<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, 1998 COMMISSION FILE NUMBER 1-1143
--------------- --------
LOCKHEED MARTIN CORPORATION
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1893632
- ------------------------- ---------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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, 1998
- -------------------------- -------------------------------
COMMON STOCK, $1 PAR VALUE 195,719,321
<PAGE>
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
____________
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, 1998 and 1997........... 3
Condensed Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1998 and 1997............................ 4
Condensed Consolidated Balance Sheet -
June 30, 1998 and December 31, 1997................................ 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.......... 19
Item 5. Other Information............................................ 19
Item 6. Exhibits and Reports on Form 8-K............................. 19
Signatures.............................................................. 21
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges.......... 22
Exhibit 27 Financial Data Schedule.................................... 23
</TABLE>
2
<PAGE>
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
(In millions, except per share data)
<S> <C> <C> <C> <C>
Net sales $6,520 $6,898 $12,737 $13,572
Cost of sales 5,882 6,261 11,481 12,279
------ ------ ------- -------
Earnings from operations 638 637 1,256 1,293
Other income and expenses, net 41 52 70 73
------ ------ ------- -------
679 689 1,326 1,366
Interest expense 221 201 434 402
------ ------ ------- -------
Earnings before income taxes 458 488 892 964
Income tax expense 169 180 334 366
------ ------ ------- -------
Net earnings $ 289 $ 308 $ 558 $ 598
====== ====== ======= =======
Earnings per common share:
Basic $ 1.54 $ 1.59 $ 2.98 $ 3.08
====== ====== ======= =======
Diluted $ 1.52 $ 1.42 $ 2.94 $ 2.77
====== ====== ======= =======
Cash dividends declared per common share $ .40 $ .40 $ .80 $ .80
====== ====== ======= =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
--------- --------
(In millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 558 $ 598
Adjustments to reconcile net earnings to net cash used for
operating activities:
Depreciation and amortization 494 524
Changes in operating assets and liabilities (1,132) (1,159)
------- -------
Net cash used for operating activities (80) (37)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to properties, net of purchased operations (307) (357)
Divestiture of L-3 companies -- 464
Divestiture of Armament Systems and Defense Systems -- 450
Other acquisition, investment and divestiture activities 88 (51)
------- -------
Net cash (used for) provided by investing activities (219) 506
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings 1,104 180
Net repayments related to long-term debt (651) (507)
Issuances of common stock 50 42
Common stock dividends (153) (154)
Preferred stock dividends -- (30)
Final settlement for redemption of preferred stock (51) --
------- -------
Net cash provided by (used for) financing activities 299 (469)
------- -------
Net increase (decrease) in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period -- --
------- -------
Cash and cash equivalents at end of period $ -- $ --
======= =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
LOCKHEED MARTIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- -------------
(In millions)
<S> <C> <C>
ASSETS
Current assets:
Receivables $ 5,233 $ 5,009
Inventories 4,047 3,144
Deferred income taxes 1,260 1,256
Other current assets 761 696
------- -------
Total current assets 11,301 10,105
Property, plant and equipment 3,613 3,669
Intangible assets related to contracts and
programs acquired 1,491 1,566
Cost in excess of net assets acquired 9,732 9,856
Other assets 3,420 3,165
------- -------
$29,557 $28,361
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 918 $ 1,234
Customer advances and amounts in excess of
costs incurred 4,066 3,644
Salaries, benefits and payroll taxes 996 924
Income taxes 567 364
Short-term borrowings 1,598 494
Current maturities of long-term debt 579 876
Other current liabilities 1,472 1,653
------- -------
Total current liabilities 10,196 9,189
Long-term debt 10,183 10,528
Post-retirement benefit liabilities 1,941 1,982
Other liabilities 1,501 1,486
Stockholders' equity:
Common stock, $1 par value per share 195 194
Additional paid-in capital 169 25
Retained earnings 5,572 5,173
Unearned ESOP shares (200) (216)
------- -------
Total stockholders' equity 5,736 5,176
------- -------
$29,557 $28,361
======= =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(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 (Lockheed Martin or the
Corporation) has continued to follow the accounting policies set forth in the
consolidated financial statements filed with the Securities and Exchange
Commission on March 19, 1998 in its 1997 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, 1998
are not necessarily indicative of results to be expected for the full year.
Certain amounts presented for prior periods have been reclassified to conform
with the 1998 presentation.
NOTE 2 - EARNINGS PER SHARE
Effective December 31, 1997, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." Accordingly, all
prior period earnings per share data presented has been restated to conform to
the provisions of the new standard.
In November 1997, Lockheed Martin exchanged all of the outstanding capital
stock of its wholly-owned subsidiary, LMT Sub, for all of the outstanding Series
A preferred stock held by General Electric Company (GE) and certain subsidiaries
of GE. The Series A preferred stock, which was originally issued to GE in
connection with the acquisition of GE's aerospace businesses in 1993, was
convertible into approximately 29 million shares of Lockheed Martin common
stock. LMT Sub was composed of two non-core commercial business units which
contributed approximately five percent of the Corporation's 1997 net sales,
Lockheed Martin's investment in a telecommunications partnership, and
approximately $1.6 billion in cash, which was initially financed through the
issuance of commercial paper; however, $1.4 billion was subsequently refinanced
with a note, due November 17, 2002 and bearing interest at 6.04%, from Lockheed
Martin to LMT Sub. During the second quarter of 1998, the final determination of
the closing net worth of the businesses exchanged was completed, resulting in a
payment of $51 million from the Corporation to MRA Systems, Inc. (formerly LMT
Sub). This final settlement payment did not impact the gain previously recorded
on the transaction. Subsequently, the remainder of the cash included in the
transaction was refinanced with a note for $210 million, due November 17, 2002
and bearing interest at 5.73%, from Lockheed Martin to MRA Systems, Inc.
