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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002 Commission file number 1-11437
--------------- --------
LOCKHEED MARTIN CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 52-1893632
- ------------------------------------ ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6801 ROCKLEDGE DRIVE, BETHESDA, MD 20817
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(301) 897-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of July 31, 2002
- ---------------------------------- ----------------------------------
Common stock, $1 par value 454,909,025
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
------------
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Statement of Earnings-
Three Months and Six Months Ended June 30, 2002 and 2001.........................................3
Unaudited Condensed Consolidated Statement of Cash Flows-
Six Months Ended June 30, 2002 and 2001..........................................................4
Unaudited Condensed Consolidated Balance Sheet-
June 30, 2002 and December 31, 2001..............................................................5
Notes to Unaudited Condensed Consolidated Financial Statements.....................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................15
Item 3. Quantitative and Qualitative Disclosure of Market Risk
(included in Item 2. under the caption "Other Matters")
Part II. Other Information
Item 1. Legal Proceedings........................................................................27
Item 4. Submission of Matters to a Vote of Security Holders......................................28
Item 6. Exhibits and Reports on Form 8-K.........................................................28
Signatures...............................................................................................29
Exhibit 10.1 Amendment to Lockheed Martin Corporation Nonqualified Retirement Plans
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
2
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Earnings
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions, except per share data)
Net sales $ 6,290 $ 5,688 $ 12,256 $ 10,435
Cost of sales 5,807 5,289 11,335 9,686
------- ------- -------- --------
Earnings from operations 483 399 921 749
Other income and expenses, net 43 26 79 69
------- ------- -------- --------
526 425 1,000 818
Interest expense 145 180 293 377
------- ------- -------- --------
Earnings from continuing operations
before income taxes 381 245 707 441
Income tax expense 30 95 132 165
------- ------- -------- --------
Earnings from continuing operations 351 150 575 276
Loss from discontinued operations (12) (6) (18) (27)
------- ------- -------- --------
Net earnings $ 339 $ 144 $ 557 $ 249
======= ======= ========= ========
Earnings (loss) per common share:
- ---------------------------------
Basic:
Continuing operations $ 0.79 $ 0.35 $ 1.30 $ 0.65
Discontinued operations (0.03) (0.01) (0.04) (0.06)
------- -------- -------- --------
$ 0.76 $ 0.34 $ 1.26 $ 0.59
======= ======== ======== ========
Diluted:
Continuing operations $ 0.78 $ 0.34 $ 1.28 $ 0.64
Discontinued operations (0.03) (0.01) (0.04) (0.06)
------- ------- -------- --------
$ 0.75 $ 0.33 $ 1.24 $ 0.58
======- ======= ======== ========
Cash dividends declared per common share $ 0.11 $ 0.11 $ 0.22 $ 0.22
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Cash Flows
Six Months Ended
June 30,
2002 2001
--------- ---------
(In millions)
Operating Activities:
Earnings from continuing operations $ 575 $ 276
Adjustments to reconcile earnings from continuing operations
to net cash provided by operating activities:
Loss from discontinued operations (18) (27)
Depreciation and amortization 272 393
Changes in operating assets and liabilities:
Receivables 494 378
Inventories 33 460
Accounts payable (270) (177)
Customer advances and amounts in excess
of costs incurred 66 72
Other 396 (178)
-------- -------
Net cash provided by operating activities 1,548 1,197
-------- -------
Investing Activities:
Expenditures for property, plant and equipment (261) (193)
Acquisitions / investments in affiliated companies (86) (172)
Proceeds from divestitures 81 4
Other 25 80
-------- -------
Net cash used for investing activities (241) (281)
-------- -------
Financing Activities:
Net decrease in short-term borrowings -- (12)
Net repayments related to long-term debt (76) (1,155)
Issuances of common stock 385 64
Common stock dividends (99) (96)
-------- --------
Net cash provided by (used for) financing activities 210 (1,199)
------- -------
Net increase (decrease) in cash and cash equivalents 1,517 (283)
Cash and cash equivalents at beginning of period 912 1,505
-------- -------
Cash and cash equivalents at end of period $ 2,429 $ 1,222
======== =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
Lockheed Martin Corporation
Condensed Consolidated Balance Sheet
(Unaudited)
June 30, December 31,
2002 2001
--------- ------------
(In millions)
Assets
Current assets:
Cash and cash equivalents $ 2,429 $ 912
Receivables 3,555 4,049
Inventories 3,107 3,140
Deferred income taxes 1,566 1,566
Assets of businesses held for sale 532 638
Other current assets 470 473
-------- --------
Total current assets 11,659 10,778
Property, plant and equipment 3,017 2,991
Investments in equity securities 1,787 1,884
Intangible assets related to contracts and programs acquired 877 939
Goodwill 7,371 7,371
Prepaid pension cost 2,161 2,081
Other assets 1,459 1,610
-------- --------
$ 28,331 $ 27,654
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,149 $ 1,419
Customer advances and amounts in excess of costs incurred 5,068 5,002
Salaries, benefits and payroll taxes 1,100 1,100
Income taxes 193 63
Current maturities of long-term debt 762 89
Liabilities of businesses held for sale 340 387
Other current liabilities 1,486 1,629
-------- --------
Total current liabilities 10,098 9,689
-------- --------
Long-term debt 6,687 7,422
Post-retirement benefit liabilities 1,593 1,565
Deferred income taxes 965 992
Other liabilities 1,594 1,543
Stockholders' equity:
Common stock, $1 par value per share 454 441
Additional paid-in capital 2,697 2,142
Retained earnings 4,419 3,961
Unearned ESOP shares (67) (84)
Accumulated other comprehensive loss (109) (17)
-------- --------
Total stockholders' equity 7,394 6,443
-------- --------
$ 28,331 $ 27,654
======== ========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Lockheed Martin Corporation
(Lockheed Martin or the Corporation) has continued to follow the accounting
policies set forth in the consolidated financial statements included in its 2001
Annual Report on Form 10-K filed with the Securities and Exchange Commission,
except for the adoption of Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002, as
discussed in "Note 3 - Adoption of New Accounting Standard." In the opinion of
management, the interim financial information provided herein reflects all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results of operations for the interim periods. The results
of operations for the six months ended June 30, 2002 are not necessarily
indicative of results to be expected for the full year. Certain amounts
presented for prior periods have been reclassified to conform with the 2002
presentation.
NOTE 2 - EXIT FROM THE GLOBAL TELECOMMUNICATIONS SERVICES BUSINESS
In December 2001, the Corporation announced the exit from its global
telecommunications services business. As a result of this action, the Global
Telecommunications segment is no longer reported as a separate business segment.
The former Global Telecommunications segment businesses retained by the
Corporation include the Systems & Technology line of business and the COMSAT
General telecommunications business unit, which were realigned within the Space
Systems segment, and Enterprise Solutions-U.S., which was realigned within the
Technology Services segment. Telecommunications equity investments, which
include Intelsat, Ltd. (Intelsat), Inmarsat Ventures plc, New Skies Satellites,
N.V., ACeS International, Ltd., Americom Asia-Pacific, LLC and other ventures,
are now reported as part of the Corporate and Other segment.
The following telecommunications businesses are classified as held for sale
in accordance with the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets":
. Satellite Services businesses - includes COMSAT World Systems and
Lockheed Martin Intersputnik. In the first quarter of 2002, the
Corporation completed the sale of COMSAT Mobile Communications. The
transaction did not have a material impact on the Corporation's
consolidated results of operations or financial position. Also in the
first quarter, the Corporation announced that it had reached an
agreement to sell COMSAT World Systems to Intelsat, subject to
regulatory approvals and customary closing conditions.
. COMSAT-International - provides telecommunications network services
in Latin America, primarily Argentina and Brazil. In the second quarter
of 2002, the Corporation announced that it had reached an agreement
to sell 81 percent of its ownership interest in COMSAT-International,
subject to regulatory approvals and customary closing conditions.
