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    Annual Report 2000 In A World That Demands Information Superiority…


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    Financial Highlights (In millions, except per share data and number of employees) 2000 1999 1998 Net sales $25,329 $25,530 $26,266 Operating profit 1,205 2,009 2,522 Operating profit before amortization of intangibles 1,655 2,449 2,958 Net (loss) earnings (519) 382 1,001 Diluted (loss) earnings per share (1.29) .99 2.63 Pro forma diluted earnings per share excluding nonrecurring and unusual items 1.07 1.50 2.99 Cash dividends per common share .44 .88 .82 Total assets 30,349 30,261 28,744 Short-term borrowings 12 475 1,043 Long-term debt (including current maturities) 9,947 11,479 9,843 Stockholders’ equity 7,160 6,361 6,137 Negotiated backlog $56,424 $45,913 $45,345 Employees 130,000 147,000 165,000 Note: For a discussion of nonrecurring and unusual items and other matters affecting the comparability of the information presented above, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 23 through 41 of this Annual Report. Contents To Our Shareholders 44 Financial Section 22 Corporate Directory 72 General Information 74 On The Cover: In a world that increasingly demands information superiority, Lockheed Martin applies its advanced technologies as well as the commitment of its talented and dedicated people to meeting our customers’ priorities.


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    Lockheed Martin Applies Its Vision, Its Purpose And Its Values To Customer Priorities Our Vision: ● To be the world’s best advanced technology systems integrator. Our Purpose: ● To achieve Mission Success by attaining total customer satisfaction and meeting all our commitments. Our Values: ● Ethics ● Excellence ● “Can-Do’’ ● Integrity ● People ● Teamwork Achieving Results Through… ● Leadership And Teamwork ● Commitment Of Our People To Our Customers ● Excellence As A Premier Systems Integrator ● Innovation In Technology And Business ● Partnerships Worldwide 1


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    Leadership And Teamwork From left to right: (seated) Robert J. Stevens, Lockheed Martin President and Chief Operating Officer; Vance D. Coffman, Lockheed Martin Chairman and Chief Executive Officer; (standing) Robert B. Coutts, Executive Vice President, Lockheed Martin Systems Integration; Dain M. Hancock, Executive Vice President, Lockheed Martin Aeronautics Co.; Albert E. Smith, Executive Vice President, Lockheed Martin Space Systems Co.; John V. Sponyoe, Lockheed Martin Global Telecommunications Chief Executive Officer; Michael F. Camardo, Executive Vice President, Lockheed Martin Technology Services. 2 3


