The congressional debate over the future of the MX missile also will affect the future growth of Martin Marietta Corp., one of the major contractors on the project.
Analysts say Marietta won't stand or fall on the outcome of the debate -- most believe, in fact, that the Bethesda-based company has conservatively left the MX out of long-range planning. But the $26 billion program would mean billions of dollars in revenues and growth to the company, even though profits from the project may not be very large. Already Marietta has received about $1.1 billion worth of MX contracts, including $400 million this year -- about 10 percent of Marietta's total revenues.
The loss of the MX contract would be another blow to a company that already has been bruised this year by the effects of its spectacular battle to thwart a takeover attempt by Bendix Corp., unsuccessful tests of its Pershing II missile, and depressed results in its cement and aluminum divisions.
Last week, the company began taking action to clean up the damage to its balance sheet done by the recession and the battle with Bendix. It announced plans to close a cement plant in Maine, contributing to a $13 million writeoff that will eliminate any fourth quarter profit. It also filed a proposed offering of $75 million in convertible preferred stock to help reduce the $900 million in debt the company incurred fighting Bendix.
Those moves will help Marietta over the short-term, but the MX could be an important factor in the company's longer-term growth. Even at slim profit margins, the more than $500 million a year that Marietta would likely receive for assembling the missile would provide the company with financial strength to take on other projects.
The survival of the MX program is uncertain. The House Appropriations Committee last week defeated, by a 26-to-26 tie vote, an amendment that would bar production of the nuclear-tipped missile.
Reagan administration officials and congressional backers of the project described the vote as a small victory, but said they still face a stiff fight in their effort to approve funding of the program, which includes the controversial "dense-pack" basing proposal. Should the missile be defeated this time around, however, its proponents are likely to offer a modified version of the program next year.
Even if Congress does vote to abandon the MX program, Martin Marietta will not be left totally in the lurch. Research and development into advanced missile programs beyond the MX will go on, at a value to Marietta of $100 million or more a year, analysts say. "My guess is that the basic R&D on the MX is going to go forward come hell or high water," says Thomas Taylor, an analyst at Legg Mason.
The experts aren't quite so sanguine about the company's situation on the Pershing II missile program. Although the technical problems are being corrected, the Pershing II is seen as a possible bargaining chip in arms negotiations with the Soviet Union, raising the possibility that the program could be rolled back or canceled entirely in the interest of detente.
Still, the analysts say that the company, in keeping with its tradition of conservative management, has adequately protected itself against the loss of either or both missile projects. It is apparently counting on neither of them when doing long-range budgeting and planning, and in the case of the MX, has done very little major gearing up of plant and equipment for the actual deployment of the missile.
"I don't think they have ever really planned, in their internal planning, to really build the MX," says Taylor. "I think they saw that as a political football."
"I don't think at this point in time they have it factored into their budget on a full upscale program," says Doug Moffat, who follows the company for First Manhattan. "They don't know any better than the next guy how it's going to work out."
"They'd love to have it, but they won't die without it," analyst Larry Lytton at Drexel Burnham Lambert says.
"In terms of looking at the two missile programs," Lytton adds, "with them, they'll have 20 percent growth over the next few years. Without them, it will maybe be 12 percent."
Much of the reason for the analysts' optimism lies in the company's considerable backlog of secure aerospace contracts, including the Patriot and Pershing I missile systems and several major components of the space shuttle. But the aerospace division is about the company's only real bright spot these days. The company's cement and aluminum divisions will show losses for the year, and Martin Marietta said last week it probably won't earn a profit in the fourth quarter.
"The story of our 1982 results is best wrapped up in the two extremes -- very good aerospace, very bad aluminum," Marietta President Thomas G. Pownall said in a statement. "Looking ahead, we foresee continuing strength in aerospace, but prospects in our other markets, most particularly aluminum, offer little encouragement at present for recovery or revival."
