District of Pennsylvania which was unsealed on that date. The
Complaint generally alleges that the Corporation improperly charged costs at
IS&T to indirect cost pools which were then allocated to various government
contracts. The Corporation has filed an Answer denying the allegations and the
matter is proceeding.
On May 21, 1996, a DoD IG subpoena was served on Sanders, one of the
Corporation's operating companies, seeking documents related to pricing concerns
on a U.S. Navy contract for the production of sonar data computers and sonobuoy
monitor controls.
On June 25, 1996, Lockheed Martin Engineering & Science Services was served with
a grand jury subpoena issued by the United States District Court for the
Southern District of Texas seeking documents related to two former employees of
a predecessor company, Lockheed Engineering & Sciences Company (LESC), and
apparently pertaining to an investigation of cost accounting issues in
connection with NASA service and support contracts. On August 13, 1996, the
Corporation was advised that the U.S. Department of Justice is investigating the
matter and the Corporation expects this investigation to continue.
25 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
(Continued)
Reference is made to prior disclosure of a subpoena served upon the Corporation
by the DoD IG seeking documents relating to the price proposal submitted in
connection with a LANTIRN program contract awarded in 1994. On July 16, 1996,
two qui tam Complaints against the Corporation were unsealed in the United
States District Court for the Middle District of Florida at Orlando. The
Complaints allege various cost accounting issues on LANTIRN program contracts
and seek damages in the amount of $140 million. The Corporation is preparing to
respond to the Complaints. The government has not yet made a decision as to
whether to intervene in the lawsuit and its investigation is continuing.
Reference is made to prior disclosure of a federal grand jury subpoena served
upon the Corporation on January 23, 1996, seeking documents related to the
manufacturing and testing of two circuit card assemblies used in the production
of the Hellfire I missile for the U.S. Army. On July 24, 1996, a second grand
jury subpoena was served on the Corporation requesting documents related to the
same subject matter and the government's investigation of this matter is
continuing.
The Corporation is involved in various other legal and environmental proceedings
arising in the ordinary course of its business, but in the opinion of management
and counsel the probability is remote that the outcome of any such litigation or
proceedings, whether specifically described above or referred to generally in
this paragraph, will have a material adverse effect on the results of the
Corporation's operations or its financial position.
26 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
(Continued)
Item 4 - Submission of Matters to a Vote of Security Holders
- - -------------------------------------------------------------
The following information provided herein was previously disclosed in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, which was filed on May 15, 1996.
At the Annual Meeting of Stockholders on April 25, 1996, the stockholders of
Lockheed Martin Corporation:
<TABLE>
<CAPTION>
- Elected the following individuals to the Board of Directors for one-year
terms expiring in 1997:
Votes Cast For Votes Withheld
-------------- --------------
<S> <C> <C>
Norman R. Augustine 170,862,168 2,340,617
Marcus C. Bennett 170,986,881 2,215,904
Lynne V. Cheney 171,021,762 2,181,023
Vance D. Coffman 170,982,572 2,220,213
Houston I. Flournoy 171,088,256 2,114,529
James F. Gibbons 171,162,115 2,040,670
Edward E. Hood, Jr. 171,105,536 2,097,249
Caleb B. Hurtt 170,980,976 2,221,809
Gwendolyn S. King 171,025,555 2,177,230
Vincent N. Marafino 170,873,889 2,328,896
Eugene F. Murphy 169,818,144 3,384,641
Allen E. Murray 171,083,097 2,119,688
Frank Savage 171,144,204 2,058,581
Daniel M. Tellep 170,904,357 2,298,428
Carlisle A. H. Trost 171,075,601 2,127,184
James R. Ukropina 171,162,820 2,039,965
Douglas C. Yearley 171,156,724 2,046,061
</TABLE>
- Ratified the appointment of Ernst & Young LLP, independent auditors, to
audit the consolidated financial statements of the Corporation for fiscal
year 1996. There were 171,656,084 votes for the appointment, 1,160,754
votes against the appointment and 909,212 abstentions.
- Ratified management's proposal for the adoption of the Lockheed Martin
Deferred Management Incentive Compensation Plan. There were 163,690,616
votes for the proposal, 7,941,803 votes against the proposal and 2,093,631
abstentions.
27 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
(Continued)
- Rejected a stockholder proposal which recommended that the Corporation
endorse the Coalition for Environmentally Responsible Economies' principles
for Corporate environmental accountability. There were 13,659,963 votes for
the proposal, 136,553,561 votes against the proposal, 14,549,267
abstentions and 8,963,259 broker non-votes.
All resolutions, comments and recommendations concerning the proposals were set
forth in the Corporation's definitive Proxy Statement dated March 18, 1996.
Item 6 - Exhibits and Reports on Form 8-K
- - ------------------------------------------
(a) Exhibits
1. Exhibit 11. Lockheed Martin Corporation Computation of Earnings per Common
Share for the three months and six months ended June 30, 1996 and 1995.
2. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of
Earnings to Fixed Charges for the six months ended June 30, 1996.
3. Exhibit 27. Financial Data Schedule for the six months ended June 30, 1996.
(b) Reports on Form 8-K filed in the second quarter of 1996
1. Current report on Form 8-K filed on April 5, 1996
Item 5. - Other Events
The registrant filed a copy of Lockheed Martin Corporation Corporate Policy
Statement No. CPS-704, which pertains to consultants to Lockheed Martin
Corporation.
2. Current report on Form 8-K filed on May 2, 1996
Item 2. - Acquisition or Disposition of Assets
The registrant filed information regarding consummation of the transactions
contemplated by the definitive Agreement and Plan of Merger dated January 7,
1996 among the registrant, Loral Corporation and LAC Acquisition Corporation.
28 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
(Continued)
Item 5. - Other Events
The registrant filed information concerning the businesses of Lockheed Martin
Tactical Systems, Inc., a wholly-owned subsidiary of the registrant which
consists of the businesses of Loral Corporation which were acquired by the
registrant.
Item 7. - Financial Statements and Exhibits
- - -Audited Consolidated Financial Statements of Loral Corporation and Subsidiaries
- - -Retained Business (Tactical Systems) as of March 31, 1995 and 1994, and for
each of the three years then ended, and related Management's Discussion and
Analysis of Results of Operations and Financial Condition.
- - -Unaudited Consolidated Financial Statements of Loral Corporation and
Subsidiaries - Retained Business (Tactical Systems) as of December 31, 1995 and
March 31, 1995, and for the nine months ended December 31, 1995, and 1994, and
related Management's Discussion and Analysis of Results of Operations and
Financial Condition.
- - -Unaudited Pro Forma Combined Condensed Financial Statements as of December
31, 1995 and for the fiscal year then ended, and related Notes to Unaudited Pro
Forma Combined Condensed Financial Statements.
29 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
(Continued)
3. Current report on Form 8-K/A filed on May 8, 1996
The Form 8-K filed on May 2, 1996 was amended to add unaudited selected
quarterly financial data of Loral Corporation and Subsidiaries - Retained
Business (Tactical Systems) and to incorporate exhibits previously filed by
Loral Corporation.
4. Current report on Form 8-K filed May 20, 1996
Item 5 - Other Events
The registrant filed information in connection with the offer and sale by the
Corporation of $3.5 billion of long-term debt securities issued by the
registrant under an existing Registration Statement on Form S-3 covering up to
$5 billion in debt securities of the registrant. The due and punctual payment of
the principal and interest on such securities is fully and unconditionally
guaranteed by Tactical Systems.
Item 7 - Financial Statements and Exhibits
- Underwriting Agreement dated May 16, 1996.
- Pricing Agreement dated May 16, 1996.
- Indenture dated as of May 15, 1996.
- Form of 6.55% Note due 1999, Form of 6.85% Note due 2001, Form of 7.25%
Note due 2006, Form of 7.65% Debenture due 2016, Form of 7.75%
Debenture due 2026 and Form of 7.20% Debenture due 2036.
- Opinion of Miles & Stockbridge, a Professional Corporation, and Opinion of
William J. LaSalle.
- Computation of Ratios of Earnings to Fixed Charges and Earnings to Combined
Fixed Charges and Preferred Stock Dividends and Pro Forma Ratios of Earnings
to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock
Dividends.
5. Current Report on Form 8-K filed on May 28, 1996
Item 5. - Other Events
The registrant filed a copy of Lockheed Martin Corporation Corporate Policy
Statement No. CPS-730, which pertains to Compliance with the Foreign Corrupt
Practices Act.
6. Current Report on Form 8-K filed on June 18, 1996
Item 5. - Other Events
The registrant filed information concerning the business of Lockheed Martin
Tactical Systems, Inc., a wholly-owned subsidiary of the registrant which
consists of the businesses of Loral Corporation which were acquired by the
registrant.
30 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
(Continued)
Item 7. - Financial Statements and Exhibits
Audited Consolidated Financial Statements of Loral Corporation and Subsidiaries
- - - Retained Business (Tactical Systems) as of March 31, 1996 and 1995, and for
each of the three years then ended.
7. Current Report on Form 8-K filed on June 25, 1996
Item 5. - Other Events
The registrant filed information in connection with the offer and sale by the
Corporation of $1.5 billion of long-term debt securities issued by the
registrant under an existing Registration Statement on Form S-3 covering up to
$5 billion in debt securities of the registrant. The due and punctual payment of
the principal and interest on such securities is fully and unconditionally
guaranteed by Tactical Systems.
Item 7. - Financial Statements and Exhibits
- Underwriting Agreement dated June 21, 1996.