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    Dear Fellow Shareholder: We began 2000 with firm commitments to serve customers better, improve financial performance, manage for Also, around the globe corporations continue to consolidate resulting in enterprises of unprecedentedly large cash, drive operational improvements, and improve planning quality. scale and complexity, whose appetite for comprehensive solutions based on the application of advanced technology We are pleased to report that we have met these commitments and, in so doing, have achieved significantly is also rapidly expanding. Here too our competencies can be applied. Our actions will be guided by a disciplined higher levels of customer satisfaction and enhanced shareholder value. We exceeded all financial goals set focus on customers and markets that value total systems solutions, enabling us to consistently generate returns for 2000, including achieving record orders and backlog, record free cash flow generation, substantial debt above the cost of capital. reduction, and the receipt of full and fair value for our divestitures. More than any other attribute, however, the degree to which we continue to build our value based performance Of nearly 550 operational and developmental “Mission Success” events measured, 95% were successful. culture will determine our future and the well being of the customers we are committed to serve. We assembled Two other important measures of customer satisfaction and confidence—award fees for current programs and this Corporation to perform, and we are going to do so. As we leverage the fully integrated resources of “Team orders representing future business—each increased substantially during 2000. Average award fees increased Lockheed Martin”, performance is our key discriminator and shareholder value our key measure. The heritage from 85% in 1999 to 93% in 2000, while we received more than $37 billion in new orders during 2000, some of where we’ve been individually is much less important than the future we create together. 33% higher than 1999. As a result, backlog expanded from $45.9 billion at the end of 1999 to $56.4 billion at As we create that future, we are first committed to achieving continuous operational improvements, including the end of 2000, an increase of 23%. We believe that the realignment of our businesses, and careful focus by sen- increased profit margins, with commensurate increases to free cash flow generation. Our goal of driving operating ior executive leadership and our dedicated employees directly contributed to this performance. This realignment margins toward double-digit performance levels remains and we have challenged our entire leadership team to was intended to increase accountability throughout our organization while, at the same time, intensify the focus contribute to this very demanding objective. As we work additional pathways to profitability, we remain committed on our customers as we deliver consistency and quality. We are gratified that our customers continue to place such to our average annual recurring EPS expansion goal of 15% to 25%. trust in us, and fulfilling their needs remains our number one priority. Second, we must sustain our disciplined deployment of cash. We have made good progress on restoring flexi- In 2000, we committed the Corporation to managing for cash and reducing debt. Free cash flow increased bility and accelerating a return to a targeted net debt to total capital range of 40% to 50%, and we will continue from approximately $875 million in 1999 to $1.8 billion in 2000, our best performance ever. This accomplishment to rigorously prioritize investments to assure the adequacy of returns. was achieved mainly through the reduction of days working capital as we focused on the management of receiv- Third, we must concentrate on achieving higher levels of profitable organic growth in our businesses that have ables, customer advances, payables and inventory throughout all our business areas. By combining free cash flow demonstrated the ability to consistently achieve solid profit margins and returns. with the $2 billion of cash proceeds from our divestitures, we reduced our debt by $2 billion and increased our And fourth, we must continue to examine an array of strategic actions to enhance shareholder value. We will cash invested by $1 billion. This brought our net-debt-to-capital ratio down from 64% to 54% and we are making follow through with our exploration of alternatives for our state and local services business, as well as examining rapid progress toward bringing this ratio within a preferred range of 40% to 50%. In 2000, we committed to the best ways to yield value from Global Telecommunications. Such businesses require strategic partners, outside drive operational improvements and improve planning quality. Our LM-21 Operating Excellence Program has been capital and entrepreneurial management to achieve their full potential. We have reported to you on imbalances significantly expanded to all elements of our enterprise. Our annual savings targets are now $3.7 billion. We have between capacity and market demand in selected businesses and markets, and will work to resolve those imbalances expanded the use of shared services across all our business areas to drive savings and efficiencies from using com- provided shareholder value considerations are preserved. And we remain firmly committed to generating additional mon practices, reengineered processes, and e-commerce-based management tools in our administrative functions. In value by increasing the return on our intellectual capital through the more aggressive management of “technology September of 2000 the aerospace and defense business-to-business exchange named “Exostar姠”, of which we were mining” activities. Working with venture capital firms, we completed several transactions in the year 2000 to create a founding partner, was activated. Our streamlining initiatives in Aeronautics and Space are providing additional startup companies in which we hold significant equity stakes. annual savings of approximately $200 million, and our business planning process is sound as we met or exceeded In closing, we are proud of our leadership team and the 130,000 Lockheed Martin professionals for their all projections in 2000. We provided our shareholders with a total return of 58% for 2000. performance in 2000. It was, by every measure, a very good start to this millennium. We have the energy and Looking forward, we see opportunities as well as risks and challenges. We have defined a set of leadership excitement of being affiliated with a truly wonderful, high performance enterprise and we are committed to building and management imperatives that will extend our vision, evolve our strategy, and further drive our culture of per- on the momentum we have created as we drive forward to apply increasingly sophisticated technologies through formance as we continue the transition from recovery to disciplined growth and sustained value creation. integrated systems solutions to meet our customers’ most demanding challenges. This is a great company…our We continue to pursue our goal of being the world’s best systems integrator. We believe our proven com- company…Lockheed Martin. While year 2000 was a year of recovery, we are sure our best days remain petencies and capabilities, which enable the seamless integration and exploitation of complex technologies, will ahead of us. be under increasing demand. Governments are increasingly likely to turn to private sector partners for solutions to national and global challenges. It is our objective to be the partner of choice that has driven us to aggressively March 1, 2001 realign customer interfaces, streamline operations, reduce costs, enhance responsiveness, expand support, focus on innovation, and deliver as promised. Through our systems and information technology skills, we intend to meet our commitment to be the preferred private sector partner and superior infrastructure supplier to the U.S. Government. Vance D. Coffman Robert J. Stevens Chairman and Chief Executive Officer President and Chief Operating Officer 4 5


