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 QUARTER ENDED March 31, 2001 COMMISSION FILE NUMBER 1-11437
--------------------- -----------
LOCKHEED MARTIN CORPORATION
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1893632
- ----------------------------------- -------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6801 ROCKLEDGE DRIVE, BETHESDA, MD 20817
- -------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (301) 897-6000
-----------------------
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 April 30, 2001
- ----------------------------- --------------------------------
COMMON STOCK, $1 PAR VALUE 434,327,261
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
____________
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Statement of Earnings-
Three Months Ended March 31, 2001 and 2000................................................. 3
Unaudited Condensed Consolidated Statement of Cash Flows-
Three Months Ended March 31, 2001 and 2000................................................. 4
Unaudited Condensed Consolidated Balance Sheet-
March 31, 2001 and December 31, 2000....................................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................... 17
Item 3. Quantitative and Qualitative Disclosure of Market Risk (included in Item 2.
under the caption "Other Matters")
Part II. Other Information
Item 1. Legal Proceedings.................................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders................................ 26
Item 6. Exhibits and Reports on Form 8-K................................................... 27
Signatures..................................................................................... 28
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
2
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Earnings
Three Months Ended
March 31,
2001 2000
---- ----
(In millions, except per share data)
Net sales $5,010 $5,562
Cost of sales 4,681 5,249
------ ------
Earnings from operations 329 313
Other income and expenses, net 43 13
------ ------
372 326
Interest expense 197 227
------ ------
Earnings before income taxes 175 99
Income tax expense 70 45
------ ------
Net earnings $ 105 $ 54
====== ======
Earnings per common share:
- --------------------------
Basic $ .25 $ .14
Diluted $ .25 $ .14
Cash dividends declared per common share $ .11 $ .11
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Cash Flows
Three Months Ended
March 31,
2001 2000
---- ----
(In millions)
Operating Activities:
Net earnings $ 105 $ 54
Adjustments to reconcile earnings to net cash provided
by operating activities:
Depreciation and amortization 227 239
Changes in operating assets and liabilities 717 189
------ -----
Net cash provided by operating activities 1,049 482
------ -----
Investing Activities:
Expenditures for property, plant and equipment (72) (84)
Other (59) (30)
------ -----
Net cash used for investing activities (131) (114)
------ -----
Financing Activities:
Net decrease in short-term borrowings (12) (234)
Net repayments related to long-term debt (17) (13)
Issuances of common stock 43 1
Common stock dividends (48) (44)
------ -----
Net cash used for financing activities (34) (290)
------ -----
Net increase in cash and cash equivalents 884 78
Cash and cash equivalents at beginning of period 1,505 455
------ -----
Cash and cash equivalents at end of period $2,389 $ 533
====== =====
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
Lockheed Martin Corporation
Unaudited Condensed Consolidated Balance Sheet
March 31, December 31,
2001 2000
--------- ------------
(In millions)
Assets
Current assets:
Cash and cash equivalents $ 2,389 $ 1,505
Receivables 3,934 4,195
Inventories 3,571 3,825
Deferred income taxes 1,124 1,236
Other current assets 505 498
------- -------
Total current assets 11,523 11,259
Property, plant and equipment 3,334 3,446
Investments in equity securities 2,365 2,433
Intangible assets related to contracts and programs acquired 1,035 1,088
Cost in excess of net assets acquired 8,794 8,855
Prepaid pension cost 1,836 1,794
Other assets 1,623 1,474
------- -------
$30,510 $30,349
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,104 $ 1,184
Customer advances and amounts in excess of costs incurred 5,153 4,780
Salaries, benefits and payroll taxes 945 1,038
Income taxes 197 519
Short-term borrowings -- 12
Current maturities of long-term debt 901 882
Other current liabilities 1,931 1,760
------- -------
Total current liabilities 10,231 10,175
Long-term debt 9,029 9,065
Post-retirement benefit liabilities 1,668 1,647
Deferred income taxes 676 736
Other liabilities 1,646 1,566
Stockholders' equity:
Common stock, $1 par value per share 434 431
Additional paid-in capital 1,860 1,789
Retained earnings 5,256 5,199
Unearned ESOP shares (108) (115)
Accumulated other comprehensive loss (182) (144)
------- -------
Total stockholders' equity 7,260 7,160
------- -------
$30,510 $30,349
======= =======
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2001
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Lockheed Martin Corporation
(Lockheed Martin or the Corporation) has continued to follow the accounting
policies set forth in the consolidated financial statements included in its 2000
Annual Report on Form 10-K filed with the Securities and Exchange Commission
except for the adoption of the provisions of Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (as amended) effective January 1, 2001, as discussed in "Note 7 -
Other" of the Notes to Unaudited Condensed Consolidated Financial Statements. 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 three months ended March 31, 2001 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
2001 presentation.
NOTE 2 -- BUSINESS COMBINATION COMSAT CORPORATION
On August 3, 2000, the Corporation completed its merger with COMSAT
Corporation (COMSAT) pursuant to the terms of the Agreement and Plan of Merger
between COMSAT and the Corporation. The total purchase price for COMSAT,
including transaction costs and amounts related to Lockheed Martin's assumption
of COMSAT stock options, was approximately $2.6 billion, net of $76 million in
cash balances acquired. The COMSAT transaction was accounted for using the
purchase method of accounting. Purchase accounting adjustments were recorded in
2000 to allocate the purchase price to assets acquired and liabilities assumed
based on their fair values. These adjustments included certain amounts totaling
approximately $2.1 billion, composed of adjustments to record investments in
equity securities acquired at their fair values and cost in excess of net assets
acquired, which is being amortized over an estimated life of 30 years.
Since August 1, 2000, the Corporation has consolidated the operations of
COMSAT with the results of operations of Lockheed Martin Global
Telecommunications, Inc. (LMGT), a wholly-owned subsidiary of the Corporation.
NOTE 3 --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.