Basic earnings per share were computed based on net earnings, less the
dividend requirement for preferred stock for the 1997 periods. The weighted
average number of common shares outstanding during the period was used in this
calculation. Diluted earnings per share were computed based on net earnings, and
the weighted average number of common shares outstanding was increased, for this
calculation, by the dilutive effect of stock options based on the treasury stock
method and, for the 1997 periods, by the assumed conversion of preferred stock.
6
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- ---------- ------ ---------
(In millions, except per share data)
<S> <C> <C> <C> <C>
Net earnings applicable to common stock:
- ----------------------------------------
Net earnings $ 289 $ 308 $ 558 $ 598
Dividends on preferred stock -- (15) -- (30)
------ ------ ------ ------
Net earnings applicable to common stock for
basic earnings per share 289 293 558 568
Dividends on preferred stock -- 15 -- 30
------ ------ ------ ------
Net earnings applicable to common stock for
diluted earnings per share $ 289 $ 308 $ 558 $ 598
====== ====== ====== ======
Average common shares outstanding:
- ----------------------------------
Average number of common shares outstanding
for basic earnings per share 187.9 184.7 187.3 184.4
Assumed conversion of the Series A preferred stock -- 28.9 -- 28.9
Dilutive stock options - based on the treasury stock
method 2.6 2.6 2.6 2.8
------ ------ ------ ------
Average number of common shares outstanding
for diluted earnings per share 190.5 216.2 189.9 216.1
====== ====== ====== ======
Basic earnings per share:
- -------------------------
Net earnings $ 1.54 $ 1.67 $ 2.98 $ 3.24
Dividends on preferred stock -- (.08) -- (.16)
------ ------ ------ ------
Earnings per share $ 1.54 $ 1.59 $ 2.98 $ 3.08
====== ====== ====== ======
Diluted earnings per share:
- ---------------------------
Net earnings $ 1.52 $ 1.42 $ 2.94 $ 2.77
====== ====== ====== ======
</TABLE>
7
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
NOTE 3 - INVENTORIES
June 30, December 31,
1998 1997
--------- -------------
(In millions)
<S> <C> <C>
Work in process, primarily related to long-term
contracts and programs in progress $ 5,856 $ 5,155
Less customer advances and progress payments (2,474) (2,805)
------- -------
3,382 2,350
Other inventories 665 794
------- -------
$ 4,047 $ 3,144
======= =======
</TABLE>
NOTE 4 - 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. In the opinion of management and
in-house counsel, the probability is remote that the outcome of these matters
will have a material adverse effect on the Corporation's consolidated results of
operations or financial position. These matters include the following items:
Environmental matters -- 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 obligated the Corporation to design and
construct facilities to monitor, extract, and treat groundwater, and to operate
and maintain such facilities for approximately eight years. A second consent
decree has been finalized which obligates the Corporation to fund the continued
operation and maintenance of these facilities through the year 2018. The
Corporation estimates that expenditures required to comply with the consent
decrees over their remaining terms will be approximately $110 million.
The Corporation has also been operating under a cleanup and abatement order
from the California Regional Water Quality Control Board (the Regional 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 costs
of these actions in excess of the requirements under the EPA consent decrees to
approximate $60 million over the remaining term of the project.
The Corporation is responding to three administrative orders issued by the
Regional Board in connection with the Corporation's former Lockheed Propulsion
Company facilities in Redlands, California. Under the orders, the Corporation
is investigating the impact and potential remediation of regional groundwater
contamination by perchlorates and chlorinated solvents. The Regional Board has
approved the Corporation's plan to maintain public water supplies with respect
to chlorinated solvents during this work, and the Corporation is negotiating
with local water purveyors to implement this plan, as well as to address water
supply concerns relative to perchlorate contamination. The Corporation
estimates that expenditures required to implement work currently approved will
be approximately $110 million. Finally, the Corporation is coordinating with
the U.S. Air Force, which is conducting preliminary studies of the potential
health effects of exposure to perchlorates in connection with several sites
across the country, including the Redlands site.
In addition, the Corporation is involved in 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 $260 million for those cases in which an estimate of
financial exposure can be determined has been recorded.
8
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
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
potentially responsible parties, are allowable in establishing the prices of the
Corporation's products and services. As a result, a substantial portion of the
expenditures are being reflected in the Corporation's sales and cost of sales
pursuant to U.S. Government agreement or regulation. Though the Defense Contract
Audit Agency has questioned certain elements of the Corporation's practices with
respect to the aforementioned agreement, no formal action has been initiated,
and it is management's opinion that the treatment of these environmental costs
is appropriate and consistent with the terms of such agreement. The Corporation
has recorded an asset for the portion of environmental 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 future recovery of portions of the environmental costs
through insurance policy coverage or from other potentially responsible parties,
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.
Waste remediation contract -- In 1994, the Corporation was awarded a $180
million fixed price contract by the U.S. Department of Energy (DOE) for the
Phase II design, construction and limited test of remediation facilities, and
the Phase III full remediation of waste found in Pit 9, located on the Idaho
National Engineering and Environmental Laboratory reservation. The Corporation
has incurred significant unanticipated costs and scheduling issues due to
complex technical and contractual matters which threaten the viability of the
overall Pit 9 program. Management completed its investigation to identify and
quantify the overall effect of these matters, and summarized its findings in a
request for equitable adjustment (REA) which was delivered to the DOE on March
31, 1997. The provisions of the REA included, but were not limited to, the
recovery of a portion of unanticipated costs incurred by the Corporation and the
restructuring of the contract to provide for a more equitable sharing of the
risks associated with the Pit 9 project. The Corporation wrote a series of
letters to the DOE seeking technical direction, including an accurate inventory
of the Pit 9 contents. No direction was provided. To better focus the
Corporation's management resources on resolving these issues, the management and
reporting structure of the Pit 9 program were changed in September 1997;
however, the Corporation has been unsuccessful in reaching any agreements with
the DOE on cost recovery or other contract restructuring matters. Starting in
May 1997, the Corporation reduced work activities at the Pit 9 site.
