<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED March 31, 1999 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
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 April 30, 1999
- -------------------------- ---------------------------------
COMMON STOCK, $1 PAR VALUE 394,325,346
<PAGE>
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
____________
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statement of Earnings (Unaudited)-
Three Months Ended March 31, 1999 and 1998........................ 3
Condensed Consolidated Statement of Cash Flows (Unaudited)-
Three Months Ended March 31, 1999 and 1998........................ 4
Condensed Consolidated Balance Sheet (Unaudited)-
March 31, 1999 and December 31, 1998.............................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited).... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 14
Part II. Other Information
Item 1. Legal Proceedings.......................................... 24
Item 4. Submission of Matters to a Vote of Security Holders........ 24
Item 6. Exhibits and Reports on Form 8-K........................... 26
Signatures............................................................. 29
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
</TABLE>
2
<PAGE>
Condensed Consolidated Statement of Earnings (Unaudited)
Lockheed Martin Corporation
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------- -------------
<S> <C> <C>
(In millions, except per share data)
Net sales $6,188 $6,217
Cost of sales 5,701 5,599
------ ------
Earnings from operations 487 618
Other income and expenses, net 129 29
------ ------
616 647
Interest expense 192 213
------ ------
Earnings before income taxes and cumulative
effect of change in accounting 424 434
Income tax expense 156 165
------ ------
Earnings before cumulative effect of change
in accounting 268 269
Cumulative effect of change in accounting (355) --
------ ------
Net (loss) earnings $ (87) $ 269
====== ======
Earnings (loss) per common share:
- ---------------------------------
Basic:
Before cumulative effect of change in accounting $ .70 $ .72
Cumulative effect of change in accounting (.93) --
------ ------
$ (.23) $ .72
====== ======
Diluted:
Before cumulative effect of change in accounting $ .70 $ .71
Cumulative effect of change in accounting (.93) --
------ ------
$ (.23) $ .71
====== ======
Cash dividends declared per common share $ .22 $ .20
====== ======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
Condensed Consolidated Statement of Cash Flows (Unaudited)
Lockheed Martin Corporation
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------- -----------
<S> <C> <C>
(In millions)
Operating Activities:
Earnings before cumulative effect of change in accounting $ 268 $ 269
Adjustments to reconcile earnings to net cash provided
by operating activities:
Depreciation and amortization 230 253
Changes in operating assets and liabilities (651) (745)
----- -------
Net cash used for operating activities (153) (223)
----- -------
Investing Activities:
Expenditures for property, plant and equipment (131) (128)
Sale of shares in L-3 Communications 182 --
Other -- 82
----- -------
Net cash provided by (used for) investing activities 51 (46)
----- -------
Financing Activities:
Net increase in short-term borrowings 120 638
Net repayments related to long-term debt (181) (325)
Issuances of common stock 8 34
Common stock dividends (87) (78)
----- -------
Net cash (used for) provided by financing activities (140) 269
----- -------
Net decrease in cash and cash equivalents (242) --
Cash and cash equivalents at beginning of period 285 --
----- -------
Cash and cash equivalents at end of period $ 43 $ --
===== =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
Condensed Consolidated Balance Sheet (Unaudited)
Lockheed Martin Corporation
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- --------------
(In millions)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 43 $ 285
Receivables 4,667 4,178
Inventories 3,959 4,293
Deferred income taxes 1,108 1,109
Other current assets 703 746
------- -------
Total current assets 10,480 10,611
Property, plant and equipment 3,587 3,513
Intangible assets related to contracts and programs acquired 1,378 1,418
Cost in excess of net assets acquired 9,462 9,521
Other assets 3,689 3,681
------- -------
$28,596 $28,744
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,021 $ 1,382
Customer advances and amounts in excess of costs incurred 4,329 4,012
Salaries, benefits and payroll taxes 934 842
Income taxes 534 553
Short-term borrowings 1,163 1,043
Current maturities of long-term debt 884 886
Other current liabilities 1,525 1,549
------- -------
Total current liabilities 10,390 10,267
Long-term debt 8,788 8,957
Post-retirement benefit liabilities 1,887 1,903
Other liabilities 1,478 1,480
Stockholders' equity:
Common stock, $1 par value per share 392 393
Additional paid-in capital 95 70
Retained earnings 5,690 5,864
Accumulated other comprehensive income (loss) 41 (8)
Unearned ESOP shares (165) (182)
------- -------
Total stockholders' equity 6,053 6,137
------- -------
$28,596 $28,744
======= =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
Lockheed Martin Corporation
March 31, 1999
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 22, 1999 in its 1998 Annual Report on Form 10-K (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 ended March 31, 1999 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
1999 presentation.
In October 1998, the Board of Directors of the Corporation authorized a two-
for-one split of the Corporation's common stock in the form of a stock dividend.
The stock split was effected on December 31, 1998 to stockholders of record at
the close of business on December 1, 1998. In the accompanying condensed
consolidated financial statements and Notes to Condensed Consolidated Financial
Statements (Unaudited), all references to shares of common stock and per share
amounts for prior periods have been restated to reflect the stock split.
NOTE 2 -- TRANSACTION AGREEMENT WITH COMSAT CORPORATION
In September 1998, the Corporation and COMSAT Corporation (COMSAT) announced
that they had entered into an Agreement and Plan of Merger (the Merger
Agreement) to combine the companies in a two-phase transaction with a total
estimated value of approximately $2.7 billion at the date of the announcement
(the Merger). The Merger Agreement has been approved by the respective Boards
of Directors of the Corporation and COMSAT. In connection with the first phase
of this transaction, the Corporation commenced a cash tender offer (the Tender
Offer) on September 25, 1998, to purchase up to 49 percent, subject to certain
adjustments, of the outstanding shares of common stock of COMSAT on the date of
purchase at a price of $45.50 per share, with an estimated value of $1.2
billion. Under the Merger Agreement, the Tender Offer will be extended for
periods of up to 60 days until the earlier of (i) September 18, 1999, or (ii)
satisfaction of certain conditions to closing. The second phase of the
transaction, which will result in consummation of the Merger, will be
accomplished by an exchange of one share of Lockheed Martin common stock for
each share of COMSAT common stock.
The consummation of the Tender Offer is subject to, among other things, the
approval of the Merger by the stockholders of COMSAT and certain regulatory
approvals, including approval by the Federal Communications Commission (FCC) and
antitrust clearance by the Department of Justice. The stockholders of COMSAT
are expected to vote on the proposed Merger at COMSAT's annual meeting of
stockholders on June 18, 1999. Upon closing of the Tender Offer, the
Corporation will account for its investment in COMSAT under the equity method of
accounting. Consummation of the Merger is subject to, among other things, the
enactment of legislation necessary to allow Lockheed Martin to acquire the
remaining shares of COMSAT common stock and certain additional regulatory
approvals. The Merger, upon consummation, will be accounted for under the
purchase method of accounting. If the Tender Offer is consummated but the
necessary legislation is not enacted and the additional regulatory approvals are
not obtained, the Corporation will not be able to achieve all of its objectives
with respect to the COMSAT transaction and will be unable to exercise control
over COMSAT.
