Lockheed Martin 2015 Annual Report Download - page 25

equity investments is in our Space Systems business segment where approximately 21% of its 2015 operating profit was
derived from its share of earnings from equity method investees, particularly that in United Launch Alliance (ULA).
Our ULA investment may be negatively impacted by restrictions in the National Defense Authorization Act for Fiscal
Year 2015 that prevent the award or renewal of contracts after December 29, 2014 for evolved expendable launch vehicle
services that utilize a rocket engine designed or manufactured in the Russian Federation such as the RD-180 engine used by
the Atlas V launch vehicle. The Consolidated Appropriations Act of 2016 lifts these restrictions for fiscal year 2016.
Accordingly, Lockheed Martin does not anticipate an impact on the carrying value of its equity investment in ULA in 2016.
If restrictions are re-imposed for fiscal year 2016, as some in Congress advocate, or the lifting of the restrictions is not
extended to later fiscal years, or if sanctioned individuals are found to be too closely connected to the engine manufacturer,
ULA will be challenged to compete effectively for national security launch procurements which could negatively impact
ULA and the carrying value of our investment in ULA. ULA continues to evaluate domestic engine alternatives and we will
continue to monitor the carrying value of our investment.
The acquired Sikorsky business may underperform relative to our expectations, the transaction may cause our
financial results to differ from our expectations or the expectations of the investment community and we may not be
able to achieve anticipated cost savings or other anticipated synergies.
On November 6, 2015, we completed the acquisition of Sikorsky Aircraft Corporation (Sikorsky) by purchasing all of
the issued and outstanding equity of Sikorsky for $9.0 billion, net of cash acquired. We believe that we will benefit from the
integration of our products and technologies with those of the Sikorsky business and realize synergies and potential for long-
term growth, as well as expanded capabilities and customer relationships as a result of the acquisition. However, the
integration process is complex, costly and time-consuming and we may not be able to capture anticipated synergies, tax
benefits, cost savings, and business opportunities in the time frame anticipated, or at all. Sikorsky also may not perform as
expected, or demand for its products may be adversely affected by global economic conditions, including oil and gas trends
that are outside of its control. The acquisition could also cause disruptions in our and Sikorsky’s business, including potential
adverse reactions or changes to business relationships and competitive responses. The DoD has expressed concerns regarding
greater consolidation in the defense industry at the prime contractor level in the context of our acquisition of Sikorsky and
indicated the potential that they will seek to work with Congress to explore additional legal tools and policy to preserve
diversity at the prime contract level. Changes in DoD policy or perception of our size could have adverse impacts on our
business, including our success in future contract pursuits. Any of the foregoing could adversely affect our business, financial
condition and results of operations.
We are pursuing a plan to separate and combine our government information technology and technical services
businesses with Leidos, Holdings, Inc. in a tax-efficient Reverse Morris Trust transaction. The proposed transaction
may not be completed on the currently contemplated timeline or at all and may not achieve the intended benefits.
On January 26, 2016, we entered into definitive agreements to separate and combine our Information Systems & Global
Solutions (IS&GS) business segment with Leidos Holdings, Inc. (Leidos) in a tax-efficient Reverse Morris Trust transaction.
As part of the transaction, we will receive a $1.8 billion one-time special cash payment. The cash payment is subject to
adjustment and could be less or more than anticipated due to variances in working capital. Additionally, our stockholders will
receive approximately 50.5 percent of the outstanding equity of Leidos on a fully diluted basis (approximately 77 million
shares) with an estimated value of $3.2 billion based on Leidos’ stock price on the date of announcement. However, the
actual value of the stock to be received by our stockholders will depend on the value of such shares at the time of closing of
the transaction and our stockholders may receive more or less than the anticipated value. At our election, the distribution may
be effected by means of a pro rata dividend in a spin-off transaction or in an exchange offer for outstanding Lockheed Martin
shares in a split-off transaction. The transaction structure, which is subject to market conditions, is currently contemplated to
be a split-off transaction resulting in a decrease in our outstanding common shares and a significant book gain at closing. In a
split-off transaction, only those stockholders that elect to participate will receive Leidos shares in the merger transaction,
provided, that, if the exchange offer is not fully subscribed, Lockheed Martin will spin-off the remaining shares to be
converted into Leidos stock in the merger pro rata. The value of the shares of Leidos stock to be received and the value of our
stock at the time of the split-off will also impact the number of any shares of our stock retired in the split-off and the amount
of any book gain. Although the transaction structure is currently contemplated to be a split-off transaction, there is no
assurance that the transaction will be structured as a split-off transaction or that it will result in a reduction in our shares or a
gain at closing.
There can be no assurance of the timing of a transaction with Leidos, or whether any such transaction will take place at
all. The transaction is subject to closing conditions, including the receipt of approval of Leidos stockholders, regulatory
approvals and receipt of opinions of tax counsel, and there can be no assurance that we will receive the required approvals in
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