On February 27, 1998, the Corporation received a cure notice alleging that
certain actions taken by the Corporation were conditions endangering performance
of the Pit 9 contract. The notice advised that, unless these conditions were
cured within 30 days, the contract might be terminated for default. The
Corporation believed (and continues to believe) that termination for default was
neither permissible under the Pit 9 contract nor warranted under the
circumstances and, on April 13, 1998, submitted its reply to the cure notice
setting forth its rationale for these positions. On June 1, 1998, despite the
Corporation's reply, the DOE, through Lockheed Martin Idaho Technologies
Company (LMITCO), its management contractor, terminated the Pit 9 contract for
default. On that same date, the Corporation filed a lawsuit against the DOE in
the U.S. Court of Federal Claims in Washington, D.C., challenging and seeking to
overturn the default termination. The Government has not yet responded to the
suit. Additionally, on July 21, 1998, the Corporation withdrew the REA
previously submitted to the DOE in March 1997 and replaced it with a certified
REA. This action resulted from the DOE's dissatisfaction with the uncertified
nature of the original REA. The certified REA is similar in substance to the REA
previously submitted, but its certification, based upon more detailed factual
and contractual analysis, raises its status to that of a formal claim. It is
anticipated that the DOE will require several months to consider this certified
REA. On August 11, 1998, LMITCO, at the DOE's direction, filed suit against the
Corporation in U.S. Federal District Court in Boise, Idaho, seeking recovery of
approximately $54 million previously paid by LMITCO to the Corporation under the
Pit 9 contract. The Corporation intends to resist this action while continuing
to pursue its certified REA.
9
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
NOTE 5 - OTHER
On July 3, 1997, the Corporation and Northrop Grumman Corporation (Northrop
Grumman) announced that they had entered into an Agreement and Plan of Merger
(the Merger Agreement) to combine the companies (the Merger). Under the terms
of the Merger Agreement, which was approved by the respective Boards of
Directors of the Corporation and Northrop Grumman, Northrop Grumman would become
a wholly-owned subsidiary of Lockheed Martin. The Merger Agreement provided for
its termination, and therefore termination of the Merger, by action of the Board
of Directors of either the Corporation or Northrop Grumman if the Merger had not
been consummated by March 31, 1998. In July 1998, the Board of Directors of
Lockheed Martin terminated the Merger Agreement, thereby terminating the Merger.
In March 1997, the Corporation executed a definitive agreement valued at
approximately $525 million to reposition 10 non-core business units as a new
independent company, L-3 Communications Corporation (L-3), in which the
Corporation retained a 34.9 percent ownership interest at closing. These
business units, primarily composed of high-technology, product-oriented
companies, contributed approximately two percent of the Corporation's net sales
during the three month period ended March 31, 1997. The transaction, which
closed on April 30, 1997 with an effective date of March 30, 1997, did not have
a material impact on the Corporation's earnings. During May 1998, L-3 completed
an Initial Public Offering resulting in the issuance of an additional 6.9
million shares of its common stock to the public. This transaction resulted in
a reduction in the Corporation's ownership to approximately 25 percent, and the
recognition of a pretax gain of $18 million in other income and expense. The
gain increased net earnings by $12 million, or $.06 per diluted share.
Commercial paper borrowings of approximately $2.6 billion were outstanding at
June 30, 1998. Of this amount, $1 billion has been classified as long-term debt
in the Corporation's condensed consolidated balance sheet based on management's
ability and intention to maintain this debt outstanding for at least one year.
During May 1998, the Corporation increased the amount of its one-year revolving
credit facility from $1.5 billion to $2.5 billion. The Corporation's four-year
revolving credit facility in the amount of $3.5 billion remains unchanged.
The Corporation's total interest payments were $442 million and $389 million
for the six months ended June 30, 1998 and 1997, respectively.
The Corporation's federal and foreign income tax payments, net of refunds
received, were $150 million and $727 million for the six months ended June 30,
1998 and 1997, respectively.
Effective January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for reporting and
disclosure of comprehensive income, which is composed of net earnings and
certain items of other comprehensive income as defined in the Statement, for all
periods presented; however, the adoption of SFAS No. 130 had no impact on the
Corporation's net earnings or stockholders' equity. The components of other
comprehensive income, both individually and in the aggregate, were not material
for the three month and six month periods ended June 30, 1998 and 1997.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way in which publicly-held companies
report financial and descriptive information about their operating segments in
financial statements for both interim and annual periods. The Statement also
requires additional disclosures with respect to products and services,
geographic areas of operation and major customers. The Statement is effective
for fiscal years beginning after December 15, 1997; however, application is not
required for interim periods in 1998. The adoption of SFAS No. 131 will have no
impact on the number or composition of the Corporation's reported business
segments, or on its consolidated results of operations, cash flows or financial
position, but is expected to increase the level of disclosure of segment
information.