6
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
Lockheed Martin Corporation
(continued)
The Corporation is not currently designated by the FCC as an "authorized
common carrier," and as such is prohibited from owning more than 10 percent of
COMSAT. The Corporation has filed an application with the FCC to be designated
an "authorized common carrier" and to purchase up to 49 percent of COMSAT. On
January 21, 1999, the Chairman of the House Committee on Commerce and the
Chairman of the Senate Subcommittee on Communications sent a joint letter to the
FCC urging the FCC not to take any action to permit any company to purchase more
than 10 percent of COMSAT prior to Congress adopting satellite industry reform
legislation. If the FCC were to delay or slow its review of the Corporation's
filings with respect to the Tender Offer, and if Congress does not make rapid
progress on satellite industry reform legislation, the Tender Offer may not be
consummated by September 18, 1999. If this occurs, either party may terminate
the Merger Agreement or both parties may elect to amend the Merger Agreement to
extend this date. If the FCC's review is not delayed or slowed and the Tender
Offer is consummated, but the legislative process relative to satellite industry
reform legislation moves slowly, the Merger may not occur in 1999.
NOTE 3 -- EARNINGS PER SHARE
As previously disclosed, all share and per share amounts for prior periods
have been restated to reflect the Corporation's December 1998 two-for-one stock
split in the form of a stock dividend. Basic and diluted earnings per share were
computed based on net earnings. The weighted average number of common shares
outstanding during the period was used in the calculation of basic earnings per
share, and this number of shares was increased by the dilutive effect of stock
options based on the treasury stock method in the calculation of diluted
earnings per share.
7
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
Lockheed Martin Corporation
(continued)
The following table sets forth the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------- -------------
<S> <C> <C>
(In millions, except per share data)
Net earnings (loss) for basic and diluted earnings per share:
- -------------------------------------------------------------
Earnings before cumulative effect of change in accounting $ 268 $ 269
Cumulative effect of change in accounting (355) --
------ ------
Net (loss) earnings $ (87) $ 269
====== ======
Average common shares outstanding:
- ----------------------------------
Average number of common shares outstanding for basic
earnings per share 380.3 373.9
Dilutive stock options based on the treasury stock method 2.3 5.5
------ ------
Average number of common shares outstanding for diluted
earnings per share 382.6 379.4
====== ======
Earnings (loss) per common share:
- ---------------------------------
Basic:
Before cumulative effect of change in accounting $ .70 $ .72
Cumulative effect of change in accounting (.93) --
------ ------
$ (.23) $ .72
====== ======
Diluted:
Before cumulative effect of change in accounting $ .70 $ .71
Cumulative effect of change in accounting (.93) --
------ ------
$ (.23) $ .71
====== ======
</TABLE>
NOTE 4 -- INVENTORIES
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
(In millions)
<S> <C> <C>
Work in process, primarily related to long-term
contracts and programs in progress $ 5,623 $ 6,198
Less customer advances and progress payments (2,226) (2,499)
------- -------
3,397 3,699
Other inventories 562 594
------- -------
$ 3,959 $ 4,293
======= =======
</TABLE>
Included in inventories at March 31, 1999 and December 31, 1998 were amounts
advanced to Russian manufacturers, Khrunichev State Research and Production
8
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
Lockheed Martin Corporation
(continued)
Space Center and RD AMROSS, a joint venture between Pratt & Whitney and NPO
Energomash, of approximately $870 million and $840 million, respectively, for
the manufacture of launch vehicles and related launch services.
NOTE 5 -- 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 -- The Corporation entered into a consent decree with
the U.S. Environmental Protection Agency (EPA) in 1991 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. The Corporation
entered into a follow-on consent decree in 1998 which obligates the Corporation
to fund the continued operation and maintenance of these facilities through the
year 2018. 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. The Corporation
estimates that total expenditures required over the remaining terms of the
consent decrees and the Regional Board order will be approximately $110 million.
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 investigation, 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. The Corporation is also
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. The results of
these studies indicate that current efforts with water purveyors regarding
perchlorate issues are appropriate; however, the Corporation currently cannot
project the extent of its ultimate clean-up obligation with respect to
perchlorates, if any.
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. In addition
to the amounts with respect to the Burbank and Redlands properties described
above, a liability of approximately $240 million for the other cases in which an
estimate of financial exposure can be determined has been recorded.
9
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
Lockheed Martin Corporation
(continued)
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. Although 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
incurred significant unanticipated costs and scheduling issues due to complex
technical and contractual matters which threatened the viability of the overall
Pit 9 program. Based on an investigation by management to identify and quantify
the overall effect of these matters, the Corporation submitted a request for
equitable adjustment (REA) to the DOE on March 31, 1997 that sought, among other
things, 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 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 while awaiting
technical direction from the DOE.
On June 1, 1998, 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. In addition, on July 21, 1998, the Corporation
withdrew the REA previously submitted to the DOE and replaced it with a
certified 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. On August
11, 1998, LMITCO, at the DOE's direction, filed suit against the Corporation in
U.S. District Court in Boise, Idaho, seeking, among other things, 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. On January 26, 1999, the U.S. District Court in
Idaho granted the Corporation's motion and stayed the Idaho proceeding until
resolution of the motion to dismiss the lawsuit in
10
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
Lockheed Martin Corporation
(continued)
the U.S. Court of Federal Claims, or until August 2, 1999. The Corporation
continues to assert its position in the litigation while continuing its efforts
to resolve the dispute through non-litigation means.
NOTE 6 -- INFORMATION ON BUSINESS SEGMENTS
The Corporation operates in four principal business segments: Space &
Strategic Missiles, Electronics, Aeronautics and Information & Services. All
other activities of the Corporation fall within the Corporate and Other segment.
