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    1999 Annual Report


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    FINANCIAL HIGHLIGHTS LOCKHEED MARTIN (In millions, except per share data and number of employees) 1999 1998 1997 Net sales $ 25,530 $ 26,266 $ 28,069 Net earnings 382 (a)(b) 1,001 (c)(d) 1,300(e) Diluted earnings (loss) per share .99(a)(b) 2.63(c)(d) (1.56)(e)(f) Pro forma diluted earnings per share excluding nonrecurring and unusual items 1.50(g) 2.99(g) 2.87(g) Cash dividends per common share .88 .82 .80 Total assets 30,012 28,744 28,361 Short-term borrowings 475 1,043 494 Long-term debt (including current maturities) 11,479 9,843 11,404 Stockholders’ equity 6,361 6,137 5,176(f) Negotiated backlog $ 45,913 $ 45,345 $ 47,059 Employees 147,000 165,000 173,000 (a) Net earnings for 1999 include the effects of nonrecurring and unusual items related to gains from sales of FOCUS the Corporation’s remaining interest in L-3 Communications Holdings, Inc. (L-3), gains from the sale of surplus real estate, and a net gain associated with sales of various non-core businesses and investments and other portfolio shaping items. These gains were more than offset by the effect of the Corporation’s adoption of Statement of Position No. 98-5 regarding the costs of start-up activities which resulted in a cumulative effect adjustment. On a combined basis, these nonrecurring and unusual items decreased net earnings $193 mil- 1 lion, or $.51 per diluted share. (b) Net earnings for 1999 include the effects of negative adjustments related to changes in estimate on the C-130J airlift aircraft program and the Titan IV launch vehicle program. On a combined basis, these changes in estimate decreased net earnings by $182 million, or $.47 per diluted share. (c) Net earnings for 1998 include the effects of a charge related to the shutdown of CalComp Technology, Inc., a majority-owned subsidiary of the Corporation, partially offset by the effects of nonrecurring and unusual items related to the gain on the initial public offering of L-3’s common stock, and gains related to the sales of surplus real estate and other portfolio shaping items. On a combined basis, these nonrecurring and unusual items reduced net earnings by $136 million, or $.36 per diluted share. (d) Net earnings for 1998 include an adjustment resulting from significant improvement in the Atlas launch vehicle program based upon a current evaluation of the program’s historical performance. This change in estimate increased net earnings by $78 million, or $.21 per diluted share. (e) Net earnings for 1997 include the effects of a tax-free gain related to a transaction with General Electric Company (GE) to redeem the Corporation’s Series A preferred stock, and gains associated with the sale of surplus real estate and other portfolio shaping items. These gains were partially offset by nonrecurring and unusual charges related to the Corporation’s decision to exit certain lines of business and impairment in the values of various non-core investments and certain other assets. On a combined basis, these items increased net earnings by $66 million and decreased diluted loss per share by $.15. (f) Loss per share for 1997 includes the effects of a deemed preferred stock dividend resulting from the transac- tion with GE. The excess of the fair value of the consideration transferred to GE (approximately $2.8 billion) over the carrying value of the Series A preferred stock ($1.0 billion) was treated as a deemed preferred stock dividend and deducted from 1997 net earnings in determining net loss applicable to common stock used in the computation of loss per share. The effect of this deemed dividend was to reduce the diluted per share amount by $4.93. (g) The calculations of pro forma diluted earnings per share exclude the effects of the nonrecurring and unusual items described in (a), (c), (e) and (f) above and, for 1997, include the pro forma dilutive effects of preferred Contents stock conversion and stock options. To Our Shareholders 14 Financial Section 20 Corporate Directory 66 ON THE COVER General Information 68 The F-22 Raptor performed superbly for our Air Force customer last year, meeting all of the demanding flight test requirements.


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    In peace and in conflict; in the public sector and in the private our customers rely on technology that must perform. We must do our jobs, so our customers can do theirs. That’s why customer focus—understanding what the customer requires, and delivering on that promise— is central to Lockheed Martin’s mission. The Theater High Altitude Area Defense (THAAD) system [seen here] for the U.S. Army successfully intercepted its targets twice last year, and now this vital defensive missile system is positioned to move into its Engineering 2 3 and Manufacturing Development phase. The Army also scored two hits in a row last year with the PAC-3 (Patriot Advanced Capability) missile. CUSTOMERS


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    RESPONSIVE The U.S. Navy depends on modern surface ships and submarines equipped with capable radar, combat systems, com- mand and control and a variety of other 4 5 technologies. Making it all work together is key to ensuring that the mission is accomplished, and our men and women at sea arrive home safely. Success as a systems integrator for the Navy, and other customers who depend on advanced tech- nology, demands responsiveness. That responsiveness is evident in work we are doing in Navy information systems, and to develop the next-generation surface combatant, the DD-21.


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    Innovation is the driving force behind advances in science and technology. Our customers rely on that spirit of 6 7 innovation for technology solutions that protect our troops, claim the frontiers of space, move the mail, or count the population for the 2000 Census. Cutting-edge robotics [seen here] is critical to customers, like NASA, who extend humanity’s reach beyond the comfort of Earth by repairing satellites in orbit or building the Space Station. I N N OVAT I V E


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    GLOBAL In a dynamic international partnership, the Spanish Navy, U.S. Navy, Spanish shipbuilder Bazan, and Lockheed Martin are designing and building the most advanced frigates in the world. The F-100, equipped with the electronics of the AEGIS Combat System, will be able to engage simultaneously threats from under the sea, the sur- face, and the air. This successful F-100 part- 8 9 nership is getting noticed by naval customers globally. In all, Lockheed Martin has 258 international partners in 30 countries.


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    D E D I CAT E D As systems integrators, we know the value of teamwork and putting it all together. And as a team of 147,000 dedicated men and women who come to work every day at Lockheed Martin facilities worldwide, we are committed to serving our 10 11 customers, our communities and our country. Habitats, like the one here, are instrumental in scientific research on Earth and someday on other worlds.


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    In an ever-changing world, customers demand reliable industry partners. From defending America and its allies, to expanding the horizons of 12 13 space, Lockheed Martin products and services must perform as promised. The Atlas launcher [seen here] performed flawlessly in 1999 with five successful launches, and achieved 46 consecutive mis- sion successes since 1993. Our space-faring customers also found consistent performance with three successful Space Shuttle missions last year. And speaking of reliable, the U.S. Navy achieved its 87th consecutive successful Trident II D5 Fleet Ballistic Missile test launch during the year, and NASA received the 100th RELIABLE Space Shuttle external tank.


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    14 AC C O U NTAB L E Dear Fellow Shareholder: 15 The year 1999 was a tumultuous one marked by sharp contrasts. In a number of important respects, we experienced a difficult and unacceptably disappointing year, marked by program and financial performance issues primarily in our aeronautics and space systems businesses. We are acutely aware that you, our shareholders, suffered a loss for the year of approximately one half the value of your investment in Lockheed Martin. While we experienced serious difficulties in some important areas, in others our program performance consis- tently met or exceeded expectations and we won a number of major competitions. In a particularly encouraging sign, orders increased 8 percent over 1998 and our backlog increased slightly, reversing a two-year trend of declining backlog. Compared to 1998 results, sales declined 3 percent to $25.5 billion. Diluted earnings per share adjusted for non- recurring and unusual items dropped from $2.99 in 1998 to $1.50 in 1999, and we were forced to reduce our 2000 financial outlook twice in 1999. While free cash flow was disappointingly lower at $873 million versus 1998’s $1.6 billion, it was well above expectations. Several program issues had a negative effect on our results: C-130J cost growth along with mission failures involving Titan and THAAD (Theater High-Altitude Area Defense) and increased advanced launch vehicle investment for the Atlas V. On the other hand, by year end we had completed C-130J development and delivered 30 aircraft, Titan had returned to flight, THAAD From left to right: John V. Sponyoe, Lockheed Martin Global Telecommunications Chief Executive Officer; Robert J. Stevens, Lockheed Martin Executive Vice President–Finance and Chief Financial achieved two successful intercepts and is proceeding to its next phase of development, and Atlas V development was progress- Officer; Vance D. Coffman, Lockheed Martin Chairman and Chief Executive Officer; Robert B. Coutts, Executive Vice President, Lockheed Martin Systems Integration; Michael F. Camardo, Executive Vice ing in a more structured plan. While many more steps are required, the direction in performance improvement is noteworthy. President, Lockheed Martin Technology Services; Dain M. Hancock, Executive Vice President, Lockheed Martin Aeronautics Co.; Albert E. Smith, Executive Vice President, Lockheed Martin Space Systems Co.


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    We are taking action to return our performance to the consistently superior level our customers and shareholders expect and have relied upon. We are focusing intently on U.S. and international government customers in aerospace, defense and technology services, who account for approximately 90 percent of our revenue. The outlook for U.S. defense spending, which represented 51 percent of our sales in 1999, is encouraging, with procurement funding increases anticipated during the next several years. Focusing more effectively on core customers will lead to improved customer satisfaction which is a prerequisite for generating increased shareholder value. While reinvigorating our focus on core customers, we have established increased cash flow and debt reduction as our primary near-term financial priorities. We are managing the business aggressively to optimize cash flow, demanding that appropriate returns are achieved on invested capital, and establishing realistic, credible financial performance plans. We are driving operating and investment discipline throughout the corporation. We are placing much greater emphasis on the consistent application of improved financial controls and proven management tools such as Value-Based Management, Earned-Value Management and Independent Cost Estimating. Additionally, we have made a number of senior management changes while streamlining and flattening the organization to improve our customer responsiveness and communication at senior levels. We eliminated the Sector layer and combined various operating units in the aeronautics and space systems business areas into two companies led by corporate executive vice presidents based at major operational centers rather than at corporate headquarters. These actions are expected to result in reductions of 2,800 positions and annual savings of $200 million. Because of the need to reduce debt, we identified several businesses for possible divestiture and are in the process of obtaining and evaluating bids for those businesses. We will sell them only if we obtain full and fair value. We sold our Hanford Corporation environmental management subsidiary in December and have added our state and municipal govern- ment services unit, Lockheed Martin IMS, to the divestiture candidate list. We anticipate generating more than $1.5 billion in after-tax cash proceeds if we sell all divestiture candidate units. Divestiture proceeds will be applied to debt reduction. We continue repositioning our global telecommunications and commercial information technology businesses to approach their high-growth markets more effectively while enhancing shareholder value. Our intent is to facilitate the 16 growth of those adjacent businesses with strategic partners through possible injections of outside capital and domain expertise. This is entirely consistent with our cash and value optimization initiatives. Our average award fee rating from the U.S. government, an important indicator of their satisfaction with our perform- ance, was 85 percent, reflecting reduced fees related to Titan mission failures. Meanwhile, we achieved a mission success rating of 94 percent by accomplishing 435 of 462 significant events defined at the start of the year. We also made progress in achieving the highest internationally recognized quality standards for software development and systems engineering. Only 12 organizations worldwide have attained the Software Engineering Institute’s highest soft- ware development quality rating—Level 5—and four of them are Lockheed Martin operating units. In our aeronautics business, the F-16 program had an excellent year, delivering 109 units and winning major competi- tions and follow-on selections involving 124 aircraft including: Greece (50 aircraft), Israel (50) and Egypt (24). The Israeli F-16 program involves options for 60 additional F-16s. Recently, the United Arab Emirates signed a contract with the corporation that results in an order for 80 F-16s. Meanwhile, the U.S. Air Force announced its intention to order 30 more F-16s. The F-22 program performed superbly, meeting demanding flight test criteria established by Congress while remaining within strict government cost caps. Our Joint Strike Fighter design met important test criteria in 1999 as we move toward the flight demonstration of our Preferred Weapon System Concept in 2000. As mentioned earlier, we met our commitment to deliver 30 C-130Js. For the first time, DoD budget plans call for C-130Js in each of the next five years. This is encouraging and bodes well for the program’s long-term future. Elsewhere in airlift, the C-27J made its first flight and received a launch order from Italy for 12 aircraft. Other wins included a contract for phased depot maintenance of the U.S. Customs Service P-3 Orion fleet and the U.S. Air Force Propulsion Business Area contract for military aircraft engine servicing. In Space Systems, Chapter 11 filings by both Iridium and ICO by mid-year disrupted the commercial space market, which negatively impacted the launch vehicle market. On the positive side, we received a $1.3 billion order from Astrolink to build four commercial satellites and a $400 million order from Teledesic for at least six satellite launches. Certain space systems programs were models of consistency. With five successful launches, Atlas achieved its 46th consecutive mission success since 1993 and our United Space Alliance joint venture safely launched and recovered the three Space Shuttle


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    missions that occurred during 1999. Additionally, the U.S. Navy achieved its 87th consecutive Trident II D-5 Fleet Ballistic Missile test launch during the year. We achieved five Proton launches through our International Launch Services joint venture, three Titan missions and two Athena launches, including the Ikonos satellite for our Space Imaging joint venture that transmitted the first commercial high-resolution photos from space. The successful launch of the Terra Earth-observing satellite for NASA will help accomplish earth science objectives. Losing the Future Imagery Architecture and Space-Based Infrared System-Low satellite competitions, however, were major disappointments that adversely affected our outlook. Our systems integration business continued its strong performance, achieving year-over-year growth and exceeding its plan for new orders, cash generation and earnings before interest and taxes. The business also achieved important milestones on air and missile defense and other high-priority programs while strengthening its position in adjacent high-growth markets. THAAD made significant strides in 1999 by intercepting its designated target twice in a row and winning approval to move into Engineering and Manufacturing Development, for which a contract is expected in early 2000. Similarly, the PAC-3 (Patriot Advanced Capability) Missile program had a successful year, achieving two successful intercepts. It was subsequently approved for low-rate initial production. And NATO awarded an international team including Lockheed Martin and its international partners a contract for the MEADS (Medium Extended Air Defense System) program, which has significant U.S. and international market potential. JASSM ( Joint Air-to-Surface Standoff Missile), another important program of the future, achieved its first powered flight. Losing the Multi-Function Radar program adversely affected our outlook. We completed deployment of the Display System Replacement (DSR) to all 20 Federal Aviation Administration (FAA) Air Route Traffic Control Centers ahead of schedule and earned acceptance of the Host and Oceanic Computer System Replacement (HOCSR) installations, enabling the FAA to meet critical Y2K requirements. General Motors selected Lockheed Martin to provide information management services for three of its units, and we received U.S. government contracts for the F-16 Mission Training Center and C-130 Aircrew Training programs, strengthening our position in the fast-growing training and simulation market. In technology services, we won a $3.4 billion contract as part of a consortium with two British firms to manage the United Kingdom’s Atomic Weapons Establishment. We won a major contract to provide research and engineering to support development of information warfare systems for the U.S. Navy’s Information Warfare Mission Support Program. 17 In Global Telecommunications, we announced the formation of Astrolink International LLC, which will offer worldwide dig- ital multimedia interactive broadband services from a constellation of four Lockheed Martin-built satellites. The venture involves Lockheed Martin, TRW, Telespazio and Liberty Media, who have provided total initial equity funding commitments of $1.35 billion. Lockheed Martin Intersputnik, Ltd., a venture between Lockheed Martin and Intersputnik International Organization of Space Communications, launched its first revenue-producing satellite in September. We remain committed to our telecommunications services strategy and completing our acquisition of COMSAT Corporation. We acquired 49 percent of COMSAT’s common stock in 1999. We are optimistic that a recent agreement among congressional leadership on draft legislation that will lift the 50 percent cap on ownership of COMSAT stock will be enacted expeditiously by Congress and enable us to complete the transaction later this year. Acquiring COMSAT is important to strengthening our position in both satellite services and network services markets. In addition, Global Telecommunications intends to further grow by linking with strategic partners to provide outside capital and domain expertise, and by tapping public equity markets at the appropriate time. Looking ahead, consistent program and financial performance are the keys to restoring customer confidence in Lockheed Martin as well as the financial strength and flexibility that will enhance shareholder value. We are intent on becoming the world’s best systems integration company serving the global aerospace, defense and technology services markets. Our primary expertise is providing advanced technology systems and services that help governments around the world accom- plish nationally significant goals. As a result of 1999’s disappointments, we have learned important lessons. We understand the challenges we face. The rebuilding of Lockheed Martin is underway. We are focused intently on our customers. We know that we are accountable to you, the owners of this business, and we will deliver. February 24, 2000 Vance D. Coffman Chairman and Chief Executive Officer


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    MI S SIO N S U C C E S S Mission Success is a measurement of performance—it’s a commitment to deliver on our promise of technical excellence in everything we do. In 1999, we achieved a 94 percent level of Mission Success on 462 meas- urable events. One of those success stories is the U.S. Air Force’s F-22 Raptor [seen here]. Last year, the F-22 18 19 met all its demanding flight test criteria, and the aircraft is on its way to meeting the Air Force’s requirements as the 21st century air superiority fighter.


