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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 September 30, 2002
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Commission file number 1-11437
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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 October 31, 2002
- ------------------------------------ ----------------------------------
Common stock, $1 par value 456,079,806
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
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INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Statement of Earnings -
Three Months and Nine Months Ended September 30, 2002 and 2001 ....................... 4
Unaudited Condensed Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2002 and 2001 ........................................ 5
Unaudited Condensed Consolidated Balance Sheet -
September 30, 2002 and December 31, 2001 ............................................. 6
Notes to Unaudited Condensed Consolidated Financial Statements ......................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 18
Item 3. Quantitative and Qualitative Disclosure of Market Risk ........................ 31
Item 4. Controls and Procedures ....................................................... 32
Part II. Other Information
Item 1. Legal Proceedings ............................................................. 34
Item 6. Exhibits and Reports on Form 8-K .............................................. 35
Signatures .................................................................................... 37
Management Certifications ..................................................................... 38
Exhibit 10.1 Lockheed Martin Corporation Deferred Management Incentive
Compensation Plan, as amended effective October 1, 2002
Exhibit 10.2 Lockheed Martin Corporation Directors Equity Plan, as amended
effective October 24, 2002
Exhibit 10.3 Lockheed Martin Corporation Directors Deferred Compensation
Plan, as amended effective October 24, 2002
2
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
-------------
INDEX (continued)
Exhibit 10.4 Lockheed Martin Corporation Directors Deferred Stock Plan, as
amended effective October 24, 2002
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
3
Part I. Financial Information
Item 1. Financial Statements
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Earnings
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions, except per share data)
Net sales $ 6,542 $ 6,221 $ 18,798 $ 16,656
Cost of sales 5,989 5,783 17,324 15,469
------- ------- -------- --------
Earnings from operations 553 438 1,474 1,187
Other income (expense), net 23 (380) 102 (311)
------- ------- -------- --------
576 58 1,576 876
Interest expense 147 172 440 549
------- ------- -------- --------
Earnings (loss) from continuing operations
before income taxes 429 (114) 1,136 327
Income tax expense (benefit) 129 (27) 261 138
------- ------- -------- --------
Earnings (loss) from continuing operations 300 (87) 875 189
(Loss) earnings from discontinued operations (10) 300 (28) 273
------- ------- -------- --------
Net earnings $ 290 $ 213 $ 847 $ 462
======= ======= ======== ========
Earnings (loss) per common share:
- ---------------------------------
Basic:
Continuing operations $ 0.67 $ (0.20) $ 1.97 $ 0.45
Discontinued operations (0.02) 0.70 (0.06) 0.64
------- ------- -------- --------
$ 0.65 $ 0.50 $ 1.91 $ 1.09
======= ======= ======== ========
Diluted:
Continuing operations $ 0.66 $ (0.20) $ 1.94 $ 0.44
Discontinued operations (0.02) 0.70 (0.06) 0.63
------- ------- -------- --------
$ 0.64 $ 0.50 $ 1.88 $ 1.07
======= ======= ======== ========
Cash dividends declared per common share $ 0.11 $ 0.11 $ 0.33 $ 0.33
======= ======= ======== ========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Cash Flows
Nine Months Ended
September 30,
2002 2001
------- -------
(In millions)
Operating Activities:
Earnings from continuing operations $ 875 $ 189
Adjustments to reconcile earnings from continuing operations
to net cash provided by operating activities:
(Loss) earnings from discontinued operations (28) 273
Depreciation and amortization 403 600
Changes in operating assets and liabilities:
Receivables 319 289
Inventories 756 446
Accounts payable (312) (216)
Customer advances and amounts in excess
of costs incurred 138 681
Other 577 (68)
------- -------
Net cash provided by operating activities 2,728 2,194
------- -------
Investing Activities:
Expenditures for property, plant and equipment (396) (312)
Acquisitions / investments in affiliated companies (88) (235)
Sale of Lockheed Martin IMS Corporation -- 825
Proceeds from other divestitures 84 50
Other 55 96
------- -------
Net cash (used for) provided by investing activities (345) 424
------- -------
Financing Activities:
Net decrease in short-term borrowings -- (12)
Net repayments related to long-term debt (87) (2,289)
Issuances of common stock 431 123
Common stock dividends (149) (144)
------- -------
Net cash provided by (used for) financing activities 195 (2,322)
------- -------
Net increase in cash and cash equivalents 2,578 296
Cash and cash equivalents at beginning of period 912 1,505
------- -------
Cash and cash equivalents at end of period $ 3,490 $ 1,801
======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
Lockheed Martin Corporation
Condensed Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
2002 2001
------------ -----------
(In millions)
Assets
Current assets:
Cash and cash equivalents $ 3,490 $ 912
Receivables 3,730 4,049
Inventories 2,254 3,140
Deferred income taxes 1,524 1,566
Assets of businesses held for sale 508 638
Other current assets 441 473
------------ ----------
Total current assets 11,947 10,778
------------ ----------
Property, plant and equipment 3,153 2,991
Investments in equity securities 1,751 1,884
Intangible assets related to contracts and programs acquired 846 939
Goodwill 7,371 7,371
Prepaid pension cost 2,230 2,081
Other assets 1,621 1,610
------------ ----------
$ 28,919 $ 27,654
============ ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,107 $ 1,419
Customer advances and amounts in excess of costs incurred 5,140 5,002
Salaries, benefits and payroll taxes 1,146 1,100
Income taxes 228 63
Current maturities of long-term debt 763 89
Liabilities of businesses held for sale 328 387
Other current liabilities 1,545 1,629
------------ ----------
Total current liabilities 10,257 9,689
------------ ----------
Long-term debt 6,693 7,422
Post-retirement benefit liabilities 1,572 1,565
Deferred income taxes 950 992
Other liabilities 1,747 1,543
Stockholders' equity:
Common stock, $1 par value per share 455 441
Additional paid-in capital 2,799 2,142
Retained earnings 4,659 3,961
Unearned ESOP shares (58) (84)
Accumulated other comprehensive loss (155) (17)
------------ ----------
Total stockholders' equity 7,700 6,443
------------ ----------
$ 28,919 $ 27,654
============ ==========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
6
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
September 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 (including its critical 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 nine
months ended September 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, including
Intelsat, Ltd. (Intelsat), Inmarsat Ventures plc, New Skies Satellites, N.V.
(New Skies), ACeS International, Ltd., Americom Asia-Pacific, LLC and other
ventures, are now reported as part of the Corporate and Other segment.