6
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The Corporation adopted SFAS No. 144 effective January 1, 2001.
Accordingly, the results of operations of these telecommunications businesses
are reported as discontinued operations, net of income taxes, in the
Corporation's unaudited condensed consolidated statements of operations for all
periods presented, and excluded from business segment information. Similarly,
their assets and liabilities are separately identified in the unaudited
condensed consolidated balance sheet as being held for sale. The businesses are
recorded at estimated fair value less cost to sell at June 30, 2002. Any changes
in the estimated fair value will be recorded in future periods as appropriate.
In addition, the Corporation completed the sale of Lockheed Martin IMS
Corporation (IMS) in August 2001. The results of IMS' operations for the quarter
and six months ended June 30, 2001 have been reclassified to discontinued
operations in accordance with SFAS No. 144.
NOTE 3 - ADOPTION OF NEW ACCOUNTING STANDARD
The Corporation adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," as of January 1, 2002. Among other things, the Statement prohibits the
amortization of goodwill and sets forth a new methodology for periodically
assessing and, if warranted, recording impairment of goodwill. The Corporation
completed the initial step of the goodwill impairment test required by the new
rules and concluded that no adjustment to the balance of goodwill at the date of
adoption was required. In addition, the Corporation reassessed the estimated
remaining useful lives of other intangible assets as part of its adoption of the
Statement. As a result of that review, the estimated remaining useful life of
the intangible asset related to the F-16 program has been extended. This change
is expected to decrease annual amortization expense associated with that
intangible asset by approximately $30 million on a pretax basis, or
approximately $8 million per quarter. The following table provides a
reconciliation of reported earnings from continuing operations and related per
share amounts for the quarter and six months ended June 30, 2001 to adjusted
amounts which exclude the effects of goodwill amortization and reflect the
change in amortization related to the F-16 program for those periods.
7
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions, except per share data)
Earnings from continuing operations:
As reported $ 351 $ 150 $ 575 $ 276
Impact of:
Goodwill amortization -- 58 -- 106
Contract value amortization -- 5 -- 10
------- ------- ------- -------
Adjusted $ 351 $ 213 $ 575 $ 392
======= ======= ======= =======
Diluted earnings per share from continuing operations:
As reported $ 0.78 $ 0.34 $ 1.28 $ 0.64
Impact of:
Goodwill amortization -- 0.13 -- 0.24
Contract value amortization -- 0.02 -- 0.03
------- ------- ------- -------
Adjusted $ 0.78 $ 0.49 $ 1.28 $ 0.91
======= ======= ======= =======
Intangible assets related to contracts and programs acquired are displayed
in the unaudited condensed consolidated balance sheet net of accumulated
amortization of $1,302 million and $1,239 million at June 30, 2002 and December
31, 2001, respectively. Amortization expense related to these intangible assets
was $32 million and $63 million for the quarter and six months ended June 30,
2002, respectively, and $39 million and $77 million for the quarter and six
months ended June 30, 2001, respectively.
NOTE 4 - EARNINGS PER SHARE
Basic and diluted earnings per share were computed based on net earnings.
The weighted average number of common shares outstanding during the period was
used in the calculation of basic earnings per share, and this number of shares
was increased by the dilutive effect of stock options based on the treasury
stock method in the calculation of diluted earnings per share.
8
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The following table sets forth the computations of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions, except per share data)
Net earnings (loss):
Earnings from continuing operations $ 351 $ 150 $ 575 $ 276
Loss from discontinued operations (12) (6) (18) (27)
------- ------- ------- -------
Net earnings for basic and diluted computations $ 339 $ 144 $ 557 $ 249
======= ======= ======= =======
Average common shares outstanding:
Average number of common shares outstanding for basic
computations 444.5 425.7 441.0 424.5
Dilutive stock options 8.0 4.4 7.6 4.4
------- ------- ------- -------
Average number of common shares outstanding for diluted
computations 452.5 430.1 448.6 428.9
======= ======= ======= =======
Earnings (loss) per share:
Basic:
Continuing operations $ 0.79 $ 0.35 $ 1.30 $ 0.65
Discontinued operations (0.03) (0.01) (0.04) (0.06)
------- ------- ------- -------
$ 0.76 $ 0.34 $ 1.26 $ 0.59
======= ======= ======= =======
Diluted:
Continuing operations $ 0.78 $ 0.34 $ 1.28 $ 0.64
Discontinued operations (0.03) (0.01) (0.04) (0.06)
------- ------- ------- -------
$ 0.75 $ 0.33 $ 1.24 $ 0.58
======= ======= ======= =======
NOTE 5 - INVENTORIES
June 30, December 31,
2002 2001
---- ----
(In millions)
Work in process, commercial launch vehicles $ 1,245 $ 1,205
Work in process, primarily related to other long-term contracts and
programs in progress 4,760 4,279
Less customer advances and progress payments (3,414) (2,931)
-------- --------
2,591 2,553
Other inventories 516 587
-------- --------
$ 3,107 $ 3,140
======== ========
Work in process inventories related to commercial launch vehicles include
costs for launch vehicles, including approximately $135 million of unamortized
deferred costs at June 30, 2002 related to the Corporation's Atlas V program.
Such costs include the Atlas Space Operations Center, the vehicle integration
facility and certain related ground equipment for the program. In the third
quarter of 2002, in connection with the completion of the launch facilities and
the initial
9
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
operational status of the Atlas V program, the Corporation expects to reclassify
these unamortized costs from work in process inventory to property, plant and
equipment to be depreciated over a period of 10 years.
Commercial launch vehicle inventories also include amounts advanced to
Khrunichev State Research and Production Space Center, a Russian manufacturer,
of $605 million and $672 million at June 30, 2002 and December 31, 2001,
respectively, for the manufacture of Proton launch vehicles and related launch
services. In addition, commercial launch vehicle inventories include amounts
advanced to RD AMROSS, a joint venture between Pratt & Whitney and NPO
Energomash, of $44 million and $58 million at June 30, 2002 and December 31,
2001, respectively, for the development and purchase, subject to certain
conditions, of RD-180 booster engines to be used for Atlas launch vehicles.
NOTE 6 - CONTINGENCIES
The Corporation or its subsidiaries are parties to or have property subject
to litigation and other proceedings, including matters arising under provisions
relating to the protection of the environment. In the opinion of management and
in-house counsel, the probability is remote that the outcome of these matters
will have a material adverse effect on the Corporation's consolidated results of
operations or financial position. These matters include the following items:
Environmental matters - The Corporation is responding to three
administrative orders issued by the California Regional Water Quality Control
Board (the Regional Board) in connection with the Corporation's former Lockheed
Propulsion Company facilities in Redlands, California. Under the orders, the
Corporation is investigating the impact and potential remediation of regional
groundwater contamination by perchlorates and chlorinated solvents. The Regional
Board has approved the Corporation's plan to maintain public water supplies with
respect to chlorinated solvents during this investigation, and the Corporation
continues to negotiate with local water purveyors to implement this plan, as
well as to address water supply concerns relative to perchlorate contamination.
The Corporation estimates that expenditures required to implement work currently
approved will be approximately $85 million. The Corporation is also coordinating
with the U.S. Air Force, which is working with the aerospace and defense
industry to conduct preliminary studies of the potential health effects of
perchlorate exposure in connection with several sites across the country,
including the Redlands site. The results of these studies are intended to assist
state and federal regulators in setting appropriate action levels for
perchlorates in groundwater, and therefore are intended to assist the
Corporation in determining its ultimate clean-up obligation, if any, with
respect to perchlorates. In January 2002, the State of California reduced its
provisional standard for perchlorate concentration in water from 18 parts per
billion (ppb) to four ppb. This provisional standard may be used by the State in
providing guidelines to water purveyors; however, until such time as it is
formally adopted after a public notice and comment period, it is not a legally
enforceable standard. If formally adopted as a regulation, this change would
lead to increased clean-up costs for the Corporation related to the Redlands
site.