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    FINANCIAL SECTION Financial Highlights Inside Front Cover Management’s Discussion and Analysis of Financial Condition and Results of Operations 21 The Corporation’s Responsibility for Financial Reporting 38 Audited Consolidated Financial Statements: Report of Ernst & Young LLP, Independent Auditors 39 Consolidated Statement of Earnings 40 Consolidated Statement of Cash Flows 41 Consolidated Balance Sheet 42 Consolidated Statement of Stockholders’ Equity 43 Notes to Consolidated Financial Statements 44 20 Consolidated Financial Data – Ten Year Summary 64 Forward-Looking Statements Inside Back Cover


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 1999 Lockheed Martin Corporation (Lockheed Martin or the services market described above, totaled $1.9 billion. The Corporation) is engaged in the conception, research, divestiture of one business unit in the environmental manage- design, development, manufacture, integration and oper- ment line of business was consummated in December 1999, ation of advanced technology systems, products and serv- the impact of which was not material to the Corporation’s ices. The Corporation serves customers in both domestic net earnings. Relative to all other business units identified for and international defense and commercial markets, with its potential divestiture, based on preliminary data, and assum- principal customers being agencies of the U.S. Government. ing that the potential divestiture transactions are approved The following discussion should be read in conjunction with by the Board and ultimately consummated in the future, the audited consolidated financial statements included herein. management estimates that the potential one-time effects, if combined, could result in a net loss on disposition of Strategic and Organizational Review approximately $850 million, primarily non-cash. How- In September 1999, Lockheed Martin announced the results ever, the potential proceeds from these transactions, if to date of its strategic and organizational review that began consummated, could also generate in excess of $1.5 billion in June 1999. As a result of this review, the Corporation in cash, after transaction costs and associated tax pay- has implemented a new organizational structure (as more ments, that will be used to repay debt. Financial effects fully described in Note 17 of the Notes to Consolidated that may result, if any, would be recorded when the trans- Financial Statements, “Information on Industry Segments and actions are consummated or when losses can be estimated. Major Customers”), and announced plans to evaluate the Management cannot predict the timing of the potential repositioning of certain businesses to maximize their value divestitures, the amount of proceeds that may ultimately and growth potential and the divestiture of certain non-core be realized or whether any or all of the potential transac- business units. tions will take place. The Corporation is continuing to evaluate alternatives 21 In a further development related to the strategic and relative to maximizing the value of two business units that organizational review, the Corporation announced in serve the commercial information technology markets, January 2000 its plans to streamline the Aeronautical including Lockheed Martin’s internal information technology Systems and Space Systems segments. These plans provide needs. These units have been identified by management for the consolidation of multiple business units into one as having high growth potential, but are distinct from the focused company in each segment, and the integration Corporation’s core business segments. The Corporation of certain operational and administrative activities within may seek to maximize the value of these business units each segment. Management expects these actions to result through strategic partnerships or joint ventures, or by in future cost savings for the Corporation. accessing public equity markets, although the outcome On an ongoing basis, the Corporation will continue to of those efforts cannot be predicted. Management has explore the sale of various investment holdings and surplus decided to evaluate for divestiture, subject to appropriate real estate, review its businesses to identify ways to improve valuation, negotiation and approval, a third business unit organizational effectiveness and performance, and clarify originally identified for evaluation relative to maximizing its and focus on its core business strategy. value. This business unit serves state and local government services markets. Transaction Agreement with COMSAT Corporation The Corporation is also continuing its evaluation of In September 1998, the Corporation and COMSAT the divestiture, subject to appropriate valuation, negotiation Corporation (COMSAT) announced that they had entered and approval, of certain business units in the aerospace into an agreement (the Merger Agreement) to combine electronics, control systems and environmental management the companies in a two-phase transaction (the Merger). lines of business. On a combined basis, net sales in 1999 In connection with the first phase of this transaction, the related to the business units being evaluated for divestiture, Corporation completed a cash tender offer (the Tender including the business unit in the state and local government Offer) on September 18, 1999, after satisfaction of all


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) December 31, 1999 conditions to its closing. As a result, the Corporation now with the Federal Trade Commission (FTC) and the U.S. owns approximately 49 percent of the outstanding common Department of Justice (DOJ) regarding its acquisition of stock of COMSAT and accounts for its investment under minority interests in two businesses held by COMSAT. In the equity method of accounting. The total value of this addition, following the passage of legislation, the Federal first phase of the transaction was $1.2 billion, and such Communications Commission (FCC) must approve the amount is included in investments in equity securities in Merger. The precise nature of the FCC approval require- the December 31, 1999 Consolidated Balance Sheet. ment will, however, depend upon the details of the final The second phase of the transaction, which will result legislation enacted by Congress. There is no assurance as in consummation of the Merger, is to be accomplished by to the timing or whether the FTC, DOJ or FCC will provide an exchange of one share of Lockheed Martin common the requisite approvals. If the Merger is not completed on stock for each remaining share of COMSAT common stock. or before September 18, 2000, under the terms of the Consummation of the Merger remains contingent upon the Merger Agreement, Lockheed Martin or COMSAT could satisfaction of certain conditions, including the enactment of terminate the Merger Agreement or elect not to exercise federal legislation necessary to remove existing restrictions this right, or both parties could agree to extend this date. If on the ownership of COMSAT voting stock. Legislation nec- consummated, the Merger will be accounted for under the essary to remove these restrictions cleared the U.S. Senate purchase method of accounting. If the Merger is not con- on July 1, 1999. On November 10, 1999, the U.S. House summated, the Corporation will not be able to achieve all of Representatives (the House) also passed legislation which, of its objectives with respect to the COMSAT transaction and if adopted into law, would remove these restrictions. There will be unable to exercise control over COMSAT. are substantial differences between the two bills, and signifi- The market value of the Corporation’s investment in cant issues raised by the House bill in particular which, if not COMSAT at December 31, 1999 was approximately $515 22 resolved satisfactorily, would likely have a Significant Adverse million based on the closing price of its shares on the New Effect on COMSAT (as defined in the Merger Agreement). York Stock Exchange on that date. As noted previously, The Corporation hopes these issues will be favorably resolved. completion of the Merger will require the exchange of one In early 2000, sponsors of the two different bills share of the Corporation’s common stock for each remain- announced a compromise agreement that, if adopted, ing share of COMSAT’s common stock. As a result, the would resolve many of the issues raised by the House bill. price of COMSAT’s common stock is closely aligned with It is now expected that legislation that reflects the compro- the price of Lockheed Martin’s common stock and may not mise agreement will be enacted before May 2000. There is reflect the price at which COMSAT’s common stock might no assurance that this legislation will be passed or passed in trade absent the Merger Agreement. this time frame, or that any legislation that does become Formation of Lockheed Martin Global Telecommunications law would not have an adverse effect on COMSAT’s busi- Effective January 1, 1999, investments in several existing ness. If Congress enacts legislation that the Corporation joint ventures and certain operating elements of the determines in good faith, after consultation with COMSAT, Corporation were combined with Lockheed Martin Global would reasonably be expected to have a Significant Adverse Telecommunications, Inc. (Global Telecommunications), a Effect on COMSAT’s business, the Corporation would have wholly-owned subsidiary of the Corporation focused on the right to elect not to complete the Merger. capturing a greater portion of the worldwide telecommuni- Before the Merger can occur, the Corporation must cations services market. The Corporation intends to com- file separate notification and report forms under the bine the operations of Global Telecommunications and Hart Scott-Rodino Antitrust Improvement Act (HSR Act)


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    Lockheed Martin Corporation COMSAT upon consummation of the Merger. Given the accounted for at fair value, and resulted in the reduction substantial investment necessary for the growth of the of the Corporation’s stockholders’ equity by $2.8 billion global telecommunications services business, support from and the recognition of a tax-free gain of approximately strategic partners for Global Telecommunications may be $311 million in other income and expenses. Also see the sought and public equity markets may be accessed to raise discussion under the caption “Results of Operations” capital, although the Corporation cannot predict the out- regarding the impact of the GE Transaction on the com- come of these efforts. putation of 1997 earnings per share. In 1998 and 1997, in connection with the GE Transaction, the Corporation Divestiture Activities issued notes to a wholly-owned subsidiary of GE for In March 1997, the Corporation repositioned 10 of its $210 million, bearing interest at 5.73%, and $1.4 billion, non-core business units as a new independent company, bearing interest at 6.04%, respectively. The notes are L-3 Communications Holdings, Inc. (L-3), in which the due November 17, 2002. Corporation retained an approximate 35 percent owner- ship interest at closing. The Corporation’s ownership per- Industry Considerations centage was reduced to approximately 25 percent in the The Corporation’s primary lines of business are in second quarter of 1998 as a result of an initial public advanced technology systems, products and services for offering of L-3’s common stock. In 1999, the Corporation aerospace and defense, serving both government and sold its remaining shares of L-3 in two separate transac- commercial customers. In recent years, domestic and world- tions. On a combined basis, these transactions increased wide political and economic developments have strongly 1999 pretax earnings by $155 million, and increased net affected these markets, requiring significant adaptation by earnings by $101 million, or $.26 per diluted share. market participants. In September 1999, the Corporation sold its interest The U.S. aerospace and defense industry has experi- 23 in Airport Group International Holdings, LLC which resulted enced years of declining budgets for research, development, in a pretax gain of $33 million. In October 1999, the test and evaluation, and procurement. After over a decade Corporation exited its commercial 3D graphics business of continuous declines in the U.S. defense budget, the por- through a series of transactions which resulted in the sale of tion of the Federal budget devoted to defense is at one of its interest in Real 3D, Inc., a majority-owned subsidiary, its lowest levels in modern history. In addition, worldwide and a pretax gain of $33 million. On a combined basis, defense budgets have been declining with a focus on these transactions increased net earnings by $43 million, or operational readiness and personnel issues at the expense $.11 per diluted share. of acquisition programs, with modernization becoming In November 1997, Lockheed Martin exchanged all of increasingly popular over acquisition. Consequently, an the outstanding capital stock of a wholly-owned subsidiary increasing portion of expenditures for defense is used for for all of the outstanding Series A preferred stock held by upgrading and modernizing existing equipment rather General Electric Company (GE) and certain subsidiaries than acquisition of new equipment. Such trends in defense of GE (the GE Transaction). The Series A preferred stock spending have created risks associated with demand and was convertible into approximately 58 million shares of timing of orders relative to certain of the Corporation’s Lockheed Martin common stock. The Lockheed Martin existing programs. For example, the Corporation has not subsidiary was composed of two non-core commercial received the level of orders anticipated for the C-130J airlift business units which contributed approximately five percent aircraft program which has resulted in lower than expected of the Corporation’s 1997 net sales, Lockheed Martin’s production levels. The Corporation is continuing to focus its investment in a telecommunications partnership and approx- efforts on new orders from foreign and domestic customers, imately $1.6 billion in cash. The GE Transaction was though it cannot predict the outcome of these efforts.


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) December 31, 1999 The industry participants have reacted to shrinking As a government contractor, the Corporation is subject defense budgets by combining to maintain critical mass to U.S. Government oversight. The government may investi- and attempting to achieve significant cost savings. The U.S. gate and make inquiries of the Corporation’s business Government had been supportive of industry consolidation practices and conduct audits of contract performance activities through 1997, and the Corporation had been at and cost accounting. Depending on the results of these the forefront of these activities. Through its own consolida- investigations, the government may make claims against tion activities, the Corporation has been able to pass along the Corporation. Under U.S. Government procurement regu- savings to its customers, principally the U.S. Department of lations and practices, an indictment of a government con- Defense (DOD). With the more recent decline of significant tractor could result in that contractor being fined and/or domestic industry consolidation, major aerospace companies suspended for a period of time from eligibility for bidding continue to focus on cost savings and efficiency improve- on, or for award of, new government contracts. A convic- ments, as well as generation of cash to repay debt incurred tion could result in debarment for a specified period of during this period of consolidation. time. Similar government oversight exists in most other Ongoing consolidation continues within the European countries where the Corporation conducts business. aerospace industry resulting in fewer but larger and more Although the outcome of such investigations and inquiries capable competitors, potentially resulting in an environment cannot be predicted, in the opinion of management, there where there could be less demand for products from U.S. are no claims, audits or investigations pending against the companies. Such an environment could affect opportunities Corporation that are likely to have a material adverse effect for European partnerships and sales potential for U.S. prod- on the Corporation’s business or its consolidated results of ucts outside the U.S. operations, cash flows or financial position. There are signs that the continuing decline in the The Corporation remains exposed to other inherent 24 defense budget may have ended, with proposals being risks associated with U.S. Government contracting, includ- made for modest increases in the next several years. The ing technological uncertainties and obsolescence, changes Corporation’s broad mix of programs and capabilities in government policies and dependence on annual Con- makes it a likely beneficiary of any increased defense gressional appropriation and allotment of funds. Many spending. However, there are risks associated with certain of the Corporation’s programs involve development and of the programs for which the Corporation is competing application of state-of-the-art technology aimed at achiev- which will be the primary recipients of significant future ing challenging goals. As a result, setbacks and failures U.S. Government spending. These programs are very large can occur. It is important for the Corporation to resolve and likely to be well-funded, but may only involve one performance issues related to such programs in a timely prime contractor. For example, the Corporation is involved manner to achieve success on these programs. in the competition for the Joint Strike Fighter ( JSF) tactical The Corporation also conducts business in related com- aircraft program. Because of the magnitude of this pro- mercial and non-defense markets. Although these lines of gram, being unsuccessful in the competition would be sig- business are not dependent on defense budgets, they share nificant to any of the competitors’ future fighter aircraft many of the risks associated with the Corporation’s defense operations. Additionally, the JSF program and other large, businesses, as well as other risks unique to the commercial highly visible programs, such as the Corporation’s F-22 marketplace. Such risks include development of competing tactical fighter program, frequently receive substantial products, technological feasibility and product obsolescence. Congressional focus as potential targets for reductions Industry-wide, the launch vehicle industry experienced and/or extensions of their funding to pay for other pro- a reduction in demand in 1999 primarily reflecting grams. However, the JSF and F-22 programs remain a start-up issues for certain satellite systems with which the high priority for the DOD and the armed services, as Corporation was not involved, delays in completing certain well as for the Corporation.