Effective January 1, 1999, the Corporation combined its investments in several
existing joint ventures and certain elements of the Corporation with Lockheed
Martin Global Telecommunications, Inc., a wholly-owned subsidiary of the
Corporation, which is included in the Corporate and Other segment. Such
investments were transferred from the Space & Strategic Missiles and Information
& Services segments. The prior period amounts related to these joint ventures
and elements transferred were not material to the respective segments and,
therefore, the prior period segment information has not been restated to conform
with the 1999 presentation.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------- --------------
Selected Financial Data by Business Segment (In millions)
<S> <C> <C>
Net Sales
- ----------------------------
Space & Strategic Missiles $1,626 $1,907
Electronics 1,750 1,698
Aeronautics 1,536 1,351
Information & Services 1,201 1,212
Corporate and Other 75 49
------ ------
$6,188 $6,217
====== ======
Operating Profit
- ----------------------------
Space & Strategic Missiles $ 125 $ 267
Electronics 152 141
Aeronautics 169 151
Information & Services 61 55
Corporate and Other 109 33
------ ------
$ 616 $ 647
====== ======
Intersegment Revenue(a)
- ----------------------------
Space & Strategic Missiles $ 20 $ 16
Electronics 93 110
Aeronautics 25 16
Information & Services 205 161
Corporate and Other 11 12
------ ------
$ 354 $ 315
====== ======
</TABLE>
(a) Intercompany transactions between segments are eliminated in consolidation,
and excluded from the net sales and operating profit amounts presented
above.
11
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
Lockheed Martin Corporation
(continued)
NOTE 7 -- OTHER
In February 1999, the Corporation sold 4.5 million of its shares in L-3
Communications (L-3) as part of a secondary public offering by L-3. This
transaction resulted in a reduction in the Corporation's ownership to
approximately seven percent and the recognition of a pretax gain of $114 million
which is reflected in other income and expenses. The gain increased net earnings
by $74 million, or $.19 per diluted share. After the transaction was
consummated, the Corporation began accounting for its remaining investment in L-
3 as an available-for-sale investment, as defined in Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Accordingly, as of March 31, 1999, the investment in L-3
was adjusted to reflect its current market value, and the unrealized gain of $42
million, which is net of income taxes, was included in stockholders' equity as a
component of other comprehensive income.
The Corporation's total comprehensive loss for the three months ended March
31, 1999 was $38 million, which included the $87 million net loss for the
period, and other comprehensive income of $7 million attributable to net foreign
currency translation adjustments and $42 million attributable to the net
unrealized gain discussed above. Total comprehensive income for the three
months ended March 31, 1998 was $269 million, equal to net earnings for the
period, as the components of other comprehensive income were not material,
individually or in the aggregate.
In the fourth quarter of 1998, the Corporation recorded a nonrecurring and
unusual pretax charge, net of state income tax benefits, of $233 million related
to actions surrounding the decision to fund a timely non-bankruptcy shutdown of
the business of CalComp Technology, Inc. (CalComp), a majority-owned subsidiary.
As of March 31, 1999, CalComp had, among other actions, consummated or entered
into letters of intent for sales of substantially all of its assets other than
those related to one of its lines of business, and had terminated approximately
75% of its domestic work force. The financial impacts of these actions were
within the parameters established by the Corporation's plans and estimates.
Management expects the shutdown process will be substantially completed in the
third quarter of 1999, and believes that the remaining amount recorded is
adequate to complete the plan.
Commercial paper borrowings of approximately $1.5 billion were outstanding at
March 31, 1999. Of this amount, $300 million 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 level of debt outstanding
for at least one year. Commercial paper borrowings are supported by a short-term
revolving credit facility in the amount of $2.5 billion which matures on May 28,
1999, and a long-term revolving credit facility in the amount of $3.5 billion
which matures on December 20, 2001. Management anticipates that, subject to
prevailing financial, market and economic conditions, the Corporation will renew
its short-term revolving credit facility prior to its May 28, 1999 maturity in
the amount of $1.0 billion.
The Corporation's total interest payments were $99 million and $127 million
for the three months ended March 31, 1999 and 1998, respectively.
The Corporation's net federal and foreign income tax payments were $63 million
for the three months ended March 31, 1999, and the net refund was $49 million
for the three months ended March 31, 1998.
12
<PAGE>
Notes to Condensed Consolidated Financial Statements (Unaudited)
Lockheed Martin Corporation
(continued)
New accounting pronouncements adopted -- Effective January 1, 1999, the
Corporation adopted the American Institute of Certified Public Accountants'
(AICPA) Statement of Position (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. The adoption of SOP No. 98-5 resulted in the
recognition of a cumulative effect adjustment which reduced net earnings for the
first quarter of 1999 by $355 million, or $.93 per diluted share. The
cumulative effect adjustment was recorded net of income tax benefits of $227
million, and was primarily composed of approximately $560 million of costs which
were included in inventories as of December 31, 1998.
Effective January 1, 1999, the Corporation adopted the AICPA's SOP No. 97-3,
"Accounting by Insurance and Other Enterprises for Insurance Related
Assessments." SOP No. 97-3 provides authoritative guidance on the recognition,
measurement and disclosure of liabilities for guaranty-fund and certain other
insurance-related assessments, as well as certain related assets. The impact of
the adoption of this SOP was not material to the Corporation's consolidated
results of operations, cash flows or financial position.
Also, effective January 1, 1999, the Corporation adopted the AICPA's SOP No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP, which requires the capitalization of certain costs
incurred in connection with developing or obtaining software for internal use
after the date of adoption, will affect the timing of future cash flows under
contracts with the U.S. Government. However, the impact of the adoption of SOP
No. 98-1 was not material to the Corporation's consolidated results of
operations, cash flows or financial position.
New accounting pronouncements to be adopted -- In June 1998, the Financial
Accounting Standards Board 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 continuing its process of 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, but has not yet
reached any conclusions.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lockheed Martin Corporation
March 31, 1999
COMMON STOCK SPLIT
In October 1998, the Board of Directors of the Corporation authorized a two-
for-one split of the Corporation's common stock in the form of a stock dividend
which was effected on December 31, 1998. In the following discussion, all
references to shares of common stock and per share amounts for prior periods
have been restated to reflect the stock split.
TRANSACTION AGREEMENT WITH COMSAT CORPORATION
In September 1998, the Corporation and COMSAT Corporation (COMSAT) announced
that they had entered into an agreement (the Merger Agreement) to combine the
companies in a two-phase transaction (the Merger). In connection with the first
phase, the Corporation commenced a cash tender offer (the Tender Offer) to
purchase up to 49 percent, subject to certain adjustments, of the outstanding
shares of common stock of COMSAT. Under the Merger Agreement, the Tender Offer
will be extended for periods of up to 60 days until the earlier of (i) September
18, 1999, or (ii) satisfaction of certain conditions to closing. The
consummation of the Tender Offer is subject to, among other things, the approval
of the Merger by the stockholders of COMSAT and certain regulatory approvals,
including approval by the Federal Communications Commission (FCC) and antitrust
clearance by the Department of Justice. The stockholders of COMSAT are expected
to vote on the proposed merger at COMSAT's annual meeting of stockholders on
June 18, 1999. The second phase of the transaction will be accomplished by an
exchange of one share of Lockheed Martin common stock for each share of COMSAT
common stock. Consummation of the Merger is subject to, among other things, the
enactment of legislation necessary to allow Lockheed Martin to acquire the
remaining shares of COMSAT common stock and certain additional regulatory
approvals. If the Tender Offer is consummated but the necessary legislation is
not enacted and the additional regulatory approvals are not obtained, the
Corporation will not be able to consummate the merger, nor will it be able to
exercise control over COMSAT.