Since 1990, the Corporation has been responding to various consent decrees
and orders relating to soil and regional groundwater contamination in the San
Fernando Valley associated with the Corporation's former operations in Burbank,
California. Among other things, these consent decrees and orders obligate the
Corporation to construct and fund the operations of soil and groundwater
treatment facilities in Burbank and Glendale, California through 2018 and 2012,
10
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
respectively; however, responsibility for the long-term operation of these
facilities was assumed by the respective localities in 2001. The Corporation has
been successful in limiting its financial responsibility for these activities to
date to its pro rata share as a result of litigation and settlements with other
potentially responsible parties. In addition, under an agreement reached with
the U.S. Government in 2000, the Corporation will continue to be reimbursed in
an amount equal to approximately 50 percent of future expenditures for certain
remediation activities by the U.S. Government in its capacity as a potentially
responsible party under the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA). The Corporation estimates that total expenditures
required over the remaining terms of the consent decrees and orders described
above, net of the effects of the agreement, will be approximately $50 million.
The Corporation is involved in proceedings and potential proceedings
relating to environmental matters at other facilities, including disposal of
hazardous wastes and soil and water contamination. The extent of the
Corporation's financial exposure cannot in all cases be reasonably determined at
this time. In addition to the amounts with respect to the Redlands and Burbank
properties and the city of Glendale described above, a liability of
approximately $165 million for the other properties (including current operating
facilities and certain facilities operated in prior years) in which an estimate
of financial exposure can be determined has been recorded.
Under agreements reached with the U.S. Government in 1990 and 2000, certain
groundwater treatment and soil remediation expenditures referenced above are
being allocated to the Corporation's operations as general and administrative
costs and, under existing government regulations, these and other environmental
expenditures related to U.S. Government business, after deducting any recoveries
from insurance or other potentially responsible parties, are allowable in
establishing the prices of the Corporation's products and services. As a result,
a substantial portion of the expenditures are being reflected in the
Corporation's sales and cost of sales pursuant to U.S. Government agreement or
regulation.
The Corporation has recorded an asset for the portion of environmental
costs that are probable of future recovery in pricing of the Corporation's
products and services for U.S. Government business. The portion that is expected
to be allocated to commercial business has been reflected in cost of sales. The
recorded amounts do not reflect the possible future recoveries of portions of
the environmental costs through insurance policy coverage or from other
potentially responsible parties, which the Corporation is pursuing as required
by agreement and U.S. Government regulation. Any such recoveries, when received,
would reduce the allocated amounts to be included in the Corporation's U.S.
Government sales and cost of sales.
Waste remediation contract - In 1994, the Corporation was awarded a $180
million fixed-price contract by the U.S. Department of Energy (DoE) for
remediation of waste found in Pit 9, located on the Idaho National Engineering
and Environmental Laboratory reservation. The Corporation incurred significant
unanticipated costs and scheduling issues due to complex technical and
contractual matters, which it sought to remedy through submission of a request
for equitable adjustment. To date, the Corporation has been unsuccessful in
reaching any agreements with the DoE on cost recovery or other contract
restructuring matters. In 1998, the management contractor for the project, a
wholly-owned subsidiary of the Corporation, at the DoE's direction, terminated
the Pit 9 contract for default. As a result, the Corporation filed a lawsuit
against the DoE in the Court of Federal claims challenging and seeking to
overturn the default termination and recover its costs, which are included in
inventories. Also in 1998, the management contractor, also at the DoE's
direction, filed suit against the Corporation seeking, among other things,
recovery of approximately $54 million previously paid to the Corporation under
the Pit 9 contract. The Corporation is defending this
11
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
action in which discovery has been pending since August 1999. In 2001, the DoE
filed a motion for summary judgment seeking to dismiss the Corporation's
complaint on jurisdictional grounds, which the Court of Federal Claims granted,
finding that there was no privity of contract between the Corporation and the
United States sufficient to provide the Court with the jurisdiction over the
dispute. The Corporation's appeal of the Court's decision is pending before the
U.S. Court of Appeals for the Federal Circuit. The Corporation continues to seek
resolution of the Pit 9 dispute through non-litigation means.
NOTE 7 - INFORMATION ON BUSINESS SEGMENTS
The Corporation operates in the following four principal business
segments: Systems Integration, Space Systems, Aeronautics and Technology
Services. All other activities fall within the Corporate and Other segment.
As discussed more fully in "Note 3 - Adoption of New Accounting Standard,"
the Corporation adopted SFAS No. 142 as of January 1, 2002. As a result of the
adoption, goodwill is no longer being amortized and the estimated remaining
useful life of a contract intangible related to the F-16 program was extended.
In connection with its adoption of SFAS No. 142, amortization expense related to
goodwill and the impact of the change in the estimated remaining useful life of
the F-16 intangible asset is now reflected in the Corporate and Other segment
for all periods prior to January 1, 2002 to provide management with consistent
financial information on which to base its evaluation of the performance of the
Corporation's business segments.
Financial data for the six months ended June 30, 2001 have been
reclassified to reflect the elimination of the Corporation's Global
Telecommunications segment as discussed more fully in "Note 2 - Exit From The
Global Telecommunications Services Business" and to reflect the adoption of SFAS
No. 142.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Selected Financial Data by Business Segment
Net sales
- ---------
Systems Integration $ 2,245 $ 2,165 $ 4,333 $ 4,045
Space Systems 1,783 1,808 3,653 3,230
Aeronautics 1,547 1,058 2,881 1,913
Technology Services 711 654 1,381 1,238
Corporate and Other 4 3 8 9
-------- ------- --------- -------
$ 6,290 $ 5,688 $ 12,256 $10,435
======== ======= ========= =======
Operating profit (loss) (a)
- -----------------------
Systems Integration $ 235 $ 236 $ 454 $ 452
Space Systems 122 116 244 314
Aeronautics 127 96 234 183
Technology Services 43 35 83 70
Corporate and Other (1) (58) (15) (201)
-------- ------- --------- -------
$ 526 $ 425 $ 1,000 $ 818
======== ======= ========= =======
12
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Intersegment revenue(b)
- -----------------------
Systems Integration $ 72 $ 55 $ 131 $ 110
Space Systems 25 20 40 40
Aeronautics 6 10 13 28
Technology Services 184 176 372 347
Corporate and Other 7 37 39 71
-------- -------- --------- ---------
$ 294 $ 298 $ 595 $ 596
======== ======== ========= =========
June 30, December 31,
2002 2001
---- ----
(In millions)
Customer advances and amounts in excess of
- ------------------------------------------
costs incurred
--------------
Systems Integration $ 904 $ 797
Space Systems 1,668 1,784
Aeronautics 2,494 2,406
Technology Services 2 15
-------- -------
$ 5,068 $ 5,002
======== =======
(a) With respect to the adoption of SFAS No. 142, amounts previously included
in segment operating results for the quarter and six months ended June
30, 2001, respectively, were as follows: Systems Integration - $42
million and $85 million; Space Systems - $9 million and $19 million;
Aeronautics - $7 million and $15 million; Technology Services - $3
million and $6 million; and Corporate and Other - $7 million and $12
million.
(b) Intercompany transactions between segments are eliminated in
consolidation and therefore excluded from the net sales and operating
profit (loss) amounts presented above.
NOTE 8 - OTHER
In the second quarter of 2002, the Corporation settled a research and
development (R&D) tax credit claim and received a refund of $117 million for the
years 1982 through 1988. The settlement increased earnings from continuing
operations for the quarter and six months ended June 30, 2002 by $90 million
($0.20 per diluted share) and was recorded as a reduction of the Corporation's
second quarter income tax expense.
The Corporation received net federal and foreign income tax refunds,
including the R&D tax credit refund discussed above, of $150 million for the six
months ended June 30, 2002, and made federal and foreign income tax payments,
net of refunds received, of $348 million for the same period in 2001.