10
<PAGE>
LOCKHEED MARTIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP is effective
for fiscal years beginning after December 15, 1998, and will require the
capitalization of certain costs incurred in connection with developing or
obtaining software for internal use after the date of adoption. The Corporation
is in the process of analyzing and assessing the impact of this SOP, and plans
to adopt effective January 1, 1999. Although the adoption of this SOP is
expected to affect the timing of future cash flows under contracts with the U.S
Government, management does not currently expect its adoption will have a
material effect on the Corporation's consolidated results of operations, cash
flows or financial position.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 provides authoritative guidance on accounting
and financial reporting related to costs of start-up activities. This SOP
requires that, at the effective date of adoption, costs of start-up activities
previously capitalized be expensed and reported as a cumulative effect of a
change in accounting principle, and further requires that such costs subsequent
to adoption be expensed as incurred. SOP No. 98-5 is effective for fiscal years
beginning after December 15, 1998. The Corporation plans to adopt this SOP
effective January 1, 1999. Management expects that the amount of the cumulative
effect adjustment to be recognized upon the adoption of the SOP could be
material, though the Corporation is continuing to analyze and assess the impact
of the adoption on the Corporation's consolidated results of operations and
financial position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 provides authoritative
guidance on accounting and financial reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. The
Statement requires the recognition of all derivatives as either assets or
liabilities in the consolidated balance sheet, and the periodic measurement of
those instruments at fair value. The classification of gains and losses
resulting from changes in the fair values of derivatives is dependent on the
intended use of the derivative and its resulting designation, as further defined
in the Statement. SFAS No. 133 requires adoption no later than January 1, 2000,
but early adoption is allowed, and initial application must be as of the
beginning of a fiscal quarter. Additionally, the Statement cannot be applied
retroactively to prior periods. At adoption, existing hedging relationships must
be designated anew and documented pursuant to the provisions of the Statement.
The Corporation is currently analyzing and assessing the impact that the
adoption of SFAS No. 133 is expected to have on its consolidated results of
operations, cash flows and financial position.
11
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TRANSACTION AGREEMENT WITH NORTHROP GRUMMAN CORPORATION
On July 3, 1997, the Corporation and Northrop Grumman Corporation (Northrop
Grumman) announced that they had entered into an Agreement and Plan of Merger
(the Merger Agreement) to combine the companies (the Merger). Under the terms
of the Merger Agreement, which was approved by the respective Boards of
Directors of the Corporation and Northrop Grumman, Northrop Grumman would become
a wholly-owned subsidiary of Lockheed Martin. The Merger Agreement provided for
its termination, and therefore termination of the Merger, by action of the Board
of Directors of either the Corporation or Northrop Grumman if the Merger had not
been consummated by March 31, 1998. In July 1998, the Board of Directors of
Lockheed Martin terminated the Merger Agreement, thereby terminating the Merger.
TRANSACTION AGREEMENT WITH GENERAL ELECTRIC COMPANY
In November 1997, Lockheed Martin exchanged all of the outstanding capital
stock of its wholly-owned subsidiary, LMT Sub, for all of the outstanding Series
A preferred stock held by General Electric Company (GE) and certain subsidiaries
of GE. The Series A preferred stock, which was originally issued to GE in
connection with the acquisition of GE's aerospace businesses in 1993, was
convertible into approximately 29 million shares of Lockheed Martin common
stock. LMT Sub was composed of two non-core commercial business units which
contributed approximately five percent of the Corporation's 1997 net sales,
Lockheed Martin's investment in a telecommunications partnership, and
approximately $1.6 billion in cash, which was initially financed through the
issuance of commercial paper; however, $1.4 billion was subsequently refinanced
with a note, due November 17, 2002 and bearing interest at 6.04%, from Lockheed
Martin to LMT Sub. During the second quarter of 1998, the final determination of
the closing net worth of the businesses exchanged was completed, resulting in a
payment of $51 million from the Corporation to MRA Systems, Inc. (formerly LMT
Sub). This final settlement payment did not impact the gain previously recorded
on the transaction. Subsequently, the remainder of the cash included in the
transaction was refinanced with a note for $210 million, due November 17, 2002
and bearing interest at 5.73%, from Lockheed Martin to MRA Systems, Inc.
The debt incurred to finance the GE Transaction resulted in an increase in the
Corporation's leverage ratio. In anticipation of this increase, Lockheed Martin
negotiated an increase in the leverage ratio permitted under its credit
facilities, which support its outstanding commercial paper borrowings, in order
to permit the GE Transaction to take place. As the issuance of the
Corporation's common stock contemplated in connection with the Northrop Grumman
transaction was expected to reduce the leverage ratio, this negotiated increase
was temporary, expiring on June 30, 1998. Lockheed Martin has negotiated a
further amendment to the leverage restrictions under its credit facilities so as
to be in compliance with these restrictions subsequent to June 30, 1998.
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.
Consolidated net sales for the second quarter of 1998 were $6.5 billion, a six
percent decrease from the $6.9 billion recorded for the comparable period in
1997. Consolidated net sales for the six months ended June 30, 1998 were $12.7
billion, a six percent decrease from the $13.6 billion reported for the same
period in 1997. The 1997 results include the operations of the two commercial
businesses divested to GE in November 1997, the operations of L-3 Communications
Corporation (L-3), which was repositioned as an independent company effective
March 30, 1997, and the operations of the Corporation's Commercial Electronics
business unit which was divested in the first quarter of 1998. Excluding the
effects of these divested operations, net sales for the quarter and the six
months ended June 30, 1998 would have increased by three percent and two percent
over comparable 1997 results, respectively. The Corporation's operating
12
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
profit (earnings before interest and taxes) for the second quarter of 1998 was
$679 million versus $689 million for the comparable 1997 period. The
Corporation's operating profit for the six months ended June 30, 1998 was $1.33
billion, a three percent decrease from the $1.37 billion reported for the
comparable 1997 period. Excluding the impact of divested operations, operating
profit for the second quarter 1998 would have increased by one percent from the
comparable 1997 period, while operating profit for the six months ended June 30,
1998 would have been consistent with the 1997 amount.