6
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
March 31,
2001 2000
------ ------
(In millions, except per share data)
Net earnings for basic and diluted computations $ 105 $ 54
- -----------------------------------------------
Average common shares outstanding:
- ----------------------------------
Average number of common shares outstanding for basic
computations 423.3 387.1
Dilutive stock options-based on the treasury stock method 4.5 .4
------ ------
Average number of common shares outstanding for diluted
computations 427.8 387.5
====== ======
Earnings per common share:
- --------------------------
Basic $ .25 $ .14
Diluted $ .25 $ .14
NOTE 4 -- INVENTORIES
March 31, December 31,
2001 2000
------- -------
(In millions)
Work in process, commercial launch vehicles $ 1,216 $ 1,175
Work in process, primarily related to other long-term
contracts and programs in progress 4,122 3,834
Less customer advances and progress payments (2,467) (1,864)
------- -------
2,871 3,145
Other inventories 700 680
------- -------
$ 3,571 $ 3,825
======= =======
Work in process inventories related to commercial launch vehicles include
costs for launch vehicles, both under contract and not under contract, including
approximately $100 million of unamortized deferred costs at March 31, 2001 and
December 31, 2000 for launch vehicles not under contract related to the
Corporation's Atlas programs. At March 31, 2001 and December 31, 2000,
commercial launch vehicle inventories included amounts advanced to Russian
manufacturers, Khrunichev State Research and Production Space Center and RD
AMROSS, a joint venture between Pratt & Whitney and NPO Energomash, of
approximately $696 million and $657 million, respectively, for the manufacture
of launch vehicles and related launch services.
Work in process inventories at March 31, 2001 and December 31, 2000 related
to other long-term contracts and programs in progress included approximately $50
million of unamortized deferred costs for aircraft not under contract related to
the Corporation's C-130J program.
7
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
NOTE 5 -- 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 is
negotiating with local water purveyors to implement this plan, as well as to
address water supply concerns relative to perchlorate contamination. The
Corporation estimates that expenditures required to implement work currently
approved will be approximately $90 million. The Corporation is also coordinating
with the U.S. Air Force, which is working with the aerospace and defense
industry to conduct preliminary studies of the potential health effects of
perchlorate exposure in connection with several sites across the country,
including the Redlands site. The results of these studies will assist state and
federal regulators in setting appropriate action levels for perchlorates in
groundwater, which will in turn assist the Corporation in determining its
ultimate clean-up obligation, if any, with respect to perchlorates.
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 operate and maintain soil and groundwater treatment facilities in
Burbank and Glendale, California through 2018 and 2012, respectively; however,
responsibility for the long-term operation of the Burbank facilities was assumed
by the city of Burbank in the first quarter of 2001, and responsibility for the
Glendale operations will be assumed by the city of Glendale following an
appropriate start-up period. Under an agreement reached with the U.S. Government
and filed with the U.S. District Court in January 2000 (the Agreement), the
Corporation was reimbursed approximately $100 million in the first quarter of
2000 for past expenditures for certain remediation activities related to the
Burbank and Glendale properties. Also under the Agreement, an amount equal to
approximately 50 percent of future expenditures for certain remediation
activities will be reimbursed by the U.S. Government as a responsible party
under the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA). The Corporation estimates that total expenditures required over the
remaining terms of the consent decrees and orders described above, net of the
effects of the Agreement, will be approximately $45 million.
The Corporation is involved in proceedings and potential proceedings relating
to environmental matters at other facilities, including disposal of hazardous
wastes and soil and water contamination. The extent of the Corporation's
financial exposure cannot in all cases be reasonably estimated at this time. In
addition to the amounts with respect to the Redlands and Burbank properties and
the city of Glendale described above, a liability of approximately $190 million
for the other properties (including current operating facilities and certain
facilities
8
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
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,
environmental expenditures related to the Redlands and Burbank properties
referenced above are being allocated to the Corporation's operations as general
and administrative costs. Under existing government regulations, these and other
environmental expenditures related to U.S. Government business, after deducting
any recoveries from insurance or other potentially responsible parties, are
allowable in establishing the prices of the Corporation's products and services.
As a result, a substantial portion of the expenditures are being reflected in
the Corporation's sales and cost of sales pursuant to U.S. Government agreement
or regulation.
The Corporation has recorded an asset for the portion of environmental costs
that are probable of future recovery in pricing of the Corporation's products
and services for U.S. Government business. The portion that is expected to be
allocated to commercial business has been reflected in cost of sales. The
recorded amounts do not reflect the possible future recoveries of portions of
the environmental costs through insurance policy coverage or from other
potentially responsible parties, which the Corporation is pursuing as required
by agreement and U.S. Government regulation. Any such recoveries, when received,
would reduce the allocated amounts to be included in the Corporation's U.S.
Government sales and cost of sales.
Waste remediation contract - In 1994, the Corporation was awarded a $180
million fixed price contract by the U.S. Department of Energy (DOE) for the
Phase II design, construction and limited test of remediation facilities, and
the Phase III full 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 the Corporation sought to remedy
through submission of a request for equitable adjustment (REA) to the DOE in
March 1997. In 1998, the Corporation took actions to raise the status of the REA
to a formal claim. To date, the Corporation has been unsuccessful in reaching
any agreements with the DOE on cost recovery or other contract restructuring
matters. In June 1998, the DOE, through Lockheed Martin Idaho Technologies
Company (LMITCO), its management contractor, terminated the Pit 9 contract for
default. As a result, the Corporation filed a lawsuit against the DOE in the
U.S. Court of Federal Claims in Washington, D.C., challenging and seeking to
overturn the default termination and recover its costs. In August 1998, LMITCO,
at the DOE's direction, filed suit against the Corporation in U.S. District
Court in Boise, Idaho, seeking, among other things, recovery of approximately
$54 million previously paid by LMITCO to the Corporation under the Pit 9
contract. Discovery in the Idaho proceeding has been ongoing since August 2,
1999. In January 2001, in the Court of Federal Claims, the DOE filed a motion
for summary judgment seeking to dismiss the Corporation's complaint on
jurisdictional grounds. The Corporation opposed the motion in papers filed in
April 2001. The Corporation continues to assert its position in the litigation
while continuing its efforts to resolve the dispute through non-litigation
means.
NOTE 6 -- INFORMATION ON BUSINESS SEGMENTS
The Corporation operates in five principal business segments. The five
segments include Systems Integration, Space Systems, Aeronautics, Technology
Services and Global Telecommunications. All other activities fall within the
Corporate and Other segment.
9
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
The Corporation began presenting LMGT as a separate operating segment called
Global Telecommunications in the third quarter of 2000. As mentioned previously,
LMGT includes the operations of COMSAT from August 1, 2000, and also includes
the operations of Lockheed Martin Integrated Business Solutions (IBS). LMGT and
IBS were included in the Corporate and Other segment prior to the third quarter
of 2000. In the second quarter of 2000, the Corporation reassigned the Space
Applications Systems line of business from the Systems Integration segment to
the Space Systems segment. Prior period amounts have been reclassified to
conform with these organizational changes.
