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    Annual Report 1997


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    Financial Highlights (In millions, except per share data) 1997(a) 1996(a) Net sales $28,069 $26,875 (c) Net earnings l,300 l,347(d) Diluted earnings per share before deemed preferred stock dividend(b) 6.09(c) 6.09(d) Cash dividends per common share 1.60 1.60 Total assets 28,361 29,540 Short-term borrowings 494 1,110 Current maturities of long-term debt 876 180 Long-term debt 10,528 10,188 (b) Shareholders' equity 5,176 6,856 Negotiated backlog 47,059 50,406 (a) Includes the effects of the business combination with Loral Corporation since April 1996. (b) Earnings per share for 1997 excludes the effects of a deemed preferred stock dividend resulting from a transaction with General Electric Company (GE). 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 determining net earnings applicable to common stock used in the computation of earnings per share. The effect of this deemed dividend was to decrease basic earnings per share by $9.85, and was antidilutive in the calculation of diluted earnings per share. (c) Earnings for 1997 include the effects of a tax-free gain of $311 million, or $1.46 per diluted share, related to the transaction with GE to redeem the Corporation's Series A preferred stock, and nonrecurring and unusual charges related to the Corporation's decision to exit certain lines of business in the areas of children and family services systems development and environmental remediation, and related to impairments in the values of various non-core investments and certain other assets in keeping with the Corporation's continued focus on core operations. These charges decreased net earnings by $303 million, or $1.42 per diluted share. (d) Earnings for 1996 include the effects of a nonrecurring gain resulting from divestitures which increased net earnings by $351 million, or $1.59 per diluted share. The gain was substantially offset by nonrecurring charges related to the Corporation's environmental remediation business, and related to impairments in the values of non-core investments and certain other assets, and costs for facility closings and transfers of programs. These charges decreased net earnings by $209 million, or $.94 per diluted share. Contents To Our Shareholders 1997 Achievements On the Cover: From the depths of the oceans to the far reaches of space, Lockheed Martin will continue to Financial Section write new chapters in the chronicle of technological advances. We will enjoy success in the highly competitive global marketplace. Success will depend on the intensity with which we pursue our Corporate Directory work and excellence in everything we do. We are proud of our heritage, confident of our present, and excited about our future. General Information


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    "1997 was the third consecutive year of significant achievements..." Vance D. Coffman Chief Executive Officer and Vice Chairman Norman R. Augustine Chairman Peter B. Teets President and Chief Operating Officer Dear Fellow Shareholders Upon the completion of the Generate substantial cash flow merger forming Lockheed Martin and deploy cash to enhance Corporation, we set forth five goals shareholder value for the new corporation: Produce double-digit earnings per Enhance our position as one of share growth the leaders in the aerospace/defense Achieve superior shareholder returns. industry Achieve significant cost reductions 1997 was the third consecutive year of to increase margins and improve significant achievements in meeting competitiveness each of these goals and fulfilling the promise of Lockheed Martin.


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    "Mission Success is the 'litmus test' for our systems." Enhance Aerospace/Defense such items as satellite deployments, On July 3, 1997, the Corporation Leadership — test flights and missile launches, announced the execution of an $11.6 Lockheed Martin has led the including development efforts) were billion merger agreement with the consolidation of the industry, growing successful. For many of our Northrop Grumman Corporation. net sales to a record $28 billion in programs, the customers score our On February 26, 1998, stockholders 1997. In an industry as technologically performance with award fees. Our of Northrop Grumman approved the demanding as ours and where the award fees in 1997 were representa- merger and stockholders of Lockheed adverse consequences of product tive of leadership performance — a Martin approved the issuance of failures are substantial, leadership median of approximately 95 percent common stock necessary to complete comes not from size, but from perfor- of all available award fees were the merger, and closing was targeted mance. Mission Success is the "litmus awarded by our customers, and nearly for March 17, 1998. On March 9, test" for our systems. Our Mission one-third of those award fee ratings 1998, the Corporation announced Success record in 1997 was just short were at 100 percent. that it had been informed by the of perfection — 96 percent of over Department of Justice (DOJ) that the DOJ was fundamentally opposed 600 measurable events (comprising to the merger. The Corporation has committed that it will not close on its combination with Northrop Grumman prior to April 24, 1998 and EchoStar III direct-to-home communications satellite gets a successful lift from an Atlas IIAS will in the interim attempt to develop and submit a proposal responding to the DOJ's antitrust concerns while preserving the benefits of the merger. As we went to press, the DOJ had informed the Corporation that it did not find this commitment satisfactory and the matter remained unresolved.


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    "The Corporation won more than two-thirds of its competitive bids in 1997" Longbow Apache is a true around-the-clock, all-weather anti-armor platform Achieve significant cost reductions to increase margins and improve competitiveness — The Corporation achieved significant progress in 1997, and remains ahead of schedule in its consolidation program to reduce annual costs by $2.6 billion. This progress was manifested in 1997 through the achievement of record operating margins and record win rates on competitive programs. Excluding the effects of nonrecurring and unusual items, our operating margin, based on Earnings Before Interest and Taxes (EBIT), of 10.4 percent was above the 10 percent margin recorded in 1996. Equally important for the future, If consummated, the Northrop Generate substantial cash flow and a key metric of our improved Grumman combination will provide and deploy it to enhance competitiveness, the Corporation further opportunity for cost savings shareholder value — won more than two-thirds of its and increased competitiveness. In 1997, the Corporation generated competitive bids in 1997. This win Preliminary analyses have identified over $1.6 billion in cash, consisting rate was up from the exemplary an additional $1 billion in annual of $900 million in free cash flow 63 percent win rate achieved in 1996. steady-state savings expected to be from operations and $750 million in achieved from cost reduction oppor- after-tax proceeds from divestitures. tunities related to this transaction. While our stated priority entering The majority of these savings accrue to the government. 3


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    The New En Route Center — modern air traffic management for the United Kingdom transaction consummated in October 1996, the Corporation retired in excess of 16 percent of its diluted shares outstanding in 1996 and 1997. Produce double-digit earnings per share growth — Lockheed Martin's diluted earnings per share over the past three years have been impacted by numerous nonrecurring and unusual items arising out of the Corporation's consolidation and shareholder value initiatives (most notably the negative impact of the deemed preferred stock dividend of $8.55 per diluted share the year was to use available cash to $1.6 billion in cash for all of the in 1997) which are described in detail reduce debt resulting from the Loral Corporation's convertible preferred in management's financial discussion transaction, the Corporation was stock held by the General Electric and analysis section of this report. presented a unique opportunity Company. This transaction resulted Excluding those nonrecurring and to enhance shareholder value. In in approximately 29 million unusual items, 1997 diluted earnings November, the Corporation equivalent common shares being per share would have been $6.05 per exchanged a subsidiary composed of reacquired. Combined with the share, an 11 percent increase over the Access Graphics and thrust Martin Marietta Materials exchange similarly-adjusted 1996 earnings per reversers businesses, its investment share of $5.44. This earnings per in Globalstar, and approximately share growth exceeded growth in net sales, which reached a record $28.1


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    "With the fulfillment of major goals we set for ourselves at the time of the 1995 merger... a firm foundation for the future has been established." billion in 1997 compared with $26.9 Goals for 1998 and Beyond businesses will provide products and billion in 1996. Earnings per share services to other companies within growth was also achieved despite With the fulfillment of major goals Lockheed Martin as well as to an 11 percent increase in goodwill and we set for ourselves at the time other prime contractors and other intangible amortization, which rose of the 1995 merger of Lockheed and customers around the world. At the to $446 million in 1997 from $402 Martin Marietta, a firm foundation same time, all Lockheed Martin million in 1996. This amortization for the future has been established. businesses will purchase the products represents an ongoing non-cash Generating robust cash flows and services they need from the expense reflected in the Corporation's will continue to be an important goal most capable, cost effective suppliers results of operations. of Lockheed Martin. In fact, we in the world, whether these have recently raised the weighting of suppliers are found inside or outside Generate superior shareholder returns — the cash generation element of the Lockheed Martin. Despite share price performance management incentive compensation The Corporation faces an in 1997 being below overall market formula. We recognize cash flow intensely competitive environment averages, we have realized an as a key valuation driver and a key to in our key businesses, a new set excellent shareholder return record enhancing long-term earnings. of competitors and global market (based on stock price appreciation Our goals for 1998 and beyond dynamics in our closely-related plus dividends) since the formation include our continuing commitment target areas of information services of Lockheed Martin three years ago. to being a "merchant supplier" and commercial space, along Over that period, Lockheed Martin and a "merchant buyer" in the world with overall higher standards of generated a 28 percent compound marketplace. This means that our shareholder returns. annual shareholder return, which compares favorably to the 2 5 percent F-22 Raptor air superiority fighter makes its first flight annual return achieved by our aerospace/defense peer group. 5


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    To enhance our position as a Procurement Leverage — days sales outstanding could generate world-class company, and in order As a premier high-technology over $200 million in cash flow to meet our goal of superior share- systems provider, the Corporation to redeploy toward growing share- holder returns, we must continually has historically procured goods and holder value. evaluate our processes and implement services totaling about 50 percent changes to improve the way we of net annual sales. The financial Inventory Management — do business, over and above activities and operational benefits from forging Lockheed Martin had over $3 billion designed to achieve consolidation stronger relationships with strategic in inventories at year end 1997. savings. Lockheed Martin is partners, embracing electronic It is estimated that a five percent committed to growing shareholder commerce, and working more closely improvement in our inventory value by improving productivity and with our suppliers can provide turnover rate could generate more efficiencies, and generating additional improved returns to our customers than $150 million in cash flow. cash flows through the sharing and and shareholders. implementation of "Best Practices" Manufacturing Excellence — throughout the Corporation. Receivables Reduction — We are installing a "lean thinking" We have identified five initiatives, Lockheed Martin had $5 billion mentality throughout our to be launched in 1998, to focus in receivables at year end 1997, repre- Corporation to reduce cycle times, our management processes on the senting opportunities to improve improve quality, promote "just in fundamentals of cash flow generation, billing and cash collection cycles. It is time" manufacturing, and eliminate increased competitiveness, and estimated that a reduction of three non-productive assets. At the continual operating margin enhance- ment. These initiatives can be summarized as follows: Sandia-developed air bags give Mars Pathfinder a soft landing


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    We are confident of our present and excited about our future as we look to the new challenges ahead." same time, we are maintaining and Our employees have done a While we take pride in our enhancing our standards of quality superlative job in working together history, we have challenged ourselves to ensure relentless focus on future as a team during a period of unprece- to improve upon the past. And Mission Success. dented consolidation in our industry. while that has been our attitude Our unrelenting drive to become since we formed Lockheed Martin Employee Development — more efficient and productive, on March 15, 1995, we are confident In order to drive our productivity and accelerate our growth outlook, of our present and excited about gains, we must continue to empower provides a brighter future for our our future as we look to the new our employees with the proper employees, attractive pricing for challenges ahead. tools and incentives. Productivity our customers, and higher returns improvements should result in mean- for our shareholders. March 12, 1998 ingful margin improvements. While Before closing, we would like each productivity step is important, to express our admiration, gratitude so also is the strong commitment to and thanks to Daniel M. Tellep, the develop new technologies and the first Chairman and Chief Executive systems that bring them to everyday Officer of Lockheed Martin, for use. Employee development and Norman R. Augustine his dedicated and exemplary service Chairman capability enhancement make this to the Corporation and its Board possible. We continue to invest about of Directors. Dan has decided not to $1 billion annually in research and seek re-election to the Board in development efforts and bid and order to spend more time with his proposal activities to build advanced family in California. Vance D. Coffman technology capabilities and win Chief Executive Officer and Vice Chairman new business. Peter B. Teets President and Chief Operating Officer 7


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    1997 Achievements Space & Strategic Missiles Sector 100 percent Mission Success Lockheed Martin builds the on five Titan, eight Atlas, one External Tanks for eight Athena and three Russian successful Space Shuttle Proton vehicle launches. launches. U.S. Air Force awards Lockheed Martin completes Lockheed Martin a develop- demonstration tank proof ment contract for the Evolved testing for the X-33 in support Expendable Launch Vehicle of the VentureStar™ Reusable family of launchers. Launch Vehicle. Mel Brashears President and Chief Operating Officer Electronics Sector U.S. Air Force awards contract Lockheed Martin signs a con- to develop and integrate tract to provide a vessel traffic modifications for the A/0A-10 management system to China. aircraft fleet. Lockheed Martin to build The Raytheon 77 Systems "smart" guidance kits for the Inc./Lockheed Martin Javelin Wind Corrected Munitions joint venture receives a con- Dispenser. tract for full-rate production. Thomas A. Corcoran President and Chief Operating Officer Information & Services Sector 100 percent Mission Success The U.K. National Air Traffic on eight Space Shuttle Services selects Sky Solutions missions launched by United Ltd. as preferred bidder for Space Alliance. the New Scottish Centre, a FAA selects Lockheed Martin new air traffic control facility. Sky Solutions is owned by to modernize the nation's Lockheed Martin and Bovis Ltd. air traffic control system, including assistance to the The U.S. Patent and Trademark FAA's upgrade of computer Office awards Lockheed Martin and control systems. contract for information Arthur E. Johnson President and Chief Operating Officer systems development and maintenance. Aeronautics Sector F-22 aircraft rollout April 9 Singapore makes follow-on and first flight September 7. order for 12 F-16 aircraft; U.S. and international Lockheed Martin co-produces customers order 42 C-130J and delivers total of 117 Hercules aircraft in 1997, Fighting Falcons in 1997. bringing total orders and Joint Strike Fighter: Teaming options to 145 aircraft. agreements with Northrop Grumman and British Aerospace; start component production for two X-35 James A. Blackwell, Jr. President and Chief Operating Officer concept demonstrators; Energy & Environment Sector Industry Week magazine investment and saving $106.3 names the Paducah Gaseous million by turning Tritium Diffusion Plant as a Top 10 Research Laboratory into a Best Plant in America. chemical/radiation detection Sandia receives Department research facility. of Energy award for delivering Lockheed Martin employees at a 500 percent return on Idaho National Engineering and Environmental Laboratory, Oak Ridge Energy Systems and Robert J. Stevens President and Chief Operating Officer 8


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    100 percent Mission Success Lockheed Martin and Russia's Lockheed Martin supports Lockheed Martin conducts on 54 commercial, four civil Intersputnik International NASA's Mars Pathfinder, 15 successful land- and and four military satellites, Organization of Space Mars Global Surveyor and sea-launched strategic and all manufactured by Lockheed Communications form a joint Cassini planetary missions. tactical missile flights. Martin, including the first venture called Lockheed Lockheed Martin assists United Missile Defense A2100 bus completed at the Martin Intersputnik to provide with the successful second Company is formed to Corporation's new Commercial international telecommunica- Hubble Space Telescope strengthen National Missile Satellite Center. tions services. servicing mission. Defense bid. Lockheed Martin wins 25 The Lockheed Martin-Tenix Lockheed Martin Federal A Lockheed Martin-Northrop domestic and international joint venture to manage to Systems-Owego attains highest Grumman joint venture is postal contracts to provide completion the Jindalee rating of a company's software formed to produce Longbow advanced recognition, automa- Operational Radar Network development capability from Apache anti-armor missiles tion, material handling in Australia. the Carnegie Mellon Software and missile launchers for and information management Engineering Institute, joining U.S. Army. Spanish Ministry of Defense systems. only two other companies selects the AEGIS combat Ballistic Missile Defense worldwide rated at Level 5. system for its F-100 frigates. Organization and U.S. Army conduct two successful test flights of the Patriot Advanced Capability (PAC-3) Missile. The Census Bureau selects for satellite operations, The New York State in 24 states. Local number Lockheed Martin to develop operations support, plus main- Metropolitan Transportation portability allows customers and install document imaging tenance and training. Authority selects Lockheed to keep existing telephone system to capture information Martin to outsource its infor- numbers if they switch local The Environmental Protection from forms used for the Year mation technology initiatives. service providers. Agency awards Lockheed 2000 Census. Martin contracts to support Lockheed Martin becomes Lockheed Martin wins U.S. Air Force Space the agency's computing the North American Numbering Phase I of Consolidated Space Command's 50th Space and telecommunications Plan Administrator; signs Operations Contract. Wing selects Lockheed Martin requirements. Local Number Portability contracts serving phone carriers successful Interim Program Lockheed Martin and Alenia Deliver first operational Receive U.S. Air Force contract Review confirming we're Aerospazio announce launch Block 30 EC-130H Compass to develop technologies/con- on schedule, within budget, of C-27J medium airlifter. Call electronic warfare aircraft. cepts for a military spaceplane. with robust design. Lockheed Martin-Northrop Successful transition of Aircraft & Logistics Centers Successful X-33 Critical Design Grumman team joins Big Safari maintenance and begin operating January 1 Review, providing go-ahead Australia's Transfield Defence modification work from following consolidation of four to complete fabrication (now Tenix) to compete Ontario plant to Palmdale; units into a single operating and assembly of subscale for Wedgetail airborne early close Ontario plant as part company; capture contracts prototype. Linear Aerospike warning and control program. of facilities consolidations. totaling over $1.25 billion SR-71 Experiment validates in 1997. propulsion configurations. Hanford are honored with Vice The Joint Program Office Oak Ridge Energy Systems Department of Energy selects President Gore's "Hammer for Unmanned Ground Vehicles delivers "hospital-in-a-box" Lockheed Martin to eliminate Award". selects Lockheed Martin prototype to the Army and solid propellant, rocket motor NASA thanks Sandia for its to provide robotic systems Air Force. cases and missile canisters role in the Pathfinder mission for bomb detection. The U.S. Environmental from former Soviet ICBMs. to Mars, including design and Sandia and eight universities Protection Agency accepts test of airbags that protected will pilot the FAA's new Center Sandia's application to open equipment during landing. of Excellence for air worthiness the Waste Isolation Pilot assurance. Project to store transuranic wastes.


