1995 Annual Report - Lockheed Martin

Lockheed Martin Corporationworldwide political and economic developments have strongly affected these markets, requiringsignificant adaptation by market participants.The Federal defense budgets for research, development, test and evaluation and procurementhave been reduced dramatically (after adjusting for inflation) over the last decade. These reductionshave caused participants in the aerospace/defense industry to consolidate in order to maintain criticalmass and production economies. The Corporation has actively participated in this consolidationactivity. The Corporation's recent acquisitions described above are examples of actions that havebeen taken to blend successful operations and broaden the business portfolio, create opportunitiesfor increased efficiency and cost competitiveness, improve access to new markets and reduceexposure to further defense budget program reductions. In prior years, the Corporation acquiredboth the tactical military aircraft and space systems businesses of General Dynamics, as well as theGE Aerospace businesses. Additionally, the Corporation has undertaken major cost reductionefforts throughout its operating units, continuously monitoring and adjusting employment levelsconsistent with changing business requirements.In light of the anticipated continuation of the recent consolidations in the aerospace/defenseindustry, executive management and the Board of Directors periodically review the Corporation'sstrategic plans related to joint ventures and business combinations with companies engaged insimilar or related businesses, as well as potential internal investments. During 1995, these effortsresulted in, among other actions, the establishment of a joint venture with Rockwell Internationalto negotiate a contract with NASA for space shuttle operations, and the purchase of the aircraftcontrols business of GE. As noted previously, in early 1996, the Corporation announced it hadentered into a merger agreement with Loral for a business combination which, if consummated,will create synergy by bringing together the technologies and resources of two successful defenseelectronics companies.In December 1995, President Clinton signed the fiscal year 1996 defense appropriations bill.This legislation is significant in that it marked the first increase in defense budget appropriations inseveral years. Many analysts and political observers expect that the fiscal 1996 budget represents thebeginning of a period of flat to modestly growing defense spending. Management believes that itsstrategic actions will place the Corporation in an advantageous position in the industry once thedefense budget climate starts to improve.To date, the Corporation's major programs generally have been well supported during thebudget decline, but uncertainty exists over the size and scope of future defense and space budgets andtheir impact on specific programs. Some of the Corporation's programs have been delayed, curtailedor terminated, and future spending reductions and funding limitations could further impact theseprograms or have similar effects on other existing or emerging programs.As a U.S. Government contractor, the Corporation's government contracts and operations aresubject to government oversight. The government may investigate and make inquiries of theCorporation's business practices and conduct audits of contract performance and cost accounting.These investigations may lead to claims against the Corporation. Under U.S. Government