The Corporation is not currently designated by the FCC as an "authorized
common carrier," and as such is prohibited from owning more than 10 percent of
COMSAT. The Corporation has filed an application with the FCC to be designated
an "authorized common carrier" and to purchase up to 49 percent of COMSAT. On
January 21, 1999, the Chairman of the House Committee on Commerce and the
Chairman of the Senate Subcommittee on Communications sent a joint letter to the
FCC urging the FCC not to take any action to permit any company to purchase more
than 10 percent of COMSAT prior to Congress adopting satellite industry reform
legislation. If the FCC were to delay or slow its review of the Corporation's
filings with respect to the Tender Offer, and if Congress does not make rapid
progress on satellite industry reform legislation, the Tender Offer may not be
consummated by September 18, 1999. If this occurs, either party may terminate
the Merger Agreement or both parties may elect to amend the Merger Agreement to
extend this date. If the FCC's review is not delayed or slowed and the Tender
Offer is consummated, but the legislative process relative to satellite industry
reform legislation moves slowly, the Merger may not occur in 1999.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lockheed Martin Corporation
(continued)
GLOBAL TELECOMMUNICATIONS SUBSIDIARY
Effective January 1, 1999, investments in several existing joint ventures and
certain elements of the Corporation were combined with Lockheed Martin Global
Telecommunications, Inc. (Global Telecommunications), a wholly-owned subsidiary
of the Corporation focused on capturing a greater portion of the worldwide
telecommunications services market. The following operations and investments
became a part of Global Telecommunications: Lockheed Martin Intersputnik, Ltd.,
a strategic venture with Moscow-based Intersputnik that is scheduled to deploy
its first satellite in 1999; the assets and liabilities relating to the
Astrolink /TM/ system which will provide global interactive multimedia services
using next-generation broadband satellite technology; the elements of Lockheed
Martin Missiles & Space, Lockheed Martin Management & Data Systems and Lockheed
Martin Western Development Laboratories that provide commercial communications
capabilities; the Corporation's investment in Americom Asia Pacific, LLC, a
joint venture with GE Americom that is scheduled to launch a satellite in 1999
that will serve broadcasters in the Asia-Pacific region; and the Corporation's
investment in ACeS International Limited, a joint venture that will provide
cellular telephone communications in regions of Asia. Additionally, the
Corporation intends to combine the operations of Global Telecommunications and
COMSAT upon consummation of the Merger.
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 first quarter of 1999 were $6.2 billion, which
was comparable to reported net sales for the first quarter of 1998. The
Corporation's operating profit (earnings before interest and taxes) for the
first quarter of 1999 was $616 million, a five percent decrease from the
comparable 1998 period. The Corporation recorded a net loss of $87 million, or
$.23 per diluted share, for the first quarter of 1999, versus net earnings of
$269 million, or $.71 per diluted share, for the comparable 1998 period.
Operating profit for 1999 included a pretax gain of $114 million resulting from
the sale of 4.5 million shares of stock in L-3 Communications Corporation (L-3)
in a secondary offering of L-3's common stock which increased net earnings by
$74 million, or $.19 per diluted share. In addition, the Corporation adopted
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities,"
effective January 1, 1999, which resulted in the recognition of a cumulative
effect adjustment which reduced net earnings by $355 million, or $.93 per
diluted share. Excluding the effects of these nonrecurring and unusual items,
net earnings for the first quarter of 1999 would have been $194 million, or $.51
per diluted share.
The Corporation's backlog of undelivered orders was approximately $45.7
billion at March 31, 1999, versus $45.3 billion reported at December 31, 1998.
The Corporation received orders for approximately $6.4 billion in new and
follow-on business during the first quarter of 1999 which were substantially
offset by sales during the period. Significant new orders received during the
quarter principally related to various aircraft modification and maintenance,
postal systems, and surface ship systems activities.
The following discussion of the results of operations of the Corporation's
business segments is based on information in the tables under the headings "Net
Sales" and "Operating Profit" in
15
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lockheed Martin Corporation
(continued)
"Note 6 -- Information on Business Segments" of the Notes to Condensed
Consolidated Financial Statements (Unaudited) included in this Form 10-Q.
The Space & Strategic Missiles and Aeronautics segments generally include
programs that are substantially larger in terms of sales and operating profits
than those included in the other segments. Accordingly, due to the significant
number of relatively smaller programs in the Electronics and Information &
Services segments, the impact of performance related to each individual program
typically is not as material to these segments' results of operations. The
operating results of Global Telecommunications are included in the Corporate and
Other segment effective January 1, 1999. Net sales and operating profit for
Global Telecommunications in 1998 were not material. Accordingly, segment
operating results for 1998 have not been restated to conform to the 1999
presentation.
First quarter 1999 net sales for the Space & Strategic Missiles segment
decreased by 15 percent from the comparable 1998 period. Approximately $130
million of the decrease related to reductions in commercial and civil satellite
programs and reduced volume of fleet ballistic missile activities. In addition,
the segment was negatively impacted by a reduction in classified program
activities. First quarter 1999 operating profit decreased by $142 million as
compared to the first quarter of 1998. During the first quarter of 1999, the
segment incurred a $15 million penalty related to the Theater High Altitude Area
Defense (THAAD) missile program for failure to intercept the target during a
test firing. The segment also recorded a $20 million charge during the quarter
for further potential exposure related to this program. Approximately one-half
of the remaining decrease was attributable in relatively equivalent proportions
to a reduction in civil space activities between years and reduced fleet
ballistic missile activities, with the remainder of the decrease due primarily
to cost growth pertaining to technical issues on certain commercial satellite
programs and start-up costs associated with launch vehicle investments.
The Electronics segment's net sales increased by three percent in first
quarter 1999 as compared to first quarter 1998. The segment experienced an
increase of approximately $100 million in net sales from greater volume of
postal program activities. This increase was partially offset by reduced sales
relating to the maturing NITE Hawk program and the absence of approximately $24
million of net sales from the divestiture of the Commercial Electronics unit
during the first quarter of 1998. First quarter 1999 operating profit increased
by eight percent as compared to first quarter 1998, principally due to operating
profit related to the volume increases in postal programs discussed above.
