While the Lockheed Aircraft Corp.'s payoff revelation detonated a spectacular string of political explosions in Japan, the Netherlands, Italy and several other foreign countries over the past year, the company itself appears not only to have emerged financially stronger than it has been for quite some time.
Write-offs and losses on the L-1011 TriStar jumbo jet program continued to affect the company's earnings significantly and will for many years to come.
But in the past year, Lockheed has continued to gain billions of dollars in domestic and foreign orders for its military hardwar, has reached a major financial restructuring agreement with its 24 banks that stabilized its debt and raised needed new equity, and has paid down all but $100 million of the loans covered by the controversial U.S. government loan guarantee program which it hopes to phase out soon.
"The bottom line is that for some strange, unfathomable reason, our sign-ups for the last 12 months have been in excess of $3 billion," said Lockheed chairman Robert W. Haach in an interview. Of the total, nearly $2 billion came from abroad.
Haack, who was in San Francisco for a speech before the city Commonwealth Club, said that in 1976 "some very good things happened for Lockheed."
Prominent among the 1976 orders were the $710 million sale of anti-submarine patrol planes to Canada, a $450 million order from British Airways for a new long-rang L-1011, a $625 million air traffic control contract in Saudi Arabia, a $150 million award from Iran to develop a logistics support system, and another sizeable order from Iran and also one from Greece to establish aerospace facilities.
"The other side of the coin is that there are some parts of the world in which marketing decisions have been delayed to let the dust settle and clear up the uncertainity," Haack added.
But almost no major sales have been lost, he indicated, despite the company's strict new policy banning payoffs and controlling the activities of foreign agents and consultants which also has reduced their commission fees.
One exception is a $19 million order in an unnamed country that Haack said fell through recently because the government official responsible for approving it was demanding a Mercedes Benz as part of the deal.
"We haven't gotten the order to this day, and the official is still driving around in his Volkswagen," he jokes.
But in Japan, where the trial of former prime minister Kakuei Tanaka and 16 others on charges of accepting millions of dollars in Lockheed bribes is getting under way, the company remains optimistic about landing a long-delayed $350 million contract for its P-3C anti-sub patrol plane, according to Haack.
When the bribery revelations first began to unfold, former Lockheed officials were defended with the claim that this type of activity was common practice and necessary in order to compete in the international arena. The obvious question now is what validity, if any, this defense has given Lockheed's recent sales record.
While condemning all such activities, Haack nevertheless argued that "some of our people in the field still tell us that our restrictive policies are putting us at a disadvantage as far as competition is concerned," though he said he could not really document it.
A former chairman of the New York Stock Exchange and a Lockheed outside director since 1972, Haack, 59, was asked to head the company almost exactly a year ago, taking over on Friday, Feb. 13, 1976, after Lockheed's chairman and vice chairman were swept out in the wake of payoff disclosures.
Haack frequently has admitted he doesn't know much about running the day-to-day operation of the country's biggest defense contractor. But as an outsider with good ties to both the Wall Street financial community and the Washington bureaucracy, he was expected to restore the credibility of the company, assure customers of its long-range survival prospects and negotiate with its lenders to put it on a sounder financial footing.
With these tasks essentially completed, Haack is sticking to his commitment to make the Lockheed chairmanship a temporary assignment and is heading up a search committee to decide on a successor so he can return to his vocation as a professional corporate director. He serves on nine other boards besides Lockheed.
"The company now has gotten to the point where it needs a more experienced industralist, and I think I have made my unique contribution based on my background and skills," he said. But he indicated the search for a successor has "just gotten under way," and said no decision has been made as to whether he will come from inside or outside of the company.
Outside speculation has been that either Roy A. Anderson, Lockheed's vice chairman for finance and administration, or L.O. Kitchen, the company's president and chief operating officer, would succeed Haack. But there is also apprehension that either or both might be implicated in the upcoming report by seven outside company directors with having knowledge of Lockheed's past payoff activities.