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    Financial Section Management's Discussion and Analysis of Financial Condition and Results of Operations The Corporation's Responsibility for Financial Reporting Report of Ernst & Young LLP, Independent Auditors Consolidated Statement of Earnings Consolidated Statement of Cash Flows Consolidated Balance Sheet Consolidated Statement of Stockholders' Equity Notes to Consolidated Financial Statements Consolidated Financial Data - Eight Year Summary


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    Lockheed Martin Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations Lockheed Martin Corporation (Lockheed Martin or the by April 8, 1998 designed to address the DOJ's antitrust Corporation) is a highly diversified global enterprise concerns while preserving the expected benefits and principally engaged in the conception, research, design, efficiencies of the transaction to the Corporation and its development, manufacture and integration of advanced- stockholders, customers, employees and suppliers. On technology products and services. The following discussion March 12, 1998, the DOJ informed the Corporation that it should be read in conjunction with the audited consolidated found this commitment unacceptable and demanded that financial statements included herein. the Corporation agree to certain substantial divestitures or the DOJ will proceed to court. The DOJ stated that they Transaction Agreement with expected a response by March 16, 1998. Northrop Grumman Corporation The transaction will be accounted for using the On July 3, 1997, the Corporation and Northrop Grumman purchase method of accounting. Concurrent with the Corporation (Northrop Grumman) announced that they consummation of the Merger, the Corporation will increase had entered into an Agreement and Plan of Merger (the the amount of its one-year revolving credit facility from Merger Agreement) to combine the companies in a transac- $1.5 billion to $2.5 billion. The operations of Northrop tion with a total estimated value at the announcement Grumman are expected to be reported in the Electronics, date of approximately $11.6 billion, including Northrop Information & Services, Aeronautics, and Energy and Grumman debt to be assumed by the Corporation of Other segments. approximately $3.1 billion (the Merger). Under the terms of the Merger Agreement, which was approved by the respec- Transaction Agreement with tive Boards of Directors of the Corporation and Northrop General Electric Company Grumman, Northrop Grumman stockholders will receive On November 3, 1997, the Corporation announced a 1.1923 shares of Lockheed Martin common stock for each definitive agreement with General Electric Company (GE) share of Northrop Grumman common stock. On February under which Lockheed Martin would exchange the stock 26, 1998, the stockholders of the Corporation approved the of a newly formed subsidiary, LMT Sub, for all of the issuance of shares of Lockheed Martin common stock in Lockheed Martin Series A preferred stock held by GE and connection with the Merger. In addition, the Corporation's certain subsidiaries of GE (the GE Transaction). The stockholders approved an amendment to Lockheed Martin's Series A preferred stock, which was originally issued to charter to increase the number of authorized shares of GE in connection with the acquisition of GE's aerospace Lockheed Martin common stock from 750 million to 1.5 businesses in 1993, was convertible into approximately billion. Also on February 26, 1998, the stockholders of 29 million shares of Lockheed Martin common stock with Northrop Grumman approved the Merger Agreement pur- a market value of approximately $2.8 billion at the date of suant to which Northrop Grumman is to become a wholly- the announcement of the GE Transaction. owned subsidiary of Lockheed Martin. In accordance with the agreement, on November 17, On March 9, 1998, the Corporation announced that it 1997, Lockheed Martin exchanged all of the outstanding had been informed by the Department of Justice (DOJ) that capital stock of LMT Sub for all of the outstanding Series A the DOJ was fundamentally opposed to the Merger. The preferred stock held by GE and certain subsidiaries of Corporation also announced on that date that it had com- GE. LMT Sub was composed of two non-core commercial mitted to the DOJ not to close the transaction before April business units which contributed approximately five percent 24, 1998, and to develop and submit a proposal to the DOJ 11


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    Management's Discussion and Analysis of Financial Condition and Results of Operations • Continued of the Corporation's 1997 net sales, Lockheed Martin's Loral's former space and satellite telecommunications inter- investment in a telecommunications partnership, and ests, and in which the Corporation acquired shares of pre- approximately $1.6 billion in cash. The cash included in the ferred stock that were convertible into 20 percent of Loral exchange was initially financed through the issuance of SpaceCom's common stock on a diluted basis at the date of commercial paper. On November 20, 1997, $1.4 billion was acquisition, and (ii) the acquisition by the Corporation of refinanced pursuant to a note, due November 17, 2002 and Loral's defense electronics and systems integration busi- bearing interest at 6.04%, from Lockheed Martin to LMT nesses (collectively, the Loral Transaction). With regard to Sub. The remainder is expected to be refinanced with a note the Loral Transaction, the total purchase price paid, includ- from Lockheed Martin to LMT Sub on substantially similar ing acquisition costs, was approximately $7.6 billion. The terms following final determination of the closing net worth Loral Transaction was accounted for using the purchase of the businesses exchanged. method of accounting. In connection with the Loral The GE Transaction was accounted for at fair value, Transaction, Loral changed its name to Lockheed Martin and resulted in the reduction of the Corporation's stock- Tactical Systems, Inc. (Tactical Systems), which became a holders' equity by $2.8 billion and the recognition of a tax- wholly-owned subsidiary of the Corporation. The opera- free gain of approximately $311 million, or $1.46 per diluted tions of Tactical Systems have been included in the results share, during the fourth quarter. For purposes of determin- of operations of the Corporation from April 1, 1996. ing net earnings applicable to common stock used in the Effective June 30, 1997, Tactical Systems was merged with computation of earnings per share, the excess of the fair and into the Corporation. value of the consideration transferred to GE (approximately In March 1997, the Corporation executed a definitive $2.8 billion) over the carrying value of the Series A pre- agreement valued at approximately $525 million to reposi- ferred stock ($1.0 billion) was treated as a deemed preferred tion 10 non-core business units as a new independent stock dividend and deducted from 1997 net earnings in company, L-3 Communications Corporation, in which the accordance with the requirements of the Emerging Issues Corporation retained a 34.9 percent ownership interest at Task Force's Issue D-42. This deemed dividend had a sig- closing. These business units, primarily composed of high- nificant impact on the earnings per share calculations, but technology, product-oriented companies, contributed did not impact reported 1997 net earnings. The effect of approximately two percent of the Corporation's net sales this deemed dividend decreased basic earnings per share by during the three month period ended March 31,1997. The $9.85, and was antidilutive in the calculation of diluted transaction, which closed on April 30, 1997 with an effective earnings per share. date of March 30, 1997, did not have a material impact on the Corporation's earnings. Other Acquisitions and Divestitures During the third quarter of 1996, the Corporation announced its intention to distribute via an exchange offer In April 1996, the Corporation purchased all of the issued its 81 percent interest in Martin Marietta Materials, Inc. and outstanding shares of common stock of Loral (Materials) to its stockholders (the Exchange Offer). Under Corporation (Loral) for an aggregate consideration of $38 the terms of the Exchange Offer, the Corporation's stock- per share in cash. The purchase involved a series of trans- holders were given the opportunity to exchange each actions that resulted in (i) the distribution to stockholders Lockheed Martin common share held for 4.72 common of Loral, immediately prior to the consummation of the shares of Materials on a tax-free basis. The Exchange Offer purchase, of shares of capital stock in Loral Space & Communications, Ltd. (Loral SpaceCom), a newly-formed company, which now owns and manages substantially all of 12


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    Lockheed Martin Corporation expired by its terms on October 18, 1996 and was oversub- the operations of Tactical Systems for a full year, more than scribed. On October 23, 1996, approximately 7.9 million offset the reduction of sales due to divested operations. The shares of the Corporation's common stock were exchanged 1996 increase principally resulted from the inclusion of the for the 37.35 million shares of Materials common stock held operations of Tactical Systems from April 1, 1996, which by the Corporation. Upon the closing of this transaction, more than offset sales decreases in the Aeronautics segment. the Corporation had no remaining ownership interest in The U.S. Government remained the Corporation's largest Materials and had reduced its common shares outstanding customer, comprising 66 percent of the Corporation's by approximately four percent. This fourth quarter 1996 net sales for 1997 compared to 70 percent in 1996 and 69 exchange was accounted for at fair value, resulting in the percent in 1995. reduction of the Corporation's stockholders' equity by $750 The Corporation's operating profit (earnings before million and the recognition of a pretax gain of $365 million. interest and taxes) was approximately $2.8 billion in 1997, a In November 1996, the Corporation announced the two percent increase from the $2.7 billion reported in 1996. proposed divestiture of two of its business units, Armament Operating profit for 1996 was significantly greater than Systems and Defense Systems, to General Dynamics the $1.4 billion reported in 1995. However, the reported Corporation (General Dynamics). This transaction, which amounts for each of the three years presented included the concluded with the Corporation's receipt of $450 million in financial impacts of various nonrecurring and unusual items, cash on January 2, 1997, had no pretax effect on the results the details of which are described below. Excluding the of operations for 1996 or 1997. At December 31,1996, effects of these nonrecurring and unusual items for each $450 million, representing the net assets of the two business year, operating profit for 1997 would have been approxi- units, was included in other current assets. mately nine percent greater than the 1996 amount, which in On a combined basis, the Materials exchange and the turn would have been approximately 29 percent greater than Armament Systems and Defense Systems divestiture noted the 1995 amount. For 1997 compared to 1996, increases in above increased 1996 net earnings by $351 million, or operating profits at the Space & Strategic Missiles and $1.59 per diluted share. Aeronautics segments more than offset a reduction in oper- ating profit at the Information & Services segment. A signif- icant portion of the 1996 increase resulted from the inclusion Results of Operations of the operations of Tactical Systems. Additional growth in The Corporation's operating cycle is long-term and involves various types of production contracts with varying production delivery schedules. Accordingly, results of a Net Sales particular year, or year-to-year comparisons of recorded In millions sales and profits, may not be indicative of future operating results. The following comparative analysis should be $30,000 viewed in this context. $25,000 The Corporation's consolidated net sales for 1997 $20,000 were a record $28.1 billion. Net sales for the year were four $15,000 percent greater than 1996 net sales, which in turn were 18 percent greater than 1995 net sales. Sales increases for $10,000 1997 in the Space & Strategic Missiles, Aeronautics and $5,000 Information & Services segments, as well as the inclusion of $0 97 ( a ) 96 ( a | 95 (a) Includes the effects of the business combination with Loral Corporation since April 1996. 13


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    Management's Discussion and Analysis of Financial Condition and Results of Operations • Continued operating profit in 1996 resulted from increases in the Space approximately $75 million were related to costs for facility & Strategic Missiles and Electronics segments, slightly offset closings and transfers of programs resulting from manage- by declines in the Aeronautics segment. ment's decision to include the operations of Tactical During the fourth quarter of 1997, in addition to Systems in the Electronics, Information & Services, and recording the tax-free gain resulting from the GE Energy and Other segments. Transaction, the Corporation recorded nonrecurring and During the first quarter of 1995, the Corporation unusual pretax charges, net of state income tax benefits, recorded a pretax charge of $165 million for merger related totaling $457 million. These charges were identified in con- expenses in connection with the formation of Lockheed nection with the Corporation's review, which concluded in Martin. During the second quarter of 1995, the Corporation the fourth quarter, of non-strategic lines of business, non- recorded a pretax charge of $525 million in conjunction core investments and certain other assets. Approximately with a corporate-wide consolidation plan under which the $200 million of the pretax charges reflected the estimated Corporation would close certain facilities and laboratories effects of exiting non-strategic lines of business, including and eliminate duplicative field offices in the U.S. and amounts related to the fixed price systems development line abroad, eliminating up to approximately 12,000 positions. of business in the area of children and family services, and This charge represented the portion of the accrued costs related to increases in estimated exposures relative to the and net realizable value adjustments that were not probable environmental remediation lines of business initially identi- of recovery. fied in 1996 and for which initial estimates of exposure Reported net earnings for 1997 were $1.30 billion, were provided in the fourth quarter 1996 charges. These which was approximately three percent lower than the net increases in estimated exposures were based on more cur- earnings reported in 1996. Reported 1996 net earnings of rent information, including deterioration in a partner's financial condition as evidenced by the partner seeking pro- tection under the bankruptcy laws. The remaining charges Net Earnings reflected impairments in the values of various non-core In millions investments and certain other assets in keeping with the Corporation's continued focus on core operations. Operating profit in 1996 included the gain on the Materials exchange discussed previously. In addition, during the fourth quarter of 1996, the Corporation recorded non- recurring pretax charges, net of state income tax benefits, of $307 million. Approximately one-half of the charges reflected the estimated effects of terminating a relationship formed to provide environmental remediation services to government and commercial customers worldwide, and the initial estimated effects related to management's decision to exit a certain environmental remediation line of business. Charges of approximately $85 million were identified in connection with an evaluation of the Corporation's future strategic focus, and reflected impairments in the values of non-core investments and certain other assets which were other than temporary in nature. The remaining charges of 14


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    Lockheed Martin Corporation $1.35 billion were significantly greater than the 1995 net on the earnings per share calculations, but did not impact earnings of $682 million. The 1997 reported amount reported 1997 net earnings. The effect of this deemed includes the Corporation's tax-free gain of $311 million, or dividend decreased basic earnings per share by $9.85 and $1.46 per diluted share, resulting from the GE Transaction, diluted earnings per share by $8.55. Accordingly, the 1997 and the after-tax effects of the nonrecurring and unusual diluted loss per share is not presented on the Consolidated charges described above, which decreased net earnings by Statement of Earnings as the calculated amount was anti- $303 million, or $1.42 per diluted share. The 1996 reported dilutive as compared to the calculated basic loss per share amounts include the after-tax effects of the Materials of $3.12. Basic and diluted earnings per share amounts exchange and the provision for the after-tax effect of the reported were $6.80 and $6.09 for 1996, and $3.28 and Corporation's divestiture of its Armament Systems and $3.09 for 1995, respectively. Defense Systems business units. On a combined basis, the The Corporation's reported 1997, 1996, and 1995 Materials exchange and the divestiture noted above diluted earnings per share before the deemed preferred increased 1996 net earnings by $351 million, or $1.59 per stock dividend were $6.09, $6.09, and $3.09, respectively. diluted share. The 1996 reported amounts also include the Excluding the effects of the nonrecurring and unusual items after-tax impact of the nonrecurring charges described described above, diluted earnings per share before the above, which decreased net earnings by $209 million, or deemed preferred stock dividend for 1997, 1996, and 1995 $.94 per diluted share. The 1995 reported amounts include would have been $6.05, $5.44, and $5.06, respectively. the after-tax effects of the merger related and consolidation The Corporation's debt to capitalization ratio increased charges identified above of $436 million, or $1.97 per from 63 percent at December 31, 1996 to just under 70 per- diluted share. Excluding the effects of these nonrecurring cent at December 31,1997. Total debt (including short-term and unusual items, net earnings for 1997 would have been slightly more than $1.29 billion, representing a seven per- cent increase from the adjusted 1996 net earnings of approx- Diluted Earnings Per Share Before imately $1.20 billion. The adjusted 1996 net earnings Deemed Preferred Stock Dividend amount would have been eight percent higher than the In dollars adjusted 1995 net earnings amount of approximately $1.12 billion. All earnings per share amounts have been computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Prior year amounts computed under the new standard do not differ significantly from amounts computed under previous guid- ance. For purposes of determining net earnings applicable to common stock used in the computation of earnings per share, the excess fair value of assets transferred to GE over the carrying value of the preferred stock (approximately $1.8 billion) was treated as a deemed preferred stock divi- dend 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 15