Three Months Ended
March 31,
2001 2000
------ ------
Selected Financial Data by Business Segment (In millions)
Net sales
- ---------
Systems Integration $1,880 $2,071
Space Systems 1,371 1,672
Aeronautics 855 1,036
Technology Services 500 464
Global Telecommunications 254 173
Corporate and Other 150 146
------ ------
$5,010 $5,562
====== ======
Operating profit (loss)
- -----------------------
Systems Integration $ 173 $ 168
Space Systems 187 85
Aeronautics 79 79
Technology Services 34 26
Global Telecommunications (130) (33)
Corporate and Other 29 1
------ ------
$ 372 $ 326
====== ======
Intersegment revenue/(a)/
- ------------------------
Systems Integration $ 55 $ 105
Space Systems 20 28
Aeronautics 18 18
Technology Services 168 166
Global Telecommunications 19 3
Corporate and Other 19 12
------ ------
$ 299 $ 332
====== ======
10
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
March 31, December 31,
2001 2000
--------- ------------
(In millions)
Customer advances and amounts in excess of costs incurred/(b)/
- -------------------------------------------------------------
Systems Integration $ 986 $ 899
Space Systems 1,749 2,012
Aeronautics 2,181 1,636
Technology Services 14 16
Global Telecommunications 200 202
Corporate and Other 23 15
-------- --------
$ 5,153 $ 4,780
======== ========
(a) Intercompany transactions between segments are eliminated in
consolidation and therefore excluded from the net sales and operating
profit (loss) amounts presented above.
(b) At March 31, 2001, customer advances and amounts in excess of costs
incurred in the Space Systems segment included approximately $987
million for commercial launch vehicles and related launch services
(approximately $460 million of which relates to launch vehicles and
services from Russian manufacturers) and approximately $121 million for
the manufacture of commercial satellites (approximately $20 million of
which is refundable to the customer at each such customer's discretion).
Customer advances and amounts in excess of costs incurred in the
Aeronautics segment included approximately $1.4 billion related to the
F-16 fighter aircraft program (approximately $972 million of which
relates to a contract with the United Arab Emirates).
NOTE 7 -- OTHER
In the first quarter of 2001, the Corporation's Space Systems segment sold
certain property in Sunnyvale, California for approximately $185 million in
cash. The transaction resulted in a nonrecurring and unusual gain, net of state
income taxes, of $111 million which is recorded in other income and expenses.
The gain increased net earnings for the quarter by $72 million, or $.17 per
diluted share.
Also during the first quarter of 2001, the Corporation's Global
Telecommunications segment recorded a nonrecurring and unusual charge, net of
state income tax benefits, of $100 million in other income and expenses related
to impairment of its investment in Americom Asia-Pacific, LLC, a joint venture
in which the Corporation holds a 50 percent interest. The charge, which was
recorded due to an other than temporary decline in the value of the
Corporation's investment, reduced net earnings by $65 million, or $.15 per
diluted share. The satellite operated by Americom Asia-Pacific, which serves
Southeast Asia, was placed in commercial operation late in the fourth quarter of
2000. The decline in value of the investment was assessed to be other than
temporary as a result of lower transponder pricing, lower than expected demand
manifested in the first quarter and overall market conditions.
On March 27, 2001, the Corporation announced that it had reached a definitive
agreement to sell LMGT's COMSAT Mobile Communications operations to Telenor of
Norway for $116.5 million in cash. Consummation of the transaction is
conditioned upon approval by the Federal Communications Commission as well as
regulatory review under the Hart Scott-Rodino Antitrust Improvement Act and
other antitrust laws. If consummated, this transaction is expected to close in
the second half of 2001 and is not expected to have a material impact on the
Corporation's consolidated results of operations.
11
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
The components of comprehensive income for the three months ended March 31,
2001 and 2000 consisted of the following:
Three Months Ended
March 31,
2001 2000
---- ----
(In millions)
Net earnings $ 105 $ 54
Other comprehensive income (loss):
Net foreign currency translation adjustments 2 --
Net unrealized (loss) gain from
available-for-sale investments (54) 50
Net unrealized gain from hedging activities 14 --
----- ------
(38) 50
----- ------
Comprehensive income $ 67 $ 104
===== ======
The Corporation's total interest payments were $72 million and $94 million
for the three months ended March 31, 2001 and 2000, respectively.
The Corporation made net federal and foreign income tax payments of $272
million and received net federal and foreign income tax refunds of $25 million
in the three months ended March 31, 2001 and 2000, respectively.
New accounting pronouncements adopted - Effective January 1, 2001, the
Corporation adopted SFAS No. 133, as amended, related to accounting for
derivatives and hedging activities. This Statement requires the recognition of
all derivative financial instruments as either assets or liabilities in the
Consolidated Balance Sheet, and the periodic adjustment of those instruments to
fair value. The classification of gains and losses resulting from changes in the
fair values of derivatives is dependent on the intended use of the derivative
and its resulting designation. Adjustments to reflect changes in fair values of
derivatives that are not considered highly effective hedges are reflected in
earnings. Adjustments to reflect changes in fair values of derivatives that are
considered highly effective hedges are either reflected in earnings and largely
offset by corresponding adjustments related to the fair values of the hedged
items, or reflected in other comprehensive income until the hedged transaction
matures and the entire transaction is recognized in earnings. The change in fair
value of the ineffective portion of a hedge is immediately recognized in
earnings. The effect of adopting SFAS No. 133 at January 1, 2001, and amounts
recorded related to derivative financial instruments as of and for the three
month period ended March 31, 2001, were not material to the Corporation's
consolidated results of operations, cash flows, or financial position.
Pending accounting pronouncements - In February 2001, the Financial
Accounting Standards Board (FASB) issued a revision to the exposure draft
related to accounting for business combinations and intangible assets issued in
September 1999. The revision related to the accounting for cost in excess of net
assets acquired (goodwill). The exposure draft issued in 1999, among other
provisions, would eliminate the pooling of interests method of accounting for
business combinations and would have limited the amortization life of goodwill
to 20 years. The revision in 2001, among other
12
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
provisions, would no longer permit the amortization of goodwill under the
purchase method of accounting, but rather sets forth a new methodology for
assessing and recording impairment of goodwill. In April 2001, the FASB
tentatively decided to adopt the non-amortization, impairment-only approach to
accounting for goodwill; however, several issues remain unresolved relative to
the approach to be used to assess and record impairment. The FASB expects to
issue a final pronouncement related to business combinations and intangible
assets by June 30, 2001. The Corporation has been monitoring and will continue
to monitor the project closely.
NOTE 8 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Corporation recorded $200 million of Monthly Income Preferred Securities
(MIPS) on its consolidated balance sheet in connection with the merger with
COMSAT. The MIPS were issued in 1995 by a subsidiary of COMSAT and were
guaranteed by COMSAT. In the third quarter of 2000, Lockheed Martin also
guaranteed the MIPS. The guarantees by the Corporation and COMSAT are full and
unconditional and joint and several.