The Corporation adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective January 1, 2001. Accordingly, the
results of operations of the businesses held for sale as part of the exit from
the telecommunications services business are reported as discontinued
operations, net of income taxes, in the Corporation's consolidated statements of
operations for all periods presented, and excluded from business segment
information. Similarly, their assets and liabilities are separately identified
in the consolidated balance sheet as being held for sale. The businesses held
for sale at September 30, 2002 are recorded at estimated fair value less cost to
sell. Any changes in the estimated fair value will be recorded in future periods
as appropriate.
The following telecommunications businesses are classified as held for sale
at September 30, 2002:
. Satellite Services businesses - COMSAT World Systems (World Systems)
and Lockheed Martin Intersputnik (LMI). The Corporation reached
agreements to sell World Systems and LMI in the first and third
quarters of 2002, respectively. These transactions are subject to
regulatory approvals and other closing conditions.
7
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
. COMSAT International - provides telecommunications network services in
Latin America, primarily Argentina and Brazil. The Corporation
completed the sale of an 81 percent ownership interest in COMSAT
International in October 2002. The transaction is not expected to have
a material impact on the Corporation's consolidated results of
operations or financial position.
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.
In addition, the Corporation completed the sale of Lockheed Martin IMS
Corporation (IMS) in August 2001, resulting in a net gain of $309 million. This
gain, as well as the results of IMS' operations for the quarter and nine months
ended September 30, 2001, have been classified as 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 $7.4 billion
of goodwill included on the Corporation's consolidated balance sheet is recorded
in the Systems Integration, Space Systems and Technology Services segments.
There is no goodwill in the Aeronautics segment. In connection with the guidance
in SFAS No. 142, the Corporation evaluated the operating units within the
Systems Integration and Space Systems segments and determined the reporting
units within the segments based on similarities of the economic characteristics
of their lines of business. The Technology Services segment was determined to be
a separate reporting unit.
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 figher
aircraft program has been extended from six to ten years, effective January 1,
2002. The critical factors in making this determination included the existing
backlog for F-16 deliveries which extends production beyond the original
anticipated life, and the Corporation's outlook for potential new orders for the
F-16 during the next ten years. 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 nine months ended
September 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.
8
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions, except per share data)
Earnings (loss) from continuing operations:
As reported $ 300 $ (87) $ 875 $ 189
Impact of:
Goodwill amortization -- 62 -- 168
Contract value amortization -- 5 -- 15
------ ------- ------ -------
Adjusted $ 300 $ (20) $ 875 $ 372
====== ======= ====== =======
Diluted earnings (loss) per share from
continuing operations:
As reported $ 0.66 $ (0.20) $ 1.94 $ 0.44
Impact of:
Goodwill amortization -- 0.14 -- 0.38
Contract value amortization -- 0.02 -- 0.05
------ ------- ------ -------
Adjusted $ 0.66 $ (0.04) $ 1.94 $ 0.87
====== ======= ====== =======
Intangible assets related to contracts and programs acquired are displayed
in the unaudited condensed consolidated balance sheet net of accumulated
amortization of $1,333 million and $1,239 million at September 30, 2002 and
December 31, 2001, respectively. Amortization expense related to these
intangible assets was $31 million and $94 million for the quarter and nine
months ended September 30, 2002, respectively, and $38 million and $115 million
for the quarter and nine months ended September 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.
9
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions, except per share data)
Net earnings:
Earnings (loss) from continuing operations $ 300 $ (87) $ 875 $ 189
Discontinued operations:
Results of operations from discontinued
businesses (10) (9) (28) (36)
Gain on sale of IMS -- 309 -- 309
------ ------ ------ ------
Net earnings for basic and diluted computations $ 290 $ 213 $ 847 $ 462
====== ====== ====== ======
Average common shares outstanding:
Average number of common shares outstanding for basic
computations 448.5 428.0 443.5 425.7
Dilutive stock options 7.2 --/(a)/ 7.4 4.6
------ ------ ------ ------
Average number of common shares outstanding for diluted
computations 455.7 428.0 450.9 430.3
====== ====== ====== ======
Earnings (loss) per share:
Basic:
Continuing operations $ 0.67 $(0.20) $ 1.97 $ 0.45
Discontinued operations:
Results of operations from discontinued
businesses (0.02) (0.02) (0.06) (0.08)
Gain on sale of IMS -- 0.72 -- 0.72
------ ------ ------ ------
$ 0.65 $ 0.50 $ 1.91 $ 1.09
====== ====== ====== ======
Diluted:
Continuing operations $ 0.66 $(0.20) $ 1.94 $ 0.44
Discontinued operations:
Results of operations from discontinued
businesses (0.02) (0.02) (0.06) (0.08)
Gain on sale of IMS -- 0.72 -- 0.71
------ ------ ------ ------
$ 0.64 $ 0.50 $ 1.88 $ 1.07
====== ====== ====== ======
/(a)/ The average number of common shares used in the calculation of the
diluted loss per share from continuing operations has not been adjusted
for the effects of 5.2 million dilutive stock options, as such adjustment
would have been antidilutive.
10
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE 5 - INVENTORIES
September 30, December 31,
2002 2001
---- ----
(In millions)
Work in process, commercial launch vehicles $ 807 $ 1,205
Work in process, primarily related to other
long-term contracts and programs in progress 4,870 4,279
Less customer advances and progress payments (3,928) (2,931)
-------- --------
1,749 2,553
Other inventories 505 587
-------- --------
$ 2,254 $ 3,140
======== ========
In the third quarter of 2002, approximately $130 million of work in process
inventory related to commercial launch vehicles was reclassified to property,
plant and equipment. These assets, which are related to the Corporation's Atlas
V program, include the Atlas Space Operations Center, the vehicle integration
facility and certain related ground equipment for the program. The
reclassification was made in connection with the completion of the facilities
and the initial operational status of the Atlas V program. The assets are being
depreciated over a period of 10 years.
Commercial launch vehicle inventories include amounts advanced to
Khrunichev State Research and Production Space Center, a Russian manufacturer,
of $589 million and $672 million at September 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 September 30, 2002 and December
31, 2001, respectively, for the development and purchase, subject to certain
conditions, of RD-180 booster engines 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 is also coordinating with the U.S. Air Force, which is working
with the aerospace and defense industry to conduct preliminary studies of the
11
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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. 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, a move that
neither industry nor the Air Force believes is supported by the current studies.