In addition to the stock offering and cement plant closing announced last week, the company is believed to be looking at some of its troubled operations, in the hopes of selling them to cut losses and raise cash. One source said German and Swiss companies are considering making offers for Marietta's cement division, and that Japanese steelmaker Mitsui is attempting to put together a group of companies to buy its struggling aluminum operations. But a company spokesman says, "Right at the moment, there is nothing on the table."
Assessing Marietta's future is difficult because company officials will not publicly discuss their plans, saying that they are still evaluating its situation.
At his last meeting with the press, shortly after the end of the Bendix tussle in September, Pownall said, "Although we do have a heavy debt, we do believe that we can manage that debt with the cash flows that we anticipate, from the earnings that we anticipate, and the stockholder base that we anticipate over the next year or so . . . I think that we have the opportunity to demonstrate that we can bring this corporation back to the same health and stature that it was known to have for many many years prior to this time."
The peace agreement in the Bendix battle -- under which Allied Corp. acquires Bendix and 39 percent of Martin Marietta -- is still not complete, much to the chagrin of Wall Street, which would like to get the whole episode resolved. The companies now expect to be able to close the deal by Dec. 21, once the Justice Department has finished examining the antitrust implications of the Allied-Bendix combination. Allied is expected to be forced to sell some assets to settle antitrust problems.
With that agreement behind it, Martin Marietta can get to work rehabilitating its finances. The company increased its debt by $900 million when it bought half of Bendix's stock during the battle, and though analysts say low interest rates are keeping the debt load from dragging Martin Marietta down, the company is expected to stretch out that debt at even more moderate rates.
"The debt load for the company is extraordinarily heavy, if they have to carry it for any period of time," says Moffat of First Manhattan. "The company has very little reserve for major setbacks." Further trouble with the national economy, rather than cancellation of the MX, would be such a setback, he adds.
The issue of convertible preferred stock announced last week had been expected by analysts as a means to help the company reduce its debt, and many expect the company to issue more stock in coming months.
Marietta also is expected to trim some of its unprofitable operations. The plans to close the cement plant in Thomastown, Maine--representing about 10 percent of the company's cement capacity -- seems to be the first step in that direction.
Analysts disagree on whether the company will -- or even can -- take the more radical step of disposing entirely of some of its worst-performing businesses. The slump in construction has severely depressed both the cement and aluminum businesses, weighing down the company's overall performance. Its other non-aerospace businesses -- specialty chemicals and sand and gravel--are not particularly bright spots, either.
Some analysts believe that Martin Marietta should cut its losses and sell the cement and aluminum businesses. "The probability is pretty good that they can sell off one of the businesses, if not in whole then in part," Lytton of Drexel Burnham Lambert says. "There are significant portions of their business that they would be willing to sell if they could find a buyer at the right price."
And there's the rub. While a source says "there's a lot of tire-kicking" by possible buyers for the non-aerospace divisions, none have stepped forward with an offer, at least not at a price that would make it worth Marietta's while.
"The price you're going to get for anything, selling it off now, even if you're a good bargainer, is nowhere near what you'd get for it selling it off in a healthy economy," says Wolfgan H. Demisch, who follows the company for Morgan Stanley.
In fact, Demisch and some other analysts think that Martin Marietta would be better off waiting for the economy to improve -- not to make the divisions more saleable, but to reap their benefits. "Many of their businesses are economy-sensitive," says analyst Eliot Fried of Shearson American Express. "I think those businesses will rebound as the economy improves."
The analysts believe that in an economic recovery, the cement industry will literally be the foundation of a revival in the construction business, as pent-up demand spurs residential and commercial building. And despite Pownall's gloomy prediction last week, some forecasters are now expecting a resurgence in the aluminum business after the middle of the decade.
That potential has many analysts optimistic about Marietta's long-range outlook despite its current problems and the uncertainty over the MX and Pershing II missile programs.
"They're hoping for some significant earnings growth over the next couple of years, which is truly possible if the economy comes back," says Fried.
"Once the economy picks up a little bit, [Marietta] should do very well," Demisch says.