The following condensed consolidating financial information presents separate
financial information for each of the guarantors, with all non-guarantor
entities presented as a separate group. Purchase accounting adjustments recorded
in connection with the merger with COMSAT, and amortization of the related
intangible assets, are appropriately reflected in this financial information.
Investments in majority-owned subsidiaries are accounted for under the equity
method of accounting for purposes of this presentation and, accordingly,
earnings of such subsidiaries are reflected in the earnings and investment
accounts of the parent companies. The elimination entries eliminate investments
in subsidiaries and intercompany balances and transactions.
13
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
Non-
Lockheed Guarantor
(In millions) Martin/(a)/ COMSAT/(b)/ Entities Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Condensed Statement of Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 2001
Net sales $ 3,609 $ 79 $ 1,716 $ (394) $ 5,010
Cost of sales 3,290 107 1,678 (394) 4,681
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings from operations 319 (28) 38 -- 329
Other income and expenses, net (29) 24 48 -- 43
Equity in earnings of majority-owned
subsidiaries 7 (11) -- 4 --
- ---------------------------------------------------------------------------------------------------------------------------------
297 (15) 86 4 372
Interest expense 180 10 7 -- 197
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 117 (25) 79 4 175
Income tax expense 12 -- 58 -- 70
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 105 $ (25) $ 21 $ 4 $ 105
=================================================================================================================================
Condensed Statement of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------------------
For the quarter ended March 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating
activities $ 94 $ (121) $ 1,076 $ -- $ 1,049
- ---------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Expenditures for property, plant and
equipment (55) -- (17) -- (72)
Other 60 (29) (90) -- (59)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing
activities 5 (29) (107) -- (131)
- ---------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net decrease in short-term borrowings (12) -- -- -- (12)
Net repayments related to long-term debt (17) -- -- -- (17)
Issuances of common stock 43 -- -- -- 43
Common stock dividends (48) -- -- -- (48)
Net intercompany financing activities (369) 97 272 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing
activities (403) 97 272 -- (34)
- ---------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (304) (53) 1,241 -- 884
Cash and cash equivalents at beginning of
period 524 (9) 990 -- 1,505
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 220 $ (62) $ 2,231 $ -- $ 2,389
- ---------------------------------------------------------------------------------------------------------------------------------
14
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
Non-
Lockheed Guarantor
(In millions) Martin/(a)/ COMSAT/(b)/ Entities Eliminations Consolidated
==================================================================================================================
Condensed Balance Sheet
- ------------------------------------------------------------------------------------------------------------------
As of March 31, 2001
Assets
Cash and cash equivalents $ 220 $ (62) $2,231 $ -- $ 2,389
Receivables 4,306 78 2,813 (3,263) 3,934
Inventories 2,419 2 1,150 -- 3,571
Deferred income taxes 1,121 -- 3 -- 1,124
Other current assets 434 3 68 -- 505
- -----------------------------------------------------------------------------------------------------------------
Total current assets 8,500 21 6,265 (3,263) 11,523
Property, plant and equipment 2,548 121 665 -- 3,334
Investments in equity securities 76 1,617 672 -- 2,365
Investments in majority-owned
subsidiaries 5,470 942 -- (6,412) --
Intangible assets related to contracts and
programs acquired 1,000 -- 35 -- 1,035
Cost in excess of net assets acquired 6,726 615 1,453 -- 8,794
Prepaid pension cost 1,784 50 2 -- 1,836
Other assets 897 246 480 -- 1,623
- -----------------------------------------------------------------------------------------------------------------
$27,001 $3,612 $9,572 $(9,675) $30,510
=================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 698 $ 29 $3,640 $(3,263) $ 1,104
Customer advances and amounts in excess
of costs incurred 4,524 5 624 -- 5,153
Salaries, benefits and payroll taxes 731 26 188 -- 945
Income taxes 137 (5) 65 -- 197
Short-term borrowings -- -- -- -- --
Current maturities of long-term debt 825 75 1 -- 901
Other current liabilities 695 100 1,136 -- 1,931
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 7,610 230 5,654 (3,263) 10,231
Long-term debt 8,658 135 236 -- 9,029
Post-retirement benefit liabilities 1,629 39 -- -- 1,668
Deferred income taxes 634 160 (118) -- 676
Other liabilities 1,210 353 83 -- 1,646
Stockholders' equity:
Common stock, $1 par value per share 434 -- -- -- 434
Additional paid-in capital 1,860 -- -- -- 1,860
Retained earnings 5,256 -- -- -- 5,256
Unearned ESOP shares (108) -- -- -- (108)
Accumulated other comprehensive loss (182) -- -- -- (182)
Total equity of subsidiaries 2,695 3,717 (6,412) --
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 7,260 2,695 3,717 (6,412) 7,260
- -----------------------------------------------------------------------------------------------------------------
$27,001 $3,612 $9,572 $(9,675) $30,510
=================================================================================================================
15
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
Non-
Lockheed Guarantor
(In millions) Martin/(a)/ COMSAT/(b)/ Entities Eliminations Consolidated
===================================================================================================================
Condensed Balance Sheet
- -------------------------------------------------------------------------------------------------------------------
As of December 31, 2000
Assets
Cash and cash equivalents $ 524 $ (9) $ 990 $ -- $ 1,505
Receivables 3,140 76 2,454 (1,475) 4,195
Inventories 3,054 1 770 -- 3,825
Deferred income taxes 1,233 3 -- -- 1,236
Other current assets 232 9 257 -- 498
- -------------------------------------------------------------------------------------------------------------------
Total current assets 8,183 80 4,471 (1,475) 11,259
Property, plant and equipment 2,742 76 628 -- 3,446
Investments in equity securities 206 1,617 610 -- 2,433
Investments in majority-owned
subsidiaries 5,016 974 -- (5,990) --
Intangible assets related to contracts and
programs acquired 1,052 -- 36 -- 1,088
Cost in excess of net assets acquired 6,732 664 1,459 -- 8,855
Prepaid pension cost 1,743 49 2 -- 1,794
Other assets 629 73 772 -- 1,474
- -------------------------------------------------------------------------------------------------------------------
$26,303 $3,533 $7,978 $(7,465) $30,349
===================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 831 $ 2 $1,826 $(1,475) $ 1,184
Customer advances and amounts in excess
of costs incurred 3,623 2 1,155 -- 4,780
Salaries, benefits and payroll taxes 821 43 174 -- 1,038
Income taxes 241 (2) 280 -- 519
Short-term borrowings 12 -- -- -- 12
Current maturities of long-term debt 802 75 5 -- 882
Other current liabilities 607 70 1,083 -- 1,760
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,937 190 4,523 (1,475) 10,175
Long-term debt 8,713 134 218 -- 9,065
Post-retirement benefit liabilities 1,607 39 1 -- 1,647
Deferred income taxes 677 156 (97) -- 736
Other liabilities 1,209 333 24 -- 1,566
Stockholders' equity:
Common stock, $1 par value per share 431 -- -- -- 431
Additional paid-in capital 1,789 -- -- -- 1,789
Retained earnings 5,199 -- -- -- 5,199
Unearned ESOP shares (115) -- -- -- (115)
Accumulated other comprehensive loss (144) -- -- -- (144)
Total equity of subsidiaries -- 2,681 3,309 (5,990) --
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 7,160 2,681 3,309 (5,990) 7,160
- -------------------------------------------------------------------------------------------------------------------
$26,303 $3,533 $7,978 $(7,465) $30,349
===================================================================================================================
/(a)/ Data is related to the Lockheed Martin parent company only.