  • Page 18

    Management's Discussion and Analysis of Financial Condition and Results of Operations • Continued borrowings) at December 31, 1997 increased to $11.9 billion designer, systems integrator and manufacturer of military from $11.5 billion at December 31, 1996 while stockholders' surveillance and combat aircraft, defense electronics and sys- equity decreased to $5.2 billion at December 31, 1997 from tems, airspace management systems, information systems, nearly $6.9 billion at December 31, 1996. These changes marine systems, precision weapons, space systems, and com- principally resulted from the increase in long-term debt and mercial and military aerostructures. Northrop Grumman the redemption of the Series A preferred stock in con- itself has been an active participant in the consolidation of nection with the GE Transaction. The Corporation paid the industry through its acquisitions of Vought Corporation, common dividends of $299 million in 1997, or $1.60 per the defense electronics businesses of Westinghouse common share. Corporation, and Logicon Corporation. The acquisition of Northrop Grumman, if consummated, will strengthen Industry Considerations the Corporation's business portfolio in several key areas and broaden its product lines and range of technologies. The Corporation's primary lines of business are in high In addition to the acquisition actions noted above, the technology systems for aerospace and defense, serving both Corporation's management has been active in identifying government and commercial customers. In recent years, and divesting its less well-positioned and non-core busi- domestic and worldwide political and economic develop- nesses. Such actions include the exchange of the remaining ments have strongly affected these markets, requiring ownership interest in Materials, the divestiture of the significant adaptation by market participants. Armament Systems and Defense Systems businesses to Reductions in the Federal defense budget for research, General Dynamics, the repositioning of non-core businesses development, test and evaluation, and procurement over the as L-3 Communications Corporation, and the exchange of last several years have caused continued pressures on partic- non-core businesses and cash for GE's preferred stock hold- ipants in the aerospace and defense industry to consolidate ings in the Corporation. In addition, the Corporation trans- in order to maintain critical mass and achieve production ferred its Space Shuttle processing operations to United economies. The Corporation has been at the forefront of Space Alliance (USA), a joint venture with The Boeing the consolidation within the industry, as evidenced by the Company which has become NASA's prime Space Shuttle acquisitions of the aerospace businesses of GE, the Fort operations contractor. These actions have helped the Worth and Space Systems divisions of General Dynamics, the defense electronics and systems integration businesses of Loral, and the pending acquisition of Northrop Grumman. These transactions, combined with other Dividends Per Common Share In dollars strategic acquisitions and alliances, have broadened the Corporation's business portfolio, created opportunities for increased efficiency and cost competitiveness, improved access to new markets and reduced the impact of exposure to specific defense budget reductions. The pending acquisition of Northrop Grumman is the latest action taken by the Corporation to solidify its position in the aerospace and defense industry. Northrop Grumman operates principally in the electronics, aircraft and informa- tion technology segments of the defense industry as a 16


  • Page 19

    Lockheed Martin Corporation Corporation's management focus its attention on core As a U.S. Government contractor, the Corporation's competencies. The Corporation's management and Board government contracts and operations are subject to govern- of Directors will continue to periodically review the ment oversight. The government may investigate and make Corporation's strategic plans, which include the possibility inquiries of the Corporation's business practices and con- of further acquisitions and divestitures, joint ventures duct audits of contract performance and cost accounting. and other new business relationships with aerospace and These investigations may lead to claims against the defense companies. Corporation. Under U.S. Government procurement Recently, the U.S. Department of Defense delivered regulations and practices, an indictment of a government to Congress a proposed budget for fiscal year 1999 that contractor could result in that contractor being fined and/or increases weapons procurement by eight percent over last suspended for a period of time from eligibility for bidding year's level, ending a 12-year period of decline. Also, the on, or for award of, new government contracts; a conviction Department of Defense proposed a five-year budget that could result in debarment for a specified period of time. would ultimately exceed the $60 billion target in procure- Although the outcome of such investigations and inquiries ment endorsed in the government's Quadrennial Defense cannot be predicted, in the opinion of management, there Review. This target is considered the minimum necessary to are no claims, audits or investigations pending against the adequately modernize aging ships, aircraft and other equip- Corporation that are likely to have a material adverse effect ment. The potential end to the decline in defense budgets, on the Corporation's business or its consolidated results of combined with a trend toward outsourcing of information operations or financial position. technology functions by federal, state, and local govern- The Corporation remains exposed to other inherent ments and an increase in civil and commercial space activity, risks associated with U.S. Government contracting. These may result in an improved industry market environment in risks include technological uncertainties and obsolescence, future periods. changes in government policies and dependence on annual The Corporation continued to achieve an excellent Congressional appropriation and allotment of funds. mission success record during 1997, with a 96 percent suc- Progress has been made in expanding the Corporation's cess rating out of 640 events such as test flights, rocket presence in related commercial and non-defense markets, firings, missile launches and satellite deployments. In the most notably in space and telecommunications activities, new business competition arena, the Corporation won more information management and systems integration. than two-thirds of its competitions based on dollars bid, Although these lines of business are not dependent on which was above its 1996 performance. To date, the defense budgets, they share many of the risks associated Corporation's major programs generally have been well with the Corporation's primary businesses, as well as others supported, but uncertainty exists over the size and scope of unique to the commercial marketplace. Such risks include future defense and space budgets and their impact on spe- development of competing products, technological feasibil- cific programs. Some of the Corporation's programs have ity, product obsolescence and the risks inherent in conduct- been delayed, curtailed or terminated, and future spending ing business internationally. The Corporation has advanced reductions and funding limitations could further impact funds to a foreign subcontractor for the manufacture of these programs or have similar effects on other existing or launch vehicles and related launch services. At December emerging programs. 31,1997, such advances totaled approximately $450 million and were included in inventories. 17


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    Management's Discussion and Analysis of Financial Condition and Results of Operations • Continued The following table displays the pretax impact of the Discussion of Business Segments nonrecurring and unusual items discussed earlier as The Corporation's operations are divided into five business reflected in each segment's operating profit for each of segments: Space & Strategic Missiles; Electronics; the three years presented. Information & Services; Aeronautics; and Energy and (In millions) 1997 1996 1995 Other. Certain amounts for prior years have been Nonrecurring and Unusual Items: reclassified to conform with the 1997 presentation. Consolidated Effects The following table displays net sales for the Lockheed Gain on GE Transaction $ 311 $ — $ — Martin business segments for each of the three years in the Gain on Materials exchange — 365 — Nonrecurring and unusual charges (457) (307) — period ended December 31, 1997, which correspond to the Merger related and segment information presented in Note 17 to the consoli- consolidation expenses — — (690) dated financial statements. $(146) $ 58 $(690) Segment Effects (In millions) 1997 1996 1995 Space & Strategic Missiles $ (87) $ (25) $(263) Net Sales Electronics (69) — (93) Space & Strategic Missiles Information & Services (163) (86) (24) $ 8,303 $ 7,904 $ 7,813 Aeronautics (44) (46) (138) Electronics 7,069 6,675 3,357 Information & Services Energy and Other 217 215 (172) 6,468 5,893 4,173 Aeronautics 6,045 5,596 6,617 $(146) $ 58 $(690) Energy and Other 184 807 893 $28,069 $26,875 $22,853 In an effort to make the following discussion of significant operating results of each business segment more Operating profit by industry segment for each of understandable, the impact of these nonrecurring and the three years in the period ended December 31, 1997, unusual items discussed earlier have been excluded. including the effects of the nonrecurring and unusual Space & Strategic Missiles items discussed previously, is displayed in the table below. This information also corresponds to the segment Net sales of the Space & Strategic Missiles segment information presented in Note 17 to the consolidated increased by five percent in 1997 compared to 1996 and by financial statements. one percent in 1996 compared to 1995. The 1997 increase was the result of greater Proton D-l-e launch services (In millions) 1997 1996 1995 volume as well as an increase in revenue from commercial Operating Profit Space & Strategic Missiles $1,053 $ 973 $ 463 satellite programs. Increases in commercial satellite systems Electronics 594 673 224 volume and classified program activities in 1996 compared Information & Services 163 290 267 to 1995 were largely offset by the timing of Atlas II and Aeronautics 612 441 394 Energy and Other 357 356 29 Atlas E launches (seven successful launches in 1996 versus $2,779 $2,733 $1,377 12 in 1995) and from reduced volume on the Trident fleet ballistic missile program. Operating profit for the segment increased by 14 per- cent in 1997 compared to 1996 and by 37 percent in 1996 compared to 1995. The 1997 increase resulted from an increase in the profitability of Atlas launches combined with 18


  • Page 21

    Lockheed Martin Corporation the increase in Proton D-l-e launch activity mentioned to reflect the Tactical Systems companies and the businesses above. The increase in 1996 was attributable to the increases divested to General Dynamics on a comparable basis, oper- in commercial satellite volume and classified program ating profit for the segment would have decreased by seven activities discussed above, margin expansion from improved percent in 1997 compared to 1996 and would have increased cost performance on the Corporation's Titan and Atlas by 28 percent in 1996 compared to 1995. The net decrease launch vehicle programs and timing of the recognition of in 1997 was primarily the result of investments in new award and incentive fees on certain space programs. programs, while the 1996 increase was principally the result of the production volume increases discussed above as well Electronics as the inclusion in 1995 of contract charges related to the LANTIRN program close-out. Net sales of the Electronics segment increased by six per- cent in 1997 compared to 1996 after having doubled in 1996 Information & Services compared to 1995. The 1997 net sales amount reflects the inclusion of a full year of the operations of certain Tactical Net sales of the Information & Services segment increased Systems companies versus nine months in 1996. However, by 10 percent in 1997 compared to 1996, and by 41 percent this increase is offset by the divestiture of the Corporation's in 1996 compared to 1995. The 1997 net sales increase Armament Systems and Defense Systems businesses to reflected an increase in sales volume related to commercial General Dynamics at the beginning of 1997. Adjusting the products, systems integration programs and information results of operations to reflect these companies on a compa- systems programs. The inclusion of a full year of the opera- rable basis, net sales in 1997 would have decreased by two tions of certain Tactical Systems companies in 1997 versus percent compared to 1996. The 1996 net sales amount nine months in 1996 was offset by the effect of the absence reflected the inclusion of the operations of certain Tactical of the L-3 operations and the Corporation's Space Shuttle Systems companies since April 1, 1996. Excluding the oper- processing operations. The 1996 increase is principally due ations of the Tactical Systems companies, 1996 net sales for to the inclusion of the operations of certain Tactical the segment would have increased by 12 percent compared Systems companies since April 1, 1996. Excluding the oper- to 1995. This increase was principally attributable to volume ations of those businesses, 1996 net sales would have been increases in a variety of government and commercial elec- comparable to 1995 levels. Increases in commercial product tronics programs and the inclusion of the operations of the distribution activities in 1996 were largely offset by the aircraft controls business formerly owned by GE, which was transfer of the Corporation's contracts for Space Shuttle acquired in the fourth quarter of 1995. processing operations to USA as mentioned previously. The Operating profit for the segment in 1997 was compara- operations of the Access Graphics business unit, which was ble to 1996 after having increased by 112 percent in 1996 divested in the GE Transaction, generated approximately compared to 1995. As was the case with net sales, 1997 oper- 19 percent of the segment's net sales in 1997. ating profit reflects the inclusion of a full year of operations Operating profit for the segment decreased by 13 per- of certain Tactical Systems companies and does not include cent in 1997 compared to 1996 after having increased by 29 the operations of the businesses divested to General percent in 1996 compared to 1995. However, adjusting Dynamics, while the 1996 operating profit reflects the the results of operations to reflect the companies divested in inclusion of the operations of the Tactical Systems compa- the L-3 transaction and the Tactical Systems companies nies since April 1, 1996. Adjusting the results of operations on a comparable basis, operating profit in 1997 would have decreased by six percent compared to 1996 while operating profit in 1996 would have decreased by 30 percent compared


  • Page 22

    Management's Discussion and Analysis of Financial Condition and Results of Operations • Continued to 1995. The 1997 decrease was caused primarily by the Corporation's performance on certain environmental unfavorable performance in the operations of a majority- programs coupled with gains related to dispositions of owned subsidiary and by charges recorded in the miscellaneous Corporate investments essentially offset the Corporation's graphics technology line of business. The absence of the results of operations of Materials which 1996 decrease from 1995 was principally the result of was divested in 1996. The net decrease in 1996 compared charges taken in 1996 related to certain information systems to 1995 principally resulted from losses on certain environ- contracts and accounts, and from losses experienced at mental programs. two of the Corporation's commercial subsidiaries. Backlog Aeronautics Total negotiated backlog of $47.1 billion at December 31, Net sales of the Aeronautics segment increased by eight per- 1997 included both unfilled firm orders for the cent in 1997 compared to 1996 after decreasing by 15 percent Corporation's products for which funding has been auth- in 1996 compared to 1995. The 1997 increase principally orized and appropriated by the customer (Congress, in the resulted from increased deliveries of F-16 fighter aircraft. case of U.S. Government agencies) and firm orders for The net sales decrease in 1996 was principally due to fewer which funding has not been appropriated. The following deliveries of both F-16 fighter and C-130 airlift aircraft. table shows total backlog by segment at the end of each of Operating profit increased by 35 percent in 1997 the last three years: compared to 1996 after decreasing by eight percent in 1996 compared to 1995. The increase in 1997 resulted from (In millions) 1997 1996 1995 the greater number of F-16 aircraft deliveries previously Backlog mentioned, completion of significant flight performance Space & Strategic Missiles $16,834 $19,463 $18,066 Electronics 9,849 10,650 5,271 milestone events and margin improvements on the C-130 Information & Services 6,674 6,718 3,005 program, and increased margins in the manufacture of Aeronautics 13,456 13,408 14,775 thrust reversers. The Corporation's thrust reverser business Energy and Other 246 167 8 was divested in the GE transaction during the fourth $47,059 $50,406 $41,125 quarter of 1997. The 1996 operating profit decrease compared to 1995 was principally the result of the volume decreases discussed previously. Negotiated Backlog Energy and Other In millions $60,000 Net sales of this segment decreased significantly in 1997 $50,000 compared to 1996, and by 10 percent in 1996 compared to 1995. The net sales decreases for both periods were princi- $40,000 pally the result of the divestiture of Materials during the $30,000 fourth quarter of 1996. $20,000 Operating profit for this segment was relatively $10,000 unchanged in 1997 compared to 1996 after having decreased by 30 percent in 1996 compared to 1995. Improvement in $0 97(a) 96(a) 95 (a) Includes the effects of the business combination with Loral Corporation since April 1996. 20


  • Page 23

    Lockheed Martin Corporation Total Space & Strategic Missiles backlog decreased by In the Aeronautics segment, total backlog increased 14 percent in 1997 compared to 1996 after having increased slightly in 1997 compared to 1996 and decreased by nine by eight percent in 1996 compared to 1995. The decrease percent in 1996 compared to 1995. In 1997, the segment's in 1997 resulted principally from a reduction in classified C-130 airlift aircraft backlog increased due to the receipt of backlog and a finalization of the Corporation's backlog new orders. These new orders offset a reduction in F-16 recognition policy for the SBIRS program. The increase in fighter aircraft backlog and the divestiture of the segment's 1996 occurred principally from new orders received for thrust reverser program backlog to GE during 1997. In 1996, Titan, Atlas and Proton launch vehicle services and the F-16 aircraft backlog decreased, primarily reflecting deliver- SBIRS program. ies of aircraft exceeding new orders. Decreases in backlog In the Electronics segment, total backlog decreased by for the F-22 air-superiority fighter aircraft program, eight percent in 1997 compared to 1996 after more than currently in the development phase, also contributed to doubling in 1996 compared to 1995. The 1997 decrease was the 1996 decrease. caused by the absence of backlog related to the businesses that were divested to General Dynamics during 1997. The Liquidity and Cash Flows 1996 increase was due to the addition of the backlog of the Tactical Systems companies acquired in 1996. Excluding the Cash provided by operating activities was approximately acquired backlog of the Tactical Systems companies, back- $1.2 billion in 1997, compared with $1.6 billion and $1.3 bil- log in 1996 for the segment would have decreased by three lion of cash provided in 1996 and 1995, respectively. As in percent compared to 1995. This decrease was principally the the prior years, positive cash flows were derived in large result of the net effect of close-outs of completed govern- part from operating profits before deducting non-cash ment electronics contracts during the year. charges for depreciation and amortization of property and Total Information & Services backlog decreased slightly intangible assets, offset in part by working capital increases. in 1997 compared to 1996, and increased by 124 percent in Cash provided by operating activities also includes the 1996 compared to 1995. The decrease in 1997 resulted from effect of merger related and consolidation payments of the absence of backlog related to the companies that were $68 million in 1997, $244 million in 1996, and $208 million divested to L-3 during 1997. If the 1996 end of year backlog in 1995. of L-3 is excluded, backlog in 1997 would have increased by eight percent compared to 1996, principally because of new orders generated in a number of the segment's information Net Cash Provided by Operating technology businesses. The significant 1996 increase was Activities due to the addition of the backlog of the Tactical Systems companies acquired in 1996. Excluding the acquired backlog of the Tactical Systems companies, backlog in 1996 for the segment would have increased by 25 percent compared to 1995. This increase was principally the result of new infor- mation management services contract awards. (a) Includes the effects of the business combination with Loral Corporation since April 1996. 21


