Lockheed Martin 1998 Annual Report Download - page 37

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Lockheed Martin Corporation
Corporation’s 1997 net sales, Lockheed Martin’s investment in a
telecommunications partnership, and approximately $1.6 billion in
cash, which was initially financed through the issuance of commer-
cial paper; however, $1.4 billion was subsequently refinanced with
a note, due November 17, 2002 and bearing interest at 6.04%, from
Lockheed Martin to LMT Sub. The fair value of the non-cash net
assets exchanged was approximately $1.2 billion.
The GE Transaction was accounted for at fair value, and resulted in
the reduction of the Corporation’s stockholders’ equity by $2.8 billion
and the recognition of a tax-free gain, in other income and expenses,
of approximately $311 million during the fourth quarter of 1997. For
purposes of determining net loss applicable to common stock used in
the computation of loss per share, the excess of the fair value of the
consideration transferred to GE (approximately $2.8 billion) over the
carrying value of the Series A preferred stock ($1.0 billion) was treated
as a deemed preferred stock dividend and deducted from 1997 net
earnings in accordance with the requirements of the Emerging Issues
Task Force’s Issue D-42. This deemed dividend had a significant
impact on the loss per share calculations, but did not impact reported
1997 net earnings. The effect of this deemed dividend was to reduce
the basic and diluted per share amounts by $4.93.
During the second quarter of 1998, the final determination of
the closing net worth of the businesses exchanged was completed,
resulting in a payment of $51 million from the Corporation to MRA
Systems, Inc. (formerly LMT Sub). This final settlement did not
impact the gain previously recorded on the transaction. Subsequently,
the remainder of the cash included in the transaction was refinanced
with a note for $210 million, due November 17, 2002 and bearing
interest at 5.73%, from Lockheed Martin to MRA Systems, Inc.
Note 4—Other Acquisitions and Divestitures
In July 1997, the Corporation and Northrop Grumman Corporation
(Northrop Grumman) announced that they had entered into an
agreement to combine the companies whereby Northrop Grumman
would become a wholly-owned subsidiary of Lockheed Martin.
The proposed merger with Northrop Grumman was terminated by
the Board of Directors of Lockheed Martin in July 1998.
In March 1997, the Corporation executed a definitive agreement
valued at approximately $525 million to reposition 10 non-core
business units as a new independent company, L-3 Communications
Corporation (L-3), in which the Corporation retained an approximate
35 percent ownership interest at closing. These business units
contributed approximately two percent of the Corporation’s net
sales during the three month period ended March 31, 1997. The
transaction, which closed on April 30, 1997 with an effective
date of March 30, 1997, did not have a material impact on the
Corporation’s earnings. During May 1998, L-3 completed an initial
public offering resulting in the issuance of an additional 6.9 million
shares of its common stock to the public. This transaction resulted
in a reduction in the Corporation’s ownership to approximately
25 percent, and the recognition of a pretax gain of $18 million in
other income and expenses. The gain increased net earnings by
$12 million, or $.03 per diluted share. At December 31, 1998 and
1997, the Corporation’s investment in L-3 totaled $77 million and
$49 million, respectively.
In February 1999, 4.5 million shares previously owned by the
Corporation were sold as part of a secondary public offering
by L-3. This transaction resulted in a further reduction in the
Corporation’s ownership to approximately 7.1 percent. Management
estimates that the gain recognized on this transaction will increase
net earnings for the first quarter of 1999 by an amount between
$75 million and $85 million. Subsequent to this transaction, the
Corporation’s remaining investment in L-3 will be accounted
for as an available-for-sale investment, as defined in SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities.”
Under SFAS No. 115, investments in available-for-sale securities
are adjusted to reflect current market values at each reporting
period, with resulting unrealized gains or losses, net of income
taxes, reported as a component of other comprehensive income.
During the third quarter of 1996, the Corporation announced its
intention to distribute via an exchange offer its 81 percent interest
in Martin Marietta Materials, Inc. (Materials) to its stockholders. In
October 1996, approximately 15.8 million shares of the Corporation’s
common stock were exchanged for the 37.35 million shares of
Materials common stock held by the Corporation. Upon the
closing of this transaction, the Corporation had no remaining own-
ership interest in Materials and had reduced its common shares
outstanding by approximately four percent. This fourth quarter
1996 exchange was accounted for at fair value, resulting in the
reduction of the Corporation’s stockholders’ equity by $750 million
and the recognition of a pretax gain of $365 million in other
income and expenses.
In November 1996, the Corporation announced the proposed
divestiture of two of its business units, Armament Systems and
Defense Systems. This transaction, which concluded with the
Corporation’s receipt of $450 million in cash in January 1997, had
no pretax effect on the results of operations for 1997 or 1996.
On a combined basis, the Materials exchange and the Armament
Systems and Defense Systems divestiture noted above increased
1996 net earnings by $351 million.
In April 1996, the Corporation consummated its business com-
bination with Loral Corporation (Loral) for a total purchase price,
including acquisition costs, of approximately $7.6 billion (the Loral
Transaction). In addition to the acquisition of Loral’s defense elec-
tronics and systems integration businesses, the Loral Transaction
resulted in the Corporation acquiring shares of preferred stock of
Loral Space & Communications, Ltd. (Loral SpaceCom), a newly-
formed company, which were convertible into 20 percent of Loral
SpaceCom’s common stock on a diluted basis at the date of acqui-
sition. The Corporation’s investment in Loral SpaceCom totaled
$393 million at December 31, 1998 and 1997, and the fair value at
December 31, 1998 was estimated to be approximately $650 mil-
lion. The Loral Transaction was accounted for using the purchase
method of accounting. The businesses acquired in connection with
the Loral Transaction have been included in the results of opera-
tions of the Corporation since April 1996.
Note 5—Restructuring and Other Charges
During the fourth quarter of 1998, CalComp Technology, Inc.
(CalComp), a majority-owned subsidiary of the Corporation,
made a decision to divest certain of its businesses and concluded