/(b)/ Data is related to the COMSAT parent company only and pertains to
operations from August 1, 2000.
16
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 2001
RESULTS OF OPERATIONS
Consolidated Results of Operations
The Corporation's operating cycle is long-term and involves many types of
production contracts with varying production delivery schedules. Accordingly,
results of a particular quarter, or quarter-to-quarter comparisons of recorded
sales and profits, may not be indicative of future operating results. The
following comparative analysis should be viewed in this context.
The Corporation's consolidated net sales for the first quarter of 2001 were
$5.0 billion, a decrease of ten percent from the $5.6 billion recorded for the
comparable period in 2000. Net sales decreases in the Systems Integration,
Space Systems and Aeronautics segments more than offset increases in the
remaining segments. The Corporation's operating profit (earnings before interest
and taxes) for the first quarter 2001 was approximately $372 million, an
increase of 14 percent from the $326 million recorded in the comparable 2000
period. The reported amounts for the first quarter of both years include the
financial impacts of various nonrecurring and unusual items. The impact of
these items on operating profit, net earnings and earnings per diluted share is
as follows:
Earnings
Operating Net (loss) per
profit (loss) earnings (loss) diluted share
------------- --------------- -------------
(In millions, except per share data)
Quarter ended March 31, 2001
Sale of surplus real estate (Note 7) $ 111 $ 72 $ .17
Impairment charge related to
Americom Asia-Pacific (Note 7) (100) (65) (.15)
----- ---- -----
$ 11 $ 7 $ .02
===== ==== =====
Quarter ended March 31, 2000
Sales of surplus real estate $ 16 $ 10 $ .03
Divestitures and other portfolio shaping activities (6) (4) (.01)
----- ---- -----
$ 10 $ 6 $ .02
===== ==== =====
Excluding the effects of these nonrecurring and unusual items, operating
profit would have increased in the Systems Integration, Space Systems,
Technology Services and Corporate and Other segments, and the operating loss for
the Global Telecommunications segment would have declined in the first quarter
of 2001 as compared to the first quarter of 2000. Operating profit for the
Aeronautics segment remained consistent for the two periods presented. For a
more detailed discussion of the operating results of the business segments, see
"Discussion of Business Segments" below.
The Corporation reported diluted earnings per share of $.25 and $.14 for
the first quarter of 2001 and 2000, respectively. Excluding the nonrecurring and
unusual items presented above, diluted earnings per share for the first quarter
of 2001 and 2000 would have been $.23 and $.12, respectively.
17
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Corporation's backlog of undelivered orders at March 31, 2001 remained
unchanged from the $56.4 billion reported at December 31, 2000. The Corporation
received orders for approximately $5.0 billion in new and follow-on business
during the first quarter of 2001 that were substantially offset by sales during
the period. Significant new orders received during the quarter primarily related
to the CVN 77 Aircraft Carrier systems integration contract, classified
activities, bridge funding for the F-22 program, Aegis production, the A-10
Precision Engagement weapon systems upgrade, the National Airspace System
Implementation Support contract and three new launch services orders.
Discussion of Business Segments
The Corporation operates in five principal business segments: Systems
Integration, Space Systems, Aeronautics, Technology Services and Global
Telecommunications. All other activities fall within the Corporate and Other
segment. The following tables 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 6 -- Information on Business
Segments" of the Notes to Unaudited Condensed Consolidated Financial Statements
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 (loss) profit for each of the
periods presented:
Three Months Ended
March 31,
2001 2000
----- -----
(In millions)
Nonrecurring and unusual items - profit (loss):
Systems Integration $ -- $ --
Space Systems 111 17
Aeronautics -- --
Technology Services -- (6)
Global Telecommunications (100) --
Corporate and Other -- (1)
----- -----
$ 11 $ 10
===== =====
In an effort to make the following discussion of significant operating results
of each business segment more understandable, the effects of the nonrecurring
and unusual items in the preceding table have been excluded. The Space Systems
and Aeronautics segments generally include 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 relatively smaller programs
in the Systems Integration, Technology Services and Global Telecommunications
segments, the performance of individual programs typically is not as significant
to the results of operations of these segments.
Systems Integration
Net sales of the Systems Integration segment decreased by nine percent in the
first quarter of 2001 from the comparable 2000 period. However, excluding the
sales attributable to the
18
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
segment's Aerospace Electronic Systems and Controls Systems businesses, which
were divested in the second half of 2000, and the transfer of the Payload Launch
Vehicle contract to the Space Systems business segment, sales for the first
quarter of 2001 increased slightly from the year-ago period. Approximately $70
million of the increase in net sales over the comparable 2000 period is
attributable to the segment's Missiles & Air Defense product line as a result
of higher volume on the Theater High Altitude Area Defense (THAAD) missile
program and certain tactical missile programs. Increased net sales in the
segment's Naval Electronic and Surveillance Systems product line, primarily due
to higher volume on AEGIS programs, contributed approximately $40 million to the
current year increase. These increases were partially offset by an approximate
$30 million decrease in the segment's Systems Integration-Owego line of
business, which includes electronic platform integration businesses.
Operating profit for the segment increased by three percent in the first
quarter of 2001 compared to the same period in 2000. Adjusting for the operating
profit attributable to the divested Aerospace Electronic Systems and Controls
Systems businesses, operating profit for the first quarter of 2001 would have
increased seven percent from the year-ago period. The fluctuation in operating
profit was due primarily to the changes in volume mentioned in the discussion of
net sales as well as the impact of increases in volume on certain other Systems
Integration programs.