The Corporation's total interest payments were $293 million and $380
million for the six months ended June 30, 2002 and 2001, respectively.
13
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The components of comprehensive income for the three months and six months
ended June 30, 2002 and 2001 consisted of the following:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Net earnings $ 339 $ 144 $ 557 $ 249
Other comprehensive (loss) income:
Net foreign currency translation adjustments (10) (11) (32) (9)
Net unrealized (loss) gain from
available-for-sale investments (46) 8 (77) (46)
Net unrealized gain (loss) from hedging
activities 16 (9) 17 5
------ ------- ------ -------
(40) (12) (92) (50)
------ ------- ------ -------
Comprehensive income $ 299 $ 132 $ 465 $ 199
====== ======= ====== =======
14
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 2002
Lockheed Martin Corporation (Lockheed Martin or the Corporation) is engaged
in the conception, research, design, development, manufacture, integration and
operation of advanced technology systems, products and services. The Corporation
serves customers in both domestic and international defense and commercial
markets, with its principal customers being agencies of the U.S. Government. The
following discussion should be read in conjunction with the Corporation's 2001
Annual Report on Form 10-K filed with the Securities and Exchange Commission,
and with the unaudited condensed consolidated financial statements included in
this Form 10-Q.
EXIT FROM THE GLOBAL TELECOMMUNICATIONS SERVICES BUSINESS
In December 2001, the Corporation announced the exit from its global
telecommunications services business. As a result of this action, the Global
Telecommunications segment is no longer reported as a separate business segment.
As discussed in "Note 2 - Exit From the Global Telecommunications Services
Business," certain of the former Global Telecommunications segment's businesses
have been realigned with other business segments, certain other businesses have
been classified as held for sale or have been sold, and investments held by the
former segment are now reported as part of the Corporate and Other segment.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
results of operations of the businesses classified as held for sale, including
Lockheed Martin IMS Corporation (IMS) which was sold in August 2001, are
reported as discontinued operations in the Corporation's unaudited condensed
consolidated financial statements. As discussed in Note 2, the Corporation has
entered into agreements for the proposed sale of COMSAT World Systems (World
Systems) and 81% of its ownership interest in COMSAT-International. The
Corporation expects to complete the COMSAT-International transaction by the end
of 2002, subject to receipt of regulatory approvals and satisfaction of other
closing conditions. The Corporation has received a letter from Intelsat, Ltd.
(Intelsat) stating that Intelsat has the right, but has not yet elected, to
terminate the agreement to acquire World Systems based on the allegation that a
bankruptcy filing by WorldCom, a World Systems' customer, among other things,
has had or reasonably is expected to have a material adverse effect on the World
Systems' business. The Corporation disagrees with Intelsat's statement that the
bankruptcy filing gives Intelsat the right to terminate the agreement and has
responded accordingly. Consummation of the World Systems and the
COMSAT-International transactions are not expected to have a material impact on
the Corporation's consolidated results of operations or financial position. The
Corporation's ability to identify buyers and complete the sale of the remaining
businesses held in discontinued operations by year-end could be adversely
affected by current trends and conditions affecting the telecommunications
industry generally. The businesses are recorded at estimated fair value less
cost to sell at June 30, 2002. Any changes in the estimated fair value will be
recorded in future periods as appropriate.
RESULTS OF OPERATIONS
Consolidated Results of Operations
The Corporation's operating cycle is long-term and involves many types of
development and production contracts with varying delivery schedules.
Accordingly, results of a particular quarter, or quarter-to-quarter comparisons
of recorded sales and operating profits, may not be indicative of future
operating results. The following comparative analysis should be viewed in this
context.
Continuing Operations
The Corporation's consolidated net sales for the second quarter of 2002
were $6.3 billion, an increase of 11 percent over second quarter 2001 sales of
$5.7 billion. Sales for the six months
15
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
ended June 30, 2002 were $12.3 billion, an approximate 17 percent increase over
the $10.4 billion of sales recorded in the comparable 2001 period.
Quarter-to-quarter sales increases in the Systems Integration, Aeronautics, and
Technology Services operating segments more than offset a decrease at Space
Systems. For the six months ended June 30, 2002, as compared to the respective
2001 period, sales increased in all operating segments.
The Corporation's operating profit (earnings before interest and taxes) for
the second quarter of 2002 was $526 million, an increase of 24 percent from the
$425 million recorded in the comparable 2001 period before adjusting for the
adoption of SFAS No. 142. The Corporation's operating profit for the six months
ended June 30, 2002 was $1 billion, an increase of 22 percent from the $818
million recorded in the comparable 2001 period before adjusting for the adoption
of SFAS No. 142 and the effects of nonrecurring and unusual items.
Effective January 1, 2002, the Corporation adopted SFAS No. 142, as
discussed more fully in "Note 3 - Adoption of New Accounting Standard." As a
result of the adoption, goodwill is no longer amortized. Operating profit for
the quarter and six months ended June 30, 2001 included $61 million and $122
million, respectively, of goodwill amortization. Also, the estimated remaining
useful life of the Aeronautics segment's contract intangible asset related to
the F-16 program was extended from six to ten years, thereby reducing that
segment's annual contract intangible amortization expense by $30 million on a
pretax basis, or approximately $8 million per quarter. The Corporation completed
the initial step of the goodwill impairment test required by SFAS No. 142 and
concluded that no adjustment to the balance of goodwill at the date of adoption
was required.
There were no nonrecurring and unusual items in the business segments for
the quarter or six months ended June 30, 2002, or in the second quarter of 2001.
Continuing operations for the first six months of 2001 included two nonrecurring
and unusual items, as follows:
Earnings
Operating Net (loss) per
profit (loss) earnings (loss) diluted share
------------- --------------- -------------
(In millions, except per share data)
Quarter and six months ended June 30, 2002; Quarter ended
June 30, 2001
None
Six Months ended June 30, 2001
Sale of surplus real estate /(1)/ $ 111 $ 72 $ 0.17
Impairment charge related to
Americom Asia-Pacific /(2)/ (100) (65) (0.15)
------- ------- --------
$ 11 $ 7 $ 0.02
======= ======= ========
/(1)/ In the first quarter of 2001, the Corporation recognized a gain related
to the Space Systems segment's sale of certain property in Sunnyvale,
California for approximately $185 million in cash.
/(2)/ Also during the first quarter of 2001, the Corporation recorded a charge
related to impairment of its investment in Americom Asia-Pacific, LLC, a
joint venture in which it holds a 50 percent interest. The charge was
recorded due to an other than temporary decline in the value of the
Corporation's investment.
16
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Adjusting operating profit for the three and six month periods ended June
30, 2001 for the impact of adopting SFAS No. 142 as discussed above and
excluding nonrecurring and unusual items, the operating profit for these periods
would have been $493 million and $944 million, respectively, compared to $526
million and $1 billion recorded in the comparable 2002 periods. As adjusted,
this reflects increases in operating profit of seven percent and six percent for
the quarter and six month periods ended June 30, 2002 over the respective 2001
periods. Quarter-to-quarter operating profit increases in the Space Systems,
Aeronautics, Technology Services and Corporate and Other segments more than
offset a slight decrease in the Systems Integration segment. For the six months
ended June 30, 2002, as compared to the respective 2001 period, operating profit
increased in all segments.
Interest expense of $145 million and $293 million for the three and six
months ended June 30, 2002, respectively, was lower by $35 million and $84
million than the comparable periods in 2001 primarily as a result of the
reduction in the Corporation's debt.
The effective income tax rates for the quarter and year-to-date periods
ended June 30, 2002 were eight percent and 19 percent, respectively. These rates
included the benefit of a settlement on a research and development (R&D) tax
credit claim which decreased second quarter 2002 income tax expense by $90
million. Excluding the impact of this R&D tax credit, the effective income tax
rate for both the quarter and year-to-date periods ended June 30, 2002 was 31
percent. The effective income tax rates for the quarter and year-to-date periods
ended June 30, 2001 were 39 percent and 37 percent, respectively. The reduction
in the effective tax rate during the 2002 periods, as compared to 2001,
primarily resulted from non-deductible goodwill no longer being amortized for
financial statement purposes following the Corporation's adoption of SFAS No.