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    Lockheed Martin Corporation satellite systems due to over-capacity of transponders in of the related launch vehicle. Significant portions of such some regional areas, and launch vehicle failures experi- advances would be required to be refunded to each cus- enced by the Corporation and its competitors during the tomer if launch services were not successfully provided past two years. These issues have also resulted in delays within the contracted time frame. At December 31, 1999, for commercial satellite orders, which are expected to con- approximately $724 million related to launches not yet tinue into 2000. The Corporation has addressed issues provided was included in customer advances and amounts associated with prior failures of its Titan and Proton launch in excess of costs incurred, and approximately $848 vehicles, which have been returned to flight status. The million of payments to Khrunichev for launches not yet above factors related to reductions in launch vehicle orders provided was included in inventories. Through year end have resulted in pricing pressures due to increased com- 1999, launch services provided through LKEI and ILS petition in the launch vehicle industry. The Corporation have been in accordance with contract terms. has established cost objectives related to its launch vehicle An additional risk exists related to launch vehicle programs intended to allow it to continue to compete in this services in Russia. Under a trade agreement in effect since market while maintaining its focus on successful launches, September 1993 between the United States and Russia, as though it cannot predict the outcome of these efforts. amended most recently in July 1999, the number of Russian In connection with expanding its portfolio of offered launches of U.S. built satellites into geosynchronous and products and services in commercial space and telecommu- geosynchronous transfer orbit is limited to twenty from trade nications activities, the Corporation has entered into various agreement inception through the year 2000. Officials of joint venture, teaming and other business arrangements, the U.S. Government have stated that this limit will not be including some with foreign partners. The conduct of interna- raised until Russia takes satisfactory action to resolve mis- tional business introduces other risks into the Corporation’s sile technology proliferation concerns. This limit, if not operations, including fluctuating economic conditions, fluc- raised or eliminated, could impair the Corporation’s ability 25 tuations in relative currency values and the potential for to achieve certain of its business objectives related to unanticipated cost increases and timing issues resulting from launch services, satellite manufacture and telecommunica- the possible deterioration of political relations. tions market penetration. At December 31, 1999, no In 1992, the Corporation entered into a joint venture portion of customer advances was associated with launches with two Russian government-owned space firms to form in excess of the quota, and approximately $245 million Lockheed-Khrunichev-Energia International, Inc. (LKEI). of the $848 million of payments to Khrunichev disclosed Lockheed Martin owns 51 percent of LKEI and consolidates in the prior paragraph were associated with launches in the operations of LKEI into its financial statements. LKEI has excess of the number currently allowed under the quota. exclusive rights to market launches of commercial, non- The Corporation determines amounts related to launches in Russian-origin space payloads on the Proton rocket from a excess of the quota taking into account the number of launch site in Kazakhstan. In 1995, another joint venture launches currently allowed under the quota (twenty at was formed, International Launch Services (ILS), with the December 31, 1999, as discussed above), and without Corporation and LKEI each holding 50 percent ownership. regard to the quota’s current expiration date of December 31, ILS was formed to market commercial Atlas and Proton 2000. Management is working to achieve a favorable res- launch services worldwide. Contracts for Proton launch olution to raise or eliminate the limitation on the number of services typically require substantial advances from the Russian launches covered by the quota. customer in advance of launch, and a sizable percentage The Corporation has entered into agreements with RD of these advances are forwarded to Khrunichev State AMROSS, a joint venture of the Pratt & Whitney division Research and Production Space Center (Khrunichev), the of United Technologies Corporation and the Russian firm manufacturer in Russia, to provide for the manufacture NPO Energomash, for the development and purchase,


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) December 31, 1999 subject to certain conditions, of up to 101 RD-180 booster business segments. The U.S. Government remained the engines for use in two models of the Corporation’s Atlas Corporation’s largest customer, comprising approximately launch vehicle. Terms of the agreements call for payments 71 percent of the Corporation’s net sales for 1999 com- to be made to RD AMROSS upon the achievement of cer- pared to 70 percent in 1998 and 66 percent in 1997. tain milestones in the development and manufacturing The Corporation’s operating profit (earnings before processes. Approximately $55 million of payments made interest and taxes) for 1999 was approximately $2.0 billion, a decrease of 20 percent compared to 1998. Operating profit for 1998 was approximately $2.5 billion, a decrease Net Sales of nine percent compared to 1997. The reported amounts (In millions) $30,000 for the three years presented include the financial impacts of various nonrecurring and unusual items, the details of which are described below. Excluding the effects of these $24,000 nonrecurring and unusual items for each year, operating profit for 1999 would have decreased by 34 percent com- $18,000 pared to 1998, and would have decreased by five percent for 1998 compared to 1997. For 1999 compared to $12,000 1998, decreases in operating profit at the Space Systems and Aeronautical Systems segments more than offset the $6,000 slight increase in operating profit at the Systems Integration and Technology Services segments. For 1998 compared $0 ’98 ’97 ’97 ’98 ’96 ’99 to 1997, increases in operating profit at the Aeronautical 26 Systems and Systems Integration segments were more than offset by reductions in operating profit in the remaining under these agreements were included in the Corporation’s segments. For a more detailed discussion of the operating inventories at December 31, 1999. results of the business segments, see “Discussion of Business Segments” below. Results of Operations Operating profit in 1999 included the effects of non- The Corporation’s operating cycle is long-term and involves recurring and unusual items which on a combined basis, many types of production contracts with varying production net of state income taxes, increased operating profit by delivery schedules. Accordingly, the results of a particular $249 million. These items included a $155 million gain year, or year-to-year comparisons of recorded sales and related to the sale of the Corporation’s remaining interest profits, may not be indicative of future operating results. in L-3, a $57 million gain associated with the sale of sur- The following comparative analysis should be viewed in plus real estate, and a net gain of $37 million associated this context. with the sale of non-core businesses and investments and The Corporation’s consolidated net sales for 1999 other portfolio shaping actions. were $25.5 billion, a decrease of three percent compared Operating profit in 1998 included the effects of non- to 1998. Net sales during 1998 were $26.3 billion, a recurring and unusual items which on a combined basis, decrease of six percent compared to 1997. The net sales net of state income taxes, decreased operating profit by decrease in the Space Systems segment in 1999 more $162 million. These items included a $233 million charge than offset increases in the remaining business segments. related to the timely non-bankruptcy shutdown of CalComp In 1998, slight increases in net sales in the Systems Inte- Technology, Inc. (CalComp), a majority-owned subsidiary gration and Aeronautical Systems segments compared of the Corporation. The Corporation’s decision to finance to 1997 were more than offset by decreases in the other


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    Lockheed Martin Corporation non-core investments and certain other assets. In addition, Net Earnings 1997 included nonrecurring and unusual items related to a (In millions) $1,500 $19 million gain associated with the sale of surplus real estate and a net gain of $69 million associated with the $1,200 sale of non-core businesses and investments and other port- folio shaping actions. $900 The Corporation’s reported net earnings for 1999 were $382 million, a decrease of 62 percent compared to 1998. Reported net earnings for 1998 were $1.0 billion, a $600 decrease of 23 percent compared to the reported 1997 net $300 (a) (a) (b) (c) (c) (d) Diluted Earnings ’97 ’98 ’99 (Loss) Per Share $0 (In dollars) $3.00 (a) Excluding the effects of the gain on the transaction with GE, the charges relating to the decision to exit certain lines of business and $2.00 to impairment in values for certain assets, and gains from sales of surplus real estate and other portfolio shaping items, 1997 net earnings would have been $1,234 million. $1.00 (b) Excluding the effects of the charge related to CalComp, and gains (b) (c) (d) from sales of surplus real estate and other portfolio shaping items, 1998 net earnings would have been $1,137 million. $0 ’97 ’98 ’99 (c) Excluding the effects of gains from the sale of the Corporation’s 27 interest in L-3 and sales of surplus real estate, a net gain from sales (a) of non-core businesses and investments and other portfolio shaping -$1.00 items, and the cumulative effect adjustment related to start-up costs, 1999 net earnings would have been $575 million. -$2.00 the shutdown of CalComp resulted in a charge related to (a) Includes the effects of a deemed preferred stock dividend in deter- the impairment of assets and estimated costs required to mining net loss applicable to common stock in the computation of accomplish the shutdown of CalComp’s operations. The loss per share which resulted from the GE Transaction. The effect remaining 1998 nonrecurring and unusual items included of this deemed dividend was to reduce the diluted per share amount by $4.93. net gains of $18 million related to the initial public offering (b) Excluding the effects of the deemed preferred stock dividend, of L-3’s stock, $35 million associated with gains on sales of the gain on the transaction with GE, the charges relating to the surplus real estate, and $18 million associated with other decision to exit certain lines of business and to impairment in values for certain assets, and gains from sales of surplus real estate and portfolio shaping actions. other portfolio shaping items, and including the dilutive effects of Operating profit for 1997 also included the effects preferred stock conversion and stock options, 1997 diluted earnings per share would have been $2.87. of nonrecurring and unusual items which on a combined (c) Excluding the effects of the charge related to CalComp, and gains basis, net of state income taxes, decreased operating profit from sales of surplus real estate and other portfolio shaping items, by $58 million. These items included the $311 million tax- 1998 diluted earnings per share would have been $2.99. free gain resulting from the GE Transaction, and charges (d) Excluding the effects of gains from the sale of the Corporation’s interest in L-3 and sales of surplus real estate, a net gain from sales totaling $457 million recorded in the fourth quarter of 1997 of non-core businesses and investments and other portfolio shaping related to the Corporation’s decision to exit certain lines items, and the cumulative effect adjustment related to start-up costs, 1999 diluted earnings per share would have been $1.50. of business and to the impairment in the values of various


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) December 31, 1999 earnings of $1.3 billion. The 1999 reported amount includes as a deemed preferred stock dividend and deducted from the combined after-tax effects of the nonrecurring and 1997 net earnings. This deemed dividend had a signifi- unusual items discussed above of $162 million, including cant impact on the 1997 loss per share calculations, but $101 million related to the gain on the sale of the did not impact reported 1997 net earnings. The effect of Corporation’s remaining interest in L-3, $37 million associ- this deemed dividend was to reduce basic and diluted ated with gains on the sale of surplus real estate, and a earnings per share amounts by $4.93. If the nonrecurring $24 million net gain associated with the sale of non-core and unusual items described above were excluded from businesses and investments and other portfolio shaping the calculation of earnings per share, and, for 1997, if actions. Nonrecurring and unusual items for 1999 also the dilutive effects of preferred stock conversion and stock include the effects of the Corporation’s adoption of options were factored into the diluted earnings per share Statement of Position No. 98-5, “Reporting on the Costs calculation, diluted earnings per share for 1999, 1998 of Start-Up Activities,” effective January 1, 1999, which and 1997 would have been $1.50, $2.99 and $2.87, resulted in the recognition of a cumulative effect adjustment respectively. that reduced 1999 net earnings by $355 million. On a Discussion of Business Segments combined basis, these nonrecurring and unusual items In September 1999, the Corporation announced the results decreased 1999 net earnings by $193 million, or $.51 per of the strategic and organizational review that began in diluted share. The after-tax effects of the nonrecurring and June 1999. As a result of this review, the Corporation has unusual items in 1998 discussed above included $183 mil- implemented a new organizational structure, effective lion related to the charge for CalComp, $12 million related October 1, 1999, that realigns its core lines of business to a gain on the initial public offering of L-3’s stock, $23 into four principal business segments. The four principal million associated with gains on the sale of surplus real 28 business segments are Systems Integration, Space Systems, estate, and a gain of $12 million associated with the sale Aeronautical Systems, and Technology Services. All other of non-core businesses and investments and other portfolio activities of the Corporation fall within the Corporate and shaping actions. On a combined basis, these items decreased Other segment. Prior period amounts have been adjusted 1998 net earnings by $136 million, or $.36 per diluted to conform with the new organizational structure. share. The after-tax effects of the nonrecurring and unusual The following table displays net sales for the Lockheed items in 1997 discussed above included the $311 million Martin business segments for 1999, 1998 and 1997, tax-free gain resulting from the GE Transaction, $303 million which correspond to the segment information presented in related to the charges recorded in the fourth quarter, $12 Note 17 of the Notes to Consolidated Financial Statements: million associated with a gain on the sale of surplus real (In millions) 1999 1998 1997 estate, and a net gain of $46 million associated with other portfolio shaping actions. On a combined basis, these Net Sales Systems Integration $10,954 $10,895 $10,853 items increased 1997 net earnings by $66 million, or Space Systems 5,825 7,039 7,931 $.15 per diluted share. Aeronautical Systems 5,499 5,459 5,319 The Corporation reported diluted earnings (loss) Technology Services 2,261 1,935 1,989 Corporate and Other 991 938 1,977 per share of $.99, $2.63, and $(1.56) for 1999, 1998, $25,530 $26,266 $28,069 and 1997, respectively. For the purposes of determining the 1997 net loss applicable to common stock used in the Operating profit (loss) by industry segment for 1999, calculation of earnings per share, the excess fair value of 1998 and 1997, including the effects of the nonrecurring the assets transferred to GE over the carrying value of the and unusual items discussed previously, is displayed in the preferred stock (approximately $1.8 billion) was treated


  • Page 22

    Lockheed Martin Corporation table below. This information also corresponds to the seg- segments. Accordingly, due to the significant number of ment information presented in Note 17 of the Notes to smaller programs in the Systems Integration and Technology Consolidated Financial Statements. Services segments, the impacts of performance by individual (In millions) 1999 1998 1997 programs typically are not as material to these segments’ Operating Profit (Loss) overall results of operations. Systems Integration $ 967 $ 949 $ 843 Space Systems 474 954 1,090 Systems Integration Aeronautical Systems 247 649 561 Net sales of the Systems Integration segment increased Technology Services 137 135 187 by one percent in 1999 compared to 1998, and also Corporate and Other 184 (165) 98 increased by one percent in 1998 compared to 1997. $2,009 $2,522 $2,779 The increase in 1999 was comprised of an $80 million The following table displays the pretax impact of the increase in volume on tactical training systems and a $65 nonrecurring and unusual items discussed earlier and the million increase in postal systems activities. These increases related effects on each segment’s operating profit (loss) for were partially offset by a decrease of $100 million in each of the three years presented: classified activities and space electronics programs. The remaining increase is primarily attributable to increased (In millions) 1999 1998 1997 electronics activities in the United Kingdom. The 1998 Nonrecurring and Unusual Items— Profit (Loss): increase resulted from an increase in production deliveries Consolidated Effects of postal systems equipment of $180 million and a $170 Sale of remaining interest in L-3 $155 $ — $ — million increase in volume on surface ship systems. These Sales of surplus real estate 57 35 19 Divestitures and other increases were partially offset by a $215 million decrease portfolio shaping items 37 18 69 in fire control systems, air defense systems and defense 29 Initial public offering of L-3 — 18 — information systems program activities. An additional $70 Charge for shutdown of CalComp — (233) — GE Transaction — — 311 million decrease related to the absence in 1998 of sales Charges for exit from businesses and associated with the segment’s Commercial Electronics busi- impairment of assets — — (457) ness, which was divested early in 1998. The remaining $249 $(162) $ (58) decrease is attributable to a decline in volume on various Segment Effects other systems integration activities. Systems Integration $ 13 $ 4 $ (65) Space Systems 21 — (60) Operating profit for the segment increased by one per- Aeronautical Systems — — (31) cent in 1999 compared to 1998, and increased by four Technology Services — — (12) percent in 1998 compared to 1997. The 1999 increase Corporate and Other 215 (166) 110 is comprised of a $50 million increase related to the tacti- $249 $(162) $ (58) cal training systems and postal systems volume increases In an effort to make the following discussion of sig- discussed in the preceding paragraph as well as improved nificant operating results of each business segment more performance on missile and fire control programs. These understandable, the effects of these nonrecurring and increases were partially offset by a $15 million penalty unusual items discussed earlier have been excluded. The on the Theater High Altitude Area Defense (THAAD) Space Systems and Aeronautical Systems segments gener- program booked in the second quarter and the absence ally include programs that are substantially larger in terms of in 1999 of a $16 million favorable arbitration resolution sales and operating results than those included in the other