Net earnings for the second quarter of 1998 were $289 million, a six percent
decrease from reported second quarter 1997 net earnings of $308 million. The
Corporation's diluted earnings per share reported for the second quarter of 1998
was $1.52, a seven percent increase from second quarter 1997 diluted earnings
per share of $1.42. Net earnings for the six months ended June 30, 1998 were
$558 million, a seven percent decrease from reported net earnings of $598
million for the comparable 1997 period. The Corporation's diluted earnings per
share for the six months ended June 30, 1998 was $2.94, a six percent increase
from the comparable 1997 diluted earnings per share of $2.77. The 1998
earnings per share amounts reflect the impact of the fourth quarter 1997
redemption of the Corporation's Series A preferred stock formerly held by GE.
The effective income tax rate for the second quarter of 1998 was 37 percent as
compared to 41 percent for the second quarter of 1997, and 37.5 percent as
compared to 39 percent for the first six months of 1998 and 1997, respectively.
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
previous acquisition activities.
The Corporation's backlog of undelivered orders was approximately $44.2
billion at June 30, 1998, versus $47.1 billion reported at December 31, 1997.
The Corporation received orders for approximately $10.3 billion in new and
follow-on business, which were more than offset by sales during the first six
months of 1998.
The following table displays second quarter and year-to-date net sales and
operating profit for the Corporation's business segments.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- ------- -------
(In millions)
<S> <C> <C> <C> <C>
Net Sales:
Space & Strategic Missiles $2,005 $1,986 $ 3,912 $ 3,884
Electronics 1,770 1,755 3,468 3,493
Information & Services 1,282 1,680 2,494 3,327
Aeronautics 1,381 1,447 2,732 2,806
Energy and Other 82 30 131 62
------ ------ ------- -------
$6,520 $6,898 $12,737 $13,572
====== ====== ======= =======
Operating Profit:
Space & Strategic Missiles $ 234 $ 245 $ 501 $ 564
Electronics 182 135 323 266
Information & Services 71 102 126 178
Aeronautics 152 160 303 287
Energy and Other 40 47 73 71
------ ------ ------- -------
$ 679 $ 689 $ 1,326 $ 1,366
====== ====== ======= =======
</TABLE>
Effective January 1, 1998, management responsibility for United Space
Alliance, a limited liability company owned by the Corporation and The Boeing
Company, was reassigned from the Information & Services segment to the Space &
Strategic Missiles segment. Management reporting of certain other activities was
also reassigned among the Space & Strategic Missiles, Electronics, and Energy
and Other segments. Consequently, 1997 operating profit amounts for these
segments have been restated to conform with the 1998 presentation.
13
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Net sales of the Space & Strategic Missiles segment increased slightly during
the quarter and the six months ended June 30, 1998 from the comparable 1997
periods. Increases in launch vehicle activities were generally offset by a
decrease in Trident fleet ballistic missile program activities, and a reduction
in activity on the Iridium satellite program due to the program nearing its
completion, during the quarter and six months ended June 30, 1998. These factors
also contributed to the decrease in operating profit of four percent for the
second quarter of 1998 and 11 percent for the six months ended June 30, 1998,
each as compared to the same periods in the prior year. In addition, operating
profit for the comparative six month periods was impacted by the recognition in
the first quarter of 1997 of improved performance and award fees on the Titan
launch vehicle program and the Trident fleet ballistic missile program,
respectively.
Net sales of the Electronics segment remained relatively consistent for the
quarter and six months ended June 30, 1998 versus the same period in 1997.
Excluding the net sales of the Commercial Electronics business unit divested in
the first quarter of 1998, net sales for the quarter and six months ended June
30, 1998 would have increased by five percent and three percent, respectively,
from the comparable 1997 amounts. These increases were principally the result of
increased production deliveries of postal systems equipment and increased sales
in various other programs. Operating profit for the quarter and six months
ended June 30, 1998 increased significantly as compared to the respective 1997
amounts, primarily due to performance improvements in the programs mentioned
above and the absence in 1998 of development costs from investments in new
programs.
Net sales of the Information & Services segment for the quarter and six months
ended June 30, 1998 decreased by 24 percent and 25 percent, respectively, from
the comparable 1997 periods. Excluding the 1997 net sales of the non-core
businesses divested to L-3 and GE, net sales for both the quarter and six months
ended June 30, 1998 would have increased by approximately two percent as
compared to the same periods in 1997. Sales volume increases in certain
technology services programs and welfare and family services programs were
offset by reduced activities resulting from maturing programs in both 1998
periods. Operating profit for the quarter and six months ended June 30, 1998
decreased by approximately 29 percent from the comparable 1997 periods.
Excluding the 1997 operating profit from divested entities, operating profit for
the quarter and six months ended June 30, 1998 would have decreased by 26
percent and 22 percent, respectively, each as compared to the same periods in
1997. These decreases primarily resulted from adverse performance in the
segment's commercial product lines.
Net sales of the Aeronautics segment for the quarter and six months ended June
30, 1998 decreased by five percent and three percent from the comparable 1997
periods, respectively, due principally to the divestiture of the segment's
Aerostructures business unit to GE. Operating profit for the second quarter and
six months ended June 30, 1998 decreased by five percent and increased by six
percent, respectively, as compared to the same periods in 1997. Excluding the
operating profit from the segment's Aerostructures business unit, operating
profit for the 1998 quarter would have remained relatively consistent with
the same 1997 period; however, operating profit for the six months ended
June 30, 1998 would have increased by 12 percent as compared to the same 1997
period. The year-to-date increase was primarily due to an increase in F-16
deliveries, performance improvements in the F-16 program and improved operating
margins on the C-130 airlift aircraft program during the first half of 1998.