142. The effective rate for 2002 was lower than the statutory rate of 35%
primarily due to tax benefits related to export sales and the realization of tax
savings initiatives.
Earnings from continuing operations for the second quarter of 2002 were
$351 million ($0.78 per diluted share) compared to $150 million ($0.34 per
diluted share) reported in the second quarter of 2001. As discussed previously,
earnings from continuing operations for the second quarter of 2002 included the
one-time impact of an R&D tax credit which increased 2002 earnings from
continuing operations by $90 million ($0.20 per diluted share). Excluding the
R&D tax credit, earnings from continuing operations in the second quarter of
2002 were $261 million ($0.58 per diluted share). Adjusting for the adoption of
SFAS No. 142 as discussed above, earnings from continuing operations for the
second quarter of 2001 would have been $213 million ($0.49 per diluted share).
Earnings from continuing operations for the six months ended June 30, 2002
were $575 million ($1.28 per diluted share), which also included the
aforementioned R&D tax credit. Excluding the R&D tax credit, earnings from
continuing operations in the six months ended June 30, 2002 were $485 million
($1.08 per diluted share). Earnings from continuing operations for the six
months ended June 30, 2001 were $276 million ($0.64 per diluted share) and
included the after-tax impact of two nonrecurring and unusual items, which
increased 2001 earnings from continuing operations by $7 million ($0.02 per
diluted share). Excluding such items and adjusting for the adoption of SFAS No.
142, earnings from continuing operations for the six months ended June 30, 2001
would have been $385 million ($0.89 per diluted share).
17
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Discontinued Operations
The Corporation reported losses from discontinued operations of $12 million
($0.03 per diluted share) and $6 million ($0.01 per diluted share) for the
quarters ended June 30, 2002 and 2001, respectively. For the six month periods,
the net losses from discontinued operations were $18 million ($0.04 per diluted
share) for 2002 and $27 million ($0.06 per diluted share) for 2001.
Net Earnings
The Corporation reported net earnings of $339 million ($0.75 per diluted
share) and $144 million ($0.33 diluted per share) for the quarters ended June
30, 2002 and 2001, respectively. Adjusting for the adoption of SFAS No. 142 as
discussed above, net earnings for the second quarter of 2001 would have been
$207 million ($0.48 per diluted share). For the six month periods, the net
earnings were $557 million ($1.24 per diluted share) for 2002 and $249 million
($0.58 per diluted share) for 2001. Excluding the effects of the nonrecurring
and unusual items recorded in 2001, and adjusting for the adoption of SFAS No.
142, net earnings for the six months ended June 30, 2001 would have been $358
million ($0.83 per diluted share).
Discussion of Business Segments
The Corporation operates in four principal business segments: Systems
Integration, Space Systems, Aeronautics, and Technology Services. All other
activities fall within the Corporate and Other segment. The following table of
financial information and related discussions of the results of operations of
the Corporation's business segments correspond to the presentation of segment
information in "Note 7 - Information on Business Segments" included in this
Form 10-Q, including the financial data in the tables under the headings "Net
sales" and "Operating profit (loss)."
The following table displays the impact of the nonrecurring and unusual
items presented earlier on each segment's operating profit (loss) for each of
the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Nonrecurring and unusual items -
profit (loss):
Systems Integration $ -- $ -- $ -- $ --
Space Systems -- -- -- 111
Aeronautics -- -- -- --
Technology Services -- -- -- --
Corporate and Other -- -- -- (100)
------- -------- -------- --------
$ -- $ -- $ -- $ 11
======= ======== ======== ========
In order to make the following discussion of significant operating results
of each business segment more understandable, the effects of these nonrecurring
and unusual items have been excluded. The Space Systems and Aeronautics segments
generally include fewer programs that are substantially larger in terms of sales
and operating results than those included in
18
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
the other segments. Accordingly, due to the large number of comparatively
smaller programs in the Systems Integration and Technology Services segments,
the discussions of the results of operations of these business segments
generally focus on lines of business within the segments.
Systems Integration
Net sales for the Systems Integration segment were $2.2 billion and $4.3
billion for the quarter and six months ended June 30, 2002, respectively,
representing increases of four percent and seven percent from sales recorded in
the comparable 2001 periods. For the quarter, approximately $105 million of the
increase in sales over the comparable 2001 period is attributable to the
segment's Missiles & Fire Control line of business as a result of higher volume
on certain tactical missile programs and the Theater High Altitude Area Defense
(THAAD) program. This increase was partially offset by an approximate $30
million decrease in the segment's Systems Integration-Owego line of business
primarily due to lower platform integration activities. The remainder of the
fluctuation between periods is primarily attributable to increased sales in the
segment's Naval Electronic and Surveillance Systems line of business, mainly due
to higher volume on surface system programs. For the first six months of 2002 as
compared to the respective 2001 period, approximately $295 million of the
increase in sales is attributable to the segment's Missiles & Fire Control line
of business as a result of higher volume on the same programs mentioned above.
This increase was partially offset by an approximate $85 million decrease in the
segment's Systems Integration-Owego line of business. Increased sales of
approximately $75 million in the segment's Naval Electronic and Surveillance
Systems line of business as a result of higher volume on the same programs
mentioned above accounted for the majority of the remaining increase between the
six month periods.
Operating profit for the segment decreased by $1 million and increased by
$2 million for the quarter and six months ended June 30, 2002, respectively,
from the $236 million and $452 million recorded in comparable 2001 periods.
During the second quarter of 2002, as compared to the respective 2001 period,
increased operating profit at Missiles & Fire Control, primarily on certain
tactical missile programs, was offset by decreased operating profit in
distribution technologies at Systems Integration-Owego and on certain undersea
programs at Naval Electronics and Surveillance Systems. For the six months of
2002 as compared to the comparable 2001 period, increases in certain tactical
missile programs at Missiles & Fire Control were offset by distribution
technologies decreases at Systems Integration-Owego. While net sales increased
in both periods, margins were also reduced by the decline in volume on mature
production programs and by higher volume on development programs in the
comparative periods.
Space Systems
Net sales for the Space Systems segment were $1.8 billion and $3.7 billion
for the quarter and six months ended June 30, 2002, respectively, representing a
decline of one percent and an increase of 13 percent from the sales recorded in
the comparable 2001 periods. The second quarter decreases in commercial space
programs more than offset increases in government space programs. The
approximate $90 million decrease in commercial space is primarily attributable
to a reduction in launch vehicle activities, with one commercial launch in the
current quarter compared to three in the second quarter of 2001. The approximate
$65 million increase in government space is mainly due to higher volumes on
government satellite development programs and ground systems activities
partially offset by declines in volume on government launch vehicle programs.
19
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The increase in net sales for the six months ended June 30, 2002 resulted
from higher volumes in both commercial space programs and government space
programs. The approximate $190 million increase in commercial space is primarily
attributable to higher launch vehicle activities, with four commercial launches
in the first six months of 2002 compared to three during the comparable 2001
period. In government space programs, increases of approximately $280 million in
government satellite and ground system activities more than offset declines in
volume of approximately $50 million on government launch vehicle programs.
Space Systems operating profit was $122 million and $244 million for the
quarter and six months ended June 30, 2002, respectively, representing increases
of five percent and 20 percent over the operating profit recorded in the
comparable 2001 periods. For the quarter, commercial space losses declined by
approximately $20 million compared to the prior year primarily due to commercial
satellite programs. Reduced profit from lower volume on government launch
vehicle programs and lower margins on government satellite development programs
accounted for approximately $25 million of the decrease in operating profit for
government space programs. In both periods, operating profit included the
adverse effects of adjustments recorded to reflect the continued industry-wide
oversupply and further deterioration of pricing in the commercial launch market.