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) December 31, 1999 recorded in 1998. The remaining decrease relates to the and civil satellite activities. Approximately 40 percent of the decline in volume on various other systems integration activ- remaining decrease was due to additional reductions in ities. The increase in operating profit in 1998 compared to 1998 net sales relating to a net decrease in military satel- 1997 was comprised of $45 million in improved margins lite programs and classified activities, with the remainder on naval electronics programs, a $15 million increase from due to various other space systems activities. deliveries of control systems, approximately $20 million Operating profit for the segment decreased by 53 related to volume increase in postal systems activities percent in 1999 compared to 1998, and decreased by and $16 million from the previously mentioned favorable 17 percent in 1998 compared to 1997. A contributing fac- arbitration resolution. These increases were partially offset tor to the decrease in the segment’s operating profit in by a $32 million decrease in air defense systems, an 1999 compared to 1998 was the impact of a third quarter $11 million decrease in operating profit on fire control 1998 favorable adjustment of approximately $120 million, systems and, to a lesser extent, other volume decreases net of state income taxes, which resulted from a significant that impacted net sales. improvement in the Atlas program related to the retirement of technical and program risk based upon an evaluation of Space Systems historical performance. In addition, 1999 operating profit Net sales of the Space Systems segment decreased by was adversely affected by the impact of the $90 million 17 percent in 1999 compared to 1998, and decreased Titan IV program adjustment discussed above. Operating by 11 percent in 1998 compared to 1997. Almost half of profit in 1999 was also adversely impacted by increased the segment’s 1999 net sales decrease resulted from vol- period costs (principally start-up costs) related to launch ume decreases on military satellite programs and classified vehicle investments which accounted for approximately 15 activities. Net sales were also reduced by a $185 million percent of the decrease, by a reduction in Trident fleet bal- 30 decrease in commercial and civil satellite activities as a listic missile activities that reduced operating profit by result of the maturity of certain programs and lower market approximately $30 million, and by a launch vehicle con- demand. Net sales were further reduced by a $50 million tract cancellation which resulted in a charge of $30 million. decrease from 1998 in launch vehicle activities. In addi- The remainder of the decrease is attributable to the decline tion, during the second quarter of 1999, the segment in sales related to military satellite and classified activities recorded a $90 million negative adjustment related to the discussed above as well as a reduction in commercial satel- Titan IV program which included the effects of changes in lite activities. The 1998 decrease resulted from the same estimates for award and incentive fees resulting from the issues that impacted net sales, as discussed above, with the launch failure on April 30, 1999, as well as a more con- Trident fleet ballistic missile program and classified activities servative assessment of future program performance. The accounting for approximately 75 percent of the total remaining decrease is related to a decline in volume on decrease. In addition, $75 million of the decrease was various other space systems activities. The segment’s 1998 attributable to reductions in commercial launch vehicle activi- net sales activity was adversely impacted by a decrease in ties, and $30 million related to a decline in commercial and commercial launch vehicle activity resulting from delays in civil satellite activities. These decreases were partially offset the availability of commercial satellites due primarily to by the previously discussed $120 million favorable Atlas supplier issues. This reduction accounted for approximately program adjustment and $15 million contributed by 20 percent of the 1998 decrease and was mainly attributa- enhanced performance on the military satellite programs. ble to the Atlas and Proton commercial launch vehicles. The The remaining decrease was due to reduced operating 1998 net sales further decreased by $165 million due to profit related to various other activities of the segment. a reduction in volume on the Trident fleet ballistic missile program and $85 million due to a reduction in commercial


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    Lockheed Martin Corporation Aeronautical Systems Consolidated Space Operations Contract, which was Net sales of the Aeronautical Systems segment increased awarded in September 1998. The 1998 decrease was by one percent in 1999 compared to 1998, and increased primarily attributable to the absence in 1998 of approxi- by three percent in 1998 compared to 1997. The 1999 mately $240 million in sales related to the segment’s increase was comprised of $715 million in increased sales Aerostructures business unit, which was divested in related to C-130J airlift aircraft program activities offset by November 1997 as part of the GE Transaction. Excluding a $717 million decrease in F-16 sales and deliveries. The the effect of this divestiture, 1998 net sales would have remaining increase was attributable to increased sales on increased by 11 percent. This increase resulted mainly from various other aircraft programs. The 1998 net sales $110 million in higher sales volume related to the aircraft increase was primarily due to $116 million in increased maintenance and logistics lines of business and a $70 volume related to F-16 fighter aircraft. Activities related to million increase in certain technology services programs. the F-22 program and other tactical aircraft programs Operating profit for the segment increased by one per- accounted for the remaining increase in sales. cent in 1999 compared to 1998 after having decreased Operating profit for the segment decreased by 62 per- 32 percent in 1998 compared to 1997. The increase cent in 1999 compared to 1998 after increasing 10 percent in 1999 operating profit is attributable to the Consolidated during 1998 compared to 1997. The 1999 decrease princi- Space Operations Contract as well as increases related pally reflects adjustments during the second quarter that to improved performance in the segment’s aircraft mainte- resulted from changes in estimates in the C-130J program nance and logistics lines of business, partially offset by due to cost growth and a reduction in production rates, decreases attributable to the timing of award fees on cer- based on a current evaluation of the program’s perform- tain energy-related contracts. The operating profit decrease ance. This adjustment negatively impacted operating profit for 1998 was primarily attributable to the absence in 1998 by $210 million. Additionally, until further favorable prog- of $62 million in operating profit related to the segment’s 31 ress occurs in terms of orders and cost, the Corporation Aerostructures business unit, as discussed above. Excluding does not intend to record profit on future deliveries of the the effect of this divestiture, the 1998 operating profit aircraft, and will reduce production levels over time from would have only decreased by one percent due to perform- 16 to 8 aircraft per year. Of the remaining decrease, ance issues related to certain of the segment’s aircraft main- $80 million resulted from reduced F-16 deliveries, with the tenance and logistics contracts and the absence in 1998 remaining decrease due to volume decreases on various of profit associated with a Space Station contract, which other aircraft programs. Operating profit increased during was canceled in 1997. 1998 by $60 million as a result of increased F-16 aircraft Corporate and Other deliveries and the absence of approximately $60 million Net sales of the Corporate and Other segment increased in C-130J development costs incurred in 1997. These by six percent in 1999 compared to 1998 after having increases were partially offset by approximately $30 mil- decreased 53 percent in 1998 compared to 1997. The lion related to a decrease in operating profit on the F-22 1999 increases of $75 million in the information technol- program, as well as decreases associated with various ogy outsourcing business, $65 million in state and munici- other military aircraft programs. pal services, and $75 million in Global Telecommunications Technology Services programs more than offset the absence in 1999 of the Net sales of the Technology Services segment increased $155 million net sales of the CalComp subsidiary during by 17 percent in 1999 compared to 1998 after having 1998. The majority of this segment’s 1998 decrease is decreased three percent in 1998 compared to 1997. due to the absence in 1998 of $1.2 billion in net sales The increase in 1999 net sales is mainly the result of an of the segment’s Access Graphics business unit which approximate $300 million increase in volume on the was divested in the fourth quarter of 1997. In addition,


  • Page 25

    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) December 31, 1999 approximately 13 percent of the decrease is due to Backlog the absence in 1998 of net sales resulting from the Total negotiated backlog of $45.9 billion at December 31, Corporation’s repositioning of 10 business units to form 1999 included both unfilled firm orders for the Corporation’s L-3 effective in March 1997. Excluding the impact of these products for which funding has been authorized and appro- divestitures, the segment’s net sales for 1998 would have priated by the customer (Congress, in the case of U.S. increased 62 percent compared to 1997. Approximately Government agencies) and firm orders for which funding $155 million of this increase resulted from higher sales vol- has not been appropriated. ume on state and municipal programs, with the remainder The following table shows total backlog by segment at primarily due to increases in net sales related to various the end of each of the last three years: information technology outsourcing programs. (In millions) 1999 1998 1997 Operating profit for this segment decreased by $32 Backlog million in 1999 compared to 1998 after having increased Systems Integration $15,220 $14,025 $14,126 by $13 million in 1998 compared to 1997. The decrease Space Systems 14,749 15,829 16,380 Aeronautical Systems 9,003 10,265 13,019 in 1999 reflects $103 million in operating losses on Global Technology Services 4,399 3,503 2,107 Telecommunications partially offset by the absence of the Corporate and Other 2,542 1,723 1,427 1998 operating losses of $70 million on CalComp and $45,913 $45,345 $47,059 Real 3D. Adjusting the 1997 results for the effects of Access Graphics and L-3 divestitures discussed in the preceding Total Systems Integration backlog increased by paragraph, on a comparable basis, operating profit for nine percent in 1999 compared to 1998, after having 1998 would have decreased by $13 million. The operating decreased by one percent in 1998 compared to 1997. profit decrease from 1997 to 1998 resulted from unfavor- Approximately one half of the 1999 increase was com- 32 able performance in the segment’s commercial products prised of new orders for missile systems, with the remain- businesses, primarily CalComp, partially offset by increases ing increase primarily attributable to increased orders related to state and municipal programs and information for various platform integration activities and increased technology outsourcing programs. surface ship system awards. During 1998, backlog decreased due to a reduction of orders for missile systems and increased deliveries related to air traffic control programs. These decreases were partially offset Negotiated Backlog (In millions) by increased orders for certain radar electronics and $50,000 surface ship systems. Total Space Systems backlog decreased by seven per- $40,000 cent in 1999 compared to 1998, and decreased by three percent in 1998 compared to 1997. The decrease in 1999 $30,000 was mainly attributable to a significant decrease in launch vehicle backlog as a result of decreases in new orders as $20,000 well as a decrease in backlog associated with military satellites and classified activities. Approximately one half of these decreases were offset by new orders for commer- $10,000 cial and civil satellites. The decrease in 1998 resulted $0 ’98 ’97 ’97 ’98 ’96 ’99


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    Lockheed Martin Corporation principally from a decrease in backlog on military and management service contracts. The increase from 1997 to classified satellite programs in addition to decreases 1998 is primarily attributed to the 1998 award of the related to contract modifications to the Titan IV program. Consolidated Space Operations Contract by the National These reductions were partially offset by increased orders Aeronautics and Space Administration, and increases on commercial launch vehicle and satellite programs. related to the receipt of new information management During 1998, the Corporation entered into an agreement services contracts. with the U.S. Government that provides $500 million of Total Corporate and Other backlog increased by funding to develop the Evolved Expendable Launch Vehicle. 48 percent in 1999 compared to 1998, and increased The Corporation will use its best efforts to design a proto- by 21 percent in 1998 compared to 1997. Slightly more type to comply with the launch capability requirements than one half of the 1999 increase was primarily due to included in the agreement. Since this agreement does not new orders on information outsourcing contracts with the constitute a procurement contract, funding has been remainder of the increase reflecting new orders associated excluded from backlog for 1998 and 1999. with the Corporation’s Global Telecommunications line of Total Aeronautical Systems backlog decreased by business. The 1998 increase was mainly attributable to 12 percent in 1999 compared to 1998, and decreased an increase on various information services and state and by 21 percent in 1998 compared to 1997. The decline municipal services programs. in 1999 backlog was comprised of approximately equal decreases on the F-16 tactical fighter program and C-130J airlift aircraft program related to the timing of new orders and sales recorded during 1999. An increase in orders Net Cash Provided By associated with the F-22 tactical fighter program offset Operating Activities (In millions) approximately one-third of the aforementioned decreases. $2,500 33 In January 2000, the Corporation received orders from the government of Israel for F-16 fighter aircraft in an agree- $2,000 ment estimated to be worth approximately $1.5 billion. During 1998, the government of the United Arab Emirates $1,500 (UAE) selected the Corporation’s F-16 as its advanced fighter aircraft. In March 2000, an agreement was reached $1,000 for the sale of 80 F-16 fighter aircraft with an estimated value of $6.4 billion, pending various government approvals. $500 The segment’s 1998 backlog was impacted by a significant decrease in new order activity from the prior year, princi- ’98 ’97 ’97 ’98 ’96 ’99 pally related to the decrease in backlog on F-16 tactical $0 fighter programs due to the timing of new orders. An addi- tional decrease resulted from decreases in backlog on the C-130J airlift aircraft and F-22 tactical fighter programs. Total Technology Services backlog increased by 26 percent in 1999 compared to 1998, after having increased Liquidity and Cash Flows significantly, over 66 percent, in 1998 compared to 1997. Operating Activities The increase in 1999 was attributable to the booking of Operating activities provided $1.1 billion in cash during new orders associated with the 1999 award of an aircraft 1999, compared to $2.0 billion and $1.2 billion provided engine maintenance contract by the United States Air Force in 1998 and 1997, respectively. The significant decrease which was partially offset by sales on existing information


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) December 31, 1999 in cash provided by operations during 1999 compared to for general corporate purposes, including the repayment of 1998 resulted from the decrease in earnings before cumu- commercial paper and borrowings under the Corporation’s lative effect of change in accounting between the periods short-term and long-term credit facilities. During 1998, and increased working capital requirements. The significant operating activities generated significantly more cash, increase in cash provided by operations during 1998 com- which allowed the Corporation to reduce its total debt by pared to 1997 was a result of improved operating cash more than $1.0 billion. During 1997, the Corporation also flow and reduced net federal income tax payment activity. was able to decrease its short-term borrowings significantly, while long-term debt was increased to finance the GE Investing Activities Transaction. Approximately $52 million of long-term debt The Corporation used $1.6 billion in cash for investing activ- will mature in 2000. ities during 1999, compared to $455 million used during The Corporation paid dividends of $345 million in 1998 and $185 million provided during 1997. For the 1999 compared to $310 million and $299 million during three years presented, cash used for additions to property, 1998 and 1997, respectively. During the first quarter plant and equipment declined four percent in 1999 after a of 2000, the Corporation’s Board of Directors approved seven percent decrease in 1998. During 1999, $1.2 billion management’s recommendation to reduce the quarterly was used to acquire the Corporation’s 49 percent interest in cash dividend per common share from $.22 per share, COMSAT, as discussed previously, which was the primary or $.88 annually, to $.11 per share, or $.44 annually. The reason for the increase in the use of cash in 1999 compared decreased dividend will be effective for dividends declared to 1998. Also in 1999, $263 million of cash was provided in the first quarter of 2000. related to the sale of the Corporation’s remaining interest in L-3, which was partially offset by $103 million of cash used Other 34 for additional investments in Astrolink International, LLC and The Corporation receives advances on certain contracts to other acquisition and divestiture activities. During 1998, finance inventories. At December 31, 1999, approximately $134 million of net cash was provided by divestiture and $1.85 billion in advances and progress payments related acquisition activities. In 1997, cash was principally provided to work in process were received from customers and by the disposition of the Armament Systems and Defense recorded as a reduction to inventories in the Corporation’s Systems businesses and the repositioning of 10 business Consolidated Balance Sheet. Also at December 31, 1999, units to form L-3 in March 1997. approximately $486 million of customer advances and progress payments were recorded in receivables as an Financing Activities offset to unbilled costs and accrued profits. Approximately Financing activities provided $731 million in cash during $4.7 billion of customer advances and amounts in excess 1999, compared to $1.3 billion used during 1998 and of costs incurred, which are typically from foreign govern- $1.4 billion used during 1997. The $2.0 billion increase in ments and commercial customers, are included in current cash provided by financing activities in 1999 as compared liabilities at the end of 1999. to the cash used during 1998 reflects the Corporation’s issuance of $3.0 billion in long-term debt securities in the Capital Structure and Resources fourth quarter of 1999, partially offset by repayments of Total debt, including short-term borrowings, increased by long-term debt totaling $1.1 billion and a net decrease of $1.1 billion during 1999 from approximately $10.9 billion $868 million in short-term borrowings outstanding. The at December 31, 1998. This increase was comprised of the debt issuance, which represented the entire amount regis- issuance of $3.0 billion in long-term debt securities, offset tered under its previously filed shelf registration statement, by repayments of long-term debt of $1.1 billion and net included Notes and Debentures ranging in maturity from six repayments of short-term debt of $868 million. The Corpo- years to 30 years, with interest rates ranging from 7.95% ration’s long-term debt is primarily in the form of publicly to 8.5%. The proceeds from the debt issuance were used issued, fixed-rate notes and debentures. At year-end 1999,