Although this provisional standard does not create any legally enforceable
requirements for the Corporation at this time, the Corporation has developed a
preliminary remediation plan that would meet the provisional standard if it were
to become final. Because this plan entails a long lead-time for implementation,
the Corporation has elected to begin implementing this plan and recognize the
increased costs that are associated with the plan. The consolidated balance
sheet at September 30, 2002 includes a liability of approximately $185 million
representing the Corporation's estimate of the remaining expenditures necessary
to implement the remediation and other work at the site over the next 30 years.
This amount represents an approximate $100 million increase in the liability
since December 31, 2001. As at other sites, the Corporation is pursuing claims
against other potentially responsible parties, including the U. S. Government,
for contribution to site cleanup costs.
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,
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 has recorded a liability of
approximately $60 million representing its estimate of the total expenditures
required over the remaining terms of the consent decrees and orders described
above, net of the effects of the agreement.
The Corporation has been conducting remediation activities to address soil
and groundwater contamination by chlorinated solvents at its former operations
in Great Neck, New York which it acquired as part of its acquisition of Loral
Corporation in 1996. This work is being done pursuant to a series of orders and
agreements with the New York State Department of Environmental Conservation
beginning with a 1991 administrative order entered by Unisys Tactical Defense
Systems, a predecessor company at the site. Until now, all of the remediation
work associated with this site has been performed on the site itself, but in the
third quarter of 2002, the Corporation entered into negotiations with the state
of New York to implement an off-site interim remedial measure intended to
address an off-site plume of groundwater contamination that was found to be
moving more rapidly than originally anticipated. This has led to an increase of
approximately $40 million in the projected future costs for the site. Total
projected future costs are now estimated to be approximately $60 million through
2025. This amount is included in the consolidated balance sheet at September 30,
2002. As at other sites, the Corporation is pursuing claims against other
potentially responsible parties, including the United States, for contribution
to site cleanup costs.
12
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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, Burbank,
Glendale and Great Neck sites described above, a liability of approximately $155
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.
At September 30, 2002 and December 31, 2001, the aggregate amount of
liabilities recorded relative to environmental matters was $460 million and $300
million, respectively. 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 in the United States District
Court for the District of Idaho seeking, among other things, recovery of
approximately $54 million previously paid to the Corporation under the Pit 9
contract. The Corporation counterclaimed seeking to overturn the default
termination and recover its costs. The Corporation is defending this 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
jurisdiction over the dispute. On September 30, 2002, the U.S. Court of Appeals
for the Federal Circuit affirmed the decision of the Court of Federal Claims.
The Corporation does not plan further appeal and will pursue its remedies in its
counterclaims in the district court
13
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
action. 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 nine months ended September 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.
14
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Selected Financial Data by Business Segment
Net sales
- ---------
Systems Integration $ 2,253 $ 2,237 $ 6,586 $ 6,282
Space Systems 1,843 1,793 5,496 5,023
Aeronautics 1,668 1,449 4,549 3,362
Technology Services 776 734 2,157 1,972
Corporate and Other 2 8 10 17
-------- ------- ---------- ---------
$ 6,542 $ 6,221 $ 18,798 $ 16,656
======== ======= ========== =========
Operating profit (loss)/(a)/
- -----------------------
Systems Integration $ 248 $ 246 $ 702 $ 698
Space Systems 126 128 370 442
Aeronautics 126 125 360 308
Technology Services 48 39 131 109
Corporate and Other 28 (480) 13 (681)
-------- ------- ---------- ---------
$ 576 $ 58 $ 1,576 $ 876
======== ======= ========== =========
Intersegment sales/(b)/
- ---------------------
Systems Integration $ 82 $ 61 $ 213 $ 171
Space Systems 22 17 62 57
Aeronautics 8 12 21 40
Technology Services 154 194 526 541
Corporate and Other 18 40 57 111
-------- ------- ---------- ---------
$ 284 $ 324 $ 879 $ 920
======== ======= ========== =========
September 30, December 31,
2002 2001
---- ----
(In millions)
Customer advances and amounts in excess of
- ------------------------------------------
costs incurred
--------------
Systems Integration $ 869 $ 797
Space Systems 1,482 1,784
Aeronautics 2,785 2,406
Technology Services 4 15
-------- --------
$ 5,140 $ 5,002
======== ========
(a) With respect to the adoption of SFAS No. 142, amounts previously included
in segment operating results for the quarter and nine months ended
September 30, 2001, respectively, were as follows: Systems Integration -
$43 million and $128 million; Space Systems - $9 million and $28 million;
Aeronautics - $8 million and $23 million; Technology Services - $3
million and $9 million; and Corporate and Other - $5 million and $17
million.
(b) Intercompany transactions between segments are eliminated in
consolidation and therefore excluded from the net sales and operating
profit (loss) amounts presented above.
15
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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 was recorded as a reduction of the
Corporation's second quarter income tax expense, and increased earnings from
continuing operations for the nine months ended September 30, 2002 by $90
million ($0.20 per diluted share).
The Corporation received net federal and foreign income tax refunds,
including the R&D tax credit refund discussed above, of $121 million for the
nine months ended September 30, 2002, and made federal and foreign income tax
payments, net of refunds received, of $345 million for the same period in 2001.
The Corporation's total interest payments were $332 million and $450
million for the nine months ended September 30, 2002 and 2001, respectively.
The components of comprehensive income for the three month and nine month
periods ended September 30, 2002 and 2001 consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Net earnings $ 290 $ 213 $ 847 $ 462
Other comprehensive (loss) income:
Net foreign currency translation adjustments (3) (17) (35) (26)
Net unrealized (loss) gain from
available-for-sale investments, primarily
Loral Space and New Skies (27) 11 (104) (35)
Reclassification adjustment due to
realization of loss on Loral Space
investment -- 151 -- 151
Net unrealized (loss) gain from hedging
activities (16) 1 1 6
------ ------- ------ -------
(46) 146 (138) 96
------ ------- ------ -------
Comprehensive income $ 244 $ 359 $ 709 $ 558
====== ======= ====== =======
In October 2002, the Corporation announced that a new share repurchase
authority had been authorized which provides for the repurchase of up to 23
million shares of its common stock from time-to-time if market and business
conditions warrant. Under the authority, management has discretion to determine
whether to purchase shares, the number and price of shares to be repurchased,
and the timing of any repurchases. The authority replaced a prior repurchase
plan which had been authorized in 1995.
New accounting pronouncements adopted - In April 2002, the Financial
Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Among other things, the Statement generally prohibits the
classification of gains or losses from the early extinguishment of debt as
extraordinary items, and therefore rescinds the previous requirement to do so.