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    Commitment Of Our People To Our Customers The X-35A logged 27 flights in 30 days, setting records and breaking the sound barrier. Our customers in the Department of Defense, NASA, other agencies of the federal government, governments worldwide, and a variety of commercial customers depend on products that perform. For our customers who defend the peace, who rely on mission critical systems, or depend on large information networks—performance is key to achieving their goals and missions. As a world-class advanced-technology systems inte- grator, we are continually improving on that performance with innovations in science and technology. In the month following its first flight on October 24, our next-generation Joint Strike Fighter (JSF) demonstrator aircraft set new performance standards for a flight-test program, and we look forward to a successful JSF program in 2001. As proven performers, Lockheed Martin aircraft, like the F-16 tactical fighter and C-130J airlifter, serve the strategic interests of America and its allies. The U.S. Air Force, Greece, Israel, Republic of Korea, Singapore, and United Arab Emirates were among those customers that ordered 234 F-16s last year valued at $10.6 billion—a testament to the Fighting Falcon’s affordability, versatility and con- tinuing technological advancement. In another successful flight test program, the F-22 air superiority fighter met all requirements to begin Low Rate Initial Production. 6 The Joint Strike Fighter X-35A performed brilliantly in its flight demonstration program, validating the Lockheed Martin team design approach. 7


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    Evolving With Customer Priorities As a world-class advanced-technology systems integrator, we are continually improving on performance with innovations in science and technology. For our customers who defend the peace, who rely on mission critical systems, or depend on large information networks—performance is key. The Lockheed Martin team is a partner with NASA to consolidate mission operations at major NASA centers. The Consolidated Space Operations Contract (CSOC) successfully demonstrated last year its OpStar Performance as a systems integrator led to Lockheed Martin’s selection prototype, which promises significant mission operations cost reductions. as warfare systems integrator for the U.S. Navy’s new aircraft carrier, This state-of-the-art technology allows scientists to literally command their CVN-77. Systems integration is also key to missile defense programs. spacecraft safely from anywhere, using laptop computers or hand-held The Patriot Advanced Capability-3 (PAC-3) missile extended its record of devices instead of being tied to large computing centers. In addition, successful performance to eight successful test flights and six consecutive CSOC delivered the new Training Flight Control room in just six intercepts, including the destruction of targets simulating low-flying cruise months—ahead of schedule and within budget. missiles. In addition, the Theater High Altitude Area Defense (THAAD) As systems integrators, our team was instrumental in tallying the program entered the Engineering and Manufacturing Development phase, Year 2000 Census with an accuracy rate of 99.8%. Lockheed Martin’s and the Joint Air-to-Surface Standoff Missile successfully conducted Data Capture System (DCS) 2000 processed the nearly 148 million its first flight and has demonstrated its performance successfully in forms that will provide an updated picture of the United States as the subsequent flights. new century begins. 8 9


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    Excellence As A Premier Systems Integrator Transmitting more bits of data daily than all U.S. cable companies combined. Lockheed Martin is committed to excellence—to be the company that customers around the world trust most to work with them on their vitally important projects. Our vision recognizes that our core expertise is systems inte- gration—working with governments and commercial customers worldwide to help accomplish their goals. Our Department of Defense customers know that in peace and in conflict, information superiority is critical. In 2000, the U.S. Air Force selected Lockheed Martin to modernize the command and control architectures for NORAD (North American Aerospace Defense) and U.S. Space Command. The result: a complete integrated view of America’s airspace for those who defend it. In 2000, Lockheed Martin, Hughes Space and Communications Co., and TRW Inc. formed a National Team to build the Department of Defense’s next generation of highly secure communication satellites known as the Advanced Extremely High Frequency system. In addition, the U.S. Navy chose Lockheed Martin last year to provide a variety of logistics information management support services at 12 sites for the Naval Air Systems Command. Under the Integrated Space Command and Control (ISC2) program, a Lockheed Martin-led team will integrate approximately 40 separate air, missile, and space command systems into one common command and control infrastructure. 10 11