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    Lockheed Martin Corporation the Corporation held cash and cash equivalents of $455 sufficient to meet anticipated operating, capital expenditure million which were used to pay down its commercial paper and debt service requirements and discretionary investment borrowings in January 2000. Total stockholders’ equity needs during the next twelve months. Consistent with the was $6.4 billion at December 31, 1999, an increase of Corporation’s desire to generate cash to invest in its core approximately $224 million from the December 31, 1998 businesses and reduce debt, management anticipates that, balance. This increase resulted from 1999 net earnings of subject to prevailing financial, market and economic con- $382 million and employee stock option and ESOP activi- ditions, the Corporation may continue to divest certain ties of $189 million, partially offset by the payment of divi- non-core businesses, passive equity investments and dends of $345 million. As a result of the above factors, the surplus properties. Corporation’s debt to total capitalization ratio increased In February 2000, the Corporation and Loral Space & from 64 percent at December 31, 1998 to 65 percent at Communications Ltd. (Loral Space) filed certain notices under December 31, 1999. the HSR Act with the FTC and the DOJ in connection with the At the end of 1999, the Corporation had in place a Corporation’s plan to convert its 45.9 million shares of Loral short-term revolving credit facility in the amount of $1.0 Space Series A Preferred Stock (the Preferred Stock) into an billion which matures on May 26, 2000, and a long-term equal number of shares of Loral Space common stock. The revolving credit facility in the amount of $3.5 billion, which Corporation will be able to convert the Preferred Stock fol- matures on December 20, 2001 (collectively, the Credit lowing expiration on March 5, 2000 of the waiting period Facilities). No borrowings were outstanding under these required by the HSR Act, unless such period is extended by facilities at December 31, 1999. The Credit Facilities sup- a request from the FTC for additional information. Also in port commercial paper borrowings of approximately $475 February 2000, the Corporation and Loral Space entered million outstanding at December 31, 1999, all of which into an agreement which will facilitate the Corporation’s are classified as short-term borrowings. ability to divest its interest in Loral Space, but in no case 35 The Corporation has entered into standby letter of earlier than mid-May 2000. credit agreements and other arrangements with financial Year 2000 Issues institutions primarily relating to the guarantee of future Lockheed Martin completed its Year 2000 Compliance performance on certain contracts. At December 31, 1999, Program (the Program). The Program was designed to mini- the Corporation had contingent liabilities on outstanding mize risk to the Corporation’s business units and its customers letters of credit, guarantees and other arrangements aggre- in advance of the century change using a standard six-phase gating approximately $1.1 billion. industry approach. The six phases included: Awareness, The Corporation actively seeks to finance its business Assessment, Renovation, Validation, Implementation and in a manner that preserves financial flexibility while mini- Post-Implementation. The Corporation experienced no signifi- mizing borrowing costs to the extent practicable. The cant Year 2000-related issues with respect to its internal Corporation’s management continually reviews the chang- information technology (IT), its external IT systems or its ing financial, market and economic conditions to manage non-IT systems. Based on information currently available, the types, amounts and maturities of the Corporation’s the Corporation is not aware of any continued exposure indebtedness. Periodically, the Corporation may refinance to issues associated with the century change. existing indebtedness, vary its mix of variable rate and The Corporation incurred total costs of approximately fixed rate debt, or seek alternative financing sources for $75 million to complete the Program which included inter- its cash and operational needs. nal costs as well as costs for outside consulting services, Cash and cash equivalents including temporary invest- but did not include estimated costs for system replacements ments, internally generated cash flow from operations and which were not accelerated due to Year 2000 issues. The other available financing resources are expected to be


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) December 31, 1999 costs incurred for the Program are allowable in establishing The Corporation is a party to various other proceed- prices for the Corporation’s products and services under ings and potential proceedings related to environmental contracts with the U.S. Government. Therefore, a substantial clean-up issues, including matters at various sites where portion of these costs is being reflected in the Corporation’s it has been designated a Potentially Responsible Party sales and cost of sales. The total costs incurred were not (PRP) by the EPA or by a state agency. In the event the material to the Corporation’s consolidated results of opera- Corporation is ultimately found to have liability at those tions, cash flows or financial position for any prior period. sites where it has been designated a PRP, the Corporation The Corporation anticipates no material expenditures relat- anticipates that the actual burden for the costs of remedia- ing to Year 2000 issues subsequent to December 31, 1999. tion will be shared with other liable PRPs. Generally, PRPs that are ultimately determined to be responsible parties are Environmental Matters strictly liable for site clean-ups and usually agree among As more fully described in Note 16 of the Notes to themselves to share, on an allocated basis, the costs and Consolidated Financial Statements, the Corporation is expenses for investigation and remediation of hazardous responding to three administrative orders issued by the materials. Under existing environmental laws, however, California Regional Water Quality Control Board (the responsible parties are jointly and severally liable and, Regional Board) in connection with its facilities in Redlands, therefore, the Corporation is potentially liable for the full California. The Corporation estimates that expenditures cost of funding such remediation. In the unlikely event that required to implement work currently approved by the the Corporation was required to fund the entire cost of Regional Board related to the Redlands facilities will be such remediation, the statutory framework provides that the approximately $140 million. Also in connection with its Corporation may pursue rights of contribution from the Redlands facilities, the Corporation is coordinating with other PRPs. Among the variables management must assess 36 the U.S. Air Force, which is conducting studies of the in evaluating costs associated with these sites are changing potential health effects of exposure to perchlorates, a cost estimates, continually evolving governmental environ- regional groundwater contaminant. The results of these mental standards and cost allowability issues. Therefore, studies indicate that the Corporation’s current efforts with the nature of these environmental matters makes it extremely water purveyors regarding perchlorate issues are appropri- difficult to estimate the timing and amount of any future ate; however, the Corporation currently cannot project the costs that may be necessary for remedial actions. extent of its ultimate clean-up obligation, if any, with The Corporation records appropriate financial state- respect to perchlorates. The Corporation has also entered ment accruals for environmental issues in the period in into two consent decrees with the U.S. Environmental which it is probable that a liability has been incurred and Protection Agency (EPA) relating to certain property in the amounts can be reasonably estimated. In addition to Burbank, California, and is operating under a clean-up the matters with respect to the Redlands and Burbank prop- and abatement order from the Regional Board regarding erties and the city of Glendale described above, the its Burbank facilities. In addition, the Corporation is one Corporation has accrued approximately $200 million at of several parties responding to administrative orders from December 31, 1999 for other matters in which an estimate the EPA regarding the city of Glendale, California. The of financial exposure could be determined. Management Corporation estimates that total expenditures required believes, however, that it is unlikely that any additional lia- over the remaining terms of the consent decrees and the bility the Corporation may incur for known environmental Regional Board order related to the Burbank property, and issues would have a material adverse effect on its consoli- the administrative orders related to the city of Glendale, dated results of operations or financial position. will be approximately $100 million.


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    Lockheed Martin Corporation Also as more fully described in Note 16 to the Notes at December 31, 1999. Based on its portfolio of variable to Consolidated Financial Statements, the Corporation is rate short-term debt and fixed rate long-term debt outstand- continuing to pursue recovery of a significant portion of the ing at December 31, 1999, the Corporation’s exposure to unanticipated costs incurred in connection with the $180 interest rate risk is not material. million fixed price contract with the U.S. Department of The Corporation uses forward exchange contracts to Energy (DOE) for the remediation of waste found in Pit 9. manage its exposure to fluctuations in foreign exchange The Corporation has been unsuccessful to date in reaching rates. These contracts are designated as qualifying hedges any agreements with the DOE on cost recovery or other of firm commitments or specific anticipated transactions, contract restructuring matters. In 1998, the management and related gains and losses on the contracts are recog- contractor for the project, a wholly-owned subsidiary of the nized in income when the hedged transaction occurs. At Corporation, at the DOE’s direction, terminated the Pit 9 December 31, 1999, the amounts of forward exchange contract for default. At the same time, the Corporation contracts outstanding, as well as the amounts of gains and filed a lawsuit seeking to overturn the default termination. losses recorded during the year, were not material. Based Subsequently, the Corporation took actions to raise the on the above, the Corporation’s exposure to foreign cur- status of its request for equitable adjustment to a formal rency exchange risk is not material. The Corporation claim. Also in 1998, the management contractor, again at does not hold or issue derivative financial instruments the DOE’s direction, filed suit against the Corporation seek- for trading purposes. ing recovery of approximately $54 million previously paid As described more fully in Note 1 of the Notes to to the Corporation under the Pit 9 contract. The Corpora- Consolidated Financial Statements, the Corporation tion is defending this action in which discovery has been does not intend to adopt Statement of Financial Accounting pending since August 2, 1999. On October 1, 1999, the Standards (SFAS) No. 133, “Accounting for Derivative U.S. Court of Federal Claims stayed the DOE’s motion to Instruments and Hedging Activities,” prior to the current 37 dismiss the Corporation’s lawsuit, finding that the Court has required date of January 1, 2001. The Statement will jurisdiction. The Court ordered discovery to commence and require the recognition of all derivatives as either assets or gave leave to the DOE to convert its motion to dismiss to liabilities in the Consolidated Balance Sheet, and the peri- a motion for summary judgment if supported by discovery. odic measurement of those instruments at fair value. The The Corporation continues to assert its position in the liti- classification of gains and losses resulting from changes in gation while continuing its efforts to resolve the dispute the fair values of derivatives is dependent on the intended through non-litigation means. use of the derivative and its resulting designation. In gen- eral, these provisions of the Statement could result in a Other Matters greater degree of income statement volatility than current The Corporation’s primary exposure to market risk relates accounting practice. The Corporation is continuing its to interest rates and foreign currency exchange rates. process of analyzing and assessing the impact that the Financial instruments held by the Corporation which are adoption of SFAS No. 133 is expected to have on its con- subject to interest rate risk principally include variable solidated results of operations, cash flows and financial rate commercial paper and fixed rate long-term debt. The position, but has not yet reached any conclusions. 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


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    THE CORPORATION’S RESPONSIBILITY FOR FINANCIAL REPORTING Lockheed Martin Corporation The management of Lockheed Martin Corporation prepared and is responsible for the consolidated financial statements and all related financial information contained in this report. The consolidated financial statements, which include amounts based on estimates and judgments, have been prepared in accordance with accounting principles generally accepted in the United States applied on a consistent basis after consideration of the Corporation’s adoption of the provisions of the American Institute of Certified Public Accountants’ Statement of Position No. 98-5, “Reporting on the Costs of Start-Up Activities” as discussed in Note 1 of the Notes to Consolidated Financial Statements. The Corporation maintains a system of internal accounting controls designed and intended to provide reasonable assurance that assets are safeguarded, transactions are properly executed and recorded in accordance with management’s authorization, and accountability for assets is maintained. An environment that establishes an appropriate level of control consciousness is maintained and monitored and includes examinations by an internal audit staff and by the independent auditors in connection with their annual audit. The Corporation’s management recognizes its responsibility to foster a strong ethical climate. Management has issued written policy statements which document the Corporation’s business code of ethics. The importance of ethical behavior is regularly communicated to all employees through the distribution of written codes of ethics and standards of business con- duct, and through ongoing education and review programs designed to create a strong compliance environment. The Audit and Ethics Committee of the Board of Directors is composed of seven outside directors. This Committee meets periodically with the independent auditors, internal auditors and management to review their activities. Both the independ- ent auditors and the internal auditors have unrestricted access to meet with members of the Audit and Ethics Committee, with or without management representatives present. The consolidated financial statements have been audited by Ernst & Young LLP, independent auditors, whose report follows. 38 Robert J. Stevens Executive Vice President—Finance and Chief Financial Officer Christopher E. Kubasik Vice President and Controller


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    REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Lockheed Martin Corporation Board of Directors and Stockholders Lockheed Martin Corporation We have audited the accompanying consolidated balance sheet of Lockheed Martin Corporation as of December 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those stan- dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the con- solidated financial position of Lockheed Martin Corporation at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 of the Notes to Consolidated Financial Statements, in 1999 the Corporation adopted the provisions of the American Institute of Certified Public Accountants’ Statement of Position No. 98-5, “Reporting on the Costs of Start-Up Activities.” 39 Washington, D.C. January 21, 2000


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    CONSOLIDATED STATEMENT OF EARNINGS Lockheed Martin Corporation Year ended December 31, (In millions, except per share data) 1999 1998 1997 Net sales $25,530 $26,266 $28,069 Cost of sales 23,865 23,914 25,772 Earnings from operations 1,665 2,352 2,297 Other income and expenses, net 344 170 482 2,009 2,522 2,779 Interest expense 809 861 842 Earnings before income taxes and cumulative effect of change in accounting 1,200 1,661 1,937 Income tax expense 463 660 637 Earnings before cumulative effect of change in accounting 737 1,001 1,300 Cumulative effect of change in accounting (355) — — Net earnings $ 382 $ 1,001 $ 1,300 Earnings (loss) per common share:* Basic: Before cumulative effect of change in accounting $ 1.93 $ 2.66 $ (1.56) Cumulative effect of change in accounting (.93) — — $ 1.00 $ 2.66 $ (1.56) Diluted: 40 Before cumulative effect of change in accounting $ 1.92 $ 2.63 $ (1.56) Cumulative effect of change in accounting (.93) — — $ .99 $ 2.63 $ (1.56) *As more fully described in Notes 3 and 5, in 1997 the Corporation reacquired all of its outstanding Series A preferred stock resulting in a deemed dividend of $1,826 million. For purposes of computing net loss applicable to common stock for basic and diluted loss per share, the deemed preferred stock dividend was deducted from 1997 net earnings. See accompanying Notes to Consolidated Financial Statements.


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    CONSOLIDATED STATEMENT OF CASH FLOWS Lockheed Martin Corporation Year ended December 31, (In millions) 1999 1998 1997 Operating Activities Earnings before cumulative effect of change in accounting $ 737 $ 1,001 $ 1,300 Adjustments to reconcile earnings to net cash provided by operating activities: Depreciation and amortization 529 569 606 Amortization of intangible assets 440 436 446 Deferred federal income taxes 293 203 155 GE Transaction — — (311) Changes in operating assets and liabilities: Receivables 130 809 (572) Inventories (404) (1,183) (687) Customer advances and amounts in excess of costs incurred 313 329 1,048 Income taxes (284) 189 (560) Other (677) (322) (217) Net cash provided by operating activities 1,077 2,031 1,208 Investing Activities Expenditures for property, plant and equipment (669) (697) (750) Consummation of COMSAT Tender Offer (1,203) — — Sale of remaining interest in L-3 263 — — Divestiture of L-3 companies — — 464 Divestiture of Armament Systems and Defense Systems — — 450 41 Other acquisition and divestiture activities (103) 134 12 Other 74 108 9 Net cash (used for) provided by investing activities (1,638) (455) 185 Financing Activities Net decrease in short-term borrowings (868) (151) (866) Increases in long-term debt 2,994 266 1,505 Repayments and extinguishments of long-term debt (1,067) (1,136) (219) Issuances of common stock 17 91 110 Dividends on common stock (345) (310) (299) Dividends on preferred stock — — (53) Redemption of preferred stock — (51) (1,571) Net cash provided by (used for) financing activities 731 (1,291) (1,393) Net increase in cash and cash equivalents 170 285 — Cash and cash equivalents at beginning of year 285 — — Cash and cash equivalents at end of year $ 455 $ 285 $ — See accompanying Notes to Consolidated Financial Statements.