As a result, in the second quarter of 2002, operating profit was reduced by
approximately $35 million, net of favorable contract adjustments of $20 million.
Adjustments of approximately $40 million were recorded in the comparable 2001
period.
The increase in operating profit for the six months ended June 30, 2002 is
primarily attributable to reduced losses in commercial space that more than
offset lower operating profit in government space programs. Commercial space
losses declined by approximately $95 million primarily due to the timing of
satellite deliveries and the absence of a $40 million loss provision recorded in
the first quarter of 2001 on certain commercial satellite contracts. There was
also one additional launch in the first six months of 2002 as compared to the
respective period in 2001. In each period, comparable adjustments for market and
pricing pressures were recorded as a result of the continuing overcapacity in
the commercial launch vehicle market. As in the quarter, the approximate $60
million 2002 year-to-date decrease in government space is primarily due to the
reduced volume on government launch vehicle programs and lower margins on
government satellite development programs.
Aeronautics
Net sales for the Aeronautics segment were $1.5 billion and $2.9 billion
for the quarter and six months ended June 30, 2002, respectively, representing
increases of 46 percent and 51 percent from the sales recorded in the comparable
2001 periods. Increases of approximately $460 million for the quarter and $930
million for the six months ended June 30, 2002 as compared to the respective
2001 periods were attributable to increases in Combat Aircraft and Air Mobility
programs. The initial ramp-up of F-35 (Joint Strike Fighter) System Development
& Demonstration activities and higher volume on F-16 and F-22 programs
contributed approximately $235 million and $450 million to the
quarter-to-quarter and year-over-year increases in Combat Aircraft programs.
Increased deliveries of C-130Js drove the majority of the approximate $190
million and $410 million increases in the quarter-to-quarter and year-over-year
increases in Air Mobility programs. In the second quarter of 2002 there were
three C-130J deliveries as contrasted with no deliveries in the respective 2001
period. On a year-to-date basis, there were five C-130J deliveries compared to
no deliveries for the same period in 2001.
20
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Operating profit for the quarter and year-to-date periods in 2002 was $127
million and $234 million, respectively, representing increases of 32 percent and
28 percent from the operating profit recorded in the comparable 2001 periods.
Increases attributable to the higher volumes on F-16 and other Combat Aircraft
programs of approximately $30 million for the quarter and $45 million for the
six months ended June 30, 2002 as compared to the respective 2001 periods,
accounted for the majority of the increases in operating profit. The increase in
C-130J deliveries did not impact operating profit for the comparative periods
due to the previously reported suspension of earnings recognition on the
program. Margins were lower due to the C-130J deliveries combined with increased
volume on F-35 and F-16 aircraft development activities.
Technology Services
Net sales of the Technology Services segment were $711 million and $1.4
billion, for the quarter and six months ended June 30, 2002, respectively,
representing increases of nine percent and 12 percent from the sales recorded in
the comparable 2001 periods. For the quarter, the increase in sales was
primarily attributable to an approximate $95 million growth in volume in the
government information technology and military aircraft lines of business. This
growth was partially offset by approximately $45 million in lower sales on
commercial information technology and NASA programs. The year-to-date sales
increase is mainly the result of increased volume of approximately $170 million
on government information technology programs. This sales growth was partially
offset by an approximate $50 million decrease resulting from declines in volume
on commercial information technology and NASA programs.
Operating profit for the segment was $43 million and $83 million for the
quarter and six months ended June 30, 2002, respectively, representing increases
of 23 percent and 19 percent from operating profit recorded in the comparable
2001 periods. In both periods the operating profit increased mainly due to the
higher volume of government information technology programs and improved
performance on commercial information technology programs, partially offset by
lower operating profit on energy related contracts.
Corporate and Other
Excluding amortization of $68 million and $137 million from the quarter and
six months ended June 30, 2001 results relating to the adoption of SFAS No. 142
discussed previously, operating profit for the Corporate and Other segment
decreased by $11 million and $51 million for the quarter and six months ended
June 30, 2002 from the $10 million and $36 million recorded in the comparable
2001 periods. The decline in operating profit for both the quarter and
year-to-date periods is primarily the result of lower interest income and an
increase in corporate expenses, primarily in stock-based deferred compensation
costs, partially offset by increased equity earnings from investments.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 2002, $1.5 billion of cash was provided by
operating activities, compared to $1.2 billion during the first six months of
2001. Each period includes the impact of earnings from continuing operations,
adjusted for noncash depreciation and amortization, changes in operating assets
and liabilities, and significant advances received on international F-16 fighter
aircraft contracts (net of payments to subcontractors and other disbursements).
The 2002 amount also includes the receipt from a settlement on a research and
development tax credit claim. The 2001 amount includes
21
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
pretax proceeds from sales of surplus real estate and a cash distribution
received from Intelsat in the second quarter of 2001. These increases were
partially offset by income tax payments made in 2001 related to the divestiture
activities in 2000.
Net cash used for investing activities during the first six months of 2002
was $241 million as compared to $281 million used during the comparable 2001
period. The 2002 amount includes $261 million for additions to property, plant
and equipment. This outflow was partially offset by net proceeds of $20 million,
consisting of proceeds from the March 2002 sale of COMSAT Mobile Communications
and proceeds from property dispositions, offset by payments related to the 2001
acquisition of OAO Corporation. The 2001 amount included $193 million used for
additions to property, plant and equipment. Further outflows in 2001 were
attributable to additional equity investments in Astrolink International, LLC
and Intelsat of approximately $130 million and $30 million, respectively. These
outflows were partially offset by approximately $70 million received from
property dispositions.
Net cash provided by financing activities in the first six months of 2002
was $210 million as compared to $1.2 billion used during the comparable 2001
period. The 2002 amount includes approximately $385 million in common stock
proceeds, primarily from the exercise of employee stock options, partially
offset by $99 million in dividend payments and $76 million in net debt
repayments. The 2001 amount includes approximately $1.2 billion in net debt
repayments and $96 million in dividend payments, partially offset by $64 million
in common stock proceeds, primarily from the exercise of employee stock options.
Total debt, including short-term borrowings, decreased by approximately $62
million during the first six months of 2002 from approximately $7.5 billion at
December 31, 2001. This decrease was primarily attributable to the payment of
debt maturities. The Corporation's long-term debt is primarily in the form of
publicly issued, fixed-rate notes and debentures. At June 30, 2002, the
Corporation held cash and cash equivalents of $2.4 billion. Total stockholders'
equity was $7.4 billion at June 30, 2002, an increase of $951 million from the
December 31, 2001 balance. This increase resulted from employee stock option and
ESOP activities of $585 million and net earnings of $557 million, partially
offset by dividend payments of $99 million and other comprehensive losses of $92
million. The Corporation's ratio of debt to total capitalization decreased from
the 54 percent reported at December 31, 2001 to 50 percent at June 30, 2002.
At June 30, 2002, the Corporation had in place revolving credit facilities
of $1.0 billion and $1.5 billion, which will expire in November 2002 and
November 2006, respectively; no borrowings were outstanding.
The Corporation actively seeks to finance its business in a manner that
preserves financial flexibility while minimizing borrowing costs to the extent
practicable. The Corporation's management continually reviews changes in
financial, market and economic conditions to manage the types, amounts and
maturities of the Corporation's indebtedness. Periodically, the Corporation may
refinance existing indebtedness, vary its mix of variable-rate and fixed-rate
debt, or seek alternative financing sources for its cash and operational needs.
Cash and cash equivalents (including temporary investments), internally
generated cash flow from operations and other available financing resources,
including those described above, are expected to be sufficient to meet
anticipated operating, capital expenditure and debt service requirements, and
discretionary investment needs, during the next twelve months.