- Pricing Agreement dated June 21, 1996.
- Form of 6.625% Note due 1998, Form of 7.45% Note due 2004 and Form 7.70%
Note due 2008.
- Opinion of Miles & Stockbridge, a Professional Corporation, and Opinion of
William J. LaSalle.
31 of 35
<PAGE>
LOCKHEED MARTIN CORPORATION
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 thereunto duly authorized.
LOCKHEED MARTIN CORPORATION
---------------------------
(Registrant)
Date: August 12, 1996 by: /s/Robert E. Rulon
--------------- ---------------------------------
Robert E. Rulon
Vice President and Controller
(Chief Accounting Officer)
32 of 35
<PAGE>
Exhibit 11
LOCKHEED MARTIN CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------
1996 1995
---- ----
(In millions, except per share data)
<S> <C> <C>
ASSUMING NO DILUTION:
- - --------------------
Average number of common shares outstanding 190.2 189.3
====== ======
Net earnings (loss) $ 299 $ (53)
Less: Preferred stock dividends (15) (15)
------ ------
Net earnings (loss) applicable to common stock $ 284 $ (68)
====== ======
Earnings (loss) per common share $ 1.50 $ (.36)
====== ======
ASSUMING FULL DILUTION:
- - ----------------------
Average number of common shares outstanding 190.2 189.3
Dilutive stock options-based on the treasury stock
method using the June 30 market prices, if
higher than average market price 4.7 4.2
Assumed conversion of the Convertible Series A
Preferred Stock 28.9 28.9
------ ------
223.8 222.4
====== ======
Net earnings (loss) $ 299 $ (53)
====== ======
Earnings (loss) per common share $ 1.33 $ (.24) *
====== ======
</TABLE>
* The assumed conversion of the Corporation's Series A preferred stock for
purposes of calculating earnings per share on a fully diluted basis had an
anti-dilutive effect for both the three months and six months ended June 30,
1995.
33 of 35
<PAGE>
Exhibit 11
(Continued)
LOCKHEED MARTIN CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1996 1995
---- ----
(In millions, except per share data)
<S> <C> <C>
ASSUMING NO DILUTION:
- - --------------------
Average number of common shares outstanding 189.7 188.9
====== ======
Net earnings $ 571 $ 84
Less: Preferred stock dividends (30) (30)
------ ------
Net earnings applicable to common stock $ 541 $ 54
====== ======
Earnings per common share $ 2.85 $ .28
====== ======
ASSUMING FULL DILUTION:
- - ----------------------
Average number of common shares outstanding 189.7 188.9
Dilutive stock options-based on the treasury
stock method using the June 30 market prices,
if higher than average market price 4.9 4.4
Assumed conversion of the Convertible Series A
Preferred Stock 28.9 28.9
------ ------
223.5 222.2
====== ======
Net earnings $ 571 $ 84
====== ======
Earnings per common share $ 2.55 $ .38 *
====== ======
</TABLE>
* The assumed conversion of the Corporation's Series A preferred stock for
purposes of calculating earnings per share on a fully diluted basis had an
anti-dilutive effect for both the three months and six months ended June 30,
1995.
34 of 35
<PAGE>
Exhibit 12
LOCKHEED MARTIN CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN MILLIONS, EXCEPT RATIO)
<TABLE>
<CAPTION>
EARNINGS:
<S> <C>
Earnings from continuing operations before income taxes $ 936
Interest expense 260
Amortization of debt premium and discount, net (1)
Portion of rents representative of an interest factor 36
------
Adjusted earnings from continuing operations before
income taxes and fixed charges $1,231
======
FIXED CHARGES:
Interest expense $ 260
Amortization of debt premium and discount, net (1)
Portion of rents representative of an interest factor 36
Capitalized interest 1
------
Total fixed charges $ 296
======
RATIO OF EARNINGS TO FIXED CHARGES 4.2
======
</TABLE>
35 of 35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated statement of earnings and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 390
<SECURITIES> 0
<RECEIVABLES> 5,428
<ALLOWANCES> 0
<INVENTORY> 3,057
<CURRENT-ASSETS> 10,238
<PP&E> 9,842
<DEPRECIATION> 5,531
<TOTAL-ASSETS> 30,328
<CURRENT-LIABILITIES> 8,319
<BONDS> 11,086
0
1,000
<COMMON> 199
<OTHER-SE> 5,713
<TOTAL-LIABILITY-AND-EQUITY> 30,328
<SALES> 12,185
<TOTAL-REVENUES> 12,185
<CGS> 11,020
<TOTAL-COSTS> 11,020
<OTHER-EXPENSES> 31
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 260
<INCOME-PRETAX> 936
<INCOME-TAX> 365
<INCOME-CONTINUING> 571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 571
<EPS-PRIMARY> 2.85
<EPS-DILUTED> 2.55
</TABLE>
