Why did reported 1998 earnings fall 23%, and what is the underlying trend?

Reported net earnings fell to $1.001B from $1.300B, largely because of a $233M pretax ($183M after-tax) CalComp charge. Excluding it, 1998 earnings were about $1.18B, down roughly 8% from 1997's $1.29B on the same basis, and operating profit before the charge declined about 6%. The Q3 Atlas favorable adjustment of $128M helped the year, so the underlying trend is weaker than the headline suggests.

What is the status of the COMSAT merger, and when might it close?

The first phase is a cash tender offer for up to 49% of COMSAT at $45.50 per share, which is extended in up-to-60-day periods until the earlier of September 18, 1999 or closing conditions being met. The second-phase merger requires COMSAT shareholder approval (vote expected June 18, 1999), FCC approval, and federal satellite reform legislation. The filing says that if Congress is slow, the merger is unlikely to occur in 1999, and if the tender offer completes without legislation, Lockheed Martin would not control COMSAT.

How concentrated is the business, and what are the main program risks?

About 70% of 1998 sales were to the U.S. Government, so budgets and appropriations drive results. Key program risks include the THAAD missile defense intercept failure (with cost-sharing if direct hits are not achieved in 1999), the C-130J delivery shortfall due to late FAA certification, satellite and Titan launch disruptions, and the Pit 9 dispute with DOE over a $180M fixed-price contract terminated for default, with approximately $54M in recovery sought by DOE.

What is the company's balance sheet and liquidity position?

Total debt fell to $10.9B from $11.9B, and stockholders' equity rose to $6.1B from $5.2B, mainly from 1998 earnings. Cash was $285M at year end, and the company holds a $2.5B short-term and $3.5B long-term revolving credit facility, with no borrowings outstanding under them at year end. The company also filed a $2.5B shelf registration in January 1999. Management believes internally generated cash and available financing are sufficient for the next twelve months.

What growth opportunities and pending contracts should investors watch?

Management highlighted a multi-billion dollar UAE Block 60 F-16 fighter contract expected in 1999, a Lot 1 production award for the F-22 expected in late 1999, the Joint Strike Fighter down-select planned for 2001, and EELV launch vehicle work, with the Atlas V and an initial $500M government funding agreement. It also cited growth in postal automation and in telecommunications through its new Global Telecommunications unit, although management noted it has limited experience and sales in that market.

LMT 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 22, 1999. Cited figures are marked; the original filing is the authoritative source.

Lockheed Martin's 1998 10-K shows a company whose top line declined while its balance sheet strengthened.

Net sales fell 6% to $26.3 billion^a (from $28.1 billion), driven by weaker Space & Strategic Missiles volume (commercial launch delays, Trident reduction) and the absence of divested businesses. Reported net earnings dropped 23% to $1.0 billion ($2.63 diluted EPS), but this includes a $233 million pretax CalComp charge; excluding it, earnings were $1.18 billion ($3.11 diluted EPS), and operating profit would have declined about 6%. Management also booked a $128 million favorable Atlas adjustment in Q3, so underlying trends are mixed.

Free cash flow was healthy: operating cash flow rose to $2.0 billion^b from $1.2 billion, and total debt fell by more than $1.0 billion to $10.9 billion, lowering the debt-to-capitalization ratio from 70% to 64%. The company is pinned to the U.S. government, which accounts for about 70% of sales, and backlog declined to $45.3 billion from $47.1 billion. The most consequential pending item is the proposed COMSAT acquisition, a two-phase deal valued at about $2.7 billion.

Completion depends on FCC approval and federal satellite-reform legislation, and the merger may not close in 1999 even if the tender offer succeeds. Other risks include the THAAD intercept failure, C-130J delivery delays, the Pit 9 dispute with DOE (a $180 million^c contract the DOE terminated for default), environmental remediation obligations, and securities class action litigation filed in January 1999. Management expects the Joint Strike Fighter down-select in 2001 and a UAE fighter contract in 1999, and a potential defense budget upturn could be a tailwind.

02—Key points

Key Highlights

Net sales declined 6% to $26.3B in 1998 from $28.1B, reflecting weaker Space & Strategic Missiles volume and divestitures.
Reported diluted EPS was $2.63 versus $3.11 excluding the $233M pretax CalComp charge, which reduced net earnings by $183M.
Operating cash flow improved to $2.0B from $1.2B, and total debt fell more than $1.0B to $10.9B; debt-to-capitalization improved to 64% from 70%.
Total negotiated backlog declined to $45.3B from $47.1B, with Aeronautics backlog down 21%, though Information & Services rose 16%.
The pending COMSAT transaction (~$2.7B) faces FCC and legislative hurdles, and the merger may not close in 1999 even if the tender offer is completed.
Roughly 70% of 1998 net sales came from the U.S. Government, concentrating risk on budgets and appropriations.
New securities class action (Yousefi complaint, January 1999) alleges misstatements between August and December 1998; the company says the claims are without merit.
The dividend was raised to $0.22 per quarter ($0.88 annualized) on a post-split basis.

03—Questions

Frequently Asked Questions

Why did reported 1998 earnings fall 23%, and what is the underlying trend?
Reported net earnings fell to $1.001B from $1.300B, largely because of a $233M pretax ($183M after-tax) CalComp charge. Excluding it, 1998 earnings were about $1.18B, down roughly 8% from 1997's $1.29B on the same basis, and operating profit before the charge declined about 6%. The Q3 Atlas favorable adjustment of $128M helped the year, so the underlying trend is weaker than the headline suggests.
What is the status of the COMSAT merger, and when might it close?
The first phase is a cash tender offer for up to 49% of COMSAT at $45.50 per share, which is extended in up-to-60-day periods until the earlier of September 18, 1999 or closing conditions being met. The second-phase merger requires COMSAT shareholder approval (vote expected June 18, 1999), FCC approval, and federal satellite reform legislation. The filing says that if Congress is slow, the merger is unlikely to occur in 1999, and if the tender offer completes without legislation, Lockheed Martin would not control COMSAT.
How concentrated is the business, and what are the main program risks?
About 70% of 1998 sales were to the U.S. Government, so budgets and appropriations drive results. Key program risks include the THAAD missile defense intercept failure (with cost-sharing if direct hits are not achieved in 1999), the C-130J delivery shortfall due to late FAA certification, satellite and Titan launch disruptions, and the Pit 9 dispute with DOE over a $180M fixed-price contract terminated for default, with approximately $54M in recovery sought by DOE.
What is the company's balance sheet and liquidity position?
Total debt fell to $10.9B from $11.9B, and stockholders' equity rose to $6.1B from $5.2B, mainly from 1998 earnings. Cash was $285M at year end, and the company holds a $2.5B short-term and $3.5B long-term revolving credit facility, with no borrowings outstanding under them at year end. The company also filed a $2.5B shelf registration in January 1999. Management believes internally generated cash and available financing are sufficient for the next twelve months.
What growth opportunities and pending contracts should investors watch?
Management highlighted a multi-billion dollar UAE Block 60 F-16 fighter contract expected in 1999, a Lot 1 production award for the F-22 expected in late 1999, the Joint Strike Fighter down-select planned for 2001, and EELV launch vehicle work, with the Atlas V and an initial $500M government funding agreement. It also cited growth in postal automation and in telecommunications through its new Global Telecommunications unit, although management noted it has limited experience and sales in that market.

04—Continue

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