  • Page 24

    Management's Discussion and Analysis of Financial Condition and Results of Operations • Continued Cash provided by investing activities was $185 million Capital Structure and Resources in 1997, compared with $8.0 billion and $699 million used for investing activities in 1996 and 1995, respectively. The Total debt, including short-term borrowings, increased to disposition of the Armament Systems and Defense Systems approximately $11.9 billion at the end of 1997 from approxi- businesses to General Dynamics and divestiture of the L-3 mately $11.5 billion at the end of 1996. The net decrease in businesses more than offset additions to property, plant and short-term borrowings of $866 million and the repayment equipment in 1997. The Corporation used approximately of $219 million of long-term debt were more than offset by $7.3 billion of cash in 1996 to finance the Loral Transaction. borrowings incurred to finance the GE Transaction. Most of Property, plant and equipment additions in 1996 were 47 the Corporation's long-term debt is in the form of publicly percent higher compared to 1995, reflecting the inclusion of issued, fixed-rate Notes and Debentures. Stockholders' the capital spending activity of the Tactical Systems business equity decreased to approximately $5.2 billion at December units as well as approximately $150 million related to the 31, 1997 from a balance of nearly $6.9 billion one year ago. Lockheed Martin integration and consolidation program. Stockholders' equity activity for 1997 included a reduction The Corporation continually monitors its capital spending of approximately $2.8 billion in connection with the in relation to current and anticipated business needs. redemption of the preferred stock previously held by GE. Facilities are added, consolidated, modernized or disposed Consequently, the Corporation's total debt to capitalization of as business circumstances dictate. ratio (including short-term borrowings) increased from 63 Approximately $1.4 billion of cash was used for financ- percent at December 31, 1996 to nearly 70 percent at ing activities during 1997, compared with cash provided by December 31, 1997. financing activities of $5.7 billion in 1996 and cash used for At the end of 1997, the Corporation had a 4-year financing activities of $579 million in 1995. During 1997, revolving credit facility in the amount of $3.5 billion and a the Corporation decreased its short-term borrowings one-year revolving credit facility in the amount of $1.5 bil- significantly, while long-term debt increased primarily lion (collectively, the Credit Facilities). No borrowings were due to the financing of the GE Transaction, which resulted outstanding under the Credit Facilities at December 31, in the redemption of the Corporation's preferred stock. 1997. However, the Credit Facilities support commercial Approximately $7.6 billion of indebtedness was incurred in paper borrowings of approximately $1.5 billion outstanding 1996 in connection with the consummation of the Loral at December 31, 1997. Of this amount, $1.0 billion has been Transaction. Approximately $876 million of long-term debt classified as long-term debt in the Corporation's consoli- will mature in 1998. dated balance sheet based on management's ability and The Corporation receives advances on certain contracts intention to maintain this amount of debt outstanding for at and uses them to finance the inventories required to com- least one year. plete the contracted work. Approximately $2.8 billion of The Corporation has entered into standby letter of advances related to work in process at December 31, 1997 credit agreements and other arrangements with financial have been received from customers and were recorded as institutions primarily relating to the guarantee of future reductions of inventories in the Corporation's consolidated performance on certain contracts. At December 31, 1997, balance sheet. In addition, advances of approximately $3.6 the Corporation had contingent liabilities on outstanding billion at the end of 1997 have been recognized as current letters of credit, guarantees and other arrangements aggre- liabilities, mostly related to contracts with foreign govern- gating approximately $1.2 billion. ments and commercial customers. Cash on hand and temporarily invested, internally gen- erated funds, and available financing resources as detailed above are expected to be sufficient to meet the anticipated 22


  • Page 25

    Lockheed Martin Corporation operating, consolidation and debt service requirements, water purveyors to implement this plan, as well as to address discretionary investment needs and capital expenditures of water supply concerns relative to perchlorate contamina- the Corporation. Consistent with the Corporation's desire tion. The Corporation estimates that expenditures required to generate cash to reduce debt, management anticipates to implement work currently approved will be approxi- that, subject to prevailing financial, market and economic mately $110 million. conditions, the Corporation may divest other non-core The Corporation records appropriate financial state- businesses or surplus properties. ment accruals for environmental issues in the period in which it is probable that a liability has been incurred and the Environmental Matters amounts can be reasonably estimated. In addition to the matters with respect to the Burbank property and the As more fully described in Note 16 to the consolidated Redlands property described above, the Corporation has financial statements, the Corporation entered into a consent accrued approximately $260 million at December 31, 1997 decree with the U.S. Environmental Protection Agency for other matters in which an estimate of financial exposure (EPA) relating to certain property in Burbank, California, could be determined. Management believes, however, that it which obligated the Corporation to design and construct is unlikely that any additional liability the Corporation may facilities to monitor, extract and treat groundwater, and to incur for known environmental issues would have a material operate and maintain such facilities for approximately eight adverse effect on its consolidated results of operations or years. A second consent decree is being finalized which will financial position. obligate the Corporation to fund the continued operation The Corporation is a party to various proceedings and and maintenance of these facilities through the year 2018. potential proceedings related to environmental clean-up The Corporation has also been operating under a cleanup issues, including matters at various sites where it has been and abatement order from the California Regional Water designated a Potentially Responsible Party (PRP) by the Quality Control Board (the Regional Board) affecting its EPA or by a state agency. In the event the Corporation is Burbank facilities. This order requires site assessment ultimately found to have liability at those sites where it has and action to abate groundwater contamination by a com- been designated a PRP, the Corporation anticipates that the bination of groundwater and soil cleanup and treatment. actual burden for the costs of remediation will be shared Anticipated future costs for these projects are estimated with other liable PRPs. Generally, PRPs that are ultimately to approximate $170 million. determined to be responsible parties are strictly liable for The Corporation is responding to three administrative site clean-ups and usually agree among themselves to share, orders issued by the Regional Board in connection with on an allocated basis, the costs and expenses for investiga- the Corporation's former Lockheed Propulsion Company tion and remediation of hazardous materials. Under existing facilities in Redlands, California. Under the orders, the environmental laws, however, responsible parties are jointly Corporation is investigating the impact and potential and severally liable and, therefore, the Corporation is remediation of regional groundwater contamination by potentially liable for the full cost of funding such remedia- perchlorates and chlorinated solvents. The Regional Board tion. In the unlikely event that the Corporation were has approved the Corporation's plan to maintain public required to fund the entire cost of such remediation, the water supplies with respect to chlorinated solvents during statutory framework provides that the Corporation may this work, and the Corporation is negotiating with local pursue rights of contribution from the other PRPs. Among the variables management must assess in evaluating costs associated with these sites are changing cost estimates, 23


  • Page 26

    Management's Discussion and Analysis of Financial Condition and Results of Operations • Continued continually evolving governmental environmental standards reduced work activities at the Pit 9 site, is awaiting technical and cost allowability issues. Therefore, the nature of these direction from the DOE, and is in the process of preparing a environmental matters makes it extremely difficult to esti- certifiable claim. mate the timing and amount of any future costs that may be On February 27, 1998, the Corporation received a cure necessary for remedial matters. The Corporation is cur- notice alleging that certain actions taken by the Corporation rently unable to predict the outcome of these matters, inas- are conditions endangering performance of the Pit 9 much as the actual costs of remedial actions have not been contract. The notice advised that, unless these conditions determined and the allocation of liabilities among parties are cured within 30 days, the contract may be terminated that ultimately may be found liable remains uncertain. for default. The Corporation believes that termination In 1994, the Corporation was awarded a $180 million for default is neither permissible under the Pit 9 contract fixed price contract by the U.S. Department of Energy nor warranted under the circumstances and is preparing (DOE) for the Phase II design, construction and limited test its response. of remediation facilities, and the Phase III full remediation of waste found in Pit 9, located on the Idaho National Other Matters Engineering and Environmental Laboratory reservation. The Corporation has incurred significant unanticipated The Corporation is nearing completion of its assessments costs and scheduling issues due to complex technical and of the computer systems affected by the Year 2000 issue, contractual matters which threaten the viability of the over- and completion of the development of plans to resolve the all Pit 9 program. Management completed its investigation issues identified in the assessments. These plans provide to identify and quantify the overall effect of these matters, for systems to be Year 2000 compliant by the end of 1999. and summarized its findings in a request for equitable Based on information currently available from the work adjustment (REA) which was delivered to the DOE on performed, management does not expect that the amounts March 31, 1997. The provisions of the REA include, but are to be expensed for Year 2000 activities over the next two not limited to, the recovery of a portion of unanticipated years will have a material impact on the Corporation's costs incurred by the Corporation and the restructuring of consolidated results of operations or financial position. the contract to provide for a more equitable sharing of the The Corporation uses forward exchange contracts to risks associated with the Pit 9 project. To better focus the manage its exposure to fluctuations in foreign exchange Corporation's management resources on resolving these rates. These contracts are designated as qualifying hedges issues, the management and reporting structure of the Pit 9 of firm commitments or specific anticipated transactions, program were changed in September 1997; however, the and related gains and losses on the contracts are recognized Corporation has been unsuccessful in reaching any agree- in income when the hedged transaction occurs. At ments with the DOE on cost recovery or other contract December 31,1997, the amounts of forward exchange restructuring matters. As a result, the Corporation has contracts outstanding, as well as the amounts of gains and losses recorded during the year, were not material. The Corporation does not hold or issue derivative financial instruments for trading purposes. 24


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    The Corporation's Responsibility for Financial Reporting The management of Lockheed Martin Corporation prepared and is responsible for the consolidated financial statements and all related financial information contained in this report. The consolidated financial statements, which include amounts based on estimates and judgments, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis. The Corporation maintains a system of internal accounting controls designed and intended to provide reasonable assurance that assets are safeguarded, transactions are properly executed and recorded in accordance with management's authorization, and accountability for assets is maintained. An environment that establishes an appropriate level of control consciousness is maintained and monitored and includes examinations by an internal audit staff and by the independent auditors in connection with their annual audit. The Corporation's management recognizes its responsibility to foster a strong ethical climate. Management has issued written policy statements which document the Corporation's business code of ethics. The importance of ethical behavior is regularly communicated to all employees through the distribution of written codes of ethics and standards of business conduct, and through ongoing education and review programs designed to create a strong compliance environment. The Audit and Ethics Committee of the Board of Directors is composed of eight outside directors. This Committee meets periodically with the independent auditors, internal auditors and management to review their activities. The consolidated financial statements have been audited by Ernst & Young LLP, independent auditors, whose report follows. Marcus C. Bennett Todd J. Kallman Executive Vice President and Chief Financial Officer Vice President and Controller 25


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    Lockheed Martin Corporation Report of Ernst & Young LLP, Independent Auditors Board of Directors and Stockholders Lockheed Martin Corporation We have audited the accompanying consolidated balance sheet of Lockheed Martin Corporation as of December 31, 1997 and 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lockheed Martin Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Washington, D.C. January 19, 1998, except for Note 2 and the next to the last paragraph of Note 16, as to which the date is March 12, 1998 26


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    Lockheed Martin Corporation Consolidated Statement of Earnings Year ended December 31, (In millions, except per share data) 1997 1996 1995 Net sales $28,069 $26,875 $22,853 Costs and expenses: Cost of sales 25,772 24,594 20,881 Merger related and consolidation expenses 690 Earnings from operations 2,297 2,281 1,282 Other income and expenses, net 482 452 95 2,779 2,733 1,377 Interest expense 842 700 288 Earnings before income taxes 1,937 2,033 1,089 Income tax expense 637 686 407 Net earnings $ 1,300 $ 1,347 $ 682 Basic earnings (loss) per common share:* Before deemed preferred stock dividend $ 6.73 $ 6.80 $ 3.28 Deemed preferred stock dividend (9.85) (Loss) earnings per share $ (3.12) $ 6.80 $ 3.28 Diluted earnings (loss) per common share:* Before deemed preferred stock dividend $ 6.09 $ 6.09 $ 3.09 Deemed preferred stock dividend (8.55) (Loss) earnings per share ** $ 6.09 $ 3.09 *As more fully described in Notes 3 and 6, in 1997 the Corporation reacquired all of its outstanding Series A preferred stock resulting in a deemed dividend of $1,826 million. For purposes of computing net earnings applicable to common stock, the deemed preferred stock dividend was deducted from 1997 net earnings. ** Antidilutive. See accompanying Notes to Consolidated Financial Statements. 27


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    Lockheed Martin Corporation Consolidated Statement of Cash Flows Year ended December 31, (In millions) 1997 1996 1995 Operating Activities Net earnings $ 1,300 $ 1,347 $ 682 Adjustments to reconcile net earnings to net cash provided by operating activities: Merger related and consolidation—expenses — — 690 —payments (68) (244) (208) Depreciation and amortization 606 732 605 Amortization of intangible assets 446 402 230 Deferred federal income taxes 155 (251) (116) GE Transaction (311) — — Materials transaction — (365) — Changes in operating assets and liabilities: Receivables (572) (328) (394) Inventories (687) (125) 430 Customer advances and amounts in excess of costs incurred 1,048 544 (294) Salaries, benefits and payroll taxes 53 265 (132) Income taxes (560) (158) 206 Other (202) (183) (407) Net cash provided by operating activities 1,208 1,636 1,292 Investing Activities Additions to properties, net of purchased operations (750) (737) (500) Loral Transaction — (7,344) — Divestiture of L-3 companies 464 — — Divestiture of Armament Systems and Defense Systems 450 — — Other acquisition, investment and divestiture activities (24) (35) (294) Other 45 87 95 Net cash provided by (used for) investing activities 185 (8,029) (699) Financing Activities Net (decrease) increase in short-term borrowings (866) 1,110 (14) Increases in long-term debt 1,505 7,000 125 Repayments and extinguishments of long-term debt (219) (2,105) (287) Issuances of common stock 110 97 61 Purchases of common stock — — (150) Dividends on common stock (299) (302) (254) Dividends on preferred stock (53) (60) (60) Redemption of preferred stock (1,571) — — Net cash (used for) provided by financing activities (1,393) 5,740 (579) Net (decrease) increase in cash and cash equivalents — (653) 14 Cash and cash equivalents at beginning of year — 653 639 Cash and cash equivalents at end of year $ — $ — $ 653 See accompanying Notes to Consolidated Financial Statements. 28


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    Lockheed Martin Corporation Consolidated Balance Sheet December 31, (In millions) 1997 1996 Assets Current assets: Receivables $ 5,009 $ 4,999 Inventories 3,144 2,953 Deferred income taxes 1,256 1,356 Other current assets 696 1,038 Total current assets 10,105 10,346 Property, plant and equipment 3,669 3,721 Intangible assets related to contracts and programs acquired 1,566 1,767 Cost in excess of net assets acquired 9,856 10,394 Other assets 3,165 3,312 $28,361 $29,540 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,234 $ 1,294 Customer advances and amounts in excess of costs incurred 3,644 2,600 Salaries, benefits and payroll taxes 924 991 Income taxes 364 925 Short-term borrowings 494 1,110 Current maturities of long-term debt 876 180 Other current liabilities 1,653 1,572 Total current liabilities 9,189 8,672 Long-term debt 10,528 10,188 Post-retirement benefit liabilities 1,982 2,077 Other liabilities 1,486 1,747 Stockholders' equity: Series A preferred stock — 1,000 Common stock, $1 par value per share 194 193 Additional paid-in capital 25 92 Retained earnings 5,173 5,823 Unearned ESOP shares (216) (252) Total stockholders' equity 5,176 6,856 $28,361 $29,540 See accompanying Notes to Consolidated Financial Statements. 29


