AVIATION: In One Big Gulp

As boss of Lockheed Aircraft Corp., Robert E. Gross, 63, was faced with an unexpected — and huge — financial problem.

Lockheed is losing $24.5 million on its turboprop Electras, half of it spent on correcting the structural flaws that caused two crashes. Because of defense-spending cutbacks, there have been few orders for Lockheed’s small JetStar transport, a $31 million project. Other programs in the works, and the need to cover expenses on some contracts which the Government may disallow, added another $12 million to Lockheed’s losses.

Worried investors sold Lockheed stock so steadily that it dropped from a 1960 high of 32⅞ to 18⅝. Gross could minimize the losses by the usual method of spreading them over several years, or he could do what plane manufacturers had rarely done—write them all off at once. Said Gross: “We decided to take everything at once—and then be off to the races.

Intuitively, I thought the quicker we did this the better.”

Biggest Loss in History. The cost was enormous. Last week Gross announced that Lockheed wrote off losses of $67,569,000 in the first half. When charged against first-half earnings, the write-off left Lockheed with a six-month net loss of $55,409,000, biggest in the aircraft industry’s history. But by writing off “all our present, past and future losses,” Gross hopes to speed Lockheed’s profit recovery.* For the past six weeks, Lockheed has been operating profitably, hopes to cut its overall loss to $45 million by year’s end. With a tax rebate and an estimated $30 million in earnings over the next 18 months, Lockheed expects to wipe out the loss completely, be on a moneymaking basis by the end of 1961.

To many a company such sweeping write-offs would be fatal, would send the stock skittering down. But Bob Gross guessed that he could get away with it, timed the announcement to follow the successful launching from a submarine of the Lockheed-manufactured Polaris missile.

The Polaris, which accounts for a big share of Lockheed’s $1.1 billion backlog, is also being talked about as a possible NATO weapon because it is so versatile, can be fired as easily from railroad cars or barges as from submarines.

The Good News Came. Gross was also counting on other good news. Last week for example, Lockheed’s Agena-Discoverer satellite produced a space “first” when its nose cone was recovered after being placed in orbit (see SCIENCE). Lockheed is the prime contractor for the orbiting Midas satellite, which is equipped with infra-red sensors to detect the heat of ballistic missiles and send a warning back to earth. It is also working on the Samos global surveillance system. Along with the Martin Co., Lockheed was chosen fortnight ago to study the feasibility of a nuclear rocket, a development that Gross believes will “bring the next great technological breakthrough.”

At week’s end, with all the bad news out, Lockheed stock had moved up 2¼ points to 24. Bob Gross flew off to Europe for a bit of vacation and some calls on NATO nations who are interested in Lockheed’s F-104 fighters. All told, U.S. allies will spend $2.3 billion for Starfighters over the next five years, of which some $608 million will goto Lockheed.

*Federal tax write-offs work this way: a com pany can charge development and modification costs, and losses in market value of its products, (e.g., airplanes) against current expenses. If the company ends up with a net operating loss, it can claim its loss of profits from the Government as a cash refund on its three previ ous years’ back taxes. If this is not enough to cover its losses, it can offset future earnings for up to five years. These write-offs are sometimes the most valuable ingredient in money-losing companies up for sale.