Space Systems
Net sales of the Space Systems segment decreased by 18 percent in the first
quarter of 2001 compared to the first quarter 2000. The decrease in sales was
principally attributable to a reduction in launch vehicle and commercial
satellite activities from the comparable 2000 period. These declines were
partially offset by an approximate $50 million increase in volume on ground
systems and military and government satellite programs.
Operating profit for the segment increased 12 percent in the first quarter of
2001 from the respective 2000 period. This increase is primarily attributable to
the combination of the absence in 2001 of unfavorable adjustments for market and
pricing pressures related to the Atlas commercial launch vehicle program
recorded during the first quarter of 2000 and improved performance in 2001 on
the Titan IV program. The approximate $60 million increase in operating profit
realized from these items, as well as the operating profit impact of the volume
increases on ground systems and military and government satellite programs, were
largely offset by the volume declines in Commercial Space activities and an
approximate $40 million loss provision recorded in the first quarter of 2001 on
certain commercial satellite contracts related to schedule and technical issues.
Aeronautics
Net sales of the Aeronautics segment decreased by 17 percent in the first
quarter of 2001 from the comparable period in 2000. The decrease is primarily
attributable to an approximate $200 million decline in sales related to reduced
deliveries of F-16 fighter aircraft and C-130J airlift aircraft, with another
approximately $110 million related to a reduction in sales on C-130J support and
other Aeronautics aircraft programs. These decreases were partially offset by
sales related to development activities on the F-16 contract with the United
Arab Emirates (UAE) as well as increased volume in F-16 support activities.
19
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Operating profit for the segment during the first quarter of 2001 remained
consistent with the first quarter of 2000, as the impact of reduced deliveries
of F-16 aircraft was offset by continued favorable performance on other combat
aircraft programs. The reduction in C-130J deliveries did not impact operating
profit for the comparative periods due to the suspension of earnings recognition
on the program.
Technology Services
Net sales of the Technology Services segment increased by eight percent in
the first quarter of 2001 over the comparable 2000 period. This increase is
mainly the result of an approximate $60 million increase in volume on various
federal technology services programs, primarily government information
technology programs, and in the segment's aircraft maintenance and logistics
line of business, primarily the Kelly Aviation Center Propulsion Business Area
(PBA) contract. These increases were partially offset by an approximate $25
million decrease in volume on energy-related contracts due to lower operation
and maintenance contract activity as well as the divestitures of Lockheed Martin
Energy Technologies and Retech in January 2001.
Operating profit for the segment increased by six percent in the first
quarter of 2001 from the comparable 2000 period. In the first quarter of 2001,
increases in operating profits on various federal technology services programs
were mostly offset by the operating profit impact of the previously discussed
declines in volume on energy-related contracts as well as the divestitures of
Lockheed Martin Energy Technologies and Retech.
Global Telecommunications
Net sales of the Global Telecommunications segment increased by 47 percent
during the first quarter of 2001 over the comparable 2000 period. This increase
was primarily attributable to the inclusion of net sales from COMSAT Corporation
(COMSAT) in the segment's results beginning August 1, 2000, offset by the
absence in 2001 of $65 million in net sales associated with the recognition of
revenue on a Proton launch vehicle, which successfully launched the ACeS 1
satellite in the first quarter of 2000.
Global Telecommunication's operating loss decreased nine percent during the
first quarter 2001 from the respective 2000 period mainly due to improvements in
Global Telecommunications' Satellite Services line of business.
Corporate and Other
Net sales of the Corporate and Other segment increased by three percent in
the first quarter of 2001 compared to the first quarter of 2000. This
improvement is primarily attributable to increased volume on state and municipal
services programs.
Operating profit of the Corporate and Other segment increased by $27
million in the first quarter of 2001 from the comparable 2000 period. This
increase is primarily the result of increased interest income associated with
the Corporation's higher cash balances in the first quarter of 2001 as compared
to the first quarter of 2000, as well as the operating profit impact of
increased volume on state and municipal services.
20
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2001, approximately $1.0 billion of cash was
provided by operating activities, compared to $482 million during the first
quarter of 2000. This increase was primarily attributable to a significant
milestone payment received related to the F-16 fighter aircraft contract with
the UAE that increased cash from operating activities by more than $450 million
(net of payments to subcontractors and other disbursements associated with the
contract), and pretax proceeds from the sale of surplus real estate. In
addition, advances received on certain Naval Electronics and Surveillance
Systems programs, as well as the impact of increased earnings in 2001, were more
than offset by higher income tax payments related to the 2000 divestiture
activities.
Net cash used for investing activities during the first quarter of 2001 was
$131 million as compared to $114 million during the first quarter of 2000. The
2001 amount includes approximately $86 million and $30 million for additional
equity investments in Astrolink International, LLC and INTELSAT, respectively,
as well $72 million used for additions to property, plant and equipment. These
outflows were partially offset by approximately $68 million received from
property dispositions. The remainder of the cash used for investing activities
was attributable to other acquisition and divestiture activities. The 2000
amount included $84 million for additions to property, plant and equipment and
$30 million primarily related to additional equity investment in Astrolink
International, LLC.
Net cash used for financing activities in the first quarter of 2001 was $34
million as compared to $290 million during first quarter 2000. The variance
between periods was primarily due to a $29 million decrease in the Corporation's
total debt position during the first quarter of 2001 versus a decrease in total
debt of $247 million during the first quarter of 2000.
Total debt, including short-term borrowings, decreased by $29 million
during the first quarter of 2001 from approximately $10 billion at December 31,
2000. This decrease was primarily attributable to net payments on current
maturities of long-term debt of approximately $17 million and the $12 million
repayment of short-term debt. The Corporation's long-term debt is primarily in
the form of publicly issued, fixed-rate notes and debentures. At the end of the
first quarter of 2001, the Corporation held cash and cash equivalents of $2.4
billion, a portion of which is expected to be used to retire the approximately
$900 million of long-term debt maturing during 2001, with approximately $825
million of that amount due in the second quarter of 2001, and to pay
subcontractors and fund other expenditures associated with various long-term
contracts. Total stockholders' equity was $7.3 billion at March 31, 2001, an
increase of approximately $100 million from the December 31, 2000 balance. This
increase resulted from net earnings of $105 million, employee stock option and
ESOP activities of $81 million, partially offset by dividend payments of $48
million and other comprehensive losses of $38 million. The Corporation's ratio
of debt to total capitalization remained unchanged from the 58 percent reported
at December 31, 2000.