Gains and losses from prior early debt extinguishments are required to be
reclassified. The Statement is not required to be implemented until 2003, though
earlier application is encouraged. In the third
16
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
quarter of 2002, the Corporation elected to adopt the Statement and,
accordingly, reclassified the $36 million extraordinary item recognized in the
third quarter of 2001 related to the redemption of approximately $117 million of
7% debentures ($175 million at face value) due in 2011. As a result of the
reclassification, the loss on the redemption, net of state income tax benefits,
of $55 million was included in other income and expenses for the quarter and
nine month periods ended September 30, 2001, and the related income tax benefit
of $19 million was included in income tax expense for those periods.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 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 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 Lockheed
Martin Intersputnik (LMI). The Corporation expects to complete the World Systems
transaction by the end of 2002 and the LMI transaction in mid-2003, subject to
receipt of regulatory approvals and satisfaction of other closing conditions. As
previously reported, the Corporation received a letter from Intelsat, Ltd.
(Intelsat) in July 2002 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
LMI transactions is not expected to have a material impact on the Corporation's
consolidated results of operations or financial position. The Corporation has
either sold or has agreements in place to sell all of the businesses classified
as held for sale and included in discontinued operations. The businesses held
for sale at September 30, 2002 are recorded at estimated fair value less cost to
sell. Any changes in the estimated fair value will be recorded in future periods
as appropriate.
18
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 third quarter of 2002 were
$6.5 billion, an increase of five percent over third quarter 2001 sales of $6.2
billion. Sales for the nine months ended September 30, 2002 were $18.8 billion,
a 13 percent increase over the $16.7 billion sales recorded in the comparable
2001 period. Sales increased in all business segments except Corporate and Other
during both the quarter and nine-months ended September 30, 2002 from the
comparable 2001 periods.
The Corporation's operating profit (earnings before interest and taxes) for
the third quarter of 2002 was $576 million, an increase of $518 million from the
$58 million recorded in the comparable 2001 period before adjusting for the
adoption of SFAS No. 142. The Corporation's operating profit for the nine months
ended September 30, 2002 was $1.6 billion, an increase of 80 percent from the
$876 million recorded in the comparable 2001 period before adjusting for the
adoption of SFAS No. 142 and the effects of nonrecurring and unusual items
recorded in the prior-year period.
Effective January 1, 2002, the Corporation adopted SFAS No. 142, as
discussed more fully in "Note 3 - Adoption of New Accounting Standard." 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 fighter aircraft program
has been extended from six to ten years, effective January 1, 2002. The critical
factors in making this determination included the existing backlog for F-16
deliveries which extends production beyond the original anticipated life, and
the Corporation's outlook for potential new orders for the F-16 during the next
ten years. With respect to new orders, it is expected that the F-16 will
continue to be the dominant fighter aircraft available for many countries in the
international market until the F-35 Joint Strike Figher is available. As a
result of the adoption, amortization expense associated with goodwill and
certain other intangibles was lower for the quarter and nine month periods ended
September 30, 2002 by approximately $68 million and $205 million, respectively,
as compared to the same periods in the prior year.
19
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
There were no nonrecurring and unusual items in the business segments for
the quarter or nine months ended September 30, 2002. Continuing operations for
the quarter and nine months ended September 30, 2001 included the impact of
several nonrecurring and unusual items, as follows:
Net Earnings
Operating earnings (loss) per
profit (loss) (loss) diluted share
------------- ---------- --------------
(In millions, except per share data)
Quarter ended September 30, 2002
None $ -- $ -- $ --
Quarter ended September 30, 2001
Write-down of investment in Loral Space /(1)/ $(361) $(235) $ (0.54)
Loss on early repayment of debt /(2)/ (55) (36) (0.08)
Divestitures and other portfolio shaping activities (5) (3) (0.01)
------ ------ ---------
$(421) $(274) $ (0.63)
====== ====== =========
Nine months September 30, 2002
None $ -- $ -- $ --
Nine months ended September 30, 2001
Write-down of investment in Loral Space /(1)/ $(361) $(235) $ (0.55)
Sale of surplus real estate /(3)/ 111 72 0.17
Impairment charge related to
Americom Asia-Pacific /(4)/ (100) (65) (0.15)
Loss on early repayment of debt /(2)/ (55) (36) (0.08)
Divestitures and other portfolio shaping activities (5) (3) (0.01)
------ ------ ---------
$(410) $(267) $ (0.62)
====== ====== =========
/(1)/ In the third quarter of 2001, the Corporation recorded a charge related to
its investment in Loral Space & Communications Ltd. (Loral Space). The
charge was recorded due to an other than temporary decline in the value of
the investment.
/(2)/ Also in the third quarter of 2001, the Corporation redeemed approximately
$117 million of 7% debentures ($175 million at face value) due in 2011
which were originally sold at approximately 54 percent of their principal
amount. The debentures were redeemed at face value, resulting in a loss on
the early repayment of the debt.
/(3)/ 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.
/(4)/ 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.
Adjusting operating profit for the three and nine month periods ended
September 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 $547 million and $1.5 billion, respectively, compared to
$576 million and $1.6 billion recorded in the comparable 2002 periods. As
adjusted, this reflects increases in operating profit of five percent and seven
percent for the quarter and nine month periods ended September 30, 2002 over the
respective 2001
20
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
periods. The operating profit increase between the quarterly periods was
primarily driven by increases in the Technology Services and Corporate and Other
segments, as operating profit in the other segments remained essentially flat.
For the nine months ended September 30, 2002, as compared to the respective 2001
period, operating profit increased in all segments except Corporate and Other.
Interest expense of $147 million and $440 million for the three and nine
months ended September 30, 2002, respectively, was lower by $25 million and $109
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 September 30, 2002 were 30 percent and 23 percent, respectively. The
year-to-date rate included a benefit related to the settlement of a research and
development (R&D) tax credit claim which decreased 2002 income tax expense by
$90 million. Excluding the benefit of this R&D tax credit, the effective income
tax rate for the nine months ended September 30, 2002 would have been 31
percent. The effective income tax rates for the quarter and year-to-date periods
ended September 30, 2001 were 24 percent and 42 percent, respectively. These
rates include income tax benefits associated with the losses from nonrecurring
and unusual items incurred in the quarter and nine months ended September 30,
2001. The effective tax rate for the nine-month period in 2002 (after adjusting
for the R&D tax credit) was lower than the rate in the comparable 2001 period
primarily due to the fact that non-deductible goodwill was amortized in 2001 for
financial accounting purposes, but not in 2002 in accordance with SFAS No. 142.