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    Systems Solutions For Our Customers the federal government, as well as automation solutions for the U.S. Postal Service. Lockheed Martin’s handwriting recognition technology has made it possible for the Postal Service customer to boost the successful read rate of first-pass, hand-addressed envelopes to 75%, compared to the 3% accuracy read rate in 1996. Our technology solutions are matched by an equal commitment to excellence in business practices, such as our LM21 Operating Excellence initiative. This is our on-going corporate-wide program to cut waste, reduce costs, and improve competitiveness. We have measurable results on productivity, performance and quality. The savings have exceeded our As systems integrators, our team was instrumental in tallying original expectations. Last year, Lockheed Martin Aeronautics Company’s the nearly 148 million forms of the Year 2000 Census with an accuracy rate of 99.8%. success in implementing LM21 lean manufacturing principles in all its The U.S. Postal Service relies on Lockheed Martin technology to help reach its objectives tactical fighter programs was recognized with the Shingo Prize for from automatically processing letters, flats, and parcels to fully integrating entire mail Excellence in Manufacturing. processing facilities. Advances completed during 2000 in handwritten address recognition are boosting the successful read rate of first-pass, hand-addressed envelopes to 75%— a dramatic gain over the 3% accuracy read rate in 1996. In 2000, Lockheed Martin completed deployment of 20 new Display System Replacement (DSR) installations at Federal Aviation Administration facilities across the nation. The program was completed ahead of schedule and within budget. In recognition of our customer-focused approach to air traffic management solutions and advanced technologies, Lockheed Martin Air Traffic Management was selected for the third time in four years to receive the Air Traffic Control Association’s Industry Award. The civilian agencies of the federal government are important cus- tomers for information technology and systems integration solutions that make their operations faster, more efficient and less costly. We provide information systems support to the U.S. Census Bureau, Social Security Administration, IRS, Patent and Trademark Office, and other agencies of As a leader in air traffic management services, Lockheed Martin works toward transitioning today’s airspace environment to future state-of-the-art technologies. The United Kingdom’s New En Route Centre (NERC) at Swanwick will enter operational service in 2002, when it will handle up to 6,000 flights a day employing 360 controllers. 12 13


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    Innovation In Technology And Business Helping customers focus on their core competencies. Lockheed Martin’s Science, Engineering, Analysis, and Test (SEAT) operation is a leading engineering and scientific support services contractor to NASA at the Johnson Space Center (JSC). For more than three decades, the SEAT operation has supported NASA/JSC in all of its major endeavors—from the Moon landings, to the Space Shuttle era, and more recently in missions to service the Hubble Space Telescope, dock with the Mir space station, and develop and fly the International Space Station (ISS). SEAT is a prime example of how Lockheed Martin supports its NASA customer to meet vitally important national goals in space exploration, and to open new opportunities for international cooperation in space. Lockheed Martin is applying its spirit of innovation to the next generation of advanced systems, including launch vehicles. Powered by the Russian RD-180 engine, Atlas III successfully launched for the first time last year. With the Atlas III launch, up to 80% of the advanced Atlas V design and hardware was proven, leading to a first Atlas V liftoff set for 2002. Achievements in Lockheed Martin’s training and sim- ulation business last year included successful efforts for the U.S. Army’s Intermediate New Generation Army Training System; U.S. Marine Corps aircraft; the Czech Republic Third Generation Multiple Integrated Laser Engagement 14 Lockheed Martin trains astronauts for future missions to the International Space Station. 15


