01—Abstract
Summary
Summary of the 10-K filed March 19, 1998. Cited figures are marked; the original filing is the authoritative source.
Lockheed Martin's 1997 Form 10-K reports record net sales of $28.1 billiona (up 4% from $26.9 billion) and reported net earnings of $1.30 billion, roughly flat versus $1.35 billion in 1996.
Reported results are heavily distorted by nonrecurring items: a $311 millionb tax-free gain on the November 1997 exchange of its Series A preferred stock held by General Electric, offset by $457 million of pretax charges (about $303 million after tax) for exiting non-strategic lines and impairing non-core investments. Excluding these items, management says diluted EPS would have been $6.05, an 11% increase over an adjusted $5.44 in 1996, and net earnings would have grown about 7% to roughly $1.29 billion. The GE transaction also created a $1.826 billion deemed preferred dividend that drove basic EPS to a loss of $(3.12), so investors should focus on the $6.09 diluted figure before the deemed dividend and the adjusted $6.05.
The balance sheet became more leveraged. Stockholders' equity fell to $5.2 billionc from $6.9 billion, largely because of the $2.8 billion reduction tied to the GE redemption, and the debt-to-capitalization ratio rose from 63% to nearly 70%. Total debt including short-term borrowings reached about $11.9 billion.
Operating cash flow was $1.2 billiond, reduced by working capital build, while divestitures (Armament Systems, Defense Systems, L-3 businesses) supported cash generation. Management cites a $2.6 billion consolidation savings program that is ahead of schedule and a win rate above two-thirds of competitive bids in 1997. The dominant forward-looking risk is the pending $11.6 billion Northrop Grumman merger.
Stockholders approved it on February 26, 1998, but on March 9 the Department of Justice said it was fundamentally opposed, and as of the filing date the DOJ was demanding substantial divestitures or threatening to sue. Management committed not to close before April 24, 1998. The filing also discloses a Department of Energy Pit 9 contract dispute with a February 27, 1998 cure notice that could lead to default termination, and a large set of government investigations and environmental and class-action matters, which management does not expect to be material.
02—Key points
Key Highlights
- Record 1997 net sales of $28.1 billion, up 4% from $26.9 billion; U.S. Government customers were 66% of sales.
- Reported net earnings of $1.30 billion, including a $311 million tax-free GE gain offset by $457 million of pretax charges; excluding these items, EPS would have been $6.05 versus $5.44 in 1996 (+11%).
- A $1.826 billion deemed preferred stock dividend tied to the GE redemption produced a basic loss per share of $(3.12) and diluted EPS of '**' (antidilutive), so $6.09 diluted EPS before the deemed dividend is the relevant pre-charge figure.
- Total debt rose to about $11.9 billion and debt-to-capitalization climbed from 63% to nearly 70%, while stockholders' equity fell to $5.2 billion from $6.9 billion.
- Pending $11.6 billion Northrop Grumman merger was approved by shareholders, but the DOJ opposed it and demanded substantial divestitures; no closing before April 24, 1998.
- Negotiated backlog declined to $47.1 billion from $50.4 billion, with about 67% not expected to be filled within one year.
- Operating cash flow of $1.2 billion versus $1.6 billion in 1996; management targets cash generation through receivables, inventory, and procurement initiatives.
03—Questions
Frequently Asked Questions
Why did reported 1997 EPS look so different from the adjusted figures?
Reported diluted EPS before the deemed preferred dividend was $6.09, the same as 1996, but this includes a $311 million (about $1.46 per diluted share) tax-free gain from the GE preferred stock exchange and about $303 million after-tax in nonrecurring charges (about $1.42 per diluted share). Management's adjusted figure excluding these items is $6.05. Separately, the $1.826 billion deemed preferred dividend reduced basic EPS to a $(3.12) loss, though it did not affect reported net earnings.
What is the status of the Northrop Grumman merger?
Both companies' shareholders approved the deal on February 26, 1998, and the total estimated value is about $11.6 billion including $3.1 billion of Northrop debt. On March 9, 1998, the DOJ said it was fundamentally opposed. The DOJ then demanded substantial divestitures or said it would sue, and as of the filing it had not yet done so. Lockheed committed not to close before April 24, 1998, and to submit a remedy proposal by April 8. Management estimates about $1 billion in additional annual steady-state savings if the deal closes.
How much debt does Lockheed Martin carry and is it a concern?
Total debt including short-term borrowings was about $11.9 billion at year-end 1997, up from $11.5 billion, and the debt-to-capitalization ratio rose to nearly 70% because of the GE transaction, which reduced equity by $2.8 billion. Long-term debt maturities are $876 million in 1998 and $857 million in 1999. The company has a $3.5 billion four-year and $1.5 billion one-year revolving credit facility, and management says available resources are sufficient for its operating, debt-service, and capital needs.
What are the main risks to the company's government business?
About 66% of 1997 sales came from the U.S. Government, so results depend on defense budgets and annual Congressional appropriations, and contracts can be terminated for convenience. The company also faces intense competition, with fewer but larger contract awards. Significant open matters include a Department of Energy Pit 9 contract dispute, where a February 27, 1998 cure notice warned of possible default termination, and multiple federal grand jury and Inspector General investigations that management does not expect to be material.
04—Continue