The Aeronautics segment's net sales for the first quarter 1999 increased by 14
percent from first quarter 1998. This increase was attributable to increased net
sales of approximately $270 million resulting from greater deliveries of C-130J
transport aircraft, offset primarily by a decrease in overall sales relating to
the F-16 product area. First quarter 1999 operating profit increased by 12
percent as compared to first quarter 1998 primarily due to the increases in
C-130J aircraft deliveries mentioned above. Operating profit for the first
quarter of 1999 was adversely impacted by cost growth on the C-130J program as
compared to the first quarter of 1998 due to customer technical issues and
requirements; however, this cost growth was offset by the favorable impact of
C-130J costs included in the cumulative effect adjustment related to the
adoption of SOP No. 98-5 discussed previously.
16
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lockheed Martin Corporation
(continued)
The Information & Services segment's net sales decreased slightly during the
first quarter 1999 as compared to the comparable 1998 period. An increase in net
sales relating to operations under the Consolidated Space Operations Contract,
which was awarded during 1998, was offset by the absence of approximately $38
million of net sales from the commercial products businesses, primarily CalComp.
As disclosed previously, CalComp is continuing its timely non-bankruptcy
shutdown of its operations during 1999. Operating profit for first quarter 1999
increased by $6 million as compared to the comparable 1998 period.
Net sales and operating profit of the Corporate and Other segment increased
significantly in the first quarter of 1999 as compared to the same 1998 period.
More than half of the sales increase was the result of the inclusion of sales
activities of Global Telecommunications. In addition, the segment experienced,
to a lesser extent, an increase in environmental waste system activities.
Included in operating profit for 1999 was a $114 million pretax gain from the
sale of L-3 common stock discussed above. Excluding this nonrecurring and
unusual gain, the segment would have reported a slight operating loss in the
first quarter of 1999. Global Telecommunications incurred a $24 million loss in
the first quarter of 1999 primarily related to costs of start-up activities and
venture expenses. This loss more than offset operating profits derived from
energy-related activities, which were comparable to the prior year period. As
more fully described in Note 5 of the Notes to Condensed Consolidated Financial
Statements (Unaudited), the Corporation is continuing to pursue recovery of a
significant portion of the unanticipated costs incurred in connection with the
$180 million fixed price contract with the U.S. Department of Energy (DOE) for
the remediation of waste found in Pit 9. The Corporation has been unsuccessful
to date in reaching any agreements with the DOE on cost recovery or other
contract restructuring matters. In 1998, the management contractor for the
project, a wholly-owned subsidiary of the Corporation, at the DOE's direction,
terminated the Pit 9 contract for default. At the same time, the Corporation
filed a lawsuit seeking to overturn the default termination. Subsequently, the
Corporation took actions to raise the status of its request for equitable
adjustment to a formal claim. Also in 1998, the management contractor, again at
the DOE's direction, filed suit against the Corporation seeking recovery of
approximately $54 million previously paid to the Corporation under the Pit 9
contract. In January 1999, the U.S. District Court in Idaho granted the
Corporation's motion and stayed the Idaho proceeding until resolution of the
motion to dismiss the lawsuit in the U.S. Court of Federal Claims, or until
August 2, 1999. The Corporation continues to assert its position in the
litigation while continuing efforts to resolve the dispute through non-
litigation means.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1999, $153 million of cash was used for operating
activities, compared to $223 million used during the first quarter of 1998.
This fluctuation resulted principally from a reduction in working capital
requirements related to certain aircraft and space-related programs. Net cash
provided by investing activities during the first quarter of 1999 was $51
million as compared to $46 million used during the first quarter of 1998. The
1999 amount includes the receipt of $182 million of proceeds from the sale of
L-3 common stock mentioned previously. Net cash used for financing activities in
the first quarter of 1999 was $140 million as compared to $269 million provided
by financing activities during first quarter 1998. The variance between periods
was primarily due to a $61 million decrease in the Corporation's total debt
position, net of acquired debt, during the first quarter of 1999 versus an
increase in total debt of $313 million during the first quarter of 1998.
17
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lockheed Martin Corporation
(continued)
Commercial paper borrowings outstanding at March 31, 1999 were approximately
$1.5 billion. Based upon management's ability and intention to maintain this
level of debt outstanding for at least one year, $300 million of this balance
has been classified as long-term debt on the condensed consolidated balance
sheet. Management anticipates that, subject to prevailing financial, market and
economic conditions, the Corporation will reduce the amount of its short-term
revolving credit facility from $2.5 billion to $1.0 billion prior to its May 28,
1999 maturity. At March 31, 1999 and December 31, 1998, total debt including
short-term borrowings accounted for approximately 64 percent of the
Corporation's total capitalization. During the first quarter of 1999, total
stockholders' equity decreased by $84 million due to the first quarter net loss
of $87 million and the payment of $87 million in dividends, partially offset by
$49 million of other comprehensive income and $41 million of employee stock
option and ESOP activity.
In January 1999, the Corporation filed a shelf registration with the
Securities and Exchange Commission to provide for the issuance of up to $2.5
billion in debt securities. The registration statement was declared effective
in the first quarter of 1999. The Corporation ultimately expects to finance the
COMSAT Tender Offer through its disposition of various investment holdings;
however, it is likely that the Tender Offer will initially be financed through
the issuance of debt obligations, as market conditions and limitations on the
Corporation's ability to dispose of such investments makes disposition prior to
completion of the Tender Offer unlikely. As a result of the proposed COMSAT
transaction, the Corporation's senior long-term debt rating was placed under
review by Moody's Investors' Service Inc. (Moody's). In March 1999, Moody's
downgraded this debt rating from A3 to Baa1. However, the Corporation's debt
ratings from other rating agencies remained unchanged.
The Corporation actively seeks to finance its business in a manner that
preserves financial flexibility while minimizing borrowing costs to the extent
practicable. The Corporation's management continually reviews the changing
financial, market and economic conditions to manage the types, amounts and
maturities of the Corporation's indebtedness. Periodically, the Corporation may
refinance existing indebtedness, vary its mix of variable rate and fixed rate
debt, or seek alternative financing sources for its cash and operational needs.
Cash and cash equivalents including temporary investments, internally
generated cash flow from operations and other available financing resources are
expected to be sufficient to meet anticipated operating, capital expenditure and
debt service requirements and discretionary investment needs during the next
twelve months. 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). The 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. In
the Awareness phase, the problem is defined, risks and magnitude of repairs are
communicated, and executive level support and sponsorship is obtained. During
the Assessment phase, an
18
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lockheed Martin Corporation
(continued)
inventory of assets that could be impacted by Year 2000 compliance issues is
prepared which includes internal information technology (IT) systems (e.g.
hardware, program applications, data centers), external IT systems (e.g.
customer products and deliverables, interfaces with third parties) and non-IT
systems (e.g. facilities, non-IT equipment).
