Lockheed Martin 1996 Annual Report Download - page 57

Lockheed Martin Corporation
mission have approved most defense/aerospace industry
business combinations. Lockheed Martin has been at the
forefront of the industry's rapid consolidation. Since 1993,
the Corporation has made several strategic acquisitions and
alliances which affect many facets of its business, including
tactical military aircraft production, space launch systems
and defense and commercial electronics. These acquisitions
are examples of actions that have broadened the Corpora-
tion's business portfolio, created opportunities for increased
efficiency and cost competitiveness, improved access to new
markets and reduced exposure to future defense budget pro-
gram reductions. In addition, the Corporation has continued
to undertake cost reduction efforts throughout its operating
units while monitoring and adjusting employment levels
consistent with changing business requirements. During
1996, the Corporation's efforts resulted in a number of wins
in several significant competitions, including the Joint
Strike Fighter, VentureStar™, Space Based Infrared System
(SBIRS) and Evolved Expendable Launch Vehicle programs,
among others.
Currently, the defense/aerospace industry is undergoing
another phase of consolidation. In the past few months, The
Boeing Company (Boeing) acquired the aerospace and
defense businesses of Rockwell International Corporation,
and has announced it will combine with McDonnell Douglas
Corporation. Also, the Raytheon Company has announced it
will acquire the military businesses of GM Hughes Electron-
ics Corporation and Texas Instruments Corporation. The
synergies which may result from these business combina-
tions, if approved, could create more formidable competitors
within the industry.
The Corporation's executive management and Board of
Directors continue to review and monitor the Corporation's
strategic plans. These plans include assessing business
combinations and joint ventures with companies engaged in
similar or closely related businesses, building market share
in core businesses and divesting less well-positioned and
non-core businesses. Examples of recent actions include the
Loral Transaction, the exchange of the remaining owner-
ship interest in Materials, the divestiture of the Armament
Systems and Defense Systems business units, the transition
of Space Shuttle processing operations to United Space
Alliance (USA), a joint venture with Boeing which has
become NASA's prime Space Shuttle operations contractor,
and the proposed transaction with Newco. It is important to
note that the accounting implications of unconsolidated
entities such as Newco and USA are markedly different from
those of consolidated entities. The Corporation accounts for
these unconsolidated entities under the equity method of
accounting. Net sales and earnings from operations for such
entities are not included in the consolidated amounts for
the Corporation; instead, the Corporation's proportionate
share of net earnings or losses from these entities are
recorded as other income and expenses.
To date, the Corporation's major programs generally
have been well supported, but uncertainty exists over the
size and scope of future defense and space budgets and their
impact on specific programs. Some of the Corporation's pro-
grams have been delayed, curtailed or terminated, and
future spending reductions and funding limitations could
further impact these programs or have similar effects on
other existing or emerging programs.
As a U.S. Government contractor, the Corporation's
government contracts and operations are subject to govern-
ment oversight. The government may investigate and make
inquiries of the Corporation's business practices and con-
duct audits of contract performance and cost accounting.
These investigations may lead to claims against the Corpora-
tion. Under U.S. Government procurement regulations and
practices, an indictment of a government contractor could
result in that contractor being fined and/or suspended for a
period of time from eligibility for bidding on, or for award
of, new government contracts; a conviction could result in
debarment for a specified period of time. Although the out-
come of such investigations and inquiries cannot be pre-
dicted, in the opinion of management there are no claims,
audits or investigations pending against the Corporation that
are likely to have a material adverse effect on either the Cor-
poration's business or its consolidated financial position or
results of operations.
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