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    CONSOLIDATED BALANCE SHEET Lockheed Martin Corporation December 31, (In millions) 1999 1998 Assets Current assets: Cash and cash equivalents $ 455 $ 285 Receivables 4,348 4,178 Inventories 4,051 4,293 Deferred income taxes 1,237 1,109 Other current assets 605 746 Total current assets 10,696 10,611 Property, plant and equipment 3,634 3,513 Investments in equity securities 2,210 948 Intangible assets related to contracts and programs acquired 1,259 1,418 Cost in excess of net assets acquired 9,162 9,521 Other assets 3,051 2,733 $30,012 $28,744 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,228 $ 1,382 Customer advances and amounts in excess of costs incurred 4,655 4,012 Salaries, benefits and payroll taxes 941 842 Income taxes 51 553 Short-term borrowings 475 1,043 42 Current maturities of long-term debt 52 886 Other current liabilities 1,410 1,549 Total current liabilities 8,812 10,267 Long-term debt 11,427 8,957 Post-retirement benefit liabilities 1,805 1,903 Other liabilities 1,607 1,480 Stockholders’ equity: Common stock, $1 par value per share 398 393 Additional paid-in capital 222 70 Retained earnings 5,901 5,864 Unearned ESOP shares (150) (182) Accumulated other comprehensive income (loss) (10) (8) Total stockholders’ equity 6,361 6,137 $30,012 $28,744 See accompanying Notes to Consolidated Financial Statements.


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    CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY Lockheed Martin Corporation Accumulated Additional Unearned Other Total Preferred Common Paid-In Retained ESOP Comprehensive Stockholders’ Comprehensive (In millions, except per share data) Stock Stock Capital Earnings Shares Income (Loss) Equity Income Balance at December 31, 1996 $ 1,000 $193 $ 92 $ 5,823 $(252) $— $ 6,856 — Net earnings — — — 1,300 — — 1,300 $1,300 Dividends declared on preferred stock ($2.65 per share) — — — (53) — — (53) — Dividends declared on common stock ($.80 per share) — — — (299) — — (299) — Stock awards and options, and ESOP activity — 1 161 — 36 — 198 — Redemption of preferred stock (1,000) — (228) (1,598) — — (2,826) — Balance at December 31, 1997 — 194 25 5,173 (216) — 5,176 $1,300 Net earnings — — — 1,001 — — 1,001 $1,001 Dividends declared on common stock ($.82 per share) — — — (310) — — (310) — Stock awards and options, and ESOP activity — 2 204 — 34 — 240 — Stock issued for acquisitions — — 38 — — — 38 — Other comprehensive income (loss) — — — — — (8) (8) (8) Two-for-one stock split — 197 (197) — — — — — 43 Balance at December 31, 1998 — 393 70 5,864 (182) (8) 6,137 $ 993 Net earnings — — — 382 — — 382 $ 382 Dividends declared on common stock ($.88 per share) — — — (345) — — (345) — Stock awards and options, and ESOP activity — 5 152 — 32 — 189 — Other comprehensive income (loss) — — — — — (2) (2) (2) Balance at December 31, 1999 $ — $ 398 $ 222 $ 5,901 $ (150) $(10) $ 6,361 $ 380 See accompanying Notes to Consolidated Financial Statements.


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 Note 1—Summary of Significant Accounting Policies Cash and cash equivalents—Cash and cash equivalents are net of outstanding checks that are funded daily as pre- Organization—Lockheed Martin Corporation (Lockheed sented for payment. Cash equivalents are generally com- Martin or the Corporation) is engaged in the conception, prised of highly liquid instruments with maturities of three research, design, development, manufacture, integration months or less when purchased. Due to the short maturity and operation of advanced technology systems, products of these instruments, carrying value on the Corporation’s and services. Its products and services range from aircraft, Consolidated Balance Sheet approximates fair value. spacecraft and launch vehicles to missiles, electronics, infor- mation systems, telecommunications and energy manage- Receivables—Receivables consist of amounts billed and cur- ment. The Corporation serves customers in both domestic rently due from customers, and include unbilled costs and and international defense and commercial markets, with its accrued profits primarily related to revenues on long-term principal customers being agencies of the U.S. Government. contracts that have been recognized for accounting pur- poses but not yet billed to customers. As such revenues are Basis of consolidation and use of estimates—The consoli- recognized, appropriate amounts of customer advances dated financial statements include the accounts of wholly- and progress payments are reflected as an offset to the owned and majority-owned subsidiaries. Intercompany related accounts receivable balance. balances and transactions have been eliminated in con- solidation. The preparation of consolidated financial state- Inventories—Inventories are stated at the lower of cost or ments in conformity with accounting principles generally estimated net realizable value. Costs on long-term contracts accepted in the United States requires management to and programs in progress represent recoverable costs make estimates and assumptions, including estimates incurred for production, allocable operating overhead and, 44 of anticipated contract costs and revenues utilized in the where appropriate, research and development and general earnings recognition process, that affect the reported and administrative expenses. Pursuant to contract provisions, amounts in the financial statements and accompanying agencies of the U.S. Government and certain other customers notes. Actual results could differ from those estimates. have title to, or a security interest in, inventories related to such contracts as a result of advances and progress pay- Common stock split—On December 31, 1998, ments. Such advances and progress payments are reflected the Corporation effected a two-for-one split of the as an offset against the related inventory balances. General Corporation’s common stock in the form of a stock and administrative expenses related to commercial prod- dividend. All references to shares of common stock ucts and services provided essentially under commercial and per share amounts in periods prior to December terms and conditions are expensed as incurred. Costs of 1998 were restated to reflect the stock split. other product and supply inventories are principally deter- Classifications—Receivables and inventories are primarily mined by the first-in, first-out or average cost methods. attributable to long-term contracts or programs in progress Property, plant and equipment—Property, plant and equip- for which the related operating cycles are longer than one ment are carried principally at cost. Depreciation is pro- year. In accordance with industry practice, these items vided on plant and equipment generally using accelerated are included in current assets. Certain amounts for prior methods during the first half of the estimated useful lives of years have been reclassified to conform with the 1999 the assets; thereafter, straight-line depreciation generally is presentation. used. Estimated useful lives generally range from 8 years to


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    Lockheed Martin Corporation 40 years for buildings and 2 years to 20 years for machin- Customer advances and amounts in excess of costs ery and equipment. incurred—The Corporation receives advances and progress payments from customers in excess of costs incurred on Investments in equity securities—Investments in equity certain contracts, including contracts with agencies of the securities include the Corporation’s ownership interests in U.S. Government. Such advances and progress payments, affiliated companies accounted for under the equity method other than those reflected as an offset to accounts receiv- of accounting. Under this method of accounting, which able or inventories as discussed above, are classified as generally applies to investments that represent a 20 per- current liabilities. cent to 50 percent ownership of the equity securities of the investees, the Corporation’s share of the earnings of the Environmental matters—The Corporation records a liability affiliated companies is included in other income and for environmental matters when it is probable that a liability expenses. The Corporation recognizes currently gains or has been incurred and the amount can be reasonably esti- losses arising from issuances of stock by wholly-owned or mated. A substantial portion of these costs are expected majority-owned subsidiaries, or by equity method investees. to be reflected in sales and cost of sales pursuant to U.S. These gains or losses are also included in other income and Government agreement or regulation. At the time a liability expenses. Investments in equity securities also include the is recorded for future environmental costs, an asset is Corporation’s ownership interests in companies in which its recorded for estimated future recovery considered probable investment represents less than 20 percent. These invest- through the pricing of products and services to agencies of ments are generally accounted for under the cost method the U.S. Government. The portion of those costs expected of accounting. to be allocated to commercial business is reflected in cost of sales at the time the liability is established. Intangible assets—Intangible assets related to contracts and 45 programs acquired are amortized over the estimated periods Sales and earnings—Sales and anticipated profits under of benefit (15 years or less) and are displayed on the long-term fixed-price production contracts are recorded on Consolidated Balance Sheet net of accumulated amortization a percentage of completion basis, generally using units of of $958 million and $800 million at December 31, 1999 delivery as the measurement basis for effort accomplished. and 1998, respectively. Cost in excess of net assets acquired Estimated contract profits are taken into earnings in propor- (goodwill) is amortized ratably over appropriate periods, tion to recorded sales. Sales under certain long-term fixed- primarily 40 years, and is displayed on the Consolidated price contracts which, among other things, provide for Balance Sheet net of accumulated amortization of $1,373 the delivery of minimal quantities or require a significant million and $1,103 million at December 31, 1999 and amount of development effort in relation to total contract 1998, respectively. The carrying values of intangible assets, value, are recorded upon achievement of performance as well as other long-lived assets, are reviewed for impair- milestones or using the cost-to-cost method of accounting ment if changes in the facts and circumstances indicate where sales and profits are recorded based on the ratio of potential impairment of their carrying values. Any impairment costs incurred to estimated total costs at completion. determined is recorded in the current period and is meas- Sales under cost-reimbursement-type contracts are ured by comparing the discounted cash flows of the related recorded as costs are incurred. Applicable estimated profits business operations to the appropriate carrying values. are included in earnings in the proportion that incurred costs bear to total estimated costs. Sales of products and


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1999 services provided essentially under commercial terms and hedges of firm commitments or specific anticipated conditions are recorded upon shipment or completion of transactions. Gains and losses on these contracts are recog- specified tasks. nized in income when the hedged transactions occur. At Amounts representing contract change orders, claims December 31, 1999, the amounts of forward exchange or other items are included in sales only when they can be contracts outstanding, as well as the amounts of gains and reliably estimated and realization is probable. Incentives losses recorded during the year, were not material. The or penalties and awards applicable to performance on con- Corporation does not hold or issue derivative financial tracts are considered in estimating sales and profit rates, instruments for trading purposes. and are recorded when there is sufficient information to Stock-based compensation—The Corporation measures assess anticipated contract performance. Incentive provi- compensation cost for stock-based compensation sions which increase or decrease earnings based solely plans using the intrinsic value method of accounting as on a single significant event are generally not recognized prescribed in Accounting Principles Board Opinion until the event occurs. No. 25, “Accounting for Stock Issued to Employees,” When adjustments in contract value or estimated costs and related interpretations. The Corporation has adopted are determined, any changes from prior estimates are those provisions of Statement of Financial Accounting reflected in earnings in the current period. Anticipated Standards (SFAS) No. 123, “Accounting for Stock-Based losses on contracts or programs in progress are charged Compensation,” which require disclosure of the pro forma to earnings when identified. effect on net earnings and earnings per share as if compen- Research and development and similar costs—Corporation- sation cost had been recognized based upon the estimated sponsored research and development costs primarily include fair value at the date of grant for options awarded. 46 research and development and bid and proposal efforts Comprehensive income—Comprehensive income for the related to government products and services. Except for Corporation consists primarily of net earnings, foreign certain arrangements described below, these costs are gen- currency translation adjustments and unrealized gains and erally included as part of the general and administrative losses on available-for-sale securities. At December 31, costs that are allocated among all contracts and programs 1999 and 1998, the accumulated balances of other com- in progress under U.S. Government contractual arrange- prehensive income related to foreign currency translation ments. Corporation-sponsored product development costs adjustments were insignificant. Prior to 1998, such adjust- not otherwise allocable are charged to expense when ments were recorded in other liabilities and were also incurred. Under certain arrangements in which a customer insignificant. In October 1999, the Corporation sold its shares in product development costs, the Corporation’s por- remaining interest in L-3 Communications Holdings, Inc. tion of such unreimbursed costs is expensed as incurred. (L-3) (see Note 3), and reclassified to net earnings $30 Customer-sponsored research and development costs incurred million of unrealized gains previously recorded as com- pursuant to contracts are accounted for as contract costs. prehensive income. Derivative financial instruments—The Corporation may New accounting pronouncements adopted—Effective use derivative financial instruments to manage its exposure January 1, 1999, the Corporation adopted the American to fluctuations in interest rates and foreign exchange rates. Institute of Certified Public Accountants’ (AICPA) Statement Forward exchange contracts are designated as qualifying of Position (SOP) No. 98-5, “Reporting on the Costs of


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    Lockheed Martin Corporation Start-Up Activities.” This SOP requires that, at the effective SFAS No. 133, as amended, prior to the required date of date of adoption, costs of start-up activities previously capi- January 1, 2001. The Corporation is continuing its process talized be expensed and reported as a cumulative effect of analyzing and assessing the impact that the adoption of a change in accounting principle, and further requires of SFAS No. 133 is expected to have on its consolidated that such costs subsequent to adoption be expensed as results of operations, cash flows and financial position, but incurred. The adoption of SOP No. 98-5 resulted in the has not yet reached any conclusions. recognition of a cumulative effect adjustment which reduced net earnings for the year ended December 31, 1999 by Note 2—Transaction Agreement with COMSAT Corporation $355 million, or $.93 per diluted share. The cumulative In September 1998, the Corporation and COMSAT effect adjustment was recorded net of income tax benefits Corporation (COMSAT) announced that they had entered of $227 million, and was primarily composed of approxi- into an Agreement and Plan of Merger (the Merger mately $560 million of costs which were included in inven- Agreement) to combine the companies in a two-phase tories as of December 31, 1998. transaction with a total estimated value of approximately Effective January 1, 1999, the Corporation adopted $2.7 billion at the date of the announcement (the Merger). the AICPA’s SOP No. 98-1, “Accounting for the Costs of The Merger Agreement was approved by the respective Computer Software Developed or Obtained for Internal Boards of Directors of the Corporation and COMSAT. Use.” This SOP, which requires the capitalization of certain In connection with the first phase of this transaction, costs incurred in connection with developing or obtaining subsequent to obtaining all necessary regulatory approvals software for internal use, affects the future cash flows under and approval of the Merger by the stockholders of COMSAT, contracts with the U.S. Government. However, the impact the Corporation completed a cash tender offer (the Tender of the adoption of SOP No. 98-1 was not material to the 47 Offer) on September 18, 1999. On that date, the Corpora- Corporation’s consolidated results of operations, cash flows tion accepted for payment approximately 26 million shares or financial position. of COMSAT common stock, representing approximately New accounting pronouncement to be adopted—In June 49 percent of the outstanding common stock of COMSAT, 1998, the Financial Accounting Standards Board (FASB) for $45.50 a share pursuant to the terms of the Merger issued SFAS No. 133, “Accounting for Derivative Instru- Agreement. The total value of this phase of the transaction ments and Hedging Activities.” SFAS No. 133 requires the was $1.2 billion, and such amount is included in invest- recognition of all derivatives as either assets or liabilities in ments in equity securities in the December 31, 1999 the Consolidated Balance Sheet, and the periodic measure- Consolidated Balance Sheet. The Corporation accounts for ment of those instruments at fair value. The classification of its 49 percent investment in COMSAT under the equity gains and losses resulting from changes in the fair values of method of accounting. derivatives is dependent on the intended use of the deriva- The second phase of the transaction, which will result tive and its resulting designation. In general, these provi- in consummation of the Merger, is to be accomplished by sions of the Statement could result in a greater degree of an exchange of one share of Lockheed Martin common income statement volatility than current accounting practice. stock for each remaining share of COMSAT common stock. At adoption, existing hedging relationships must be desig- Consummation of the Merger remains contingent upon the nated anew and documented pursuant to the provisions of satisfaction of certain conditions, including the enactment of the Statement. The Corporation does not intend to adopt federal legislation necessary to remove existing restrictions