In the Renovation phase, a plan for remediation is developed for each system
or product based on its critical nature and risk. Renovation is considered
complete when these plans have been implemented and the actual conversion of the
hardware, firmware or software has occurred. Renovation of customer products and
deliverables, where requested and funded by the customer, is also a part of this
phase. The Validation phase involves testing of all renovated systems to ensure
that they will operate correctly across and during the Year 2000. During the
Implementation phase, renovated and validated systems are placed into live
production environments. The Post-Implementation phase occurs in the Year 2000.
This phase will entail monitoring of systems to ensure Year 2000 compliance and
implementing business continuity and contingency plans as considered necessary.
Lockheed Martin's Program was designed to achieve the Corporation's overall
goal of Year 2000 readiness in advance of the century change. The Corporation
views Year 2000 awareness as a continuous phase of the Program that has resulted
in distribution of news letters, development of internal and external web sites
and an internal Year 2000 Awareness Week. During 1998, the Assessment phase was
completed. As of March 31, 1999, the Renovation phase was completed, and the
Validation and Implementation phases were both approximately 94 percent
complete. The remainder of 1999 will be used to complete the remaining phases of
the Program, as appropriate, which will include addressing late availability of
vendor or government furnished equipment, monitoring the status of Year 2000
compliance of vendors and customers (related to both products and readiness),
completing planned replacement of systems, and developing contingency and crisis
management plans as deemed necessary. Management expects that both the
Validation and Implementation phases will be completed in the second quarter of
1999, with few exceptions that include planned new and contingency
implementations.
Business continuity planning is required to ensure a smooth transition into
the Year 2000. The purpose is to identify and mitigate risks that may disrupt
the Corporation's operations or its ability to meet commitments. Each business
unit has identified its critical first quarter Year 2000 operations to focus on
business continuity planning. Lockheed Martin has developed guidelines for when
contingency plans are required and a standard template for use in documenting
such plans. For example, contingency plans are required for any work that is
scheduled to be completed after mid-1999, where there is significant risk of
domestic or foreign supplier chain disruption, or for a new system
implementation where schedule or technical issues are assessed to be
significantly at risk, in which case renovation of legacy systems has been or
will be performed. Additionally, while management believes that most of the
Corporation's non-IT systems will function without substantial compliance
problems, preparation for events that are generally outside the direct control
of the Corporation (e.g. loss of power or telecommunication capabilities) have
been included as part of crisis management planning. The Corporation's plans
include coordination with existing emergency or crisis management teams within
our facilities to ensure that scenarios are utilized in training and drills
during 1999. Business continuity teams are being identified, and command
centers, call-out procedures and emergency procedures are being established.
Additionally, Lockheed Martin has established a moratorium period regarding any
changes to its IT systems and environments from November 30, 1999 through
January 15, 2000,
19
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lockheed Martin Corporation
(continued)
the purpose of which is to manage these compliant systems and environments and
to mitigate risk associated with major changes or implementations prior to the
Year 2000.
Management currently estimates that total costs of the Program will be
approximately $80 million, roughly 70 percent of which had been expended through
March 31, 1999. These costs have not been material to the Corporation's
consolidated results of operations, cash flows or financial position for any
prior period and, based on information available at this time, are not expected
to be material in any future period. The remaining costs are expected to be
directed primarily toward validation testing and implementation activities.
These estimates include internal costs as well as costs for outside consulting
services, but do not include estimated costs for system replacements which were
not accelerated due to Year 2000 issues. No significant IT projects have been
deferred due to Year 2000 efforts. The costs incurred for the Program are
allowable in establishing prices for the Corporation's products and services
under contracts with the U.S. Government. Therefore, a substantial portion of
these costs 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 estimates, which were derived utilizing numerous
assumptions related to future events, including each vendor's ability to modify
proprietary software, the ability of other third parties (including domestic and
foreign customers and suppliers) to successfully address their Year 2000 issues,
unanticipated issues identified in executing the Program and other similar
uncertainties. While the Corporation expects to resolve all Year 2000 risks
without a material adverse impact to its consolidated results of operations,
cash flows or financial position, there can be no guarantee that these estimates
of costs or timing, or that the objectives of the Program, will be achieved. To
mitigate these risks, the Corporation has formal measurement and reporting
processes in place. For example, internal auditors meet weekly with Program
personnel to review the current status of the Program and related issues, and
Program reviews are conducted monthly with each of the Corporation's segments
and quarterly at the business unit level. In addition, updates are presented
periodically to executive management, the Board of Directors and the Audit and
Ethics Committee. The Corporation has obtained additional assurance through the
use of internal independent test environments, third party verification of
randomly selected renovated and validated applications, and internal audits
designed to ensure Year 2000 readiness. Program assessments have been conducted
by customers and the Defense Contract Audit Agency throughout the Program. With
respect to third parties, the Corporation is aware that a number of its domestic
and foreign suppliers and customers have just recently begun to aggressively
address their Year 2000 issues and, therefore, believes there is risk associated
with their achieving timely Year 2000 compliance. To mitigate this risk, formal
communication with all of the Corporation's key suppliers and customers
(including banks and U.S. Government customers) has been initiated as part of
the Program. In response to this communication, the Corporation has received
differing levels of information from these third parties to assist in the
assessment of their Year 2000 readiness; however, in most cases, the Corporation
is unable to verify the accuracy of their responses. Based on information
available at this time, management believes that Program activities to date are
consistent with the Program's design.
The Corporation is aware that a "reasonably likely worst case" scenario of
Year 2000 risks could include isolated interruption of deliveries from critical
domestic and foreign suppliers, the inability of critical domestic and foreign
customers to conduct business due to disruption of their operations, product
liability issues, isolated performance problems with manufacturing or
administrative systems, and late availability of embedded vendor products for
which
20
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lockheed Martin Corporation
(continued)
responsibility for Year 2000 compliance rests with the respective vendor. The
consequences of these issues may include increases in manufacturing and general
and administrative expenses until the issues are resolved, lost revenues, lower
or delayed cash receipts, and product liability. The Corporation cannot
currently quantify the potential effect of these issues on its consolidated
results of operations, cash flows or financial position, should some or a
combination of these events come to pass. However, based on information
available at this time, management believes that activities of the Program
designed to mitigate these types of issues are consistent with the Program's
design.
SUBSEQUENT EVENTS
On April 30, 1999, a Titan IV launch vehicle built by the Corporation,
carrying a military communications satellite, failed to place its payload in the
proper orbit. The financial effect of this unsuccessful mission is estimated to
be approximately $40 million. This estimate reflects changes in estimates
associated with program cost and revenue assumptions. The Corporation has not
completed its evaluation of any other impacts that may result. Also, on April
27, 1999, an Athena launch vehicle built by the Corporation failed to place a
commercial imaging satellite in its proper orbit. The satellite was to be
operated by and was insured by Space Imaging, LLC, a joint venture in which
Lockheed Martin holds an approximate 46% investment. A second satellite is under
construction and is expected to be launched before the end of 1999. The effects
of this launch failure on Space Imaging's business and financing plans are
currently under review by the venture partners.