In addition, because of the proportionally lower base of earnings in 2001 versus
2002, the non-deductible goodwill had a greater impact on the effective tax rate
in the 2001 period. 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 third quarter of 2002 were $300
million ($0.66 per diluted share) compared to a loss from continuing operations
of $87 million ($0.20 per diluted share) reported in the third quarter of 2001.
The loss from continuing operations for the third quarter of 2001 included the
after-tax impact of three nonrecurring and unusual items which decreased third
quarter 2001 earnings from continuing operations by $274 million ($0.63 per
diluted share). Excluding such items and adjusting for the adoption of SFAS No.
142 as discussed above, earnings from continuing operations for the third
quarter of 2001 would have been $254 million ($0.59 per diluted share).
Earnings from continuing operations for the nine months ended September 30,
2002 were $875 million ($1.94 per diluted share), which included the one-time
impact of the R&D tax credit that 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 nine months ended September
30, 2002 were $785 million ($1.74 per diluted share). Earnings from continuing
operations for the nine months ended September 30, 2001 were $189 million ($0.44
per diluted share) and included the after-tax impact of several nonrecurring and
unusual items, which decreased 2001 earnings from continuing operations by $267
million ($0.62 per diluted share). Excluding such items and adjusting for the
adoption of SFAS No. 142, earnings from continuing operations for the nine
months ended September 30, 2001 would have been $639 million ($1.49 per diluted
share).
21
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Discontinued Operations
The Corporation reported a loss from discontinued operations of $10 million
($0.02 per diluted share) in the third quarter of 2002 as compared to earnings
from discontinued operations of $300 million ($0.70 per diluted share) in the
comparable 2001 period. For the nine months ended September 30, 2002, the loss
from discontinued operations was $28 million ($0.06 per diluted share), as
compared to earnings from discontinued operations of $273 million ($0.63 per
diluted share) in the comparable 2001 period. Both periods of 2001 were
favorably impacted by an after-tax gain of $309 million from the sale of
Lockheed Martin IMS Corporation.
Net Earnings
The Corporation reported net earnings of $290 million ($0.64 per diluted
share) and $213 million ($0.50 diluted per share) for the quarters ended
September 30, 2002 and 2001, respectively. For the nine-month periods, net
earnings were $847 million ($1.88 per diluted share) for 2002 and $462 million
($1.07 per diluted share) for 2001. Excluding the effects of the R&D tax credit
discussed previously, net earnings for the nine months ended September 30, 2002
would have been $757 million ($1.68 per diluted share). Excluding the effects of
the nonrecurring and unusual items recorded in 2001, adjusting for the adoption
of SFAS No. 142, and excluding the after-tax gain on the sale of IMS, net
earnings for the three and nine months ended September 30, 2001 would have been
$259 million ($0.60 per diluted share) and $644 million ($1.50 per diluted
share), respectively.
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Nonrecurring and unusual items - profit (loss):
Systems Integration $ -- $ -- $ -- $ --
Space Systems -- -- -- 111
Aeronautics -- -- -- --
Technology Services -- -- -- --
Corporate and Other -- (421) -- (521)
-------- --------- -------- -------
$ -- $ (421) $ -- $ (410)
======== ========= ======== =======
22
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In order to make the following discussion of 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 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 $2.3 billion and $6.6
billion for the quarter and nine months ended September 30, 2002, respectively,
representing increases of one percent and five percent from sales recorded in
the comparable 2001 periods. For the third quarter, an increase in sales of
approximately $110 million in the segment's Command, Control, Communications,
Computers and Intelligence (C4I) line of business, primarily as a result of
higher volume on certain information superiority programs, was partially offset
by a combined decrease of approximately $95 million in the segment's other lines
of business. For the nine months ended September 30, 2002, sales increased by
approximately $250 million in the segment's Missiles & Fire Control line of
business, mainly due to higher volume on certain tactical missile programs and
the Theater High Altitude Area Defense (THAAD) program, and by approximately
$115 million in the segment's C4I line of business as a result of higher volume
on certain information superiority programs. These increases were partially
offset by an approximate $100 million decrease in platform integration
activities in the segment's Systems Integration-Owego line of business.
Operating profit for the segment increased by $2 million and $4 million for
the quarter and nine months ended September 30, 2002, respectively, from the
$246 million and $698 million recorded in comparable 2001 periods. In both
periods of 2002, as compared to the respective 2001 periods, increased operating
profit at Missiles & Fire Control on certain tactical missile programs and
increases at C4I on certain information superiority programs were offset by
decreased operating profit on platform integration activities and distribution
technologies at Systems Integration-Owego and on certain marine and undersea
programs at Naval Electronics and Surveillance Systems. The segment's 2002
margin of 10.7 percent was lower than the 11.1 percent realized in 2001 due to a
decline in volume on mature production programs and by higher volume on
development programs.
Space Systems
Net sales for the Space Systems segment were $1.8 billion and $5.5 billion
for the quarter and nine months ended September 30, 2002, respectively,
representing increases of three percent and nine percent from the sales recorded
in the comparable 2001 periods. For the third quarter, increases in the
segment's commercial space line of business more than offset declines in the
segment's government space line of business. The approximate $100 million
increase in commercial space is primarily attributable to more commercial
satellite deliveries. The approximate $50 million decrease in government space
is mainly due to declines in volume on government launch vehicle programs
(Titan) and ground systems activities partially offset by higher volume on
government satellite programs.
The increase in net sales for the nine months ended September 30, 2002
resulted from higher volumes in both commercial space and government space. The
approximate $290 million
23
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
increase in commercial space is primarily attributable to more commercial
satellite deliveries and to increased launch vehicle activities, with seven
commercial launches during the nine-month period of 2002 compared to five during
the comparable 2001 period. In government space, increases totaling
approximately $310 million from government satellite and ground system
activities more than offset a decline in volume of approximately $115 million on
government launch vehicle programs.
Space Systems operating profit was $126 million and $370 million for the
quarter and nine months ended September 30, 2002, respectively, representing a
decline of two percent and an increase of 12 percent over the operating profit
recorded in the comparable 2001 periods. Commercial space operating profit
decreased by approximately $40 million quarter-over-quarter due primarily to the
lower profitability of the three commercial launches this quarter as compared to
the two launches in the respective 2001 period. Operating profit also included
the adverse effects of adjustments of $25 million in 2002 and $45 million in
2001 recorded to reflect the continued industry-wide oversupply and further
deterioration of pricing in the commercial launch vehicle market. In government
space, operating profit increases of approximately $45 million due to the higher
volume of government satellite programs more than offset an approximate $10
million decline resulting from lower volume on government launch vehicle
programs.
