Why did reported earnings fall so sharply in 1999?

Reported net earnings fell to $382 million from $1.0 billion. Most of the decline comes from a $355 million after-tax cumulative effect charge from adopting SOP 98-5, which required expensing previously capitalized start-up costs. Operating profit also fell 20%, driven by a C-130J cost-growth charge, lower Space Systems volume, and the Titan IV adjustment. Partly offsetting these were one-time gains of about $249 million pretax, mainly from the sale of the remaining L-3 stake.

Is the dividend cut a sign of financial distress?

The filing presents the cut as a deliberate step to generate cash for debt reduction and to fund core investments, not as a response to a liquidity crisis. Management states cash and credit facilities (a $3.5 billion long-term revolver and a $1.0 billion short-term facility) are sufficient for the next twelve months. However, the company's leverage increased, and cash from operations declined sharply, so investors should watch whether the divestiture proceeds materialize as expected.

What is the status of the COMSAT transaction and what happens if it fails?

The first phase, a tender for 49% of COMSAT for $1.2 billion, closed in September 1999. The second phase, a one-for-one share exchange merging COMSAT into a Lockheed subsidiary, requires federal legislation to lift foreign and ownership restrictions and FCC approval. A compromise bill was expected to be enacted before May 2000, but the outcome was uncertain. If the merger is not completed by September 18, 2000 and the parties do not extend, Lockheed would not gain control of COMSAT and would not achieve its telecommunications strategy objectives. PanAmSat has also challenged the FCC order in court.

How dependent is Lockheed Martin on the U.S. Government, and what programs are most at risk?

The U.S. Government accounted for about 71% of 1999 net sales, so the company is highly exposed to defense budgets and congressional funding decisions. The F-22 fighter faced Congressional scrutiny over potential funding cuts, and the Joint Strike Fighter down-select, where Lockheed is one of two finalists, is planned for 2001. Several grand jury investigations and qui tam allegations (including the LANTIRN program and NASA contracts) are also ongoing; management believes material adverse effects are unlikely, but the company cannot yet assess the outcome.

What environmental and legal liabilities could affect future results?

The company has accrued about $200 million for environmental matters beyond the specific sites, and estimates roughly $140 million for Redlands, California perchlorate and solvent work and about $100 million for Burbank and Glendale, with about half of the Burbank/Glendale costs expected to be reimbursed by the U.S. Government. Securities class actions filed in 1999 allege artificially inflated stock prices, and a dispute with the DOE over the Pit 9 waste contract involves an unresolved claim and a $54 million counterclaim. Management views these as manageable, but the Redlands and Burbank tort trials scheduled for 2000 and 2001 could produce unfavorable outcomes.

LMT 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 9, 2000. Cited figures are marked; the original filing is the authoritative source.

Lockheed Martin's 1999 10-K shows a company in the middle of a major strategic reshuffle.

Net sales fell 3% to $25.5 billion^a, and reported net earnings dropped 62% to $382 million, but that figure absorbs a $355 million non-cash cumulative effect charge from adopting SOP 98-5 on start-up costs. Excluding nonrecurring and unusual items, including the $249 million pretax net gain on portfolio actions, earnings were about $575 million. Diluted EPS was $0.99 reported versus roughly $1.50 on an adjusted basis.

Operating profit fell 20% to $2.0 billion^b, driven by a $210 million C-130J charge and a $90 million Titan IV adjustment, with the Space Systems segment hit hardest. Free cash flow weakened: operating cash flow was $1.08 billion, down from $2.03 billion, and capital expenditures were $669 million. The balance sheet absorbed significant pressure.

Total debt rose about $1.1 billion^c to roughly $11.9 billion after a $3.0 billion bond issuance used largely to fund the $1.2 billion COMSAT tender offer, and debt-to-capitalization rose to 65%. Management cut the quarterly dividend from $0.22 to $0.11 to conserve cash and reduce debt. The company is evaluating divestitures of non-core units that could produce roughly $850 million in net losses on disposition but more than $1.5 billion in cash proceeds for debt repayment.