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1999 on ownership of COMSAT voting stock. Legislation neces- be accounted for under the purchase method of accounting. sary to remove these restrictions cleared the U.S. Senate If the Merger is not consummated, the Corporation will not on July 1, 1999. On November 10, 1999, the U.S. House be able to achieve all of its objectives with respect to the of Representatives (the House) also passed legislation which, COMSAT transaction and will be unable to exercise control if adopted into law, would remove these restrictions. There over COMSAT. are substantial differences between the two bills, and signifi- Effective January 1, 1999, investments in several exist- cant issues raised by the House bill in particular which, ing joint ventures and elements of the Corporation were if not resolved satisfactorily, would likely have a Significant combined with Lockheed Martin Global Telecommunications, Adverse Effect on COMSAT (as defined in the Merger Inc. (Global Telecommunications), a wholly-owned sub- Agreement). The Corporation hopes these issues will be sidiary of the Corporation focused on capturing a greater favorably resolved. portion of the worldwide telecommunications services market. In early 2000, sponsors of the two different bills The Corporation intends to combine the operations of Global announced a compromise agreement that, if adopted, Telecommunications and COMSAT upon consummation of would resolve many of the issues raised by the House bill. the Merger noted above. It is now expected that legislation that reflects the compro- mise agreement will be enacted before May 2000. There Note 3—Divestiture Activities is no assurance that this legislation will be passed or passed The Corporation executed a definitive agreement in March in this time frame, or that any legislation that does become 1997 to reposition 10 of its non-core business units as a law would not have an adverse effect on COMSAT’s busi- new independent company, L-3, in which the Corporation ness. If Congress enacts legislation that the Corporation retained an approximate 35 percent ownership interest at 48 determines in good faith, after consultation with COMSAT, closing. The transaction did not have a material impact on would reasonably be expected to have a Significant the Corporation’s 1997 earnings. During May 1998, L-3 Adverse Effect on COMSAT’s business, the Corporation completed an initial public offering resulting in the issuance would have the right to elect not to complete the Merger. of an additional 6.9 million shares of its common stock to Before the Merger can occur, the Corporation must file the public. This transaction resulted in a reduction in the separate notification and report forms under the Hart Scott- Corporation’s ownership to approximately 25 percent and Rodino Antitrust Improvement Act with the Federal Trade the recognition of a pretax gain of $18 million. The gain Commission (FTC) and the U.S. Department of Justice increased net earnings by $12 million, or $.03 per diluted (DOJ) regarding its acquisition of minority interests in share. In February 1999, the Corporation sold 4.5 million two businesses held by COMSAT. In addition, following of its shares in L-3 as part of a secondary public offering the passage of legislation, the Federal Communications by L-3. This transaction resulted in a reduction in the Commission (FCC) must approve the Merger. The precise Corporation’s ownership to approximately seven percent nature of the FCC approval requirement will, however, and the recognition of a pretax gain of $114 million. The depend upon the details of the final legislation enacted by gain increased net earnings by $74 million, or $.19 per Congress. There is no assurance as to the timing or whether diluted share. After this transaction was consummated, the the FTC, DOJ or FCC will provide the requisite approvals. Corporation began accounting for its remaining investment If the Merger is not completed on or before September 18, in L-3 as an available-for-sale investment. In October 1999, 2000, under the terms of the Merger Agreement, Lockheed the Corporation sold its remaining interest in L-3. This trans- Martin or COMSAT could terminate the Merger Agreement action resulted in the recognition of a pretax gain of $41 or elect not to exercise this right, or both parties could million which increased net earnings by $27 million, or agree to extend this date. If consummated, the Merger will $.07 per diluted share.


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    Lockheed Martin Corporation In September 1999, the Corporation sold its interest in of the Series A preferred stock ($1.0 billion) was treated as Airport Group International Holdings, LLC which resulted a deemed preferred stock dividend and deducted from in a pretax gain of $33 million. In October 1999, the 1997 net earnings in accordance with the requirements of Corporation exited its commercial 3D graphics business the Emerging Issues Task Force’s Issue D-42. This deemed through consummation of a series of transactions which dividend had a significant impact on the loss per share cal- resulted in the sale of its interest in Real 3D, Inc., a majority- culations, but did not impact reported 1997 net earnings. owned subsidiary, and a pretax gain of $33 million. On The effect of this deemed dividend was to reduce the basic a combined basis, these transactions increased net earn- and diluted loss per share amounts by $4.93. ings by $43 million, or $.11 per diluted share. In November 1997, the Corporation exchanged all of Note 4—Restructuring and Other Charges the outstanding capital stock of a wholly-owned subsidiary, In the fourth quarter of 1998, the Corporation recorded LMT Sub, for all of the outstanding Series A preferred stock a nonrecurring and unusual pretax charge, net of state held by General Electric Company (the GE Transaction). income tax benefits, of $233 million related to actions LMT Sub was composed of two non-core commercial busi- surrounding the decision to fund a timely non-bankruptcy ness units which contributed approximately five percent shutdown of the business of CalComp Technology, Inc. of the Corporation’s 1997 net sales, Lockheed Martin’s (CalComp), a majority-owned subsidiary. The pretax investment in a telecommunications partnership, and charge reflected the effects of impairment related to good- approximately $1.6 billion in cash, of which $1.4 billion will of approximately $75 million; writedowns of approxi- was subsequently refinanced with a 6.04% note, due mately $73 million to reflect other assets at estimated November 17, 2002, from Lockheed Martin to LMT Sub. recoverable values; estimated severance and other costs The fair value of the non-cash net assets exchanged was 49 related to employees of approximately $25 million; esti- approximately $1.2 billion. During the second quarter of mated costs related to warranty obligations, and purchase 1998, the final determination of the closing net worth of and other commitments of approximately $37 million; and the businesses exchanged was completed, resulting in a other estimated exit costs, primarily related to facilities, payment of $51 million from the Corporation to MRA of approximately $23 million. This charge decreased net Systems, Inc. (formerly LMT Sub). Subsequently, the remain- earnings by $183 million, or $.48 per diluted share. der of the cash included in the transaction was refinanced As of December 31, 1999, CalComp had, among with a 5.73% note for $210 million, due November 17, other actions, consummated sales of substantially all of its 2002, from Lockheed Martin to MRA Systems, Inc. assets, terminated substantially all of its work force, and The GE Transaction was accounted for at fair value, initiated the corporate dissolution process under the appli- and resulted in the reduction of the Corporation’s stockhold- cable state statutes and, for its foreign subsidiaries, foreign ers’ equity by $2.8 billion and the recognition of a tax-free government statutes. The financial impacts of these actions gain of approximately $311 million during the fourth quar- were less than anticipated in the Corporation’s plans ter of 1997. The final settlement payment in 1998 did not and estimates and, in the fourth quarter of 1999, the impact the gain previously recorded on the transaction. For Corporation reversed approximately 10 percent of the purposes of determining net loss applicable to common original pretax charge recorded in 1998. While uncer- stock used in the computation of loss per share for 1997, tainty remains concerning the resolution of matters in dis- the excess of the fair value of the consideration transferred pute or litigation, management believes that the remaining to GE (approximately $2.8 billion) over the carrying value


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1999 amount recorded is adequate to provide for resolution of Corporation’s future strategic focus, and reflected impair- these matters and to complete the dissolution process. ment in the values of non-core investments and certain During the fourth quarter of 1997, the Corporation other assets which were other than temporary in nature. recorded nonrecurring and unusual pretax charges, net The remaining charges of approximately $75 million of state income tax benefits, totaling $457 million, which pertained to costs for facility closings and transfers of reduced net earnings by $303 million. The charges were programs related to the Corporation’s acquisition of Loral identified in connection with the Corporation’s review, Corporation in April 1996 (the Loral Transaction). which concluded in the fourth quarter, of non-strategic lines As of December 31, 1999, initiatives undertaken of business, non-core investments and certain other assets. as part of the 1997 and 1996 charges relating to the Approximately $200 million of the pretax charges reflected Corporation’s reviews of non-core investments and certain the estimated effects of exiting non-strategic lines of busi- other assets which resulted in impairment in values of those ness, including amounts related to the fixed price systems assets, facility closings and transfers of programs resulting development line of business in the area of children and from the consummation of the Loral Transaction, and the family services, and related to increases in estimated termination of a business relationship formed to provide exposures relative to the environmental remediation lines environmental remediation services, which in total rep- of business initially identified in 1996 and for which initial resented approximately 75 percent of the amounts origi- estimates of exposure were provided in the fourth quarter nally recorded, have been completed consistent with of 1996. These increases in estimated exposures were the Corporation’s original plans and estimates. Actions based on more current information, including deterioration contemplated as part of the Corporation’s exit from a cer- in a partner’s financial condition as evidenced by the part- tain environmental remediation line of business and a fixed 50 ner seeking protection under the bankruptcy laws. The price systems development line of business in the area of remaining charges reflected impairment in the values of children and family services have not been completed. In various non-core investments and certain other assets in 1999, the Corporation recorded an additional charge of keeping with the Corporation’s continued focus on core approximately $40 million related to the exit from these operations. These charges, in combination with the gain lines of business. During 1998 and 1997, the effects on recognized on the GE Transaction (see Note 3), decreased the Corporation’s net earnings of adjustments associated loss per diluted share for 1997 by $.02. with these charges were not material. The amounts recorded During the fourth quarter of 1996, the Corporation in the Consolidated Balance Sheet at December 31, 1999 recorded nonrecurring pretax charges, net of state income related to these actions are, in the opinion of management, tax benefits, of $307 million, which decreased net earnings adequate to complete the remaining initiatives originally by $209 million. Approximately one-half of the charges contemplated in the 1997 and 1996 charges. reflected the estimated effects of terminating a business During 1995, the Corporation recorded pretax charges relationship formed to provide environmental remediation of $690 million from merger related expenses in connec- services to government and commercial customers world- tion with the formation of Lockheed Martin and the related wide, and the initial estimated effects related to manage- corporate-wide consolidation plan. The charges repre- ment’s decision to exit a certain environmental remediation sented the portion of the accrued costs and net realizable line of business. Charges of approximately $85 million value adjustments that were not probable of recovery. In were identified in connection with an evaluation of the


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    Lockheed Martin Corporation addition, the Corporation has incurred costs through the was computed in the same manner as basic loss per share, end of 1999 which were anticipated in the 1995 consoli- as adjustments related to the assumed conversion of the dation plan but had not met the requirements for accrual preferred stock (50.6 million common shares) and the earlier. These costs include relocation of personnel and pro- related dividend requirement for the preferred stock to the grams, retraining, process re-engineering and certain capi- date of redemption ($53 million), and the dilutive effect of tal expenditures, among others. As of December 31, 1999, stock options (5.8 million common shares), were not made cumulative merger related and consolidation payments since they would have had antidilutive effects. were approximately $1.2 billion. Consistent with the origi- The following table sets forth the computations of basic nal 1995 consolidation plan, consolidation actions were and diluted earnings (loss) per share: substantially completed by December 31, 1999. (In millions, except per share data) 1999 1998 1997 Under existing U.S. Government regulations, certain Net earnings (loss) applicable costs incurred for consolidation actions that can be demon- to common stock: Earnings before cumulative strated to result in savings in excess of the cost to implement effect of change in accounting $ 737 $1,001 $ 1,300 can be deferred and amortized for government contracting Cumulative effect of change in purposes and included as allowable costs in future pricing accounting (355) — — of the Corporation’s products and services. Included in the Net earnings 382 1,001 1,300 Dividends on preferred stock — — (53) Consolidated Balance Sheet at December 31, 1999 is Deemed preferred stock dividend — — (1,826) approximately $375 million of deferred costs that will be Net earnings (loss) applicable recognized in future sales and cost of sales. to common stock for basic and diluted computations $ 382 $1,001 $ (579) Average common shares Note 5—Earnings Per Share 51 outstanding: Average number of common Basic and diluted earnings per share for 1999 and 1998 shares outstanding for basic are computed based on net earnings. For these years, the computations 382.3 376.5 370.6 weighted average number of common shares outstanding Dilutive stock options—based on the treasury stock method 1.8 4.6 — during each year was used in the calculation of basic earn- Average number of common ings per share, and this number of shares was increased by shares outstanding for diluted the effects of dilutive stock options based on the treasury computations 384.1 381.1 370.6 stock method in the calculation of diluted earnings per share. Earnings (loss) per share: Basic: Basic loss per share for 1997 was computed based on net Before cumulative effect of earnings, less the dividend requirement for preferred stock change in accounting $1.93 $ 2.66 $ (1.56) to the date of redemption, and less the deemed preferred Cumulative effect of change in accounting (.93) — — stock dividend resulting from the November 1997 GE $1.00 $ 2.66 $ (1.56) Transaction representing the excess of the fair value of the Diluted: consideration transferred to GE (approximately $2.8 billion) Before cumulative effect of over the carrying value of the Lockheed Martin preferred change in accounting $1.92 $ 2.63 $ (1.56) Cumulative effect of change stock redeemed ($1.0 billion). The weighted average num- in accounting (.93) — — ber of common shares outstanding during the year was $ .99 $ 2.63 $ (1.56) used in this calculation. The diluted loss per share for 1997


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1999 Note 6—Receivables for aircraft not under contract related to the Corporation’s (In millions) 1999 1998 C-130J program. U.S. Government: Included in 1999 and 1998 commercial launch Amounts billed $ 927 $ 987 vehicle inventories were amounts advanced to Russian Unbilled costs and accrued profits 2,300 2,440 Less customer advances and progress manufacturers, Khrunichev State Research and Produc- payments (395) (491) tion Space Center and RD AMROSS, a joint venture Commercial and foreign governments: between Pratt & Whitney and NPO Energomash, of Amounts billed 644 635 Unbilled costs and accrued profits, primarily approximately $903 million and $840 million, respec- related to commercial contracts 963 638 tively, for the manufacture of launch vehicles and related Less customer advances and progress launch services. payments (91) (31) Approximately $1.5 billion of costs included in 1999 $4,348 $4,178 inventories, including approximately $652 million advanced Approximately $385 million of the December 31, to the Russian manufacturers, are not expected to be recov- 1999 unbilled costs and accrued profits are not expected ered within one year. to be recovered within one year. Included in 1998 inventories were capitalized costs related to start-up activities of approximately $560 million Note 7—Inventories which were included in the cumulative effect adjustment (In millions) 1999 1998 related to the Corporation’s adoption of SOP No. 98-5 Work in process, effective January 1, 1999. commercial launch vehicles $ 1,514 $ 1,326 An analysis of general and administrative costs, includ- Work in process, primarily 52 related to other long-term ing research and development costs, included in work in contracts and programs process inventories follows: in progress 3,879 4,872 (In millions) 1999 1998 1997 Less customer advances and progress payments (1,848) (2,499) Beginning of year $ 693 $ 533 $ 460 Incurred during the year 2,354 2,469 2,245 3,545 3,699 Charged to cost of sales Other inventories 506 594 during the year: $ 4,051 $ 4,293 Research and development (822) (864) (788) Work in process inventories related to commercial Other general and administrative (1,732) (1,445) (1,384) launch vehicles included costs for launch vehicles, both End of year $ 493 $ 693 $ 533 under contract and not under contract, including unamor- tized deferred costs related to the commercial Atlas and In addition, included in cost of sales in 1999, 1998 the Evolved Expendable Launch Vehicle (Atlas V) programs. and 1997 were general and administrative costs, including Work in process inventories related to other long-term con- research and development costs, of approximately $509 tracts and programs included approximately $150 million million, $490 million and $539 million, respectively, of unamortized deferred costs at December 31, 1999 incurred by commercial business units or programs.