The increase in operating profit for the nine months ended September 30,
2002 is primarily attributable to reduced losses in commercial space that more
than offset lower operating profit in government space programs. Commercial
satellite losses declined by approximately $70 million as operating performance
improved and satellite deliveries increased. In the first quarter of 2001, the
Corporation recorded a $40 million loss provision on certain commercial
satellite contracts. Financial performance on commercial launch vehicle
activities continues to deteriorate, resulting in a net decrease in operating
profit of approximately $20 million between the comparative nine-month periods.
This reduction in commercial launch vehicle results of operations included
charges of approximately $60 million, net of favorable contract adjustments of
$20 million, recorded in 2002 for market and pricing pressures compared to $85
million in 2001. The 2002 year-to-date decrease of approximately $10 million in
government space is primarily due to the reduced volume on government launch
vehicle programs partially offset by increases in government satellite programs
and ground system activities.
Aeronautics
Net sales for the Aeronautics segment were $1.7 billion and $4.5 billion
for the quarter and nine months ended September 30, 2002, respectively,
representing increases of 15 percent and 35 percent from the sales recorded in
the comparable 2001 periods. For the third quarter, increases in sales of
approximately $250 million were attributable to the initial ramp-up of F-35
Joint Strike Fighter System Development & Demonstration (SDD) activities and
approximately $135 million were attributable to higher volume on the F/A-22
program, mainly Low Rate Initial Production (LRIP) activities. These increases
were partially offset by an approximate $215 million decline in sales due to
fewer C-130J deliveries and lower volume on other aeronautics programs. There
was one C-130J delivery in third quarter 2002 compared to five deliveries in the
respective 2001 period. The remainder of the increase for the quarter was
primarily due to higher volume of development activities on certain F-16 and C-5
programs. As in the quarter, the majority of the increase in sales for the
nine-month period resulted from the initial ramp-up of F-35 Joint Strike Fighter
SDD activities and higher volume on the F/A-22 program which, on a combined
basis, contributed approximately $820 million to the increase over the
comparable 2001 period. Additionally, sales increased by approximately $190
million due to an increase in C-130J program
24
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
deliveries and other activities. There were six C-130J deliveries in 2002
compared to five deliveries for the same period in 2001. The remainder of the
increase for the nine-month period was primarily attributable to an increase in
volume on F-16 and C-5 development programs.
Operating profit for the quarter and year-to-date periods in 2002 was $126
million and $360 million, respectively, representing increases of one percent
and 17 percent from the operating profit recorded in the comparable 2001
periods. These increases are primarily due to the higher volume on the programs
described in the discussion of sales, partially offset by an approximate $15
million charge recorded in the third quarter of 2002 related to performance
issues on an aircraft modification contract. The change 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. The comparison of
the third quarter 2002 margin of 7.6 percent to the third quarter 2001 margin of
8.6 percent as well as those for the nine-month periods of 7.9 percent in 2002
versus 9.2 percent in 2001, were impacted by increased development activities on
F-35, F-16 and C-5 aircraft programs, the ramp-up of F/A-22 LRIP and the
previously mentioned performance issue. Margins for the third quarter periods
were also impacted by the reduction in C-130J deliveries mentioned in the sales
discussion above.
Technology Services
Net sales of the Technology Services segment were $776 million and $2.2
billion for the quarter and nine months ended September 30, 2002, respectively,
representing increases of six percent and nine percent from the sales recorded
in the comparable 2001 periods. The increase in sales for the quarter was
primarily attributable to higher volume in the segment's government information
technology and defense lines of business of approximately $85 million and $35
million, respectively. The growth in these lines of business was partially
offset by declines totaling approximately $80 million on commercial information
technology and NASA programs. For the nine-month period, as with the quarter,
higher volume in the government information technology and defense lines of
business of approximately $255 million and $60 million, respectively, accounted
for the majority of the increase in sales over the comparable nine-month period
in 2001. The growth in these lines of business was partially offset by declines
totaling approximately $125 million for the year on commercial information
technology and NASA programs.
Operating profit for the segment was $48 million and $131 million for the
quarter and nine months ended September 30, 2002, respectively, representing
increases of 23 percent and 20 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 the military aircraft, NASA and energy lines
of business.
Corporate and Other
Operating profit for the Corporate and Other segment increased by $19
million for the quarter and decreased by $32 million for the nine months ended
September 30, 2002 from the $9 million and $45 million, respectively, recorded
in the comparable 2001 periods. These results exclude amortization of $68
million and $205 million from the quarter and nine months ended September 30,
2001 results relating to the adoption of SFAS No. 142 discussed previously. The
increase in operating profit for the quarter is primarily the result of a
decrease in corporate expenses, mainly in stock-based deferred compensation
costs, and by lower noncash losses from certain equity
25
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
investments. For the nine-month period, lower interest income and an increase in
corporate expenses, primarily in stock-based deferred compensation costs,
partially offset by lower noncash losses from certain equity investments,
accounted for the decline in operating profit.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2002, $2.7 billion of cash was
provided by operating activities, compared to $2.2 billion during the comparable
2001 period. Each period includes the impact of earnings from continuing
operations, adjusted for non-cash 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 the
settlement of the R&D tax credit claim. The 2001 amount includes pretax proceeds
from sales of surplus real estate and a cash distribution received from
Intelsat, Ltd. (Intelsat) in the second quarter of 2001. These increases were
partially offset by income tax payments made in 2001 related to divestiture
activities in 2000.
Net cash used for investing activities during the nine months ended
September 30, 2002 was $345 million as compared to $424 million provided by
investing activities during the comparable 2001 period. The 2002 amount includes
$396 million for additions to property, plant and equipment. This outflow was
partially offset by net proceeds of $51 million, consisting primarily 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 $825 million received from the
divestiture of IMS and approximately $96 million received from property
dispositions. These inflows were partially offset by $312 million used for
additions to property, plant and equipment, as well as $185 million in other
investing activities including additional equity investments in Astrolink
International, LLC and Intelsat of approximately $140 million and $30 million,
respectively.
Net cash provided by financing activities during the nine months ended
September 30, 2002 was $195 million as compared to $2.3 billion used during the
comparable 2001 period. The 2002 amount includes $431 million in proceeds from
the issuance of common stock, primarily from the exercise of employee stock
options, partially offset by $149 million in dividend payments and $87 million
in net debt repayments. The 2001 amount includes approximately $2.3 billion in
net debt repayments and $144 million in dividend payments, partially offset by
$123 million in proceeds from the issuance of common stock, primarily from the
exercise of employee stock options.