Segment reorganization into four segments and consolidation of Space and Aeronautical Systems into single operating companies are intended to cut costs. The main investor uncertainties are the pending COMSAT merger, which depends on Congressional legislation and FCC approval and has a September 18, 2000 outside date, and a sizable set of U.S. Government investigations and environmental liabilities. With about 70%^d of sales from the U.S. Government, the company also faces budget and program-funding risk on the F-22 and Joint Strike Fighter programs, where Lockheed Martin is one of two remaining competitors for the JSF down-select expected in 2001.

02—Key points

Key Highlights

Net sales declined 3% to $25.53 billion; U.S. Government customers accounted for about 71% of 1999 sales.
Reported diluted EPS of $0.99 includes a $355M ($0.93/share) non-cash cumulative effect charge from SOP 98-5; adjusted diluted EPS was about $1.50.
Operating profit fell 20% to $2.0 billion; the C-130J program charge (~$210M) and Titan IV adjustment (~$90M) weighed on results, offset by a $249M net gain from portfolio actions including the sale of the L-3 stake.
Operating cash flow fell to $1.08 billion from $2.03 billion in 1998, reflecting lower earnings and higher working capital needs.
Total debt rose about $1.1 billion to ~$11.9 billion after a $3.0 billion bond issuance; debt-to-capitalization increased to 65%.
Quarterly dividend was cut from $0.22 to $0.11 per share to conserve cash and reduce debt.
Pending COMSAT merger (49% stake acquired for $1.2 billion) depends on federal legislation and FCC approval, with a September 18, 2000 outside date; planned divestitures could yield over $1.5 billion in cash but a ~$850 million estimated net loss.

03—Questions

Frequently Asked Questions

Why did reported earnings fall so sharply in 1999?
Reported net earnings fell to $382 million from $1.0 billion. Most of the decline comes from a $355 million after-tax cumulative effect charge from adopting SOP 98-5, which required expensing previously capitalized start-up costs. Operating profit also fell 20%, driven by a C-130J cost-growth charge, lower Space Systems volume, and the Titan IV adjustment. Partly offsetting these were one-time gains of about $249 million pretax, mainly from the sale of the remaining L-3 stake.
Is the dividend cut a sign of financial distress?
The filing presents the cut as a deliberate step to generate cash for debt reduction and to fund core investments, not as a response to a liquidity crisis. Management states cash and credit facilities (a $3.5 billion long-term revolver and a $1.0 billion short-term facility) are sufficient for the next twelve months. However, the company's leverage increased, and cash from operations declined sharply, so investors should watch whether the divestiture proceeds materialize as expected.
What is the status of the COMSAT transaction and what happens if it fails?
The first phase, a tender for 49% of COMSAT for $1.2 billion, closed in September 1999. The second phase, a one-for-one share exchange merging COMSAT into a Lockheed subsidiary, requires federal legislation to lift foreign and ownership restrictions and FCC approval. A compromise bill was expected to be enacted before May 2000, but the outcome was uncertain. If the merger is not completed by September 18, 2000 and the parties do not extend, Lockheed would not gain control of COMSAT and would not achieve its telecommunications strategy objectives. PanAmSat has also challenged the FCC order in court.
How dependent is Lockheed Martin on the U.S. Government, and what programs are most at risk?
The U.S. Government accounted for about 71% of 1999 net sales, so the company is highly exposed to defense budgets and congressional funding decisions. The F-22 fighter faced Congressional scrutiny over potential funding cuts, and the Joint Strike Fighter down-select, where Lockheed is one of two finalists, is planned for 2001. Several grand jury investigations and qui tam allegations (including the LANTIRN program and NASA contracts) are also ongoing; management believes material adverse effects are unlikely, but the company cannot yet assess the outcome.
What environmental and legal liabilities could affect future results?
The company has accrued about $200 million for environmental matters beyond the specific sites, and estimates roughly $140 million for Redlands, California perchlorate and solvent work and about $100 million for Burbank and Glendale, with about half of the Burbank/Glendale costs expected to be reimbursed by the U.S. Government. Securities class actions filed in 1999 allege artificially inflated stock prices, and a dispute with the DOE over the Pit 9 waste contract involves an unresolved claim and a $54 million counterclaim. Management views these as manageable, but the Redlands and Burbank tort trials scheduled for 2000 and 2001 could produce unfavorable outcomes.

04—Continue

← View all 10-K filings