At March 31, 2001, the Corporation had in place a revolving credit facility
in the amount of $3.5 billion which expires on December 20, 2001. No borrowings
were outstanding under this credit facility at March 31, 2001.
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
21
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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 are
expected to be sufficient to meet anticipated operating, capital expenditure and
debt service requirements and discretionary investment needs during the next
twelve months. Consistent with the Corporation's desire to generate cash to
reduce debt and invest in its core businesses, management anticipates that,
subject to prevailing financial, market and economic conditions, the Corporation
may continue to divest certain non-core businesses, passive equity investments
and surplus properties.
In connection with an order for F-16 fighter aircraft from the UAE valued
at approximately $6.4 billion, in June 2000, the Corporation issued a letter of
credit in the amount of $2 billion related to advance payments to be received
under the contract. At March 31, 2001, in accordance with the terms of the
agreement with the UAE, the amount of the letter of credit available for draw
down in the event of the Corporation's nonperformance under the contract was
limited to the amount of advance payments received to date, or approximately
$1.5 billion.
In March 2001, Space Imaging LLC (Space Imaging), a joint venture in which
the Corporation holds a 46 percent ownership interest, closed on a new loan
facility under which Lockheed Martin provides debt guarantees of up to $150
million. The amount of borrowings outstanding as of March 31, 2001 for which
Lockheed Martin was guarantor was approximately $140 million. The Corporation's
investment in Space Imaging is accounted for under the equity method of
accounting. At March 31, 2001, the Corporation's investment in and receivables
from Space Imaging amounted to approximately $120 million. Space Imaging is
pursuing its business plan and Lockheed Martin, as an investor and partner, is
working with its other partners and Space Imaging to improve its investment
return.
The Corporation plans to complete its $400 million investment commitment
for Astrolink International, LLC (Astrolink), a joint venture in which it holds
a 31% interest, in the third quarter of 2001. The remaining commitment at March
31, 2001 is approximately $54 million. To date, Astrolink has a total of $1.325
billion in equity commitments from its partners which, in addition to the
Corporation, include TRW, Telespazio, and Liberty Media. The Astrolink business
plan contemplates obtaining further funding from a combination of strategic
equity, public equity and various debt funding sources. Astrolink is currently
in discussions with additional equity partners to raise the necessary funding
for the second half of 2001. Concurrently, Astrolink is discussing alternatives
for additional funding from the current shareholders, including the Corporation.
Lockheed Martin is under contract to build the satellites which will comprise
the Astrolink constellation, and to provide related launch vehicles and
services.
Effective March 31, 2000, the Corporation converted its 45.9 million shares
of Loral Space & Communications Ltd. (Loral Space) Series A Preferred Stock into
an equal number of shares of Loral Space common stock in preparation for
divestiture of the shares. The timing of the planned divestiture and the related
amount of cash received will depend upon market conditions and other factors.
Investments in equity securities in the March 31, 2001 Unaudited Condensed
Consolidated Balance Sheet includes approximately $100 million related to the
Corporation's investment in Loral Space. In addition, accumulated other
comprehensive loss includes an
22
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
unrealized loss, net of income tax benefits, of approximately $168 million
related to this investment. The Corporation is continuing to monitor and assess
the underlying market conditions impacting the value of its investment in Loral
Space.
OTHER MATTERS
The Corporation's primary exposure to market risk relates to interest rates
and foreign currency exchange rates. The Corporation's financial instruments
which are subject to interest rate risk principally include fixed rate long-term
debt. The Corporation's long-term debt obligations are generally not callable
until maturity. The Corporation may use interest rate swaps to manage its
exposure to fluctuations in interest rates; however, there were no such
agreements outstanding at March 31, 2001.
The Corporation uses forward exchange contracts to manage its exposure to
fluctuations in foreign exchange rates. These contracts are designated as
qualifying hedges of firm commitments or specific anticipated transactions.
Effective January 1, 2001, the Corporation began accounting for these contracts
under the provisions of SFAS No. 133, as amended. At March 31, 2001, the fair
value of forward exchange contracts outstanding, as well as the amounts of gains
and losses recorded during the quarter then ended, were not material. The
Corporation does not hold or issue derivative financial instruments for trading
purposes.
As part of a strategic and organizational review begun in 1999, the
Corporation is continuing to evaluate alternatives relative to the disposition
of all or a portion of its investment in a business unit in the state and
municipal services line of business, subject to appropriate valuation,
negotiation and approval. Net sales for the quarter ended March 31, 2001 related
to this business unit were approximately $140 million. Management cannot predict
whether or when a potential divestiture will take place or the amount of
proceeds that may ultimately be realized. In addition, on an ongoing basis, the
Corporation will continue to explore the sale of various investment holdings and
surplus real estate. If the Corporation were to decide to sell any such holdings
or real estate, the resulting gains, if any, would be recorded when the
transactions are consummated and losses, if any, would be recorded when they are
estimable. The Corporation also continues to review its businesses on an ongoing
basis to identify ways to improve organizational effectiveness and performance,
and to clarify and focus on its core business strategy.
On August 3, 2000, the Corporation completed its merger with COMSAT
pursuant to the terms of the Agreement and Plan of Merger between COMSAT and the
Corporation. The total purchase price for COMSAT, including transaction costs
and amounts related to Lockheed Martin's assumption of COMSAT stock options, was
approximately $2.6 billion, net of $76 million in cash balances acquired. The
COMSAT transaction was accounted for using the purchase method of accounting.
Purchase accounting adjustments were recorded in 2000 to allocate the purchase
price to assets acquired and liabilities assumed based on their fair values.
These adjustments included certain amounts totaling approximately $2.1 billion,
composed of adjustments to record investments in equity securities acquired at
their fair values and cost in excess of net assets acquired, which is being
amortized over an estimated life of 30 years.
Also as more fully described in "Note 5 - Contingencies" of the Notes to
Unaudited Condensed Consolidated Financial Statements, 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
23
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
found in Pit 9. In 1998, the management contractor for the project, a wholly-
owned subsidiary of the Corporation, at the DOE's direction, filed suit against
the Corporation seeking recovery of approximately $54 million previously paid to
the Corporation under the Pit 9 contract. The Corporation is defending this
action while continuing its efforts to resolve the dispute through non-
litigation means.