Total debt decreased by approximately $55 million during the nine months
ended September 30, 2002 from approximately $7.5 billion at December 31, 2001.
This decrease was mainly 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 September 30, 2002, the Corporation held
cash and cash equivalents of approximately $3.5 billion. Total stockholders'
equity was $7.7 billion at September 30, 2002, an increase of $1.3 billion from
the December 31, 2001 balance. This increase resulted from net earnings of $847
million and employee stock option and ESOP activities of $697 million, partially
offset by dividend payments of $149 million and other comprehensive losses of
$138 million. The Corporation's ratio of debt to total capitalization decreased
from the 54 percent reported at December 31, 2001 to 49 percent at September 30,
2002. The Corporation expects that it could record an adjustment at December 31,
2002 related to certain of its pension plans which would reduce stockholders'
equity by approximately $1 billion to $2 billion, thereby impacting the ratio of
debt to total capitalization discussed above. Such adjustment is not expected
to impact compliance with the Corporation's debt covenants. See further
discussion under the caption "Employee Benefit Plans."
26
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
At September 30, 2002, the Corporation had in place revolving credit
facilities of $1.0 billion and $1.5 billion; no borrowings were outstanding. In
October 2002, the Corporation terminated the $1.0 billion credit facility. The
$1.5 billion credit facility will expire in November 2006.
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.
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 September
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 September 30,
2002, the Corporation's investment in and receivables due from Space Imaging
amounted to approximately $50 million. Space Imaging is pursuing its business
plan, including assessments relative to future investment in replacement
satellites and related funding requirements. To execute its current business
plan and fund future replacement satellites, Space Imaging will likely need to
obtain long-term commitments and funding from the U.S. Government for purchases
of commercial satellite imagery, as well as commitments for additional
investment or funding, none of which are committed at present. In light of
current market conditions, it is uncertain as to whether Space Imaging will be
successful in attracting the necessary additional funding. If the long-term
commitments and additional investment or funding do not materialize, the
Corporation could be required to fund all or part of its obligation under the
guarantee and record a charge to earnings to the extent that any amounts
invested, advanced or paid under the guarantee are not realizable.
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 plan, general market conditions, industry considerations specific to
the investee's business, and/or other factors. The Corporation's investments in
equity securities are 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, which in turn could impact
the Corporation's earnings.
27
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 were
required to complete their initial public offerings by December 31, 2002.
However, Inmarsat may petition the Federal Communications Commission (FCC) for
an extension until June 30, 2003 pursuant to an amendment passed in 2001 and, in
October 2002, the President signed into law 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. 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 the
Corporation's investment in those entities could be adversely affected. Current
trends and market conditions in the telecommunications industry, including
recent bankruptcy filings by some carriers, as well as trends in the securities
markets, may make it difficult for Intelsat or Inmarsat to complete their
initial public offerings by the prescribed ORBIT Act deadlines. The
Corporation's investments in Intelsat and Inmarsat were $1.26 billion and $270
million, respectively, at September 30, 2002.
EMPLOYEE BENEFIT PLANS
As disclosed in its 2001 Annual Report on Form 10-K, the Corporation's
earnings will continue to be affected positively or negatively by the level of
income or expense related to its employee benefit plans, including qualified
defined benefit plans and retiree medical and life insurance plans. This is
particularly true with income or expense associated with qualified defined
benefit plans (pension plans), as the related calculations are sensitive to
changes in various key economic assumptions and workforce demographics. Based on
actuarial assumptions and projected rates of return on plan assets used as of
December 31, 2001, the Corporation anticipated that its income related to
employee benefit plans would decline substantially in 2002 and result in a net
expense in 2003.
Based on the current market performance and its preliminary analysis, the
Corporation projects that the discount rate and long-term rate of return on plan
asset assumptions to be used for year-end 2002 reporting purposes may be lower
than those used at the end of 2001. These assumptions are used in calculating
the subsequent year's pension plan expense. The assumptions used at the end of
2001 included a discount rate of 7.25% and an expected long-term rate of return
on plan assets of 9.5%. In addition, the difference between the actual return on
plan assets for a given year and the assumed rate of return may also affect the
subsequent year's pension plan expense. The Corporation had assumed a 2002
return on plan assets of approximately 5%; however, the actual year-to-date
return on plan assets through September 30, 2002 was negative. The discount rate
assumption, the long-term rate of return assumption and the actual return on
plan assets that will be used for calculating pension plan expense for 2003 will
be finalized at the end of the year consistent with the Corporation's pension
plan measurement date.
With respect to the Corporation's pension plans, the following analysis
reflects the potential incremental impact of changes in the respective plan
assumptions and experience:
. Lowering the discount rate by 25 basis points would increase 2003
pension expense by approximately $40 million to $50 million.
. Lowering the long-term rate of return on assets by 25 basis points
would increase 2003 pension expense by approximately $55 million to
$65 million.
28
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
. Each 100 basis point decline in the 2002 actual return on plan assets,
compared to the assumed rate of return, would increase 2003 pension
expense by approximately $10 million.
The balance sheet is expected to be adjusted at December 31, 2002 due to
the recording of a minimum liability adjustment related to certain of the
Corporation's pension plans. The adjustment is calculated on a plan-by-plan
basis, and is determined by comparing the accumulated benefit obligation to the
related fair value of the plan assets in accordance with SFAS No. 87,
"Employers' Accounting for Pensions." The adjustment would be recorded as a
reduction of stockholders' equity. Assuming there is no change in interest rates
or equity market performance for the remainder of the year, the Corporation
estimates that the after-tax impact of the adjustment on stockholders' equity
would be in the range of $1 billion to $2 billion.
ADVANCES TO RUSSIAN MANUFACTURERS
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 prior to 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. If the contracted launch services
could not be provided, a sizeable percentage of such advances would be required
to be refunded to each customer.
At September 30, 2002, $429 million related to launches not yet provided
was included in the caption "customer advances and amounts in excess of costs
incurred" on the consolidated balance sheet. Also at that date, $589 million of
payments to Khrunichev were reflected on the balance sheet in inventories, of
which $340 million related to launches currently under contract and $249 million
related to launches not under contract. Lockheed Martin and Khrunichev
originally anticipated the inventory related to launches not under contract
would be assigned to future launch vehicle orders over a period of not more than
three years. However, due to the reduction in demand for commercial launch
vehicles and continuing overcapacity in the launch vehicle market, the
Corporation and Khrunichev are evaluating the impact of a longer period over
which to sell the inventory related to launch vehicles not under contract. The
Corporation's ability to realize such amounts may also be affected by
Khrunichev's ability to provide the related launch services and the political
environment in Russia. Through September 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 the Corporation's Atlas
launch vehicles. 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 September 30, 2002.