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    Lockheed Martin Corporation Consolidated Statement of Stockholders' Equity Additional Unearned Total Preferred Common Paid-in Retained ESOP Stockholders' (In millions) Stock Stock Capital Earnings Shares Equity Balance at December 31, 1994 $ 1,000 $199 $ 734 $ 4,470 $(317) $ 6,086 N e t earnings — — — 682 — 682 Dividends declared on preferred stock ($3.00 per share) — — — (60) — (60) Dividends declared on c o m m o n stock ($1.34 per share) — — — (254) — (254) Repurchases of c o m m o n stock — (2) (148) — — (150) Stock awards and options, and ESOP activity — 2 97 — 30 129 Balance at December 31, 1995 1,000 199 683 4,838 (287) 6,433 N e t earnings — — — 1,347 — 1,347 Dividends declared on preferred stock ($3.00 per share) — — — (60) — (60) Dividends declared on common stock ($1.60 per share) — — — (302) — (302) Stock awards and options, and ESOP activity — 2 151 — 35 188 Stock exchanged for Materials shares — (8) (742) — — (750) Balance at December 31, 1996 1,000 193 92 5,823 (252) 6,856 Net earnings — — — 1,300 — 1,300 Dividends declared on preferred stock ($2.65 per share) — — — (53) — (53) Dividends declared on common stock ($1.60 per share) — — — (299) — (299) Stock awards and options, and ESOP activity — 1 161 — 36 198 Redemption of preferred stock (1,000) — (228) (1,598) — (2,826) Balance at December 3 1 , 1997 $ $194 $ 25 $ 5,173 $(216) $ 5,176 See accompanying N o t e s to Consolidated Financial Statements. 30


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    Lockheed Martin Corporation Notes to Consolidated Financial Statements December 3I, 1997 Intangible assets - Intangible assets related to contracts and pro- Note 1 - Summary of Significant grams acquired are amortized over the estimated periods of benefit Accounting Policies (15 years or less) and are displayed on the consolidated balance sheet net of accumulated amortization of $651 million and $505 Organization - Lockheed Martin Corporation (Lockheed Martin million at December 31, 1997 and 1996, respectively. Cost in excess or the Corporation) is engaged in the design, manufacture, inte- of net assets acquired (goodwill) is amortized ratably over appro- gration and operation of a broad array of products and services priate periods, primarily 40 years, and is displayed on the consoli- ranging from aircraft, spacecraft and launch vehicles to missiles, dated balance sheet net of accumulated amortization of $881 electronics, information systems and energy management. The million and $617 million at December 31, 1997 and 1996, respec- Corporation serves customers in both domestic and international tively. The carrying values of intangible assets are reviewed if the defense and civilian markets, with its principal customers being facts and circumstances indicate potential impairment of their car- agencies of the U.S. Government. rying value, and any impairment determined is recorded in the Basis of consolidation and use of estimates - The consolidated current period. Impairment is measured by comparing the undis- financial statements include the accounts of wholly-owned and counted cash flows of the related business operations to the appro- majority-owned subsidiaries. Material intercompany balances and priate carrying values. transactions have been eliminated in consolidation. The prepara- tion of consolidated financial statements in conformity with gener- Environmental matters - The Corporation records a liability for ally accepted accounting principles requires management to make environmental matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. A substan- estimates and assumptions, in particular estimates of anticipated tial portion of these costs are expected to be reflected in sales and contract costs and revenues utilized in the earnings recognition cost of sales pursuant to U.S. Government agreement or regula- process, that affect the reported amounts in the financial state- tion. At the time a liability is recorded for future environmental ments and accompanying notes. Actual results could differ from costs, an asset is recorded for estimated future recovery considered those estimates. probable through the pricing of products and services to agencies Classifications - Receivables and inventories are primarily attrib- of the U.S. Government. The portion of those costs expected to utable to long-term contracts or programs in progress for which be allocated to commercial business is reflected in costs and the related operating cycles are longer than one year. In accor- expenses at the time the liability is established. dance with industry practice, these items are included in current assets. Book overdrafts, which are immaterial, are included in Sales and earnings - Sales and anticipated profits under long-term current liabilities. Certain amounts for the prior years have been fixed-price production contracts are recorded on a percentage of reclassified to conform with the 1997 presentation. completion basis, generally using units of delivery as the measure- ment basis for effort accomplished. Estimated contract profits are Inventories - Inventories are stated at the lower of cost or esti- taken into earnings in proportion to recorded sales. Sales under mated net realizable value. Costs on long-term contracts and certain long-term fixed-price contracts which, among other programs in progress represent recoverable costs incurred for things, provide for the delivery of minimal quantities or require a production, allocable operating overhead, and, where appropriate, significant amount of development effort in relation to total con- research and development and general and administrative tract value, are recorded upon achievement of performance mile- expenses. Pursuant to contract provisions, agencies of the U.S. stones or using the cost-to-cost method of accounting where sales Government and other customers have title to, or a security inter- and profits are recorded based on the ratio of costs incurred to est in, certain inventories as a result of progress payments and estimated total costs at completion. advances. General and administrative expenses related to commer- Sales under cost-reimbursement-type contracts are recorded cial products and services provided essentially under commercial as costs are incurred. Applicable estimated profits are included in terms and conditions are expensed as incurred. Costs of other earnings in the proportion that incurred costs bear to total esti- product and supply inventories are principally determined by the mated costs. Sales of products and services provided essentially first-in, first-out or average cost methods. under commercial terms and conditions are recorded upon shipment or completion of specified tasks. Property, plant and equipment - Property, plant and equipment Amounts representing contract change orders, claims or are carried principally at cost. Depreciation is provided on plant other items are included in sales only when they can be reliably and equipment generally using accelerated methods of deprecia- estimated and realization is probable. Incentives or penalties and tion during the first half of the estimated useful lives of the assets; awards applicable to performance on contracts are considered in thereafter, straight-line depreciation generally is used. Estimated estimating sales and profit rates, and are recorded when there is useful lives generally range from 8 years to 40 years for buildings sufficient information to assess anticipated contract performance. and 2 years to 20 years for machinery and equipment. Incentive provisions which increase or decrease earnings based solely on a single significant event are generally not recognized until the event occurs. 31


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    Notes to Consolidated Financial Statements • Continued When adjustments in contract value or estimated costs are Effective January 1, 1996, the Corporation adopted SFAS No. determined, any changes from prior estimates are reflected in 121, "Accounting for the Impairment of Long-Lived Assets and earnings in the current period. Anticipated losses on contracts or for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires programs in progress are charged to earnings when identified. that certain long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate Research and development and similar costs - Corporation-spon- that the carrying amount of an asset may not be recoverable. sored research and development costs primarily include research Additionally, SFAS No. 121 requires that certain long-lived assets and development and bid and proposal efforts related to govern- to be disposed of be reported at the lower of carrying amount ment products and services. Except for certain arrangements or fair value less costs to sell. The impact of the adoption of this described below, these costs are generally included as part of the standard was not material to the Corporation's consolidated results general and administrative costs that are allocated among all con- of operations or financial position. tracts and programs in progress under U.S. Government contrac- Also in 1996, the Corporation adopted SFAS No. 123, tual arrangements. Corporation-sponsored product development "Accounting for Stock-Based Compensation." SFAS No. 123 costs not otherwise allocable are charged to expense when allows companies to continue to measure compensation cost for incurred. Under certain arrangements in which a customer shares stock-based employee compensation plans using the intrinsic value in product development costs, the Corporation's portion of such method of accounting as prescribed in Accounting Principles unreimbursed costs is expensed as incurred. Customer-sponsored Board (APB) Opinion No. 25, "Accounting for Stock Issued to research and development costs incurred pursuant to contracts are Employees," and related interpretations. The Corporation has accounted for as contract costs. elected to continue its APB Opinion No. 25 accounting treatment Derivative financial instruments - The Corporation may use for stock-based compensation, and has adopted the provisions of derivative financial instruments to manage its exposure to fluctua- SFAS No. 123 requiring disclosure of the pro forma effect on net tions in interest rates and foreign exchange rates. The Corporation earnings and earnings per share as if compensation cost had been designates interest rate swap agreements as hedges of specific debt recognized based upon the estimated fair value at the date of grant instruments and recognizes the interest differentials as adjust- for options awarded. ments to interest expense over the terms of the related debt obliga- Recently issued accounting pronouncements - In June 1997, the tions. There were no interest rate swap agreements outstanding Financial Accounting Standards Board issued SFAS No. 131, at December 31, 1997. Forward exchange contracts are also "Disclosures about Segments of an Enterprise and Related designated as qualifying hedges of firm commitments or specific Information." SFAS No. 131 establishes standards for the way in anticipated transactions. Gains and losses on these contracts are which publicly-held companies report financial and descriptive recognized in income when the hedged transactions occur. At information about their operating segments in financial statements December 31, 1997, the amounts of forward exchange contracts for both interim and annual periods, and requires additional dis- outstanding, as well as the amounts of gains and losses recorded closures with respect to products and services, geographic areas of during the year, were not material. The Corporation does not hold operation and major customers. The Statement is effective for fis- or issue financial instruments for trading purposes. cal years beginning after December 15, 1997; however, application Accounting changes - Effective December 31, 1997, the is not required for interim periods in 1998. The adoption of SFAS Corporation adopted Statement of Financial Accounting No. 131 will have no impact on the number or composition of the Standards (SFAS) No. 128, "Earnings Per Share", which estab- Corporation's reported business segments, or on its consolidated lished new standards for computing and disclosing earnings per results of operations or financial position, but is expected to share. The Statement requires dual presentation of "basic" and increase the level of disclosure of segment information. "diluted" earnings per share, each as defined therein, which replace primary and fully diluted earnings per share, respectively, required under previous guidance. In accordance with SFAS No. 128, all earnings per share amounts included in this annual report Note 2 - Transaction Agreement with have been restated to conform to the provisions of the new Northrop Grumman Corporation standard and required disclosures have been made (see Note 6). On July 3, 1997, the Corporation and Northrop Grumman Effective January 1, 1997, the Corporation adopted the Corporation (Northrop Grumman) announced that they had American Institute of Certified Public Accountants' Statement entered into an Agreement and Plan of Merger (the Merger of Position (SOP) No. 96-1, "Environmental Remediation Agreement) to combine the companies in a transaction with a total Liabilities." SOP No. 96-1 provides authoritative guidance on estimated value at the announcement date of approximately $11.6 certain accounting issues relative to the recognition, measurement, billion, including Northrop Grumman debt to be assumed by the display and disclosure of environmental remediation liabilities. The impact of the adoption of this SOP was not material to the Corporation's consolidated results of operations, financial position or disclosures. 32


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    Lockheed Martin Corporation Corporation of approximately $3.1 billion (the Merger). Under the two non-core commercial business units which contributed terms of the Merger Agreement, which was approved by the approximately five percent of the Corporation's 1997 net sales, respective Boards of Directors of the Corporation and Northrop Lockheed Martin's investment in a telecommunications partner- Grumman, Northrop Grumman stockholders will receive 1.1923 ship, and approximately $1.6 billion in cash (the fair value of the shares of Lockheed Martin common stock for each share of non-cash net assets exchanged was approximately $1.2 billion). Northrop Grumman common stock. On February 26, 1998, the The cash included in the exchange was initially financed through stockholders of the Corporation approved the issuance of shares of the issuance of commercial paper. On November 20, 1997, Lockheed Martin common stock in connection with the Merger. In $1.4 billion was refinanced pursuant to a note, due November 17, addition, the Corporation's stockholders approved an amendment 2002 and bearing interest at 6.04%, from Lockheed Martin to to Lockheed Martin's charter to increase the number of authorized LMT Sub. The remainder is expected to be refinanced with a shares of Lockheed Martin common stock from 750 million to note from Lockheed Martin to LMT Sub on substantially similar 1.5 billion. Also on February 26, 1998, the stockholders of Northrop terms following final determination of the closing net worth Grumman approved the Merger Agreement pursuant to which of the businesses exchanged. Northrop Grumman is to become a wholly-owned subsidiary of The GE Transaction was accounted for at fair value, and Lockheed Martin. resulted in the reduction of the Corporation's stockholders' equity On March 9, 1998, the Corporation announced that it had by $2.8 billion and the recognition of a tax-free gain, in other been informed by the Department of Justice (DOJ) that the income and expenses, of approximately $311 million, or $1.46 per DOJ was fundamentally opposed to the Merger. The Corporation diluted share, during the fourth quarter. For purposes of deter- also announced on that date that it had committed to the DOJ mining net earnings applicable to common stock used in the com- not to close the transaction before April 24, 1998, and to develop putation of earnings per share, the excess of the fair value of the and submit a proposal to the DOJ by April 8, 1998 designed to consideration transferred to GE (approximately $2.8 billion) over address the DOJ's antitrust concerns while preserving the expected the carrying value of the Series A preferred stock ($1.0 billion) was benefits and efficiencies of the transaction to the Corporation treated as a deemed preferred stock dividend and deducted from and its stockholders, customers, employees and suppliers. 1997 net earnings in accordance with the requirements of the On March 12, 1998, the DOJ informed the Corporation that it Emerging Issues Task Force's Issue D-42. This deemed dividend found this commitment unacceptable and demanded that the had a significant impact on the earnings per share calculations, Corporation agree to certain substantial divestitures or the but did not impact reported 1997 net earnings. The effect of this DOJ will proceed to court. The DOJ stated that they expected a deemed dividend decreased basic earnings per share by $9.85, and response by March 16, 1998. was antidilutive in the calculation of diluted earnings per share. The transaction will be accounted for using the purchase method of accounting. Concurrent with the consummation of the Merger, the Corporation will increase the amount of its one-year Note 4 - Other Acquisitions and Divestitures revolving credit facility from $1.5 billion to $2.5 billion. In April 1996, the Corporation purchased all of the issued and out- Note 3 - Transaction Agreement with standing shares of common stock of Loral Corporation (Loral) for an aggregate consideration of $38 per share in cash. The purchase General Electric Company involved a series of transactions that resulted in (i) the distribution On November 3, 1997, the Corporation announced a definitive to stockholders of Loral, immediately prior to the consummation agreement with General Electric Company (GE) under which of the purchase, of shares of capital stock in Loral Space & Lockheed Martin would exchange the stock of a newly formed Communications, Ltd. (Loral SpaceCom), a newly-formed subsidiary, LMT Sub, for all of the Lockheed Martin Series A pre- company, which now owns and manages substantially all of Loral's ferred stock held by GE and certain subsidiaries of GE (the GE former space and satellite telecommunications interests, and in Transaction). The Series A preferred stock, which was originally which the Corporation acquired shares of preferred stock that issued to GE in connection with the acquisition of GE's aerospace were convertible into 20 percent of Loral SpaceCom's common businesses in 1993, was convertible into approximately 29 million stock on a diluted basis at the date of acquisition, and (ii) the shares of Lockheed Martin common stock with a market value of acquisition by the Corporation of Loral's defense electronics and approximately $2.8 billion at the date of the announcement of the systems integration businesses (collectively, the Loral Transaction). GE Transaction. With regard to the Loral Transaction, the total purchase price In accordance with the agreement, on November 17, 1997, paid, including acquisition costs, was approximately $7.6 billion. Lockheed Martin exchanged all of the outstanding capital stock of The Loral Transaction was accounted for using the purchase LMT Sub for all of the outstanding Series A preferred stock held by GE and certain subsidiaries of GE. LMT Sub was composed of 33