In connection with these launch anomalies, and to ensure future mission
success, the Corporation has formed an independent assessment panel, composed of
external specialists and internal Lockheed Martin personnel, to conduct a
comprehensive review of its program management, engineering and manufacturing
processes, and quality control procedures at Astronautics, Missiles & Space and
Michoud Space Systems. In addition, in connection with Titan IV, the
Corporation is working with the U.S. Air Force which is conducting a special
review of the failed launches. The Titan IV program launch schedule and costs
may be impacted by the results of these reviews.
In May 1999, Astrolink International LLC (Astrolink), a strategic venture
initiated by the Corporation, announced that it had received commitments for
$900 million in equity capital from its founding partners, Global
Telecommunications, Telespazio S.p.A, a company of the Telecom Italia Group, and
TRW Inc. Global Telecommunications' portion of the total equity contribution is
$400 million, and its investment in Astrolink will be accounted for under the
equity method of accounting.
OTHER MATTERS
As more fully described in Management's Discussion and Analysis in Lockheed
Martin's 1998 Annual Report on Form 10-K, the Corporation is involved in two
joint ventures with Russian government-owned space firms. The operations of
these joint ventures include marketing Proton launch services, which are subject
to a U.S.-imposed quota on the number of Russian launches of U.S. built
satellites into certain orbits. The majority of customer advances received for
Proton launch vehicle services is forwarded to a launch vehicle manufacturer in
Russia. Significant portions of these advances would be required to be refunded
to customers if launch services were not provided within the contracted time
frame. At March 31, 1999, approximately
21
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lockheed Martin Corporation
(continued)
$985 million related to launches not yet provided was included in customer
advances and amounts in excess of costs incurred (approximately $410 million of
this amount is related to launches in excess of the quota), and approximately
$770 million of payments to the Russian manufacturer for launches not yet
provided was included in inventories (approximately $300 million of this amount
is related to launches in excess of the quota). Through March 31, 1999, launch
services provided through these joint ventures have been in accordance with
contract terms. With respect to the quota, the Corporation's ability to achieve
certain of its business objectives related to launch services, satellite
manufacture and telecommunications market penetration could be impaired if the
limit on the number of launches imposed by the quota is not raised or
eliminated. Management is continuing to work toward achieving a favorable
resolution to raise or eliminate the limitation on the number of Russian
launches.
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. 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. Our operations are necessarily
subject to various risks and uncertainties and, therefore, actual outcomes are
dependent upon many factors, including, without limitation, our successful
performance of internal plans; the successful resolution of our Year 2000
issues; government customers' budgetary constraints; customer changes in short-
range and long-range plans; domestic and international competition in the
defense, space and commercial areas; product performance; continued development
and acceptance of new products; performance issues with key suppliers and
subcontractors; government import and export policies; termination of government
contracts; the outcome of political and legal processes; legal, financial, and
governmental risks related to international transactions and global needs for
military and commercial aircraft and electronic systems and support; as well as
other economic, political and technological risks and uncertainties. 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 19 through 21 and
pages 21 through 23, respectively, of the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 (Form 10-K); "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 15 through 25 of the 1998 Annual Report, and "Note 1 -- Summary of
Significant Accounting Policies,"
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<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Lockheed Martin Corporation
(continued)
"Note 2 -- Transaction Agreement with COMSAT Corporation" and "Note 16 --
Commitments and Contingencies" of the Notes to Consolidated Financial Statements
on pages 32 through 34, page 34 and pages 42 through 43, respectively, of the
Audited Consolidated Financial Statements included in the 1998 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 14 through
23 of this Form 10-Q, and "Note 2 -- Transaction Agreement with COMSAT
Corporation," "Note 5 -- Contingencies" and "Note 7 -- Other" of the Notes to
Condensed Consolidated Financial Statements (Unaudited) on pages 6 through 7,
pages 9 through 11 and pages 12 through 13, respectively, of the Unaudited
Condensed Consolidated Financial Statements included in this Form 10-Q.
23
<PAGE>
Lockheed Martin Corporation
Part II--Other Information
Item 1. Legal Proceedings
The Corporation is a party to or has property subject to litigation and other
proceedings, including matters arising under provisions relating to the
protection of the environment, both as specifically described below, in the
Corporation's 1998 Annual Report on Form 10-K, or arising in the ordinary course
of business. In the opinion of management, the probability is remote that the
outcome of any such litigation or other proceedings will have a material adverse
effect on the Corporation's results of operations or financial position.
The Corporation is primarily engaged in providing products and services under
contracts with the U.S. Government and, to a lesser degree, under direct foreign
sales contracts, some of which are funded by the U.S. Government. These
contracts are subject to extensive legal and regulatory requirements and, from
time to time, agencies of the U.S. Government investigate whether the
Corporation's operations are being conducted in accordance with these
requirements. U.S. Government investigations of the Corporation, whether
relating to these 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 U.S. Government contracting. U.S. Government
investigations often take years to complete and many result in no adverse action
against the Corporation. For the U.S. Government investigations noted below and
previously reported, it is too early for the Corporation to determine whether
adverse decisions relating to these investigations could ultimately have a
material adverse effect on its results of operations or financial condition.
The following describes new matters or developments of previously reported
matters that have occurred since filing of the Corporation's 1998 Annual Report
on Form 10-K. See the "Legal Proceedings" section of the Corporation's 1998
Annual Report on Form 10-K for a description of previously reported matters.
.
On March 15, 1999, Lockheed Martin Fairchild Corporation, one of the
Corporation's subsidiaries, was served with a grand jury subpoena issued by the
United States District Court for the Southern District of New York. The
subpoena seeks documents related to quality assurance requirements for the
production of a radar warning receiver by Loral Electronic Defense Systems. The
Corporation acquired Loral Electronic Defense Systems in April 1996. The
Corporation is cooperating with the government's investigation of this matter.
