How did Lockheed Martin's 1996 earnings compare with 1995 once one-time items are excluded?

Reported 1996 net earnings were $1.347 billion ($6.04 per fully diluted share) versus $682 million ($3.05) in 1995. Reported results include a $365 million pretax Materials exchange gain (partly offset by a $307 million charge package in Q4 1996) and 1995 merger and consolidation charges of $690 million pretax. Excluding these items, management reports 1996 EPS of $5.40, up 8% from $5.01 in 1995, so the underlying improvement is more modest than the headline increase suggests.

How much debt does Lockheed Martin carry, and how is it being reduced?

Total debt, including short-term borrowings, was about $11.5 billion at December 31, 1996, up from $3.7 billion, mainly to fund the Loral acquisition. Long-term debt was $10.2 billion. Management says over $700 million was repaid after April 1996 through operating cash flow and asset sales. Further reduction is expected from the $450 million General Dynamics divestiture received January 2, 1997 and the Newco transaction, expected to generate more than $400 million in net cash.

What is the outlook implied by the record backlog?

Negotiated backlog reached $50.4 billion, supported by large 1996 wins, but the company notes that about $32 billion (63%) is not expected to be filled within a year, and that backlog is not a reliable predictor of future sales. Backlog will also be reduced in 1997 by the pending Newco divestiture. Several major programs (JSF, EELV, VentureStar) were won in competitions that are still in early phases, so their revenue contribution is uncertain.

What are the main risks investors should watch?

The company depends on U.S. Government business for about 70% of sales, so it is exposed to defense budget changes and annual Congressional appropriations. Open investigations include grand jury subpoenas on several programs, a DoD IG probe into LANTIRN and PLAD contracts, and qui tam suits seeking $140 million. The Pit 9 DOE remediation contract has significant unresolved technical, schedule and cost issues, and Burbank environmental and resident-injury suits remain pending. Management considers the probability of material adverse outcomes from these matters remote.

Why did the Electronics and Energy segments change so much?

The April 1996 Loral acquisition added the former Tactical Systems businesses, roughly doubling Electronics sales to $6.7 billion from $3.4 billion and raising Information & Services sales to $5.9 billion from $4.2 billion. Aeronautics sales fell 15% to $5.6 billion due to fewer fighter and airlift deliveries. Energy, Materials and Other operating profit was boosted in 1996 by the Materials exchange gain, so segment comparisons should be read with the nonrecurring items in mind.

LMT 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 14, 1997. Cited figures are marked; the original filing is the authoritative source.

Lockheed Martin's 1996 10-K describes a company transformed by the April 1996 Loral acquisition, which lifted record 1996 net sales to $26.9 billion^a (up 18% from $22.9 billion) and total assets to $29.3 billion.

Reported net earnings rose to $1.347 billion^b, or $6.04 per fully diluted share, versus $682 million ($3.05) in 1995. However, those figures include a net one-time benefit: a $365 million pretax gain on the Materials exchange and divestitures, offset by $307 million of pretax charges, which together added roughly $142 million to pretax results and a net $142 million after tax ($0.64 per share, based on the $351 million gain less $209 million of charges). Excluding these items, management cites earnings of about $1.2 billion, or $5.40 per share, up 8% from an adjusted $5.01 in 1995.

The balance sheet is the key investor concern. Total debt rose to about $11.5 billion^c, pushing the debt-to-capitalization ratio from 37% to 63%, and long-term debt reached $10.2 billion. Management reports that over $700 million of debt was repaid after April 1996 through cash generation and asset sales, and it expects the pending Newco transaction (about $400 million in net cash proceeds) and the January 1997 $450 million General Dynamics sale to further reduce leverage.

Operating cash flow was $1.6 billion^d, and management cites roughly $1 billion of free cash flow. Operationally, backlog reached a record $50.4 billion, and the company reports a 68% win rate on major competitions in 1996, including the Joint Strike Fighter, SBIRS, EELV and VentureStar.