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    Notes to Consolidated Financial Statements • Continued method of accounting. In connection with the Loral Transaction, Note 5 - Restructuring and Other Charges Loral changed its name to Lockheed Martin Tactical Systems, Inc. (Tactical Systems), which became a wholly-owned subsidiary of the Corporation. The operations of Tactical Systems have been During the fourth quarter of 1997, the Corporation recorded non- included in the results of operations of the Corporation from recurring and unusual pretax charges, net of state income tax bene- April 1, 1996. Effective June 30, 1997, Tactical Systems was merged fits, totaling $457 million, which reduced net earnings by $303 with and into the Corporation. million, or $1.42 per diluted share. The charges were identified in In March 1997, the Corporation executed a definitive connection with the Corporation's review, which concluded in the agreement valued at approximately $525 million to reposition fourth quarter, of non-strategic lines of business, non-core invest- 10 non-core business units as a new independent company, L-3 ments and certain other assets. Approximately $200 million of the Communications Corporation, in which the Corporation retained pretax charges reflected the estimated effects of exiting non-strate- a 34.9 percent ownership interest at closing. These business units, gic lines of business, including amounts related to the fixed price primarily composed of high-technology, product-oriented compa- systems development line of business in the area of children and nies, contributed approximately two percent of the Corporation's family services, and related to increases in estimated exposures rel- net sales during the three month period ended March 31, 1997. ative to the environmental remediation lines of business initially The transaction, which closed on April 30, 1997 with an effective identified in 1996 and for which initial estimates of exposure were date of March 30, 1997, did not have a material impact on the provided in the fourth quarter 1996 charges. These increases in Corporation's earnings. estimated exposures were based on more current information, During the third quarter of 1996, the Corporation including deterioration in a partner's financial condition as evi- announced its intention to distribute via an exchange offer its denced by the partner seeking protection under the bankruptcy 81 percent interest in Martin Marietta Materials, Inc. (Materials) laws. The remaining charges reflected impairments in the values of to its stockholders (the Exchange Offer). Under the terms of various non-core investments and certain other assets in keeping the Exchange Offer, the Corporation's stockholders were given the with the Corporation's continued focus on core operations. opportunity to exchange each Lockheed Martin common share During the fourth quarter of 1996, the Corporation recorded held for 4.72 common shares of Materials on a tax-free basis. The nonrecurring pretax charges, net of state income tax benefits, of Exchange Offer expired by its terms on October 18, 1996 and was $307 million, which decreased net earnings by $209 million, or oversubscribed. On October 23, 1996, approximately 7.9 million $.94 per diluted share. Approximately one-half of the charges shares of the Corporation's common stock were exchanged for the reflected the estimated effects of terminating a business relation- 37.35 million shares of Materials common stock held by the ship formed to provide environmental remediation services to Corporation. Upon the closing of this transaction, the Corporation government and commercial customers worldwide, and the initial had no remaining ownership interest in Materials and had reduced estimated effects related to management's decision to exit a certain its common shares outstanding by approximately four percent. environmental remediation line of business. Charges of approxi- This fourth quarter 1996 exchange was accounted for at fair value, mately $85 million were identified in connection with an evalua- resulting in tire reduction of the Corporation's stockholders' tion of the Corporation's future strategic focus, and reflected equity by $750 million and the recognition of a pretax gain of impairments in the values of non-core investments and certain $365 million in other income and expenses. other assets which were other than temporary in nature. The In November 1996, the Corporation announced the proposed remaining charges of approximately $75 million were related to divestiture of two of its business units, Armament Systems and costs for facility closings and transfers of programs resulting from Defense Systems. This transaction, which concluded with the management's decision to include the operations of Tactical Corporation's receipt of $450 million in cash on January 2, 1997, Systems in the Electronics, Information & Services, and Energy had no pretax effect on the results of operations for 1997 or 1996. and Other segments. At December 31, 1996, $450 million, representing the net assets During the first quarter of 1995, the Corporation recorded a of the two business units, was included in other current assets. pretax charge of $165 million from merger related expenses in On a combined basis, the Materials exchange and the connection with the formation of Lockheed Martin. During the Armament Systems and Defense Systems divestiture noted above second quarter of 1995, the Corporation recorded a pretax charge increased 1996 net earnings by $351 million, or $1.59 per of $525 million in conjunction with a corporate-wide consolida- diluted share. tion plan under which the Corporation would close certain facili- ties and laboratories and eliminate duplicative field offices in the U.S. and abroad, eliminating up to approximately 12,000 positions. The charge represented the portion of the accrued costs and net


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    Lockheed Martin Corporation realizable value adjustments that were not probable of recovery. The following table sets forth the computations of basic and The after-tax effect of these charges was $436 million, or $1.97 per diluted earnings per share: diluted share. As of December 31, 1997, cumulative merger related and consolidation payments were approximately $1.0 billion, (In millions, except per share data) 1997 1996 1995 which primarily relate to the formation of the Corporation, the elimination of positions and the closure of foreign and domestic Net earnings applicable to common stock offices and facilities. Net earnings $ 1,300 $1,347 $682 During 1997 and 1996, the Corporation incurred costs Dividends on preferred stock (53) (60) (60) anticipated in the 1995 consolidation plan which had not met the requirements for accrual earlier. These costs include relocation of 1,247 1,287 622 Deemed preferred stock dividend (1,826) — personnel and programs, retraining, process re-engineering and — certain capital expenditures, among others. Management estimates Net (loss) earnings applicable to that, consistent with the original 1995 consolidation plan, approxi- common stock for basic earnings per share (579) 1,287 622 mately $400 million of such costs will be incurred in the future, Dividends on preferred stock 53 60 60 and currently anticipates that the remaining consolidation actions will be substantially completed by the end of 1998. Net (loss) earnings applicable to common stock for diluted Under existing U.S. Government regulations, certain costs earnings per share $ (526) $1,347 $682 incurred for consolidation actions that can be demonstrated to result in savings in excess of the cost to implement can be deferred Average common shares outstanding and amortized for government contracting purposes and included Average number of common shares as allowable costs in future pricing of the Corporation's products outstanding for basic earnings per share 185.3 189.1 189.3 and services. Included in other assets at December 31, 1997 is Assumed conversion of the Series A approximately $330 million of deferred costs that will be amor- preferred stock 25.3 28.9 28.9 tized and recognized in future sales and cost of sales. Dilutive stock options—based on the treasury stock method 2.9 3.3 2.8 Average number of common shares outstanding for diluted earnings Note 6 - Earnings Per Share per share 213.5 221.3 221.0 Basic earnings per share Basic earnings per share were computed based on net earnings, Net earnings $ 7.02 $7.12 $3.60 less the dividend requirement for preferred stock to the date of Dividends on preferred stock (.29) (.32) (.32) redemption, and less the deemed preferred stock dividend result- 6.73 6.80 3.28 ing from the GE Transaction representing the excess of the fair Deemed preferred stock dividend (9.85) value of the consideration transferred to GE (approximately $2.8 (Loss) earnings per share $(3.12) $6.80 $3.28 billion) over the carrying value of the Lockheed Martin preferred stock redeemed ($1.0 billion). The weighted average number of Diluted earnings per share common shares outstanding during the year was used in this N e t earnings $ 6.09 $6.09 $3.09 Deemed preferred stock dividend (8.55) calculation. Diluted earnings per share were also computed based on net earnings less the deemed preferred stock dividend resulting (Loss) earnings per share * $6.09 $3.09 from the GE Transaction. For this calculation, the weighted *Antidilutive. average number of common shares outstanding was increased by the assumed conversion of preferred stock to the date of redemption, and by the dilutive effect of stock options based on the treasury stock method. Note 7 - Receivables Receivables consisted of the following components: (In millions) 1997 1996 U.S. Government: Amounts billed $ 958 $1,012 Unbilled costs and accrued profits 2,233 2,197 Commercial and foreign governments: Amounts billed 675 875 Unbilled costs and accrued profits, primarily related to commercial contracts 1,143 915 $5,009 $4,999 35


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    Notes to Consolidated Financial Statements • Continued Unbilled costs and accrued profits consisted primarily of revenues on long-term contracts that had been recognized for Note 9 - Property, Plant and Equipment accounting purposes but not yet billed to customers. Approxi- mately $410 million of the December 31, 1997 unbilled costs and Property, plant and equipment consisted of the following accrued profits are not expected to be billed within one year. components: (In millions) 1997 1996 Note 8 - Inventories Land $ 285 $ 313 Buildings 3,013 2,876 Machinery and equipment 5,346 5,263 Inventories consisted of the following components: 8,644 8,452 Less accumulated depreciation (In millions) 1997 1996 and amortization (4,975) (4,731) Work in process, primarily related to $ 3,669 $ 3,721 long-term contracts and programs in progress $ 5,155 $4,356 Less customer advances and progress payments (2,805) (2,446) Note 10-Debt 2,350 1,910 Other inventories 794 1,043 $ 3,144 $ 2,953 Long-term debt consisted of the following components: Customer advances and progress payments presented above Range of Type (Maturity Dates) Interest were those where the customer has title to, or a security interest in, (In millions) Rates 1997 1996 inventories identified with the related contracts. Other customer advances were classified as current liabilities. Included in 1997 Notes (1998-2022) 5.9- 9.4% $ 6,840 $ 5,547 work in process above were advances to a foreign subcontractor of Debentures (2002-2036) 7.0- 9.1% 3,158 3,156 Commercial Paper 5.8- 6.4% 1,000 1,250 approximately $450 million for the manufacture of launch vehicles ESOP obligations (1998-2004) 8.3 - 8.4% 292 324 and related launch services. Approximately $634 million of costs Other obligations 1.0- 12.7% 114 91 included in 1997 inventories are not expected to be recovered within one year. 11,404 10,368 Less current maturities (876) (180) An analysis of general and administrative costs, including research and development costs, included in work in process $10,528 $10,188 inventories follows: During the fourth quarter of 1997, the Corporation issued a (In millions) 1997 1996 1995 note to LMT Sub, a wholly-owned subsidiary of GE, totaling Beginning of year $ 460 $ 431 $ 480 $1.4 billion to refinance a portion of the commercial paper issued Incurred during the year 2,245 2,154 1,704 to finance the cash requirements for the GE Transaction. The Charged to costs and note, which bears interest at 6.04%, is due in 2002. The agree- expenses during the year: ments relating to the GE Transaction require that, so long as the Research and development (788) (784) (548) aggregate principal amount of the note to LMT Sub exceeds $1 bil- Other general and administrative (1,384) (1,341) (1,205) lion, the Corporation will recommend to its stockholders the End of year $ 533 $ 460 $ 431 election of one person designated by GE to serve as a director of the Corporation. During the second quarter of 1996, the Corporation issued $5 In addition, included in costs and expenses in 1997, 1996 and billion of long-term fixed rate debt securities, the entire amount 1995 were general and administrative costs, including research and registered under the Corporation's shelf registration statement development costs, of approximately $539 million, $574 million which became effective on May 10, 1996. These Notes and and $320 million, respectively, incurred by commercial business Debentures range in maturity from two years to 40 years, with units or programs. interest rates ranging from between 6.55% and 7.75%. The registered holders of $300 million of 40 year Debentures may elect, between March 1 and April 1, 2008, to have each of their Debentures repaid by the Corporation on May 1, 2008. 36


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    Lockheed Martin Corporation In February 1996, the Corporation entered into interest rate Excluding commercial paper classified as long-term, the hedging agreements to offset a portion of its exposure to rising Corporation's long-term debt maturities for the five years follow- interest rates related to the anticipated long-term financings. ing December 31, 1997 are: $876 million in 1998; $857 million in These agreements were closed in the second quarter of 1996 in 1999; $57 million in 2000; $802 million in 2001; $1,496 million in connection with the Corporation's issuance of its long-term debt 2002; and $6,316 million thereafter. securities. The Corporation realized a gain of approximately Certain of the Corporation's other financing agreements con- $150 million on the closing of these agreements, which has been tain restrictive covenants relating to debt, limitations on encum- deferred and is being amortized and recognized as an adjustment brances, and sale and lease-back transactions, and provisions which to interest expense over the terms of the related debt obligations. relate to certain changes in control. Included in Debentures are $108 million of 7% obligations SFAS No. 107, "Disclosures about Fair Value of Financial ($175 million at face value) which were originally sold at approxi- Instruments," and SFAS No. 119, "Disclosure about Derivative mately 54 percent of their principal amount. These Debentures, Financial Instruments and Fair Value of Financial Instruments," which are redeemable in whole or in part at the Corporation's require the disclosure of the fair value of financial instruments, option at 100 percent of their face value, have an effective yield including assets and liabilities recognized and not recognized in of 13.25%. the consolidated balance sheet, for which it is practicable to esti- A leveraged ESOP incorporated into the Corporation's sav- mate fair value. Unless otherwise indicated elsewhere in the notes ings plan borrowed $500 million through a private placement of to the consolidated financial statements, the carrying value of the notes in 1989. These notes are being repaid in quarterly install- Corporation's financial instruments approximates fair value. The ments over terms ending in 2004. The ESOP note agreement estimated fair values of the Corporation's long-term debt instru- stipulates that, in the event that the ratings assigned to the ments at December 31, 1997, aggregated approximately $12.0 bil- Corporation's long-term senior unsecured debt are below invest- lion, compared with a carrying amount of approximately $11.4 ment grade, holders of the notes may require the Corporation billion on the consolidated balance sheet. The fair values were to purchase the notes and pay accrued interest. These notes are estimated based on quoted market prices for those instruments obligations of the ESOP but are guaranteed by the Corporation publicly traded. For privately placed debt, the fair values were esti- and included as debt in the Corporation's consolidated mated based on the quoted market prices for similar issues, or on balance sheet. current rates offered to the Corporation for debt with similar At the end of 1997, the Corporation had a 4-year revolving remaining maturities. credit facility in the amount of $3.5 billion and a one-year revolving Interest payments were $815 million in 1997, $655 million in credit facility in the amount of $1.5 billion (collectively, the 1996 and $275 million in 1995. Credit Facilities). Borrowings under the Credit Facilities would be unsecured and bear interest, at the Corporation's option, at rates based on the Eurodollar rate or a bank Base Rate (as defined). Each Note 11 - Income Taxes bank's obligation to make loans under the Credit Facilities is sub- ject to, among other things, compliance by the Corporation with various representations, warranties, covenants and agreements, The provision for federal and foreign income taxes consisted of including, but not limited to, covenants limiting the ability of the the following components: Corporation and certain of its subsidiaries to encumber their assets and a covenant not to exceed a maximum leverage ratio. No borrowings were outstanding under the Credit Facilities (In millions) 1997 1996 1995 at December 31, 1997. However, the Credit Facilities support com- Federal income taxes: mercial paper borrowings of approximately $1.5 billion outstand- Current $448 $914 $510 ing at December 31, 1997, of which approximately $1.0 billion has Deferred 155 (251) (116) been classified as long-term debt in the Corporation's consolidated Total federal income taxes 603 663 394 balance sheet based on management's ability and intention to Foreign income taxes 34 23 13 maintain this amount of debt outstanding for at least one year. Total income taxes provided $637 $686 $407 During the third quarter of 1996, the Corporation entered into interest rate swap agreements to fix the interest rates on $875 mil- lion of its commercial paper borrowings. These agreements matured during 1997. The effects of these interest rate swap agree- ments were recorded periodically as an adjustment to interest expense related to commercial paper borrowings. 37


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    Notes to Consolidated Financial Statements • Continued Net provisions for state income taxes are included in general and administrative expenses, which are primarily allocable to Note 12 - Other Income and Expenses, Net government contracts. Such state income taxes were $62 million for 1997, $45 million for 1996 and $86 million for 1995. Other income and expenses, net, consisted of the following The Corporation's effective income tax rate varied from components: the statutory federal income tax rate because of the following tax differences: (In millions) 1997 1996 1995 Royalty income $ 52 $ 47 $64 1997 1996 1995 Interest income 40 60 33 Statutory federal tax rate 35.0% 35.0% 35.0% GE Transaction 311 — — Increase (reduction) in tax rate from: Materials transaction — 365 — Nondeductible amortization 4.9 4.2 3.2 Equity in earnings (losses) of affiliates 48 (28) (15) Revisions to prior years' estimated Other 31 8 13 liabilities (5.7) (1.6) (3.4) $482 $452 $95 Divestitures (2.4) (5.6) — Other, net 1.1 1.8 2.6 32.9% 33.8% 37.4% Note 13 - Stockholders' Equity and Related Items The primary components of the Corporation's federal deferred income tax assets and liabilities at December 31 were as follows: Capital Structure - At December 31, 1997, the authorized capital of the Corporation was composed of 750 million shares of common stock (194.4 million shares issued), 50 million shares of series pre- (In millions) 1997 1996 ferred stock (no shares issued), and 20 million shares of Series A Deferred tax assets related to: preferred stock (no shares outstanding). Approximately 70 million Accumulated post-retirement benefit common shares have been reserved for issuance under benefit and obligations $ 698 $ 700 incentive plans. Accrued compensation and benefits 258 333 The Series A preferred stock, which was redeemed in Merger related and consolidation reserves 83 217 November, 1997 in connection with the GE Transaction, had a par Contract accounting methods 669 619 value of $1 per share (liquidation preference of $50 per share). The Other 116 180 Corporation issued all of the authorized shares of Series A pre- 1,824 2,049 ferred stock to GE in 1993 in connection with the acquisition of Deferred tax liabilities related to: the GE Aerospace businesses. Dividends were cumulative and paid Intangible assets 437 486 Prepaid pension asset 259 297 at an annual rate of $3.00 per share, or 6%. Property, plant and equipment 132 178 During the second quarter of 1996, the Corporation's Board of Directors terminated the systematic common stock repurchase 828 961 plan which had been established in 1995 to counter the future dilu- Net deferred tax assets $ 996 $1,088 tive effect of common stock issued by the Corporation under its 1995 Omnibus Performance Award Plan. A separate program authorized in 1995 for the repurchase of up to nine million com- At December 31, 1997 and 1996, other liabilities included net mon shares to counter the dilutive effect of common stock issued long-term deferred tax liabilities of $260 million and $268 mil- under the Corporation's other benefit and compensation programs lion, respectively. and for other purposes related to such plans remains in effect. Federal and foreign income tax payments, net of refunds Approximately 2.3 million common shares were repurchased by received, were $986 million in 1997, $1.1 billion in 1996 and the Corporation in 1995 under these programs; no shares were $223 million in 1995. repurchased in 1997 or 1996. Stock option and award plans - On March 15, 1995, the stockholders approved the Lockheed Martin 1995 Omnibus Performance Award Plan (Omnibus Plan). Under the Omnibus Plan, employees of the Corporation may be granted stock-based incentive awards, including options to purchase common stock, stock appreciation rights, restricted stock or other stock-based incentive awards. Employees may also be granted cash-based incentive awards, such as performance units. These awards may be granted either individually or in combination with other awards. The Omnibus Plan requires that options to purchase common stock have an exercise price of not less than 100 percent 38