Net sales of the Energy and Other segment for the quarter and six months ended
June 30, 1998 increased significantly from the comparable 1997 amounts primarily
due to an increase in environmental systems activities. Operating profit for
the second quarter of 1998 decreased 15 percent from the comparable 1997 amount;
however, operating profit for the six month period ended June 30,1998 was
consistent with the comparable 1997 amount. In 1994, the Corporation was awarded
a $180 million fixed price contract by the U.S. Department of Energy (DOE) for
the Phase II design, construction and limited test of remediation facilities,
and the Phase III full remediation of waste found in Pit 9, located on the Idaho
National Engineering and Environmental Laboratory reservation. The Corporation
has incurred significant unanticipated costs and scheduling issues due to
complex technical and contractual matters which threaten the viability of the
overall Pit 9 program. Management completed its investigation to identify and
quantify the overall
14
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
effect of these matters, and summarized its findings in a request for equitable
adjustment (REA) which was delivered to the DOE on March 31, 1997. The
provisions of the REA included, but were not limited to, the recovery of a
portion of unanticipated costs incurred by the Corporation and the restructuring
of the contract to provide for a more equitable sharing of the risks associated
with the Pit 9 project. The Corporation wrote a series of letters to the DOE
seeking technical direction, including an accurate inventory of the Pit 9
contents. No direction was provided. To better focus the Corporation's
management resources on resolving these issues, the management and reporting
structure of the Pit 9 program were changed in September 1997; however, the
Corporation has been unsuccessful in reaching any agreements with the DOE on
cost recovery or other contract restructuring matters. Starting in May 1997,
the Corporation reduced work activities at the Pit 9 site.
On February 27, 1998, the Corporation received a cure notice alleging that
certain actions taken by the Corporation were conditions endangering performance
of the Pit 9 contract. The notice advised that, unless these conditions were
cured within 30 days, the contract might be terminated for default. The
Corporation believed (and continues to believe) that termination for default was
neither permissible under the Pit 9 contract nor warranted under the
circumstances and, on April 13, 1998, submitted its reply to the cure notice
setting forth its rationale for these positions. On June 1, 1998, despite the
Corporation's reply, the DOE, through Lockheed Martin Idaho Technologies
Company (LMITCO), its management contractor, terminated the Pit 9 contract for
default. On that same date, the Corporation filed a lawsuit against the DOE in
the U.S. Court of Federal Claims in Washington, D.C., challenging and seeking to
overturn the default termination. The Government has not yet responded to the
suit. Additionally, on July 21, 1998, the Corporation withdrew the REA
previously submitted to the DOE in March 1997 and replaced it with a certified
REA. This action resulted from the DOE's dissatisfaction with the uncertified
nature of the original REA. The certified REA is similar in substance to the REA
previously submitted, but its certification, based upon more detailed factual
and contractual analysis, raises its status to that of a formal claim. It is
anticipated that the DOE will require several months to consider this certified
REA. On August 11, 1998, LMITCO, at the DOE's direction, filed suit against the
Corporation in U.S. Federal District Court in Boise, Idaho, seeking recovery of
approximately $54 million previously paid by LMITCO to the Corporation under the
Pit 9 contract. The Corporation intends to resist this action while continuing
to pursue its certified REA.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1998, $80 million of cash was used for operating
activities, compared to $37 million used during the first half of 1997. This
fluctuation resulted principally from increased working capital requirements
related to certain aircraft and space-related programs. Net cash used for
investing activities during the first half of 1998 was $219 million, compared to
$506 million provided by investing activities during the first half of 1997. The
1997 amount included the receipt of $450 million from General Dynamics
Corporation related to the sale of the Corporation's Armament Systems and
Defense Systems operations and $464 million from the divestiture of the L-3
operations. Net cash provided by financing activities was $299 million in the
first half of 1998 versus $469 million used for financing activities in the
comparable 1997 period. The variance between periods was primarily due to a $453
million net increase in the Corporation's total debt position during the first
half of 1998 versus a $327 million net decrease in total debt during the
comparable 1997 period. Proceeds from new debt issued in 1998 were used
primarily to fund the increased working capital requirements noted above.
Commercial paper borrowings of approximately $2.6 billion were outstanding at
June 30, 1998. Of this amount, $1 billion has been classified as long-term debt
in the Corporation's condensed consolidated balance sheet based on management's
ability and intention to maintain this debt outstanding for at least one year.
During the second quarter of 1998, the Corporation increased the amount of its
one-year revolving credit facility from $1.5 billion to $2.5 billion. The
Corporation's four-year revolving credit facility in the amount of $3.5 billion
remains unchanged. The increase in short-term borrowings was utilized to finance
working capital requirements. Total debt, including short-term borrowings,
amounted to approximately 68 percent of total capitalization at June 30, 1998, a
reduction from the nearly 70 percent reported at December 31, 1997. The increase
in stockholders' equity resulted primarily from net earnings for the quarter and
employee stock option, ESOP and other stock activity, offset by dividends
totaling $153 million.
15
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
Consistent with the Corporation's desire to generate cash to invest in its core
businesses and reduce debt, management anticipates that, subject to prevailing
financial, market and economic conditions, the Corporation may continue to
divest certain non-core businesses, passive equity investments and surplus
properties.
YEAR 2000 ISSUES
Like most companies, Lockheed Martin is affected by Year 2000 issues.
Accordingly, all of the Corporation's business units are actively involved in
its Year 2000 Compliance Program (the Program). This Program has been designed
to minimize risk to the Corporation's business units and its customers using a
standard six-phase industry approach. The six phases include: Awareness,
Assessment, Renovation, Validation, Implementation and Post-Implementation. The
Corporation has completed its assessments which address both internal and
external (customer products and deliverables) systems. In many of the
Corporation's business units, renovation work is well underway and validation
testing has begun relative to internal systems. In the area of customer
products and deliverables, numerous contracts have been reviewed and customers
notified if Year 2000 issues were identified. Renovation of these products,
where requested and funded by the customer, is in process or planned.