For the past few years, the Corporation has been in litigation with residents
in the Redlands and Burbank areas regarding allegations of personal injury,
property damage, and other tort claims arising from the Corporation's alleged
contribution to the contamination. On April 22, 1999, the San Bernardino
Superior Court in California issued a procedural order in one of these cases,
certifying a medical monitoring class as well as a punitive damages class. No
ruling has been made on the merits nor has a merits hearing been scheduled in
any of these cases. The Corporation believes that the allegations are without
merit and will defend these cases.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on April 22, 1999, the stockholders of
Lockheed Martin Corporation:
24
<PAGE>
Lockheed Martin Corporation
Part II--Other Information (continued)
. Elected the following individuals to the Board of Directors to serve as
directors until the Annual Meeting of Stockholders in 2000 and until their
successors have been duly elected and qualified:
<TABLE>
<CAPTION>
Votes Cast For Votes Withheld
---------------- ---------------
<S> <C> <C>
Norman R. Augustine 345,946,557 6,789,194
Marcus C. Bennett 346,310,518 6,425,233
Lynne V. Cheney 346,691,274 6,044,477
Vance D. Coffman 345,507,573 7,228,178
Houston I. Flournoy 346,407,279 6,328,472
James F. Gibbons 346,672,775 6,062,976
Edward E. Hood, Jr. 346,689,863 6,045,888
Caleb B. Hurtt 346,660,642 6,075,109
Gwendolyn S. King 346,620,116 6,115,635
Eugene F. Murphy 346,713,505 6,022,246
Frank Savage 346,872,478 5,863,273
Peter B. Teets 345,968,379 6,767,372
Carlisle A. H. Trost 346,734,110 6,001,641
James R. Ukropina 346,823,298 5,912,453
Douglas C. Yearley 346,791,031 5,944,720
</TABLE>
25
<PAGE>
Lockheed Martin Corporation
Part II--Other Information (continued)
. Ratified the appointment of Ernst & Young LLP, independent auditors, to audit
the consolidated financial statements of the Corporation as of and for the
fiscal year ending December 31, 1999. There were 349,257,805 votes for the
appointment, 1,969,883 votes against the appointment, and 1,508,063
abstentions.
. Ratified a proposal to adopt the Lockheed Martin Directors Equity Plan (the
Equity Plan), the purpose of which is to attract, motivate and retain
experienced and knowledgeable directors of the Corporation and to further
align their economic interests with the interests of stockholders generally.
The Equity Plan is one component to a new compensation program for directors.
There were 249,865,810 votes for the proposal, 99,449,495 votes against the
proposal, and 3,420,446 abstentions.
. Rejected a stockholder proposal which recommended that the Board of Directors
take necessary actions to ensure that future outside directors not serve for
more than six years. There were 17,700,276 votes for the proposal, 299,694,019
votes against the proposal, 3,612,334 abstentions and 31,729,122 non-votes.
. Rejected a stockholder proposal which recommended that the Board of Directors
establish a committee to research and develop criteria for the bidding,
acceptance and implementation of military contracts, and to report the results
of its study to shareholders at the 2000 Annual Meeting of Stockholders. There
were 12,922,780 votes for the proposal, 292,299,805 votes against the
proposal, 15,784,044 abstentions and 31,729,122 non-votes.
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 three months ended
March 31, 1999.
2. Exhibit 27. Financial Data Schedule for the three months ended March
31, 1999.
(b) Reports on Form 8-K filed in the first quarter of 1999.
1. Current report on Form 8-K filed on January 19, 1999.
Item 5. Other Events
The Corporation filed information concerning the filing of a
purported class action lawsuit on January 14, 1999, by
Mohammad Yousefi and David Kane, on behalf of themselves and
on behalf of purchasers of Lockheed Martin Corporation (the
Corporation) Common Stock between August 13, 1998 and
December 23, 1998, against the Corporation and six of its
officers and directors alleging the defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934.
26
<PAGE>
Lockheed Martin Corporation
Part II--Other Information (continued)
2. Current report on Form 8-K filed on January 28, 1999.
Item 5. Other Events
The Corporation filed information contained in its press
release dated January 28, 1999 concerning its results of
operations for the year ended December 31, 1998.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated January 28,
1999.
3. Current report on Form 8-K filed on February 10, 1999.
Item 5. Other Events
The Corporation filed information concerning the extension of
a tender offer to purchase up to 49% of COMSAT's issued and
outstanding shares of common stock. In addition, the
registrant filed information concerning the fact that, on
January 21, 1999, the Chairman of the House Committee on
Commerce and the Chairman of the Senate Subcommittee on
Communications sent a joint letter to the Federal
Communications Commission (FCC) urging the FCC not to take
any action to permit any company to purchase more than 10
percent of COMSAT prior to Congress adopting satellite
industry reform legislation.
Item 7. Financial Statements and Exhibits
Text of a letter from Representative Tom Bliley and Senator
Conrad Burns to William E. Kennard, Chairman of the FCC, and
accompanying News Release issued by Representative Tom Bliley
and Senator Conrad Burns dated January 22, 1999.
4. Current report on Form 8-K filed on February 16, 1999.
Item 5. Other Events
The Corporation, on behalf of a predecessor company, Lockheed
Aircraft Corporation, filed information concerning a proposal
to amend Corporate Policy Statement No. CPS-704 pertaining to
international consultants.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Corporate Policy Statement No.
CPS-704 (International Consultants), as amended.
(c) Reports on Form 8-K filed subsequent to the first quarter of 1999.
1. Current report on Form 8-K filed on April 21, 1999.
27
<PAGE>
Lockheed Martin Corporation
Part II--Other Information (continued)
Item 5. Other Events
The Corporation filed information contained in its press
release dated April 20, 1999 concerning its results of
operations for the quarter ended March 31, 1999.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated April 20,
1999.
28
<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: May 17, 1999 by: /s/Todd J. Kallman
------------ ---------------------
Todd J. Kallman
Vice President and Controller
(Chief Accounting Officer)
29
<PAGE>
EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges
For the Three Months Ended March 31, 1999
Lockheed Martin Corporation
(In millions, except ratio)
<TABLE>
<CAPTION>
Earnings
<S> <C>
Earnings from continuing operations before income taxes $424
Interest expense 192
Amortization of debt premium and discount, net (1)
Portion of rents representative of an interest factor 16
Losses and undistributed earnings of 50% and less than 50% (1)
owned companies, net ----
Adjusted earnings from continuing operations before income taxes $630
====
Fixed Charges
Interest expense $192
Amortization of debt premium and discount, net (1)
Portion of rents representative of an interest factor 16
Capitalized interest 3
----
Total fixed charges $210
====
Ratio of Earnings to Fixed Charges 3.0X
====
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 4,667
<ALLOWANCES> 0
<INVENTORY> 3,959
<CURRENT-ASSETS> 10,480
<PP&E> 8,692
<DEPRECIATION> 5,105
<TOTAL-ASSETS> 28,596
<CURRENT-LIABILITIES> 10,390
<BONDS> 8,788
0
0
<COMMON> 392
<OTHER-SE> 5,661
<TOTAL-LIABILITY-AND-EQUITY> 28,596
<SALES> 6,188
<TOTAL-REVENUES> 6,188
<CGS> 5,701
<TOTAL-COSTS> 5,701
<OTHER-EXPENSES> 129
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 424
<INCOME-TAX> 156
<INCOME-CONTINUING> 268
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (355)
<NET-INCOME> (87)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