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    Lockheed Martin Corporation of the market value of the underlying stock on the date of grant. All stock-based incentive awards granted in 1997, 1996 and The number of shares of Lockheed Martin common stock autho- 1995 under the Omnibus Plan were stock options which have 10 rized to be issued in respect of awards under the Omnibus Plan year terms, and virtually all of which vest over a two year service at December 31, 1997 was 12 million shares. The Omnibus Plan period. Exercise prices of options awarded in those years were does not impose any minimum vesting periods on options or other equal to the market price of the stock on the date of grant. Pro awards. The maximum term of an option or any other award is forma information regarding net earnings and earnings per share 10 years. The Omnibus Plan allows the Corporation to provide for as required by SFAS No. 123 has been determined as if the financing of purchases, subject to certain conditions, by interest- Corporation had accounted for its employee stock options under bearing notes payable to the Corporation. the fair value method. The fair value for these options was esti- The following table summarizes the stock option activity of mated at the date of grant using a Black-Scholes option pricing the Corporation's plans during 1995, 1996 and 1997: model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 6.36%, Number of Shares 5.58% and 6.64%; dividend yields of 1.5%, 1.7% and 1.7%; (In thousands) volatility factors related to the expected market price of the Weighted Available Options Average Corporation's common stock of .163, .186 and .216; and a weighted for Grant Outstanding Exercise Price average expected option life of five years. The weighted average 3,652 fair values of options granted during 1997, 1996 and 1995 were December 31, 1994 9,244 $33.21 Additions 12,000 $21.87, $17.24 and $16.09, respectively. Granted (2,228) 2,228 59.38 For purposes of pro forma disclosures, the options' estimated Removed from fair values are amortized to expense over the options' vesting registration (3,674) periods. Therefore, the pro forma results for 1995 presented Exercised (1,943) 30.47 below include only 50 percent of the total pro forma expense for Terminated 81 (109) 51.63 options awarded in that year. The Corporation's pro forma December 31, 1995 9,831 9,420 39.74 information follows: Granted (2,649) 2,649 75.04 Exercised (2,241) 32.65 Terminated 141 (170) 63.32 (In millions, except per share data) 1997 1996 1995 Pro forma net earnings $1,267 $1,322 $671 December 31, 1996 7,323 9,658 50.65 Pro forma earnings per share Granted (2,898) 2,898 91.20 Exercised before deemed preferred (1,762) 41.72 Terminated stock dividend: 327 (358) 81.67 Basic $ 6.55 $ 6.67 $3.23 December 31, 1997 4,752 10,436 $62.36 Diluted $ 5.93 $ 5.97 $3.04 Approximately 6.5 million, 5.7 million and 6.5 million out- standing options were exercisable at December 31, 1997, 1996 and 1995, respectively. Information regarding options outstanding at December 31, 1997 follows (number of options in thousands): Options Outstanding Options Exercisable Weighted Weighted Average Weighted Range of Number of Average Remaining Contractual Number of Average Exercise Prices Options Exercise Price Life Options Exercise Price Less than $40.00 2,455 $30.97 4.2 years 2,455 $30.97 $40.00 - $59.99 2,942 52.24 6.9 years 2,942 52.24 $60.00 - $80.00 2,359 74.87 8.1 years 1,141 74.90 Greater than $80.00 2,680 91.21 9.0 years 10 91.83 Total 10,436 $62.36 7.1 years 6,548 $48.27 39


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    Notes to Consolidated Financial Statements • Continued Defined Benefit Plans Note 14 - Post-Retirement Benefit Plans Most employees are covered by contributory or noncontributory defined benefit pension plans. Benefits for salaried plans are gener- ally based on average compensation and years of service, while Defined Contribution Plans those for hourly plans are generally based on negotiated benefits The Corporation maintains a number of defined contribution and years of service. Substantially all benefits are paid from funds plans which cover substantially all employees, the most significant previously contributed to trustees. The Corporation's funding of which are the 401(k) plans for salaried employees and hourly policy is to make contributions that are consistent with U.S. employees. Under the provisions of these 401(k) plans, employees' Government cost allowability and Internal Revenue Service eligible contributions are matched by the Corporation at estab- deductibility requirements, subject to the full-funding limits of lished rates. The Corporation's matching obligations were $212 the Employee Retirement Income Security Act of 1974 (ERISA). million in 1997, $202 million in 1996, and $180 million in 1995. When any funded plan exceeds the full-funding limits of ERISA, The Lockheed Martin Corporation Salaried Savings Plan no contribution is made to that plan. includes an ESOP which purchased 17.4 million shares of the The net pension cost related to the Corporation's defined Corporation's common stock with the proceeds from a $500 mil- benefit plans included the following components: lion note issue which is guaranteed by the Corporation. The Corporation's match consisted of shares of its common stock, which was partially fulfilled with stock released from the ESOP at (In millions) 1997 1996 1995 approximately 1.2 million shares per year based upon the debt Service cost—benefits earned repayment schedule through the year 2004, with the remainder during the year $ 444 $ 463 $ 342 being fulfilled through purchases of common stock from terminat- Interest cost 1,163 1,050 881 ing participants or in the open market, or through newly issued Net amortization and other components 1,751 889 1,534 shares from the Corporation. Interest incurred on the ESOP debt Actual return on assets (3,329) (2,243) (2,571) totaled $26 million, $29 million and $31 million in 1997, 1996 and 1995, respectively. Dividends received by the ESOP with respect Net pension cost $ 29 $ 159 $ 186 to unallocated shares held are used for debt service. The ESOP held approximately 20.2 million issued shares of the Corporation's com- The following table sets forth the defined benefit plans' mon stock at December 31, 1997, of which approximately 12.7 mil- funded status and amounts recognized in the Corporation's con- lion were allocated and 7.5 million were unallocated. Unallocated solidated balance sheet: common shares held by the ESOP are considered outstanding for voting and other Corporate purposes, but excluded from weighted average outstanding shares in calculating earnings per share. For (In millions) 1997 1996 1997, 1996 and 1995, the weighted average unallocated ESOP shares Plan assets at fair value $20,642 $18,402 excluded in calculating earnings per share totaled approximately 7.9 million, 9.1 million and 10.3 million common shares, respec- Actuarial present value of benefit obligations: Vested $14,179 $13,486 tively. The fair value of the unallocated ESOP shares at December Non-vested 265 236 31, 1997 was approximately $740 million. Certain plans for hourly employees include non-leveraged Accumulated benefit obligation 14,444 13,722 Effect of projected future salary increases 1,882 1,694 ESOPs. The Corporation's match to these plans were made through cash contributions to the ESOP trusts which were used, in Projected benefit obligation (PBO) 16,326 15,416 part, to purchase common stock from terminating participants and Plan assets greater than PBC) 4,316 2,986 in the open market for allocation to participant accounts. These Reconciling items: ESOP trusts held approximately 1.7 million issued and outstanding Unrecognized net asset existing at the date of shares of common stock at December 31, 1997. initial application of SFAS No. 87 (106) (196) Dividends paid to the salaried and hourly ESOP trusts on Unrecognized prior-service cost 456 461 the allocated shares are paid annually by the ESOP trusts to the Unrecognized gain (3,738) (2,484) participants based upon the number of shares allocated to Prepaid pension asset $ 928 $ 767 each participant. At December 31, 1997, approximately 56 percent of the plan assets were equity securities, with the remainder primarily being fixed income securities and cash equivalents. Actuarial determina- tions were based on various assumptions displayed in the following table. Net pension costs in 1996 and 1995 were based on assump- tions in effect at the end of the respective preceding year. Effective 40


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    Lockheed Martin Corporation October 1, 1997, the Corporation changed its expected long-term At December 31, 1997, approximately 46 percent of these rate of return on assets. This change in estimate decreased pension plans' assets were equity securities, with the remainder primarily cost by approximately $70 million. Benefit obligations as of each being fixed income securities and cash equivalents. Actuarial deter- year-end were based on assumptions in effect as of those dates. minations were based on various assumptions displayed in the fol- lowing table. Net retiree medical costs for 1997, 1996 and 1995 were based on assumptions in effect at the end of the respective 1997 1996 1995 preceding years. Benefit obligations as of the end of each year Assumptions: reflect assumptions in effect as of those dates. Discount rates 7.5% 7.8% 7.5% Rates of increase in future compensation levels 6.0 6.0 6.0 1997 1996 1995 Expected long-term rate of return on assets Assumptions: 9.5 9.0 8.8 Discount rates 7.5% 7.8% 7.5% Expected long-term rate of return on assets 9.5 9.0 8.8 Retiree Medical and Life Insurance Plans Certain health care and life insurance benefits are provided to eli- gible retirees by the Corporation. These benefits are paid by the The medical trend rates used in measuring the APBO were Corporation or funded through several trusts. 7.0% in 1997 and 7.5% in 1996, and were assumed to gradually The net periodic post-retirement benefit cost included the decrease to 4.5% by the year 2004. An increase of one percentage following components: point in the assumed medical trend rates would result in an increase in the APBO of approximately 6.5% at December 31, 1997, and a 1997 post-retirement benefit cost increase of approximately (In millions) 1997 1996 1995 8.5%. The medical trend rate for 1998 is 6.7%. The Corporation Service cost—benefits believes that the cost containment features it has previously earned during the year $ 39 $ 40 $ 34 adopted and the funding approaches underway will allow it to Interest cost 191 181 177 effectively manage its retiree medical expenses, but it will continue Net amortization and other to monitor the costs of retiree medical benefits and may further components 38 13 44 Actual return on assets (117) (73) (82) modify the plans if circumstances warrant. Curtailment gain (15) N e t post-retirement cost $ 151 $ 46 $173 Note 15 - Leases The Corporation has made contributions to trusts (including Voluntary Employees' Beneficiary Association (VEBA) trusts and Total rental expense under operating leases, net of immaterial 401(h) accounts) established to pay future medical benefits to amounts of sublease rentals and contingent rentals, were eligible retirees and dependents. $295 million, $320 million and $236 million for 1997, 1996 and The following table sets forth the post-retirement benefit 1995, respectively. plans' obligations and funded status as of December 31: Future minimum lease commitments at December 31, 1997 for all operating leases that have a remaining term of more than (In millions) 1997 1996 one year were approximately $989 million ($237 million in 1998, $187 million in 1999, $141 million in 2000, $110 million in 2001, Plan assets at fair value $ 895 $ 736 $81 million in 2002, and $233 million in later years). Certain Actuarial present value of benefit obligations: major plant facilities and equipment are furnished by the U.$. Active employees, eligible to retire $ 350 $ 334 Government under short-term or cancelable arrangements. Active employees, not eligible to retire 462 454 Former employees 1,714 1,819 Accumulated post-retirement benefit obligation (APBO) 2,526 2,607 Note 16 - Commitments and Contingencies Assets less than APBO 1,631 1,871 Unrecognized gain 351 206 The Corporation or its subsidiaries are parties to or have property Post-retirement benefit unfunded liability $1,982 $2,077 subject to litigation and other proceedings, including matters arising under provisions relating to the protection of the environ- ment. In the opinion of management and in-house counsel, the probability is remote that the outcome of these matters will have a 41


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    Notes to Consolidated Financial Statements • Continued material adverse effect on the Corporation's consolidated results Government agreement or regulation. The Corporation has of operations or financial position. These matters include the recorded an asset for the portion of these costs that are probable of following items: future recovery in pricing of the Corporation's products and services for U.S. Government business. The portion that is expected to Environmental matters - In 1991, the Corporation entered into a be allocated to commercial business has been reflected in cost of consent decree with the U.S. Environmental Protection Agency sales. The recorded amounts do not reflect the possible future (EPA) relating to certain property in Burbank, California, which recovery of portions of the environmental costs through insurance obligated the Corporation to design and construct facilities to policy coverage or from other potentially responsible parties, monitor, extract, and treat groundwater, and to operate and main- which the Corporation is pursuing as required by agreement and tain such facilities for approximately eight years. A second consent U.S. Government regulation. Any such recoveries, when received, decree is being finalized which will obligate the Corporation to would reduce the Corporation's liability as well as the allocated fund the continued operation and maintenance of these facilities amounts to be included in the Corporation's U.S. Government through the year 2018. The Corporation estimates that expendi- sales and cost of sales. tures required to comply with the consent decrees over their remaining terms will be approximately $110 million. Waste remediation contract - In 1994, the Corporation was The Corporation has also been operating under a cleanup and awarded a $180 million fixed price contract by the U.S. Depart- abatement order from the California Regional Water Quality ment of Energy (DOE) for the Phase II design, construction and Control Board (the Regional Board) affecting its facilities in limited test of remediation facilities, and the Phase III full remedi- Burbank, California. This order requires site assessment and ation of waste found in Pit 9, located on the Idaho National action to abate groundwater contamination by a combination of Engineering and Environmental Laboratory reservation. The groundwater and soil cleanup and treatment. Based on experience Corporation has incurred significant unanticipated costs and derived from initial remediation activities, the Corporation esti- scheduling issues due to complex technical and contractual mates the anticipated costs of these actions in excess of the matters which threaten the viability of the overall Pit 9 program. requirements under the EPA consent decrees to approximate Management completed its investigation to identify and quantify $60 million over the remaining term of the project. the overall effect of these matters, and summarized its findings in a The Corporation is responding to three administrative orders request for equitable adjustment (REA) which was delivered to the issued by the Regional Board in connection with the Corporation's DOE on March 31, 1997. The provisions of the REA include, but former Lockheed Propulsion Company facilities in Redlands, are not limited to, the recovery of a portion of unanticipated costs California. Under the orders, the Corporation is investigating the incurred by the Corporation and the restructuring of the contract impact and potential remediation of regional groundwater conta- to provide for a more equitable sharing of the risks associated with mination by perchlorates and chlorinated solvents. The Regional the Pit 9 project. To better focus the Corporation's management Board has approved the Corporation's plan to maintain public resources on resolving these issues, the management and reporting water supplies with respect to chlorinated solvents during this structure of the Pit 9 program were changed in September 1997; work, and the Corporation is negotiating with local water purvey- however, the Corporation has been unsuccessful in reaching any ors to implement this plan, as well as to address water supply con- agreements with the DOE on cost recovery or other contract cerns relative to perchlorate contamination. The Corporation restructuring matters. As a result, the Corporation has reduced estimates that expenditures required to implement work currently work activities at the Pit 9 site, is awaiting technical direction from approved will be approximately $110 million. the DOE, and is in the process of preparing a certifiable claim. In addition, the Corporation is involved in other proceedings On February 27, 1998, the Corporation received a cure notice and potential proceedings relating to environmental matters, alleging that certain actions taken by the Corporation are condi- including disposal of hazardous wastes and soil and water contami- tions endangering performance of the Pit 9 contract. The notice nation. The extent of the Corporation's financial exposure cannot advised that, unless these conditions are cured within 30 days, in all cases be reasonably estimated at this time. A liability of the contract may be terminated for default. The Corporation approximately $260 million for those cases in which an estimate believes that termination for default is neither permissible under of financial exposure can be determined has been recorded. the Pit 9 contract nor warranted under the circumstances and is Under an agreement with the U.S. Government, the Burbank preparing its response. groundwater treatment and soil remediation expenditures refer- Letters of credit and other matters - The Corporation has entered enced above are being allocated to the Corporation's operations as into standby letter of credit agreements and other arrangements general and administrative costs and, under existing government with financial institutions primarily relating to the guarantee of regulations, these and other environmental expenditures related to future performance on certain contracts. At December 31, 1997, U.S. Government business, after deducting any recoveries from the Corporation had contingent liabilities on outstanding letters insurance or other responsible parties, are allowable in establish- of credit, guarantees, and other arrangements aggregating approx- ing the prices of the Corporation's products and services. As a imately $1.2 billion. result, a substantial portion of the expenditures are being reflected in the Corporation's sales and cost of sales pursuant to U.S. 42