Lockheed Martin has developed a plan to achieve its overall goal of Year 2000
readiness in advance of the century change. During 1998, much of the renovation
and validation testing will be completed, and 1999 will be used to address late
availability of vendor or government furnished equipment, planned replacement
systems and overflow validation testing. Based on information available at this
time, management believes that the costs to implement the Program will not have
a material impact on the Corporation's consolidated results of operations, cash
flows or financial position in any period. Such costs are allowable in
establishing prices for the Corporation's products and services under contracts
with the U.S. Government, and therefore are being reflected in the Corporation's
sales and cost of sales.
The costs to implement and the time frame contemplated by the Program are
based on management's best estimates, which were derived utilizing numerous
assumptions related to future events, including each vendor's ability to modify
proprietary software, unanticipated issues identified in the ongoing compliance
review, and other similar uncertainties. There can be no guarantee that these
estimates of costs or timing, or that the objectives of the Program, will be
achieved. However, the Corporation continues to monitor activities related to
the Program through program reviews and internal audits designed to ensure Year
2000 readiness, and management currently believes that activities to date are
consistent with the Program's design. Contingency and crisis plans are being
prepared and will be implemented if necessary.
In addition, as part of the Program, formal communication with the
Corporation's suppliers, customers and other support services has been
initiated. Interfaces to external suppliers and customers (including banks and
U.S. Government customers) have been included in assessments and validation
testing. Also, certain systems utilized by the Corporation include embedded
vendor products for which responsibility for Year 2000 compliance rests with the
respective vendor. The Corporation does not have control over these third
parties and, as a result, cannot currently estimate to what extent future
operating results may be adversely affected by the failure of these third
parties to successfully address their Year 2000 issues. However, the
Corporation's Program includes actions designed to identify and minimize any
third party exposures and management believes that, based on third party
exposures identified to date, Program activities are consistent with its design.
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, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). The words "estimate," "anticipate," "project," "intend,"
"expect," and similar expressions are intended to identify forward looking
statements.
16
<PAGE>
LOCKHEED MARTIN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
All forward looking statements involve risks and uncertainties, including,
without limitation, statements and assumptions with respect to future revenues,
program performance and cash flows; the outcome of contingencies including
litigation and environmental remediation; and anticipated costs of capital
investments and planned dispositions. Readers are cautioned not to place undue
reliance on these forward looking statements which speak only as of the date of
this Form 10-Q. The Corporation does not undertake any obligation to publicly
release any revisions to these forward looking statements to reflect events,
circumstances or changes in expectations after the date of this Form 10-Q, or to
reflect the occurrence of unanticipated events. The forward looking statements
in this document are intended to be subject to the safe harbor protection
provided by Sections 27A of the Securities Act and 21E of the Exchange Act. For
a discussion identifying some important factors that could cause actual results
to vary materially from those anticipated in the forward looking statements, see
the Corporation's Securities and Exchange Commission filings including, but not
limited to, the discussion of "Competition and Risk" and the discussion of
"Government Contracts and Regulations" on pages 14 through 17 and pages 18
through 19, respectively, of the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (Form 10-K); "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 11
through 24 of the 1997 Annual Report, and "Note 1-Summary of Significant
Accounting Policies" and "Note 16-Commitments and Contingencies" of the Notes to
Consolidated Financial Statements on pages 31 through 32 and pages 41 through
42, respectively, of the Audited Consolidated Financial Statements included in
the 1997 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 12 through 17 of this Form 10-Q, and "Note 4 -
Contingencies" and "Note 5 - Other" of the Notes to Unaudited Condensed
Consolidated Financial Statements on pages 8 through 9 and pages 10 through 11,
respectively, of the Unaudited Condensed Consolidated Financial Statements
included in this Form 10-Q.
17
<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
direct foreign sales 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. United States Government investigations of
the Corporation, whether relating to these Government contracts or conducted for
other reasons, 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. 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).
As previously reported, Lockheed Martin Energy Systems (LMES) received a
notice of violation from the Tennessee Department of Environment and
Conservation relating to alleged violations of state hazardous waste management
regulations in connection with the company's operations at the DOE complex at
Oak Ridge, Tennessee. Although the DOE is the principal operator of this
complex, LMES has entered into an arrangement with the DOE by which the company
takes direct regulatory responsibility for certain day-to-day activities under
the company's control at the K-25 and Y-12 facilities within the complex. Late
in the second quarter of 1998, the State assessed fines of $492,000 and $24,000
in connection with the notice of violation. LMES has filed an administrative
appeal of the $24,000 fine and will file an administrative appeal of the
$492,000 fine in the near future.
As previously reported, the District Attorney for Mendocino County, California
notified the Corporation that it had prepared a civil complaint naming the
Corporation, M4 Environmental L.P. and a third party for alleged violations of
state and county environmental laws at the Retech facility in Ukiah, California.
The Corporation entered into a civil settlement of the matter for $87,500 and
related criminal allegations were dismissed.
As previously reported, on July 2, 1997, the Corporation and Northrop Grumman
Corporation (Northrop Grumman) entered into an Agreement and Plan of Merger (the
Agreement), which provided for the merger of a wholly-owned subsidiary of
Lockheed Martin with and into Northrop Grumman (the Merger). On March 23, 1998,
the United States, acting through the Antitrust Division of the Department of
Justice, filed a civil action in the United States District Court for the
District of Columbia against the Corporation and Northrop Grumman requesting
that the Court permanently enjoin and restrain the Corporation and Northrop
Grumman from carrying out the Agreement or from entering into or carrying out
any agreement, understanding or plan, the effect of which would be to combine
the business or assets of the Corporation and Northrop Grumman. On July 16,
1998, at a special meeting of the Board of Directors of the Corporation, the
Board of Directors terminated the Agreement and abandoned the Merger.