22
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Corporation continues to guarantee up to $150 million in borrowings of
Space Imaging LLC (Space Imaging), a joint venture in which it holds a 46
percent ownership interest. The amount of borrowings outstanding as of June 30,
2002 for which Lockheed Martin was guarantor was approximately $140 million.
These borrowings mature on March 31, 2003. The Corporation's investment in Space
Imaging is accounted for under the equity method of accounting. At June 30,
2002, the Corporation's investment in and receivables due from Space Imaging
amounted to approximately $60 million. Space Imaging is pursuing its business
plan, including assessments relative to future investment in replacement
satellites and related financing requirements, and Lockheed Martin, as an
investor and partner, is working with its other partners and Space Imaging in
this regard. In light of current capital market conditions, there can be no
assurance that Space Imaging will be successful in attracting additional outside
funding.
The Corporation has minority investments in the equity securities of
several companies, including Intelsat, Inmarsat Ventures plc (Inmarsat), Loral
Space & Communications, Ltd. and New Skies Satellites, N.V. For a description of
the Corporation's investments in equity securities, including other investments
not referenced, see "Note 9 - Investments in Equity Securities" to the
Corporation's 2001 Annual Report on Form 10-K.
The Corporation's ability to realize the value of its investments in equity
securities may be affected by the investee's ability to successfully execute its
business plans, general market conditions, industry considerations specific to
the investee's business, and/or other factors. The Corporation's investments in
equity securities are heavily concentrated in the satellite services and
telecommunications sectors. The satellite services sector is subject to the
effects of the increasing availability of satellite capacity and competition
from other forms of telecommunications services, including fiber optic cable and
other wireless communication technologies. These factors could adversely affect
the market value of the underlying equity securities, and therefore could impact
the Corporation's earnings in the periods if affected by those events.
In 2000, Congress passed the Open-market Reorganization for the Betterment
of International Telecommunications Act (the ORBIT Act) that, among other
measures, established deadlines for completion of the initial public offerings
by Intelsat and Inmarsat. Under the ORBIT Act, Intelsat and Inmarsat must
complete their initial public offerings by December 31, 2002, provided that
Inmarsat may petition the Federal Communications Commission (FCC) for an
extension until June 30, 2003 pursuant to an amendment passed in 2001. If those
deadlines are not met, the FCC may limit access by U.S. users to the satellite
capacity of the privatized entities for certain services. If this were to occur,
the value of Corporation's investment in those entities could be adversely
affected. FCC restrictions on U.S. market access to Intelsat, if imposed, also
would adversely affect the World Systems line of business, acquired in
connection with the Corporation's merger with COMSAT Corporation. World Systems
resells Intelsat capacity and currently is held in discontinued operations.
Current trends and market conditions in the telecommunications industry,
including recent bankruptcy filings by some carriers, and in the securities
markets, may make it difficult for Intelsat or Inmarsat to complete their
initial public offerings by the prescribed ORBIT Act deadlines. In July
23
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
2002, the U.S. Senate passed legislation to extend the deadline for Intelsat to
complete its initial public offering to December 31, 2003, or June 30, 2004 if
approved by the FCC. The Corporation's investments in Intelsat and Inmarsat were
$1.25 billion and $270 million, respectively, at June 30, 2002.
OTHER MATTERS
The Corporation's primary exposure to market risk relates to interest rates
and, to a lesser extent, foreign currency exchange rates. The Corporation's
financial instruments which are subject to interest rate risk principally
include commercial paper and fixed-rate long-term debt. At June 30, 2002, the
Corporation had no commercial paper outstanding. The Corporation's long-term
debt obligations are generally not callable until maturity. The Corporation uses
interest rate swaps to manage its exposure to fixed and variable interest rates.
At the end of the second quarter of 2002, the Corporation had agreements in
place to swap fixed interest rates on approximately $920 million of its
long-term debt for variable interest rates based on LIBOR. The interest rate
swap agreements are designated as effective hedges of the fair value of the
underlying fixed-rate debt instruments. At June 30, 2002, the fair values of
interest rate swap agreements outstanding totaled approximately $9 million. The
amounts of gains and losses from changes in the fair values of the swap
agreements were entirely offset by those from changes in the fair value of the
associated debt obligations. The interest rate swaps create a market exposure to
changes in the LIBOR rate. To the extent that the LIBOR index upon which the
swaps are based increases or decreases by 1%, the Corporation's interest expense
would increase or decrease by $9 million on a pretax basis. Changes in swap
rates would affect the market value of the agreements, but such changes in value
would be offset by changes in value of the underlying debt obligations. A 1%
rise in swap rates from those prevailing at June 30, 2002 would result in a
decrease in market value of approximately $15 million. A 1% decline would
increase the market value by a like amount.
The Corporation uses forward foreign exchange contracts to manage its
exposure to fluctuations in foreign exchange rates. These contracts are
designated as qualifying hedges of the cash flows associated with firm
commitments or specific anticipated transactions, and related gains and losses
on the contracts, to the extent they are effective hedges, are recognized in
income when the hedged transaction occurs. To the extent the hedges are
ineffective, gains and losses on the contracts are recognized currently. At June
30, 2002, the fair value of forward exchange contracts outstanding, as well as
the amounts of gains and losses recorded during the quarter and six month
periods then ended, were not material. The Corporation does not hold or issue
derivative financial instruments for trading purposes.
The Technology Services segment has a business unit which provides services
to the government of Argentina. At June 30, 2002, the Corporation had
investments in and advances to the business unit totaling approximately $60
million. With regard to this business unit, the Corporation does not expect that
the current economic situation in Argentina, including the devaluation of the
Argentine peso, will have a material impact on the Corporation's results of
operations, cash flows or financial position.
As more fully described in "Note 6 - Contingencies," the Corporation is
continuing to pursue recovery of a significant portion of the unanticipated
costs incurred in connection with the $180 million fixed-price contract with the
U.S. Department of Energy (DoE) for the remediation of waste found in Pit 9. The
Corporation has been unsuccessful to date in reaching agreement with the DoE on
cost recovery or other contract restructuring matters. In 1998, the DoE
terminated the Pit 9 contract for default and filed suit against the Corporation
seeking recovery of
24
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
approximately $54 million previously paid to the Corporation under the contract.
The Corporation is defending this action while continuing with its efforts to
resolve the dispute through non-litigation means.
In 1992, the Corporation entered into a joint venture with two Russian
government-owned space firms to form Lockheed-Khrunichev-Energia International,
Inc. (LKEI). Lockheed Martin owns 51 percent of LKEI. LKEI has exclusive rights
to market launches of commercial, non-Russian-origin space payloads on the
Proton family of rockets from a launch site in Kazakhstan. In 1995, another
joint venture was formed, International Launch Services (ILS), with the
Corporation and LKEI each holding a 50 percent ownership. ILS was formed to
market commercial Atlas and Proton launch services worldwide. The Corporation
consolidates the results of operations of LKEI and ILS into its financial
statements. Contracts for Proton launch services typically provide for
substantial advances from the customer in advance of launch, and a sizable
percentage of these advances are forwarded to Khrunichev State Research and
Production Space Center (Khrunichev), the manufacturer in Russia, to provide for
the manufacture of the related launch vehicle. Significant portions of such
advances would be required to be refunded to each customer if the contracted
launch services could not be provided. At June 30, 2002, $441 million related to
launches not yet provided was included in customer advances and amounts in
excess of costs incurred, and $605 million of payments to Khrunichev for
launches both under contract and not under contract was included in inventories.
The Corporation's ability to realize such amounts included in inventories may be
affected by Khrunichev's ability to provide the related launch services, the
political environment in Russia, and demand for commercial launch vehicles.
Through June 30, 2002, launch services provided through LKEI and ILS have been
in accordance with contract terms.