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    Expanding Opportunities For Profitable Growth System; U.S. Air Force Special Operations Command combat aircrew training and mission rehearsal operations; the U.S. Navy’s first recon- figurable EA-6B weapon systems trainer; and a new commercial flight training center. As manager and operator of Sandia National Laboratories for the Department of Energy, Lockheed Martin is at the forefront of scientific dis- covery. Last year, Sandia, partnered with the U.S. Council for Automotive Research, developed software to model metal parts at close to the molec- ular level to predict mechanical failures. Lockheed Martin has earned a reputation for innovation—in technol- ogy solutions and in the way we conduct business. In 2000, Exostar姠, an electronic aerospace/defense business-to-business exchange, was Leveraging reconfigurable trainer technology, inaugurated and became operational. Exostar姠 is a partnership of Lockheed Martin last year captured U.S. Marine Corps and Navy aircraft training programs. Managing the skies for customers in the United States and Lockheed Martin, BAE SYSTEMS plc, Boeing Co., and Raytheon Co. worldwide is the primary mission for Lockheed Martin’s air The goal: To streamline and modernize our procurement systems as well traffic management business. as lower costs to our customers. That same commitment to lowering costs is evident in our new Shared Services team which consolidates and rationalizes transactional activities across the Corporation. Technology Mining transactions are innovative in both a business and a technology sense—they are a means to derive additional share- holder value without financial investment or exposure, and often include Lockheed Martin obtaining the rights to technical improvements for reap- plication in our core businesses. We are building a portfolio of equity positions, some as high as 40% ownership, in commercial firms where our sole contribution is a technology license. We continue to position ourselves to unlock the value of closely related businesses. The merger of COMSAT Corporation and Lockheed Martin Global Telecommunications (LMGT), completed in August, was a major step to achieving our objectives in the telecommunications services marketplace. Shortly thereafter, the Corporation’s commercial information technology unit, Integrated Business Solutions, also was combined with LMGT. LMGT’s vision is to be the partner of choice for delivering highly secure, reliable solutions for opportunities created by the convergence of Completion of the combination with COMSAT in 2000 gives Lockheed Martin Global Telecommunications significant capabilities in connectivity, network services, infrastructure management, and applications solutions. telecommunications and information technology. 16 17


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    Partnerships Worldwide Lockheed Martin has more than 300 partnerships in over 30 countries. In its global approach to business, Lockheed Martin’s goals are to establish and maintain enduring international partnerships with governments and advanced technology companies around the world, and to be seen as their international partner of choice. With 300 partnerships in more than 30 countries, Lockheed Martin seeks to estab- lish a long-term presence, earn the trust of customers, develop industrial alliances for growth, and match corpo- rate breadth and depth with customer priorities. Last year, we delivered the first of four Aegis combat systems for the Spanish Navy’s F-100-class frigates under construction by the Spanish shipbuilder Izar. In addition, Lockheed Martin will provide the Integrated Weapon System (IWS) for five new frigates for the Royal Norwegian Navy. As a subcontractor to Izar, Lockheed Martin and its Norwegian partners will develop the IWS as a derivative of the Aegis combat system. With our industrial partners in Italy and Germany, Lockheed Martin continues to develop 21st century air and missile defense through the Medium Extended Air Defense System (MEADS). In a joint venture start-up last year with the United Kingdom’s Serco Limited and British Nuclear Fuels plc, Lockheed Martin will maintain and manage the nuclear weapons stockpile of the United Kingdom. Additionally, in the United Kingdom last year Lockheed Martin demon- strated to its Royal Navy customer the awesome potential of the Merlin HM Mk1 helicopter to detect, hunt, locate and ultimately attack submarines. Merlin remains on schedule to enter full service in 2002. In sea trials last year, Lockheed Martin demonstrated to its UK Royal Navy customer the awesome potential of the Merlin HM Mk1 helicopter. Merlin completed six major tests and nearly 200 flight hours with excellent performance throughout. 18 19