29
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
OTHER MATTERS
The Technology Services segment has a business unit which provides
services to the government of Argentina. At September 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 management
contractor for the project, a wholly-owned subsidiary of the Corporation, at the
DoE's direction, terminated the Pit 9 contract for default and filed suit
against the Corporation in the United States District Court for the District of
Idaho seeking recovery of approximately $54 million previously paid to the
Corporation under the contract. The Corporation counterclaimed seeking to
overturn the default termination and recover its costs. 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 jurisdiction over the dispute. On September
30, 2002, the U.S. Court of Appeals for the Federal Circuit affirmed the
decision of the Court of Federal Claims. The Corporation does not plan further
appeal and will pursue its remedies in its counterclaims in the district court
action. The Corporation continues to seek resolution of the Pit 9 dispute
through non-litigation means.
30
Item 3. Quantitative and Qualitative Disclosure of Market Risk
Lockheed Martin Corporation
Quantitative and Qualitative Disclosure
of Market Risk
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 September 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 third 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 September 30, 2002, the fair values of interest
rate swap agreements outstanding totaled approximately $27 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 September 30, 2002 would result in a decrease in market
value of approximately $13 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
September 30, 2002, the fair value of forward exchange contracts outstanding, as
well as the amounts of gains and losses recorded during the quarter and nine
month periods then ended, were not material. The Corporation does not hold or
issue derivative financial instruments for trading purposes.
31
Item 4. Controls and Procedures
Lockheed Martin Corporation
Controls and Procedures
Within 90 days prior to the date of this report, the Corporation performed
an evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures. Disclosure controls and procedures help to ensure that
the financial and non-financial information required to be disclosed in the
Corporation's periodic filings with the Securities and Exchange Commission is
recorded, processed, summarized and reported timely. The evaluation was
performed with the participation of senior management of each business segment
and key Corporate functions, and under the supervision of the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO). Based on the evaluation, the
Corporation's management, including the CEO and CFO, concluded that the
Corporation's disclosure controls and procedures were effective. There have been
no significant changes in the Corporation's internal accounting controls or in
other factors that could adversely affect internal accounting controls
subsequent to the date of the evaluation.
32
Lockheed Martin Corporation
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 achieve savings through cost-cutting and
other financial management programs; the level of returns on pension and
retirement plan assets; 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 estimated costs, subcontractor performance,
and the timing of product deliveries and customer acceptance); 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 18 through 30 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 7 through 8,
pages 8 through 9 and pages 11 through 14, respectively, of this Form 10-Q; and
Part II - Item 1, "Legal Proceedings" on page 34 of this Form 10-Q.
33
Part II. Other Information
Lockheed Martin Corporation
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, 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, two shareholder class-action complaints have been
filed against the Corporation and certain of its officers and directors in the
United States District Court for the Central District of California. They are
captioned "In re Lockheed Martin Corp. Securities Litigation" and "Kops et al.
v. Lockheed Martin et al." In the Securities Litigation proceeding, the district
court granted our motion to dismiss the second amended complaint on July 22,
2002. The plaintiffs filed a third amended complaint on September 12, 2002, and
we filed a motion to dismiss that complaint on October 28, 2002.
In the Kops proceeding, the district court granted part and denied part of
our motion to dismiss the second amended complaint on November 1, 2002. The
court dismissed, with leave to amend, the allegation that we 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 1999,
expected deliveries of C-130J aircraft in 1999 and earnings projections. The
court dismissed, without leave to amend, the allegations that we made false
statements regarding the expected number of satellite launches in 1999. The
court denied our motion regarding the allegations that we falsely claimed the
sale of six C-130J aircraft to the Air Force and improperly recognized revenue
from that sale. We intend to defend these actions vigorously.
In addition, see the "Legal Proceedings" section of the Form 10-K for a
description of previously reported matters.
34
Lockheed Martin Corporation
Other Information (continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Exhibit 10.1 Lockheed Martin Corporation Deferred Management
Incentive Compensation Plan, as amended effective
October 1, 2002.
2. Exhibit 10.2 Lockheed Martin Corporation Directors Equity Plan, as
amended effective October 24, 2002.
3. Exhibit 10.3 Lockheed Martin Corporation Directors Deferred
Compensation Plan, as amended effective October 24,
2002.
4. Exhibit 10.4 Lockheed Martin Corporation Directors Deferred Stock
Plan, as amended effective October 24, 2002.
5. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of
Earnings to Fixed Charges for the nine months ended
September 30, 2002.
6. 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.
7. 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 third quarter of 2002.
1. Current report on Form 8-K filed on August 20, 2002.
Item 5. Other Events
The Corporation filed information regarding two internal
corporate policy statements pertaining to international
consultants and procedures under the Foreign Corrupt
Practices Act.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Policy Statement No. CPS-704
(International Consultants), as amended.
Lockheed Martin Corporation Policy Statement No. CPS-730
(Compliance with the Foreign Corrupt Practices Act), as
amended.
2. Current report on Form 8-K filed on August 8, 2002.
Item 5. Other Events
The Corporation filed CEO and CFO sworn statements required
by the Securities and Exchange Commission Order No. 4-460.
35
Lockheed Martin Corporation
Other Information (continued)
Item 7. Financial Statements and Exhibits
Statement under oath of principal executive officer
regarding facts and circumstances relating to Exchange Act
filings dated August 8, 2002.
Statement under oath of principal financial officer
regarding fact and circumstances relating to Exchange Act
filings dated August 8, 2002.
36
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: November 8, 2002 by: /s/ Rajeev Bhalla
----------------------------- -----------------
Rajeev Bhalla
Vice President and Controller
(Chief Accounting Officer)
37
LOCKHEED MARTIN CORPORATION
CERTIFICATION
I, Vance D. Coffman, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lockheed Martin
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
38
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002 /s/ Vance D. Coffman
------------------ --------------------
Vance D. Coffman
Chairman and Chief Executive Officer
39
LOCKHEED MARTIN CORPORATION
CERTIFICATION
I, Christopher E. Kubasik, Senior Vice President and Chief Financial
Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lockheed Martin
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002 /s/ Christopher E. Kubasik
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Christopher E. Kubasik
Senior Vice President and Chief Financial
Officer
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