The investigation and report, which is required as part of a consent settlement reached by Lockheed with the Securities and Exchange Commission last year, has been delayed a number of times and now is expected out at the beginning of April, according to Haack.
In his Commonwealth Club speech, Haack promised it would be "the most exhaustive business inquiry ever conducted by any American firm."
And while he claimed he had been kept "both insulated and isolated" from the investigation, he said he has been informed that the probe is essentially complete and has uncovered no domestic payoffs or illegal campaign contributions, unlike many other major U.S. corporations.
But he did not comment on the foreign situation where Lockheed has stated that questionable payments reached nearly $25 million between 1971 and 1975.
The company hopes that release of the report may turn out to be the last danger spot in the financial and political minefield it has been crossing since 1969, but there is also concern that a detailed report naming payoff recipients could set off a new storm of reactions that will cost Lockheed orders. With a number of foreign customers said to be quite nervous abou the report, it is expected that Lockheed will go to court to try and keep at least the names of recipients confidential as is its right under the consent order.
Lockheed's troubles began in the late 1960s when a change in government procurement policies hit the company with several hundred million dollars in bills for cost overruns on the C5-A transport plane, the Cheyenne helicopter and a few other government contracts.
This was followed in 1971 by the bankruptcy of Great Britain's Rolls Royce firm, which was making the engines for the L-1011. Until this situation was resolved, the production delay caused Lockheed to seek the $250 million loan guarantee from the U.S. government to prevent its own bankruptcy. The legislation only passed the Senate by one vote after a contentious debate, and has since been a major source of criticism directed at both the government and the company.
The TriStar was the third jumbo jet sweepstakes entrant, and it reached the market just when airline traffic growth was starting to slump and demand for new aircraft slowed to a crawl. When it looked like Lockheed could not meet its break-even goal of selling 300 L-1011s to recover its cost, a $1 billion write-off was required along with a further $500 million write-off of deferred production costs which are being spread equally over 10 years.
In addition, Lockheed's annual interest payments on the massive debt it accumulated primarily to fund the L-1011 have drained earnings by more than $50 million, and the company's earnings on its lucrative government contracts largely have been negated by the ill-starred finances of the L-1011.
"They earn $10 a share on military business and lose $7 a share on their commercial business, mainly the L-1011, and that's bascially the whole Lockheed story," according to one Wall Street analyst.
Though the full-year report for 1976 is not yet in, Lockheed is expected to earn a hefty $250 million in pre-tax operating profits, but after the L-1011 write-off of about $125 million and interest payments of $53 million, net income is projected to tally only $40 million, a drop of about 11 per cent from last year.
The trend for the balance sheet, however, is definitely one of improvement, which equity, which was down to only $27 million at the end of 1974, having risen to about $170 million at the end of 1976, and debt whittled down to about $680 million from $950 million two year ago, according to Haack.
In 1976, Lockheed paid off $95 million on the portion of its loans guaranteed by the government, and the Lockheed chairman expects that a further reduction in this amount will convince the banks that a continuation of the guarantee no longer is necessary, relieving the company of this burden.
For 1977, a debenture exchange offer is in the wings, and negotiations continue for the sale of the Lockheed-owned Hollywood-Burbank airport to the surrounding city. Haack estimates those two steps could increase equity to $250 million and reduce debt to below $500 million, possibly by the end of this year.
Because of the continued write-offs, and the expectation of a slowdown in some types of government orders this year, analysts project to about $32 million in 1977 before a further decline in Lockheed earnings to about $32 million in 1977 before picking up again next year, but most analysts are agreed that for Lockheed the bottomline earnings figure is largely irrelevant because of its complicated finances, and they believe that the government defense business will continue to provide a solid financial underprinning for the company.
"I would guess that Lockheed is probably over the hump in terms of its problems and well on its way to getting itself re-established as a very solvent entity in the aerospace industry," said Wolfgang Demisch, aerospace analyst with Smith Barney, Harris Upham & Co.