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    Lockheed Martin Corporation Note 8—Property, Plant and Equipment Note 10—Debt (In millions) 1999 1998 Type (Maturity Dates) Land $ 218 $ 235 (In millions, except Range of Buildings 3,027 2,979 interest rate data) Interest Rates 1999 1998 Machinery and equipment 5,662 5,459 Notes (2000–2022) 5.7 – 9.4% $ 6,778 $ 6,014 8,907 8,673 Debentures (2011–2036) 7.0 – 9.1% 4,407 3,160 Less accumulated depreciation Commercial paper 5.4 – 6.0% — 300 and amortization (5,273) (5,160) ESOP obligations (2000–2004) 8.4% 217 256 $ 3,634 $ 3,513 Other obligations (2000–2016) 1.0 – 12.7% 77 113 11,479 9,843 Note 9—Investments in Equity Securities Less current maturities (52) (886) (In millions) 1999 1998 $11,427 $8,957 Equity method investments: COMSAT Corporation $ 1,188 $ — During the fourth quarter of 1999, the Corporation ACeS International, Ltd. 163 162 Astrolink International, LLC 148 — issued $3.0 billion of long-term fixed rate debt securities, Americom Asia-Pacific, LLC 114 105 the entire amount registered under its previously filed shelf Space Imaging LLC 86 99 L-3 Communications Holdings, Inc. — 77 registration statement. These Notes and Debentures range Other 72 85 in maturity from six years to 30 years, with interest rates 1,771 528 ranging from 7.95% to 8.5%. Cost method investments: As of December 31, 1999, the Corporation had Loral Space & Communications Ltd. 393 393 Other 46 27 $1.3 billion of notes outstanding which had been issued to a wholly-owned subsidiary of GE in connection with the 53 439 420 $ 2,210 $ 948 GE Transaction. The notes are due November 17, 2002 and bear interest at a rate of approximately 6%. The agree- At December 31, 1999, the carrying value of the ments relating to these notes require that, so long as the Corporation’s 49 percent investment in COMSAT exceeded aggregate principal amount of the notes exceeds $1.0 the Corporation’s share of COMSAT’s net assets by approx- billion, the Corporation will recommend to its stockholders imately $900 million, and this amount is being amortized the election of one person designated by GE to serve as a ratably over 30 years. The Corporation also has commit- director of the Corporation. ments to provide funding to Astrolink International, LLC total- The registered holders of $300 million of 40 year ing approximately $270 million at December 31, 1999. Debentures issued in 1996 may elect, between March 1 The estimated fair value of the Corporation’s investment and April 1, 2008, to have their Debentures repaid by in Loral Space & Communications Ltd., which consists of the Corporation on May 1, 2008. 45.9 million shares of Loral Space Series A Preferred Included in Debentures are $112 million of 7% obliga- Stock, was $750 million at December 31, 1999. tions ($175 million at face value) which were originally sold at approximately 54 percent of their principal amount.


  • Page 47

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1999 These Debentures, which are redeemable in whole or in The weighted average interest rates for commercial paper part at the Corporation’s option at 100 percent of their outstanding at December 31, 1999 and 1998 were 6.6% face value, have an effective yield of 13.25%. and 5.8%, respectively. A leveraged employee stock ownership plan (ESOP) The Corporation’s long-term debt maturities for the five incorporated into the Corporation’s salaried savings plan years following December 31, 1999 are: $52 million in borrowed $500 million through a private placement of 2000; $816 million in 2001; $1,336 million in 2002; notes in 1989. These notes are being repaid in quarterly $858 million in 2003; $828 million in 2004; and $7,589 installments over terms ending in 2004. The ESOP note million thereafter. agreement stipulates that, in the event that the ratings Certain of the Corporation’s other financing agreements assigned to the Corporation’s long-term senior unsecured contain restrictive covenants relating to debt, limitations on debt are below investment grade, holders of the notes may encumbrances and sale and lease-back transactions, and require the Corporation to purchase the notes and pay provisions which relate to certain changes in control. accrued interest. These notes are obligations of the ESOP The estimated fair values of the Corporation’s long-term but are guaranteed by the Corporation and included as debt instruments at December 31, 1999, aggregated debt in the Corporation’s Consolidated Balance Sheet. approximately $10.9 billion, compared with a carrying At the end of 1999, the Corporation had a long-term amount of approximately $11.5 billion. The fair values revolving credit facility, which matures on December 20, were estimated based on quoted market prices for those 2001, in the amount of $3.5 billion, and a short-term instruments publicly traded. For privately placed debt, the revolving credit facility, which matures on May 26, 2000, fair values were estimated based on the quoted market in the amount of $1.0 billion (collectively, the Credit prices for similar issues, or on current rates offered to the 54 Facilities). Borrowings under the Credit Facilities would Corporation for debt with similar remaining maturities. be unsecured and bear interest, at the Corporation’s Unless otherwise indicated elsewhere in the Notes to option, at rates based on the Eurodollar rate or a bank Consolidated Financial Statements, the carrying values of Base Rate (as defined). Each bank’s obligation to make the Corporation’s other financial instruments approximate loans under the Credit Facilities is subject to, among other their fair values. things, compliance by the Corporation with various repre- Interest payments were $790 million in 1999, $856 sentations, warranties, covenants and agreements, includ- million in 1998 and $815 million in 1997. ing, but not limited to, covenants limiting the ability of the Corporation and certain of its subsidiaries to encumber Note 11—Income Taxes their assets and a covenant not to exceed a maximum lev- The provision for federal and foreign income taxes con- erage ratio. There were no borrowings outstanding under sisted of the following components: the Credit Facilities at December 31,1999. (In millions) 1999 1998 1997 The Credit Facilities support commercial paper borrow- Federal income taxes: ings of approximately $475 million and $1.3 billion out- Current $136 $432 $448 standing at December 31, 1999 and 1998, respectively, of Deferred 293 203 155 which $300 million was classified as long-term debt in the Total federal income taxes 429 635 603 Corporation’s Consolidated Balance Sheet at December 31, Foreign income taxes 34 25 34 1998 based on management’s ability and intention to main- Total income taxes provided $463 $660 $637 tain that amount of debt outstanding for at least one year.


  • Page 48

    Lockheed Martin Corporation Net provisions for state income taxes are included in Note 12—Other Income and Expenses, Net general and administrative expenses, which are primarily (In millions) 1999 1998 1997 allocable to government contracts. Such state income taxes Equity in earnings of equity investees $ 18 $ 39 $ 48 were $22 million for 1999, $70 million for 1998 and $62 Interest income 33 38 40 Sales of surplus real estate 57 35 19 million for 1997. Royalty income 17 19 52 The Corporation’s effective income tax rate varied from Sale of remaining interest in L-3 155 — — the statutory federal income tax rate because of the follow- Sale of Airport Group International 33 — — Real 3D disposition 33 — — ing differences: GE Transaction — — 311 1999 1998 1997 Other portfolio shaping activities (9) 18 69 Statutory federal tax rate 35.0% 35.0% 35.0% Other 7 21 (57) Increase (reduction) in tax $344 $170 $482 rate from: Nondeductible amortization 7.6 5.5 4.9 Revisions to prior years’ Note 13—Stockholders’ Equity and Related Items estimated liabilities (6.0) (2.4) (5.7) Divestitures — 1.1 (2.4) Capital structure—At December 31, 1999, the authorized Other, net 2.0 .5 1.1 capital of the Corporation was composed of 1.5 billion 38.6% 39.7% 32.9% shares of common stock (approximately 398 million shares The primary components of the Corporation’s federal issued), 50 million shares of series preferred stock (no deferred income tax assets and liabilities at December 31 shares issued), and 20 million shares of Series A preferred were as follows: stock (no shares outstanding). (In millions) 1999 1998 In 1995, the Corporation’s Board of Directors author- Deferred tax assets related to: ized a common stock repurchase plan for the repurchase of 55 Accumulated post-retirement up to 18 million common shares to counter the dilutive effect benefit obligations $ 632 $ 666 Contract accounting methods 587 635 of common stock issued under certain of the Corporation’s Accrued compensation and benefits 248 181 benefit and compensation programs and for other purposes Other 165 240 related to such plans. No shares were repurchased in 1999, 1,632 1,722 1998 or 1997 under this plan. Deferred tax liabilities related to: Intangible assets 436 444 Stock option and award plans—In March 1995, the stock- Prepaid pension asset 383 338 Property, plant and equipment 93 147 holders approved the Lockheed Martin 1995 Omnibus 912 929 Performance Award Plan (the Omnibus Plan). Under the Net deferred tax assets $ 720 $ 793 Omnibus Plan, employees of the Corporation may be granted stock-based incentive awards, including options to At December 31, 1999 and 1998, other liabilities purchase common stock, stock appreciation rights, restricted included net long-term deferred tax liabilities of $517 stock or other stock-based incentive awards. Employees may million and $316 million, respectively. also be granted cash-based incentive awards, such as per- Federal and foreign income tax payments, net of formance units. These awards may be granted either indi- refunds received, were $530 million in 1999, $228 million vidually or in combination with other awards. The Omnibus in 1998 and $986 million in 1997. Plan requires that options to purchase common stock have an exercise price of not less than 100 percent of the market value of the underlying stock on the date of grant. The num- ber of shares of Lockheed Martin common stock reserved


  • Page 49

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1999 for issuance under the Omnibus Plan at December 31, Approximately 19.7 million, 15.5 million and 13.0 mil- 1999 was 38 million shares. The Omnibus Plan does not lion outstanding options were exercisable by employees at impose any minimum vesting periods on options or other December 31, 1999, 1998 and 1997, respectively. awards. The maximum term of an option or any other award Information regarding options outstanding at December is 10 years. The Omnibus Plan allows the Corporation to 31, 1999 follows (number of options in thousands): provide for financing of purchases of its common stock, sub- Weighted ject to certain conditions, by interest-bearing notes payable Average Weighted Remaining to the Corporation. Range of Number of Average Contractual In December 1999, 175,000 shares of restricted Exercise Prices Options Exercise Price Life common stock were awarded under the Omnibus Plan Options Outstanding: to certain senior executives of the Corporation. The Less than $20.00 3,328 $15.82 2.7 shares were recorded based on the market value of the $20.00–$29.99 4,922 26.33 4.9 $30.00–$39.99 9,220 37.19 8.3 Corporation’s common stock on the date of the award. $40.00–$50.00 4,980 45.53 7.0 The award requires the recipients to pay the $1 par value Greater than $50.00 4,818 52.09 9.0 of each share of stock and provides for payment to be 27,268 $36.78 6.9 made in cash or in the form of a recourse note to the Options Exercisable: Corporation. Recipients are entitled to cash dividends and Less than $20.00 3,328 $15.82 $20.00–$29.99 4,922 26.33 to vote their respective shares, but are prohibited from sell- $30.00–$39.99 4,006 37.42 ing or transferring shares prior to vesting. One-third of the $40.00–$50.00 4,975 45.53 restricted shares will vest in two years from the date of Greater than $50.00 2,454 52.11 56 grant, with the remainder vesting four years from the grant 19,685 $34.87 date. The impact of these awards was not material to stock- All stock options granted in 1999, 1998 and 1997 holders’ equity or compensation expense in 1999. under the Omnibus Plan have 10 year terms and vest The following table summarizes employee stock option over a two year service period. Exercise prices of options and restricted stock activity related to the Corporation’s awarded in those years were equal to the market price plans during 1997, 1998 and 1999: of the stock on the date of grant. Pro forma information Number of Shares Weighted (In thousands) regarding net earnings and earnings per share as required Average Available Options Exercise by SFAS No. 123 has been prepared as if the Corporation for Grant Outstanding Price had accounted for its employee stock options under the December 31, 1996 14,646 19,316 $25.33 fair value method. The fair value for these options was Granted (5,796) 5,796 45.60 estimated at the date of grant using the Black-Scholes Exercised — (3,519) 20.86 Terminated 654 (716) 40.84 option-pricing model with the following weighted average December 31, 1997 9,504 20,877 31.18 assumptions for 1999, 1998 and 1997, respectively: risk- Additions 17,000 — — free interest rates of 4.64 percent, 5.39 percent and 6.36 Granted (5,090) 5,090 52.06 Exercised — (2,697) 24.70 percent; dividend yields of 2.4 percent, 1.9 percent and Terminated 220 (223) 49.03 1.5 percent; volatility factors related to the expected market December 31, 1998 21,634 23,047 36.38 price of the Corporation’s common stock of .247, .174 and Granted (5,444) 5,444 37.01 .163; and a weighted average expected option life of five Exercised — (656) 19.76 Terminated 565 (567) 42.51 years. The weighted average fair values of options granted 16,755 27,268 36.78 during 1999, 1998 and 1997 were $8.53, $10.96 and Restricted stock awards (175) — — $10.94, respectively. December 31, 1999 16,580 27,268 $36.78


  • Page 50

    Lockheed Martin Corporation For purposes of pro forma disclosures, the options’ considered outstanding for voting and other Corporate pur- estimated fair values are amortized to expense over the poses, but excluded from weighted average outstanding options’ vesting periods. The Corporation’s pro forma infor- shares in calculating earnings per share. For 1999, 1998 mation follows: and 1997, the weighted average unallocated ESOP (In millions, except per share data) 1999 1998 1997 shares excluded in calculating earnings per share totaled Pro forma net earnings $351 $ 965 $1,267 approximately 11.3 million, 13.6 million and 15.8 million Pro forma earnings (loss) per share: common shares, respectively. The fair value of the unallo- Basic $ .92 $2.56 $ (1.65) Diluted $ .91 $2.53 $ (1.65) cated ESOP shares at December 31, 1999 was approxi- mately $228 million. Certain plans for hourly employees include non- Note 14—Post-Retirement Benefit Plans leveraged ESOPs. The Corporation’s match to these plans Defined contribution plans—The Corporation maintains a was made through cash contributions to the ESOP trusts number of defined contribution plans which cover substan- which were used, in part, to purchase common stock from tially all employees, the most significant of which are the terminating participants and in the open market for alloca- 401(k) plans for salaried employees and hourly employees. tion to participant accounts. These ESOP trusts held approx- Under the provisions of these 401(k) plans, employees’ imately 3.7 million issued and outstanding shares of eligible contributions are matched by the Corporation at common stock at December 31, 1999. established rates. The Corporation’s matching obligations Dividends paid to the salaried and hourly ESOP trusts were $222 million in 1999, $226 million in 1998 and on the allocated shares are paid annually by the ESOP $212 million in 1997. trusts to the participants based upon the number of shares The Lockheed Martin Corporation Salaried Savings allocated to each participant. 57 Plan includes an ESOP which purchased 34.8 million Defined benefit pension plans, and retiree medical shares of the Corporation’s common stock with the pro- and life insurance plans—Most employees are covered by ceeds from a $500 million note issue which is guaranteed defined benefit pension plans, and certain health care and by the Corporation. The Corporation’s match consisted of life insurance benefits are provided to eligible retirees by shares of its common stock, which was partially fulfilled the Corporation. The Corporation has made contributions to with stock released from the ESOP at approximately 2.4 trusts (including Voluntary Employees’ Beneficiary Association million shares per year based upon the debt repayment trusts and 401(h) accounts, the assets of which will be used schedule through the year 2004, with the remainder being to pay expenses of certain retiree medical plans) established fulfilled through purchases of common stock from terminating to pay future benefits to eligible retirees and dependents. participants or in the open market, or through newly issued Benefit obligations as of the end of each year reflect assump- shares from the Corporation. Interest incurred on the ESOP tions in effect as of those dates. Net pension and net retiree debt totaled $20 million, $23 million and $26 million in medical costs for 1999 and 1998 were based on assump- 1999, 1998 and 1997, respectively. Dividends received tions in effect at the end of the respective preceding years. by the ESOP with respect to unallocated shares held are Effective October 1997, the Corporation changed its used for debt service. The ESOP held approximately expected long-term rate of return on assets related to its 42.6 million issued shares of the Corporation’s common defined benefit pension and retiree medical plans. stock at December 31, 1999, of which approximately 32.2 million were allocated and 10.4 million were unallo- cated. Unallocated common shares held by the ESOP are

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