Risks include heavy dependence on U.S. Government business (about 70% of sales), a pending Pit 9 Department of Energy remediation contract with unresolved cost and schedule issues, several federal grand jury and DoD Inspector General investigations (including LANTIRN and qui tam suits), and Burbank environmental and personal-injury litigation. Management characterizes the probability of material adverse outcomes from these matters as remote.

02—Key points

Key Highlights

Record 1996 net sales of $26.9 billion, up 18% year over year, driven mainly by consolidating the former Loral defense electronics businesses from April 1, 1996.
Reported EPS of $6.04 (fully diluted) includes a $365 million Materials exchange gain and $307 million of charges; management's ex-items EPS was $5.40, up 8% from $5.01.
Total debt rose to about $11.5 billion after financing the ~$7.6 billion Loral Transaction; debt-to-capitalization climbed from 37% to 63%, though over $700 million has since been repaid.
Record negotiated backlog of $50.4 billion at year-end 1996, up from $41.1 billion, with about 63% (roughly $32 billion) not expected to be filled within one year.
Strong 1996 competitive win record, including the Joint Strike Fighter concept demonstration, SBIRS, EELV and VentureStar (X-33), though some of these awards are excluded from reported backlog.
Operating cash flow of $1.6 billion, with management citing about $1 billion of free cash flow and $244 million in merger-related cash payments.
Ongoing legal and regulatory exposure: about 70% of sales are to the U.S. Government, several grand jury and DoD IG investigations are open, a $140 million LANTIRN qui tam suit is pending, and the Pit 9 DOE remediation contract faces unresolved cost and schedule issues.

03—Questions

Frequently Asked Questions

How did Lockheed Martin's 1996 earnings compare with 1995 once one-time items are excluded?
Reported 1996 net earnings were $1.347 billion ($6.04 per fully diluted share) versus $682 million ($3.05) in 1995. Reported results include a $365 million pretax Materials exchange gain (partly offset by a $307 million charge package in Q4 1996) and 1995 merger and consolidation charges of $690 million pretax. Excluding these items, management reports 1996 EPS of $5.40, up 8% from $5.01 in 1995, so the underlying improvement is more modest than the headline increase suggests.
How much debt does Lockheed Martin carry, and how is it being reduced?
Total debt, including short-term borrowings, was about $11.5 billion at December 31, 1996, up from $3.7 billion, mainly to fund the Loral acquisition. Long-term debt was $10.2 billion. Management says over $700 million was repaid after April 1996 through operating cash flow and asset sales. Further reduction is expected from the $450 million General Dynamics divestiture received January 2, 1997 and the Newco transaction, expected to generate more than $400 million in net cash.
What is the outlook implied by the record backlog?
Negotiated backlog reached $50.4 billion, supported by large 1996 wins, but the company notes that about $32 billion (63%) is not expected to be filled within a year, and that backlog is not a reliable predictor of future sales. Backlog will also be reduced in 1997 by the pending Newco divestiture. Several major programs (JSF, EELV, VentureStar) were won in competitions that are still in early phases, so their revenue contribution is uncertain.
What are the main risks investors should watch?
The company depends on U.S. Government business for about 70% of sales, so it is exposed to defense budget changes and annual Congressional appropriations. Open investigations include grand jury subpoenas on several programs, a DoD IG probe into LANTIRN and PLAD contracts, and qui tam suits seeking $140 million. The Pit 9 DOE remediation contract has significant unresolved technical, schedule and cost issues, and Burbank environmental and resident-injury suits remain pending. Management considers the probability of material adverse outcomes from these matters remote.
Why did the Electronics and Energy segments change so much?
The April 1996 Loral acquisition added the former Tactical Systems businesses, roughly doubling Electronics sales to $6.7 billion from $3.4 billion and raising Information & Services sales to $5.9 billion from $4.2 billion. Aeronautics sales fell 15% to $5.6 billion due to fewer fighter and airlift deliveries. Energy, Materials and Other operating profit was boosted in 1996 by the Materials exchange gain, so segment comparisons should be read with the nonrecurring items in mind.

04—Continue

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