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    Lockheed Martin Corporation Selected Financial Data by Business Segment Note 17 - Information on Industry Segments and Major Customers (In millions) 1997 1996 1995 The Corporation operates in four principal business segments: Net sales Space & Strategic Missiles, Electronics, Information & Services, Space & Strategic Missiles $ 8,303 $ 7,904 $ 7,813 and Aeronautics. All other activities of the Corporation fall within Electronics 7,069 6,675 3,357 the Energy and Other segment. Information & Services 6,468 5,893 4,173 Aeronautics 6,045 5,596 6,617 Space & Strategic Missiles - Engaged in the design, development, Energy and Other 184 807 893 engineering and production of civil, commercial and military $28,069 $26,875 $22,853 space systems, including spacecraft, space launch vehicles, manned space systems and their supporting ground systems and services; telecommunications systems and services; strategic fleet ballistic Operating profit missiles; and defensive missiles. Space & Strategic Missiles $1,053 $ 973 $ 463 Electronics 594 673 224 Electronics - Engaged in the design, development, integration and Information & Services 163 290 267 production of high performance electronic systems for undersea, Aeronautics 612 441 394 shipboard, land, airborne and space-based applications. Major Energy and Other 357 356 29 defense product lines include surface ship and submarine combat $2,779 $2,733 $1,377 systems; anti-submarine warfare systems; air defense systems; tac- tical battlefield missiles; aircraft controls; electronic-warfare; elec- Depreciation and amortization tro-optic and night-vision; radar; displays; and systems integration Space & Strategic Missiles $177 $188 $206 of mission specific combat suites. Major commercial product lines Electronics 214 239 122 include satellite electronics and mail handling automation systems. Information & Services 112 121 69 Aeronautics 88 126 142 Information & Services - Engaged in the development, integration Energy and Other 15 58 66 and operation of large, complex information systems; engineering, $606 $732 $605 technical, and management services for federal customers; trans- action processing systems and services for state and local govern- ment agencies; commercial information technology services; Amortization of intangible assets manufacture of computer peripherals, real-time 3-D graphics Space & Strategic Missiles $ 29 $ 29 $ 37 products and enterprise data management software; and the Electronics 228 199 64 Information & Services 107 92 47 provision of internal information technology support to Aeronautics 80 80 80 the Corporation. Energy and Other 2 2 2 Aeronautics - Engaged in the following primary lines of business: $446 $402 $230 tactical aircraft, airlift, surveillance/command, maintenance/ modification/logistics, reconnaissance and advanced development Expenditures for property, programs. Major programs include the F-22 air-superiority plant and equipment fighter, Joint Strike Fighter, F-16 multi-role fighter, C-130J Space & Strategic Missiles $293 $264 $165 tanker/transport, X-33 reusable launch vehicle technology demon- Electronics 189 213 100 strator, DarkStar reconnaissance vehicle, Airborne Early Warning Information & Services 137 104 63 & Control systems, Contractor Logistics Support, and various Aeronautics 104 75 58 Energy and Other 27 81 114 maintenance and modification programs. $750 $737 $500 Energy and Other - The Corporation manages certain facilities for the DOE. The contractual arrangements provide for the Identifiable assets Corporation to be reimbursed for the cost of operations and Space & Strategic Missiles $ 4,599 $ 3,758 $ 3,750 receive a fee for performing management services. The Electronics 10,619 11,363 3,869 Corporation reflects only the management fee in its sales and Information & Services 5,150 6,111 2,679 earnings for these government-owned facilities. In addition, while Aeronautics 3,757 4,201 3,827 the employees at such facilities are employees of the Corporation, Energy and Other 4,236 4,107 3,433 applicable employee benefit plans are separate from the $28,361 $29,540 $17,558 Corporation's plans. The Corporation also provides environmen- tal remediation services to commercial and U.S. Government customers, and has investments in other businesses. Through October 1996, the Corporation provided construction aggregates and specialty chemical products to commercial and civil customers through its Materials subsidiary. 43


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    Notes to Consolidated Financial Statements • Continued Net Sales by Customer Category Note 18 - Summary of Quarterly Information (Unaudited) (In millions) 1997 1996 1995 U.S. Government 1997 Quarters Space & Strategic Missiles $ 6,472 $ 6,401 $ 6,315 Electronics 4,844 4,451 2,266 (In millions, Information & Services 4,050 3,878 2,747 except per share data) First Second Third Fourth(a) Aeronautics 2,912 3,830 4,274 Net sales $6,674 $6,898 $6,619 $7,878 Energy and Other 118 154 168 Earnings from operations 656 637 677 327 $18,396 $18,714 $15,770 Net earnings 290 308 331 371 Diluted earnings per share before deemed preferred Foreign governments (a)(b) stock dividend 1.35 1.42 1.51 1.83(b) Space & Strategic Missiles $ 94 $ 38 $ 112 Electronics 1,695 1,656 832 Information & Services 246 152 77 Aeronautics 2,826 1,466 1,966 1996 Quarters Energy and Other — — — (In millions, $4,861 $3,312 $2,987 except per share data) First(c) Second Third Fourth(d) Net sales $5,109 $7,076 $7,028 $7,662 Commercial(b) Earnings from operations 472 693 675 441 Space & Strategic Missiles $1,737 $1,465 $1,386 Net earnings 272 299 311 465 Electronics 530 568 259 Diluted earnings per share 1.23 1.34 1.40 2.14 Information & Services 2,172 1,863 1,349 (a) Earnings for the fourth quarter of 1997 include the effects of certain nonrecurring and Aeronautics 307 300 377 unusual items, including a tax-free gain of $311 million, or $1.53 per diluted share, Energy and Other 66 653 725 and after tax charges of $303 million, or $1.49 per diluted share (see Notes 3 and 5). The Corporation also changed its expected long-term rate of return on benefit plan assets $4,812 $4,849 $4,096 effective October 1, 1997, which decreased pension cost (see Note 14). (a) Sales made to foreign governments through the U. S. Government are included in the (b) Earnings per share for 1997 excludes the effects of a deemed preferred stock dividend foreign governments category above. resulting from the transaction with GE. The excess of the fair value of the consideration transferred to GE (approximately $2.8 billion) over the carrying value of the Series A (b) Export sales, included in the foreign governments and commercial categories above, were preferred stock ($1.0 billion) was treated as a deemed preferred stock dividend and deducted $5.9 billion, $4.7 billion and $3.7 billion in 1997, 1996 and 1995, respectively. from 1997 net earnings in determining net earnings applicable to common stock used in the computation of earnings per share. The effect of this deemed dividend was to decrease basic earnings per share by $9.79, and was antidilutive in the calculation of diluted earnings per share. (c) Net sales and earnings for the first quarter of 1996 do not include the operations of Tactical Systems, as its operations have been included in the results of operations of the Corporation from April 1, 1996 (see Note 4). (d) Earnings for the fourth quarter of 1996 include the effects of certain nonrecurring items, including an after tax gain of $351 million, or $1.62 per diluted share, and after tax charges of $209 million, or $. 91 per diluted share (see Notes 4 and 5). 44


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    Lockheed Martin Corporation Consolidated Financial Data - Eight Year Summary (In millions, except per share data) 1997 1996 1995 1994 1993 1992 1991 1990 Operating Results Net sales $28,069 $26,875 $22,853 $22,906 $22,397 $16,030 $15,871 $16,089 Costs and expenses 25,772 24,594 21,571 21,127 20,857 14,891 14,767 15,178 Earnings from operations 2,297 2,281 1,282 1,779 1,540 1,139 1,104 911 Other income and expenses, net 482 452 95 200 44 42 (49) 34 2,779 2,733 1,377 1,979 1,584 1,181 1,055 945 Interest expense 842 700 288 304 278 177 176 180. Earnings before income taxes and cumulative effect of changes in accounting 1,937 2,033 1,089 1,675 1,306 1,004 879 765 Income tax expense 637 686 407 620 477 355 261 161 Earnings before cumulative effect of changes in accounting 1,300 1,347 682 1,055 829 649 618 604 Cumulative effect of changes in accounting (37) (1,010) Net earnings (loss) $ 1,300 $ 1,347 $ 682 $ 1,018 $ 829 $ (361) $ 618 $ 604 Earnings (Loss) Per Common Share Basic: Before deemed preferred stock dividend and cumulative effect of changes in accounting 6.73 $ 6.80 $ 3.28 5.32 $ 3.99 3.31 $ 3.05 $ 2.97 Deemed preferred stock dividend (9.85) Cumulative effect of changes in accounting (.20) (5.15) $ (3.12) $ 6.80 $ 3.28 5.12 $ 3.99 (1.84) $ 3.05 $ 2.97 Diluted: Before deemed preferred stock dividend and cumulative effect of changes in accounting 6.09 $ 6.09 $ 3.09 $ 4.85 $ 3.77 3.30 $ 3.04 $ 2.97 Deemed preferred stock dividend (8.55) Cumulative effect of changes in accounting — — — (.17) — (5.14) — — * $ 6.09 $ 3.09 $ 4.68 $ 3.77 $ (1.84) $ 3.04 $ 2.97 Cash dividends $ 1.60 $ 1.60 $ 1.34 $ 1.14 $ 1.09 $ 1.04 $ .98 $ .90 Condensed Balance Sheet Data Current assets $10,105 $10,346 $ 8,208 $ 8,143 $ 6,961 $ 5,157 $ 5,553 $ 5,442 Property, plant and equipment 3,669 3,721 3,134 3,455 3,643 3,139 3,155 3,200 Intangible assets related to contracts and programs acquired 1,566 1,767 1,553 1,696 1,832 42 52 59 Costs in excess of net assets acquired 9,856 10,394 2,794 2,831 2,697 841 864 882 Other assets 3,165 3,312 1,869 1,854 1,949 1,648 895 883 Total $28,361 $29,540 $17,558 $17,979 $17,082 $10,827 $10,519 $10,466 Short-term borrowings $ 494 $ 1,110 $ $ $ - $ $ $ Current maturities of long-term debt 876 180 722 285 346 327 298 30 Other current liabilities 7,819 7,382 4,462 5,177 4,690 3,176 3,833 4,235 Long-term debt 10,528 10,188 3,010 3,594 4,026 1,803 1,997 2,392 Post-retirement benefit liabilities 1,982 2,077 1,795 1,859 1,848 1,579 54 — Other liabilities 1,486 1,747 1,136 978 971 460 112 38 Stockholders' equity 5,176 6,856 6,433 6,086 5,201 3,482 4,225 3,771 Total $28,361 $29,540 $17,558 $17,979 $17,082 $10,827 $10,519 $10,466 Common Shares Outstanding at Year End 194.4 192.7 198.6 199.1 197.9 194.1 201.4 200.7 * Antidilutive. 45


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    Corporate Directors (As of March 12, 1998) Board of Directors Eugene F. Murphy Committees Vice Chairman and Executive Officer Norman R. Augustine General Electric Company Audit and Ethics Committee Chairman of the Board Mr. Hood, Chairman Allen E. Murray Mmes. Cheney and King, Messrs. Lockheed Martin Corporation Retired Chairman and Flournoy, Marafino, Tellep, Trost Marcus C. Bennett Chief Executive Officer and Ukropina Executive Vice President and Chief Mobil Corporation Financial Officer Compensation Committee Lockheed Martin Corporation Frank Savage Mr. Murray, Chairman Chairman Messrs. Gibbons, Hood, Murphy, Lynne V. Cheney Alliance Capital Management Trost and Yearley Senior Fellow for Public Policy Research International American Enterprise Institute Executive Committee Peter B. Teets Mr. Augustine, Chairman Vance D. Coffman President and Chief Operating Officer Messrs. Coffman, Hood, Marafino, Chief Executive Officer and Lockheed Martin Corporation Murray, Tellep, Ukropina and Yearley Vice Chairman Lockheed Martin Corporation Daniel M. Tellep Finance Committee Retired Chairman of the Board and Mr. Ukropina, Chairman Houston I. Flournoy Chief Executive Officer Mrs. King and Messrs. Hurtt, Special Assistant to the President, Lockheed Martin Corporation Marafino, Savage, Tellep and Yearley Governmental Affairs University of Southern California Carlisle A. H. Trost Nominating Committee Retired Chief of Naval Operations Mr. Murphy, Chairman James F. Gibbons James R. Ukropina Mrs. Cheney and Messrs. Flournoy, Reid Weaver Dennis Professor Partner Gibbons, Hurtt, Murray and Savage of Electrical Engineering O'Melveny & Myers Stanford University Stock Option Subcommittee Douglas C. Yearley Mr. Murray, Chairman Edward E. Hood, Jr. Chairman, President and Chief Messrs. Gibbons, Hood, Trost Retired Vice Chairman and Yearley Executive Officer General Electric Company Phelps Dodge Corporation Caleb B. Hurtt Retired President and Chief Operating Officer Martin Marietta Corporation Gwendolyn S. King Retired Senior Vice President, Corporate and Public Affairs PECO Energy Company Vincent N. Marafino Retired Executive Vice President Lockheed Martin Corporation 46


  • Page 49

    Lockheed Martin Corporation Officers Brian D. Dailey Albert Narath Vice President Vice President Peter DeMayo David S. Osterhout Joseph D. Antinucci Vice President Vice President Vice President Terrance M. Drabant Daniel W. Patterson William F. Ballhaus, Jr. Vice President Vice President Vice President Philip J. Duke Susan M. Pearce Marcus C. Bennett Vice President Vice President Executive Vice President and Chief Financial Officer Jack S. Gordon Terry F. Powell Vice President Vice President James F. Berry Vice President John Hallal John B. Ramsey James A. Blackwell, Jr. Vice President Vice President Vice President and President and Dain M. Hancock Walter E. Skowronski Chief Operating Officer, Vice President Vice President and Treasurer Aeronautics Sector Alfred G. Hansen Albert E. Smith Melvin R. Brashears Vice President Vice President Vice President and President and Chief Operating Officer, Marcus C. Hansen Michael A. Smith Space & Strategic Missiles Sector Vice President Vice President William B. Bullock K. Michael Henshaw John V. Sponyoe Vice President Vice President Vice President Michael F. Camardo Arthur E. Johnson Robert J. Stevens Vice President Vice President and President and Vice President and President and Chief Operating Officer, Chief Operating Officer, Joseph R. Cleveland Information & Services Sector Energy & Environment Sector Vice President Todd J. Kallman Peter B.Teets Vance D. Coffman Vice President and Controller President and Chief Operating Officer Chief Executive Officer and Vice Chairman Gary P. Mann Robert H. Trice, Jr. Vice President Vice President Raymond S. Colladay Vice President John F. Manuel Lillian M. Trippett Vice President Vice President, Corporate Secretary and Thomas A. Corcoran Associate General Counsel Vice President and President and G. Thomas Marsh Chief Operating Officer, Vice President Anthony Van Schaick Electronics Sector Vice President Carol R. Marshall Robert B. Coutts Vice President Leonard L. Victorino Vice President Vice President Russell T. McFall Vice President William T Vinson Vice President and Chief Counsel Janet L. McGregor Vice President Frank H. Menaker, Jr. Senior Vice President and General Counsel John E. Montague Vice President


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    Lockheed Martin Corporation General Information As of December 31, 1997, there were approximately 41,071 holders of record of Lockheed Martin common stock and 194,416,938 shares outstanding. Common Stock Prices (New York Stock Exchange—composite transactions) (In dollars) High Low Close 1997 Quarters 1st 92 7/8 82 84 2nd 105 1/4 78 1/4 103 9/16 3rd 113 7/16 98 3/8 106 5/8 4th 108 7/16 88 1/8 98 1/2 1996 Quarters 1st 80 7/8 73 1/8 75 7/8 2nd 86 3/4 73 84 3rd 91 3/4 76 1/4 90 1/8 4th 96 5/8 85 1/4 91 1/2 Transfer Agent & Registrar Common Stock First Chicago Trust Company of New York Stock symbol: LMT P. 0. Box 2536, Suite 4694 Listed: New York Stock Exchange Jersey City, New Jersey 07303-2536 Telephone: 1-800-519-3111 Annual Report on Form 10-K Stockholders may obtain, without charge, a copy of Lockheed Dividend Reinvestment Plan Martin's Annual Report on Form 10-K, as filed with the Securities Lockheed Martin's Dividend Reinvestment and Stock Purchase and Exchange Commission for the year ended December 31, 1997 Plan offers stockholders an opportunity to purchase additional shares by writing to: through automatic dividend reinvestment and/or voluntary cash Lockheed Martin Investor Relations investments. For more information, contact our transfer agent, 6801 Rockledge Drive First Chicago Trust Company of New York at 1-800-519-3111. Bethesda,MD 20817 For accessing the Lockheed Martin homepage on the Internet use the Uniform Resource Locator: http://www.shareholder.com/lmt. Independent Auditors Ernst if Young LLP Updates on earnings, dividends and company news are available 1225 Connecticut Avenue, N W. by calling Lockheed Martin Shareholder Direct at Washington, D.C. 20036 1-800-LMT-9758, 24 hours a day, seven days a week.

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