The Corporation has entered into an agreement with RD AMROSS, a joint
venture of the Pratt & Whitney division of United Technologies Corporation and
the Russian firm NPO Energomash, for the development and purchase, subject to
certain conditions, of RD-180 booster engines for use in two models of the
Corporation's Atlas launch vehicle. Terms of the agreement call for payments to
be made to RD AMROSS upon the achievement of certain milestones in the
development and manufacturing processes. Approximately $44 million of payments
made under this agreement for engines not yet delivered were included in the
Corporation's inventories at June 30, 2002.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934.
The words believe, estimate, anticipate, project, intend, expect, plan, outlook,
forecast and similar expressions are intended to identify forward-looking
statements. Numerous factors, including potentially the following factors, could
affect the Corporation's forward-looking statements and actual performance: the
ability to obtain or the timing of obtaining future government awards; the
availability of government funding and customer requirements both domestically
and internationally; changes in government or customer priorities due to program
reviews or revisions to strategic objectives (including changes in priorities to
respond to terrorist threats or to improve homeland security); the termination
of programs or contracts for convenience by customers; difficulties in
developing and producing operationally advanced technology systems; launch
failures and potential problems that might result, including potential loss of
future or existing orders; the ability to procure insurance to cover operational
and contractual risks, including launch and satellite failures, on commercially
reasonable terms; the competitive environment (including continued pricing
pressures associated with commercial satellites and launch services); economic
business and political conditions both domestically and internationally;
government import and export policies; program performance and the timing of
contract payments (including the ability to perform fixed-price contracts within
25
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
estimated costs, subcontractor performance, and the timing of product deliveries
and customer acceptance); the level of returns on pension and retirement plan
assets; and the outcome of contingencies (including completion of acquisitions
and divestitures, litigation and environmental remediation efforts). The
Corporation's ability to monetize assets or businesses placed in discontinued
operations will depend upon market and economic conditions, negotiation of
acceptable terms with prospective purchasers and other factors, and may require
receipt of regulatory or governmental approvals. Realization of the value of the
Corporation's investments in equity securities, or related equity earnings for a
given period, may be affected by the investee's ability to obtain adequate
funding and execute its business plan, general market conditions, industry
considerations specific to the investee's business, and/or other factors.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date of this Form 10-Q. The Corporation
does not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events, circumstances or changes in
expectations after the date of this Form 10-Q, or to reflect the occurrence of
unanticipated events. The forward-looking statements in this document are
intended to be subject to the safe harbor protection provided by Sections 27A of
the Securities Act and 21E of the Exchange Act.
For a discussion identifying some important factors that could cause actual
results to vary materially from those anticipated in the forward-looking
statements, see the Corporation's Securities and Exchange Commission filings
including, but not limited to, the discussions of "Competition and Risk,"
"Government Contracts and Regulations," and "Industry Considerations" on pages
11 through 12, pages 13 through 14 and pages 28 through 31, respectively, of the
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31,
2001 (Form 10-K); "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 15 through 26 of this Form 10-Q; "Note 2 -
Exit From the Global Telecommunications Services Business," "Note 3 - Adoption
of New Accounting Standard" and "Note 6 - Contingencies" of the Notes to
Unaudited Condensed Consolidated Financial Statements on pages 6 through 7,
pages 7 through 8 and pages 10 through 12, respectively, of this Form 10-Q; and
Part II - Item 1, "Legal Proceedings" on pages 27 through 28 of this Form 10-Q.
26
Lockheed Martin Corporation
Part II - Other Information
Item 1. Legal Proceedings
The Corporation is a party to or has property subject to litigation and
other proceedings, including matters arising under provisions relating to the
protection of the environment, as described in "Note 6 - Contingencies" of the
Notes to Unaudited Condensed Consolidated Financial Statements in this Form
10-Q, and in the Corporation's 2001 Annual Report on Form 10-K (Form 10-K), or
arising in the ordinary course of business. In the opinion of management, the
probability is remote that the outcome of any such litigation or other
proceedings will have a material adverse effect on the Corporation's results of
operations or financial position.
The Corporation is primarily engaged in providing products and services
under contracts with the U.S. Government and, to a lesser degree, under direct
foreign sales contracts, some of which are funded by the U.S. Government. These
contracts are subject to extensive legal and regulatory requirements and, from
time to time, agencies of the U.S. Government investigate whether the
Corporation's operations are being conducted in accordance with these
requirements. U.S. Government investigations of the Corporation, whether
relating to these contracts or conducted for other reasons, could result in
administrative, civil or criminal liabilities, including repayments, fines or
penalties being imposed upon the Corporation, or could lead to suspension or
debarment from future U.S. Government contracting. U.S. Government
investigations often take years to complete and many result in no adverse action
against the Corporation. For the U.S. Government investigations described in the
Corporation's Form 10-K and below, it is too early for Lockheed Martin to
determine whether adverse decisions relating to these investigations could
ultimately have a material adverse effect on its results of operations or
financial position.
As previously reported, a consolidated class action complaint has been
filed against the Corporation and certain of its officers and directors in the
United States District Court for the Central District of California, In re
Lockheed Martin Corporation Securities Litigation. See the Corporation's Form
10-K and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
On July 22, 2002, the district court granted our motion to dismiss the second
amended consolidated complaint in that proceeding. In general, the court found
that the plaintiffs had failed to plead facts sufficient to demonstrate that the
Corporation knew that the alleged false statements were false when made.
Specifically, the court dismissed with leave to amend the complaint's
allegations that the Corporation publicly announced false or misleading
expectations about anticipated results in a variety of areas, including the sale
of F-16 aircraft to a foreign government in 1998, expected deliveries of C-130J
aircraft in 1998, and earnings projections. The court also dismissed with leave
to amend allegations that certain individual defendants engaged in illegal
insider trading. The court dismissed without leave to amend the complaint's
allegations that the Corporation made false statements regarding the expected
number of satellite launches in 1998, and anticipated savings projections from
cost-cutting programs.
On June 17, 2002, the Corporation was served with a grand jury subpoena
issued by the United States District Court for the Central District of
California. The subpoena seeks documents relating to the activities of an
international sales agent engaged by a business unit of the Corporation in
connection with the sale of synthetic aperture radars to the government of Korea
in 1996. We are cooperating with the Government's investigation.
On May 2, 2002, the U.S. Environmental Protection Agency (EPA) issued a
notice alleging that the Corporation had been out of compliance during portions
of 2000 and 2001 with certain terms and conditions of the Burbank Operable Unit
consent decrees concerning the operation of the groundwater pump-and-treat
system constructed by the Corporation. The notice sought to assess $1.3 million
in stipulated penalties against the Corporation. The Corporation disputes the
EPA's allegation that it was out of compliance and has invoked the dispute
resolution provisions
27
Lockheed Martin Corporation
Part II - Other Information (continued)
of the consent decrees. In response to the Corporation's initial submission in
the dispute resolution process, the EPA has unilaterally reduced its proposed
penalty to $460,500. The Corporation is continuing to dispute the proposed
assessment through the dispute resolution process.
In addition, see the "Legal Proceedings" section of the Form 10-K for a
description of previously reported matters.
Item 4. Submission of Matters to a Vote of Security Holders
On April 25, 2002, the Corporation held its Annual Meeting of Stockholders.
A description of matters voted upon by stockholders at this meeting, and the
results of such votes, were disclosed in Item 4 of Lockheed Martin Corporation's
Form 10-Q for the quarter ended March 31, 2002 filed with the Securities and
Exchange Commission on May 3, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Exhibit 10.1 Amendment to Lockheed Martin Corporation Nonqualified
Retirement Plans
2. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of
Earnings to Fixed Charges for the six months ended
June 30, 2002.
3. Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
4. Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K filed in the second quarter of 2002.
None.
(c) Reports on Form 8-K filed subsequent to the second quarter of 2002.
None.
28
LOCKHEED MARTIN CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOCKHEED MARTIN CORPORATION
---------------------------
(Registrant)
Date: August 8, 2002 by: /s/Rajeev Bhalla
-------------------------- ----------------
Rajeev Bhalla
Vice President and Controller
(Chief Accounting Officer)
29