Thereafter, the parties to the civil action entered into a stipulation
voluntarily dismissing the action without prejudice and the Court so ordered on
July 23, 1998.
The Corporation has previously reported a continuing Government investigation
related to the performance of various Government contracts by the former Unisys
Corporation Defense Systems facility at Great Neck, New York. The Corporation
acquired the facility when it acquired Loral Corporation. Loral Corporation
acquired the facility from Unisys Corporation. On June 12, 1998, the
Corporation was served with a grand jury subpoena issued by the United States
District Court for the Eastern District of New York seeking documents related to
this investigation. The Corporation is cooperating in the investigation.
Between May 13 and May 19, 1998, Lockheed Martin Technical Operations and 13
employees were served with grand jury subpoenas issued by the United States
District Court for the District of Colorado seeking documents relating to
efforts to obtain and to perform space operations, maintenance and support
contracts with the U.S. Air Force. The Corporation and its employees have
responded to the subpoenas and the Corporation is cooperating in the
Government's continuing investigation.
18
<PAGE>
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION (Continued)
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 in the Office of General Counsel of the Corporation
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 23, 1998, the Corporation held its Annual Meeting of Stockholders. A
description of matters voted upon by stockholders at this meeting, and the
results of such votes, were disclosed in Item 4 of Lockheed Martin Corporation's
first quarter 1998 Form 10-Q filed with the Securities and Exchange Commission
on May 8, 1998.
Item 5. OTHER INFORMATION
In accordance with the provisions of Rule 14a-8 under the Securities Exchange
Act of 1934, as amended, stockholders wishing to submit a proposal to be
considered for inclusion in the Corporation's proxy statement and on the proxy
solicitation/voting instruction card for the Corporation's 1999 Annual Meeting
of Stockholders (the 1999 Meeting) must submit the proposal in writing and the
proposal must be received by the Corporate Secretary of the Corporation on or
before November 20, 1998.
In addition, the Corporation's Bylaws anticipate that stockholders may wish to
bring nominations or other business before a stockholders' meeting without
including the proposal in the Corporation's proxy statement as discussed above.
In this regard, the Bylaws include advance notice provisions whereby
stockholders desiring to bring nominations or other business before a
stockholders' meeting must do so in accordance with the terms of the advance
notice provisions. These advance notice provisions require that, among other
things, stockholders give timely written notice to the Corporate Secretary of
the Corporation regarding such nominations or other business. To be timely,
subject to certain limited exceptions, the notice must be delivered to the
Corporate Secretary at the principal executive offices of the Corporation not
more than 120 days nor less than 90 days prior to the first anniversary of the
preceding year's annual meeting. The 1998 Annual Meeting of Stockholders of the
Corporation was held on April 23, 1998. As a result, to be properly brought
before the 1999 Meeting, written notice of nominations or other business to be
introduced by a stockholder of the Corporation must be received by the
Corporation's Corporate Secretary between the dates of December 24, 1998 and
January 23, 1999, inclusive.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of Earnings
to Fixed Charges for the six months ended June 30, 1998.
2. Exhibit 27. Financial Data Schedule for the six months ended June 30,
1998.
(b) Reports on Form 8-K filed in the second quarter of 1998.
None.
19
<PAGE>
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION (Continued)
(c) Reports on Form 8-K filed subsequent to the second quarter of 1998.
1. Current report on Form 8-K filed on July 17, 1998.
Item 5. Other Events
On July 17, 1998, the registrant filed information concerning the
termination of the Agreement and Plan of Merger dated July 2, 1997 among
the registrant, a wholly-owned subsidiary of the registrant and Northrop
Grumman Corporation.
20
<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 13, 1998 by: /s/Todd J. Kallman
--------------- --------------------
Todd J. Kallman
Vice President and Controller
(Chief Accounting Officer)
21
<PAGE>
Exhibit 12
LOCKHEED MARTIN CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(In millions, except ratio)
<TABLE>
<CAPTION>
EARNINGS:
<S> <C>
Net earnings $ 558
Income tax expense 334
Interest expense 434
Amortization of debt premium and discount, net (2)
Portion of rents representative of an interest factor 26
------
Adjusted earnings before taxes and fixed charges $1,350
======
FIXED CHARGES:
Interest expense $ 434
Amortization of debt premium and discount, net (2)
Portion of rents representative of an interest factor 26
Capitalized interest 4
------
Total fixed charges $ 462
======
RATIO OF EARNINGS TO FIXED CHARGES 2.9
======
</TABLE>
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,233
<ALLOWANCES> 0
<INVENTORY> 4,047
<CURRENT-ASSETS> 11,301
<PP&E> 8,785
<DEPRECIATION> 5,172
<TOTAL-ASSETS> 29,557
<CURRENT-LIABILITIES> 10,196
<BONDS> 10,183
0
0
<COMMON> 195
<OTHER-SE> 5,736
<TOTAL-LIABILITY-AND-EQUITY> 29,557
<SALES> 12,737
<TOTAL-REVENUES> 12,737
<CGS> 11,481
<TOTAL-COSTS> 11,481
<OTHER-EXPENSES> 70
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 434
<INCOME-PRETAX> 892
<INCOME-TAX> 334
<INCOME-CONTINUING> 558
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 558
<EPS-PRIMARY> 2.98
<EPS-DILUTED> 2.94
</TABLE>