In 1992, the Corporation entered into a joint venture with two Russian
government-owned space firms to form Lockheed-Khrunichev-Energia International,
Inc. (LKEI). Lockheed Martin owns 51 percent of LKEI and consolidates the
operations of LKEI into its financial statements. LKEI has exclusive rights to
market launches of commercial, non-Russian-origin space payloads on the Proton
rocket 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. Contracts for Proton launch services typically
provide for substantial advances from the customer in advance of launch, and a
sizable percentage of these advances are forwarded to Khrunichev State Research
and Production Space Center (Khrunichev), the manufacturer in Russia, to provide
for the manufacture of the related launch vehicle. Significant portions of such
advances would be required to be refunded to each customer if launch services
were not successfully provided within the contracted time frames. At March 31,
2001, approximately $460 million related to launches not yet provided was
included in customer advances and amounts in excess of costs incurred, and
approximately $641 million of payments to Khrunichev for launches not yet
provided was included in inventories. Through March 31, 2001, launch services
provided through LKEI and ILS have been in accordance with contract terms.
The Corporation has entered into agreements 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 up to 101 RD-180 booster engines for use in two models of
the Corporation's Atlas launch vehicle. Terms of the agreements call for
payments to be made to RD AMROSS upon the achievement of certain milestones in
the development and manufacturing processes. Approximately $55 million of
payments made under these agreements were included in the Corporation's
inventories at March 31, 2001.
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 Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). The words "estimate," "anticipate," "project," "intend,"
"expect," and similar expressions are intended to identify forward looking
statements. All forward looking statements involve risks and uncertainties,
including, without limitation, statements and assumptions with respect to future
revenues, program performance and cash flows, the outcome of contingencies
including litigation and environmental remediation, and anticipated costs of
capital investments and planned dispositions. Our operations are necessarily
subject to various risks and uncertainties and, therefore, actual outcomes are
dependent upon many factors, including, without limitation, our successful
performance of internal plans and reorganization efforts; government customers'
budgetary constraints and the timing of awards and contracts; customer changes
in short-range and long-range plans; domestic and international competition in
the defense, space and commercial areas; continued development and acceptance of
new products; timing and customer acceptance of product delivery and launches;
product
24
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
performance; performance issues with the U.S. Government, key suppliers and
subcontractors; government import and export policies; termination of government
contracts; the outcome of political and legal processes; the outcome of
contingencies, including completion of acquisitions and divestitures, litigation
and environmental remediation; legal, financial, and governmental risks related
to international transactions and global needs for military and commercial
aircraft and electronic systems and support; domestic and international
telecommunications regulatory developments; market conditions and other factors
affecting the value of the Corporation's equity investments; as well as other
economic, political and technological risks and uncertainties. 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 discussion of "Competition and Risk," the
discussion of "Government Contracts and Regulations," and the discussion of
"Industry Considerations" on pages 16 through 17, pages 17 through 19 and pages
39 through 42 respectively, of the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000 (Form 10-K); "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 17
through 25 of this Form 10-Q; "Note 5 -- Contingencies" and "Note 7 -- Other" of
the Notes to Unaudited Condensed Consolidated Financial Statements on pages 8
through 9 and pages 11 through 13, respectively, of the Notes to Unaudited
Condensed Consolidated Financial Statements included in this Form 10-Q; and Part
II - Item 1, "Legal Proceedings" on page 26 of this Form 10-Q.
25
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is a party to or has property subject to litigation and
other proceedings, including matters arising under provisions relating to the
protection of the environment, as described in "Note 5 - Contingencies" of the
Notes to Unaudited Condensed Consolidated Financial Statements in this Form 10-Q
and in the Corporation's 2000 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.
See the "Legal Proceedings" section of the Form 10-K for a description of
previously reported matters.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on April 26, 2001, the stockholders of
Lockheed Martin Corporation:
. Elected the following individuals to the Board of Directors to serve as
directors until the Annual Meeting of Stockholders in 2002 and until their
successors have been duly elected and qualified:
Votes Cast For Votes Withheld
-------------- --------------
Norman R. Augustine 381,799,222 6,976,737
Marcus C. Bennett 382,340,200 6,435,759
Vance D. Coffman 381,697,884 7,078,075
James F. Gibbons 382,643,871 6,132,088
Caleb B. Hurtt 381,351,349 7,424,610
Gwendolyn S. King 382,465,541 6,310,418
Douglas H. McCorkindale 382,542,876 6,233,082
Eugene F. Murphy 381,577,813 7,198,146
Frank Savage 382,704,536 6,071,423
Robert J. Stevens 382,819,446 5,956,513
James R. Ukropina 382,672,109 6,103,850
Douglas C. Yearley 382,638,027 6,137,932
26
LOCKHEED MARTIN CORPORATION
PART II - OTHER INFORMATION (continued)
. Ratified the appointment of Ernst & Young LLP, independent auditors, to audit
the consolidated financial statements of the Corporation as of and for the
fiscal year ending December 31, 2001. There were 384,387,916 votes for the
appointment, 2,440,760 votes against the appointment, and 1,947,283
abstentions.
. Ratified a proposal to amend the 1995 Omnibus Plan to increase the number of
shares authorized for issuance, remove the ability to change the price of a
grant and set limits as to the number of restricted shares which could be
issued. There were 268,296,452 votes for the proposal, 116,460,846 votes
against the proposal, and 4,018,661 abstentions.
. Rejected a stockholder proposal that recommended that the Corporation publish
in various newspapers of general circulation certain information regarding
political contributions. There were 12,496,021 votes for the proposal,
320,241,054 votes against the proposal, 14,569,428 abstentions and 41,469,456
non-votes.
. Rejected a stockholder proposal that recommended that the Corporation prepare
and make available to its stockholders a report on the dilutive effects of
certain options to purchase the Corporation's stock. There were 23,190,661
votes for the proposal, 318,672,058 votes against the proposal, 5,443,784
abstentions and 41,469,456 non-votes.
. Rejected a stockholder proposal that recommended that the Corporation
disclose all significant promises made to foreign governments or foreign
firms in connection with military sales that are intended to offset the U.S.
dollar cost of weapons purchased by foreign nations. There were 11,963,988
votes for the proposal, 321,959,461 votes against the proposal, 13,383,054
abstentions and 41,469,456 non-votes.
. Rejected a stockholder proposal that recommended that the Corporation provide
for simple majority vote on each issue submitted to stockholder vote to the
fullest extent possible. There were 156,609,272 votes for the proposal,
182,403,307 votes against the proposal, 8,293,924 abstentions and 41,469,456
non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of Earnings
to Fixed Charges for the three months ended March 31, 2001.
(b) Reports on Form 8-K filed in the first quarter of 2001.
None.
(c) Reports on Form 8-K filed subsequent to the first quarter of 2001.
None.
27
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: May 10, 2001 by: /s/ Christopher E. Kubasik
----------------- --------------------------
Christopher E. Kubasik
Vice President and Chief Financial
Officer; Acting Controller
28