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    G l o b a l P a r t n e r s h i p s L e a d i n g To G l o b a l O p p o r t u n i t i e s Building on our expertise in traffic management solutions worldwide, Lockheed Martin will develop and install an air traffic management sys- tem at the New Scottish Centre at Prestwick. In addition, Lockheed Martin supplies the Vessel Traffic Management Information System (VTMIS) to the U.S. Coast Guard and customers in 14 other countries to improve safety and efficiency at busy harbors and ports. A VTMIS for the Strait of the Bosphorus at Istanbul will include advanced radar and operator aids integrating video, meteorological, hydrographic and navigational Lockheed Martin seeks to establish a long-term presence, earn the trust of customers, and match corporate breadth and depth with customer priorities. sensors. With Lockheed Martin’s VTMIS, vessel traffic in the busiest waters is provided orderly and safe passage. In the area of aircraft maintenance, the government of Argentina awarded Lockheed Martin a five-year contract to continue performing The Atlas III launcher, powered by the Russian RD-180 engine, successfully launched for the first time last year. Atlas III represents the fifth consecutive Atlas model— all of which launched successfully on their first missions. Between 1993 and 2000 Atlas launchers have flown a total of 54 consecutive successful missions. maintenance and modification services for Argentine Air Force aircraft, as well as for other military and commercial customers. One of Lockheed Martin’s most successful joint ventures is the Guangzhou Aircraft Maintenance Engineering Company (GAMECO), in China. Since 1988 GAMECO has developed into one of the largest and most successful aircraft maintenance centers in China. In the United States, operations at Kelly Air Force Base were streamlined by restructuring from a military to a com- mercial environment, while maintaining production on two engine lines. In the United States and worldwide, Lockheed Martin is committed to strong partnerships and innovative solutions for our government and commercial customers. At Lockheed Martin, we also recognize that excel- lence and performance in every product and service are the ingredients for continued success in 2001. Lockheed Martin provides vessel traffic management for ports and harbors globally, and in 2000 a contract was awarded at one of the world’s busiest waterways—the Strait of the Bosphorus at Istanbul. 20 21


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    FINANCIAL SECTION Financial Highlights Inside Front Cover Management’s Discussion and Analysis of Financial Condition and Results of Operations 23 The Corporation’s Responsibility for Financial Reporting 42 Report of Ernst & Young LLP, Independent Auditors 43 Audited Consolidated Financial Statements: Consolidated Statement of Operations 44 Consolidated Statement of Cash Flows 45 Consolidated Balance Sheet 46 Consolidated Statement of Stockholders’ Equity 47 Notes to Consolidated Financial Statements 48 Consolidated Financial Data—Five Year Summary 70 Forward-Looking Statements Inside Back Cover 22


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2000 Lockheed Martin Corporation (Lockheed Martin or the In addition, on an ongoing basis, the Corporation will Corporation) is engaged in the conception, research, continue to explore the sale of various investment holdings design, development, manufacture, integration and opera- and surplus real estate. If the Corporation were to decide to tion of advanced technology systems, products and serv- sell any of its investment holdings or surplus real estate, the ices. The Corporation serves customers in both domestic resulting gains, if any, would be recorded when the trans- and international defense and commercial markets, with its actions are consummated and losses, if any, would be principal customers being agencies of the U.S. Government. recorded when they are estimable. The Corporation will The following discussion should be read in conjunction with also continue to review its businesses on an ongoing basis the audited consolidated financial statements included herein. to identify ways to improve organizational effectiveness and performance, and to clarify and focus on its core busi- Strategic and Organizational Review ness strategy. In September 1999, as part of a strategic and organizational In the third quarter of 2000, the Corporation completed review, the Corporation announced plans to evaluate the its evaluation of alternatives relative to maximizing the value divestiture of certain non-core business units and the reposi- of two business units that serve the commercial information tioning of certain businesses to maximize their value and technology markets. In October 2000, the operations of growth potential. one of the two business units, Integrated Business Solutions In connection with its decision to evaluate the divestiture (IBS), were combined with the operations of Lockheed of certain non-core business units, the Corporation com- Martin Global Telecommunications (LMGT), a wholly-owned pleted the sale of its Aerospace Electronics Systems (AES) subsidiary of the Corporation. The remaining business unit, businesses to BAE SYSTEMS, North America Inc. (BAE which provides Lockheed Martin’s internal information SYSTEMS) in November 2000. In addition, in September technology needs, will continue to be operated as part of 2000, the Corporation completed the sale of Lockheed Lockheed Martin’s Corporate and Other segment, consistent Martin Control Systems (Control Systems) to BAE SYSTEMS. with prior periods. These transactions are discussed in more detail under the caption “Divestiture Activities” below. Business Combination with COMSAT Corporation In January 2001, the Corporation completed the In September 1998, the Corporation and COMSAT Corpor- divestiture of two business units in the environmental man- ation (COMSAT) announced that they had entered into an agement line of business. The impact of these divestitures Agreement and Plan of Merger (the Merger Agreement) was not material to the Corporation’s consolidated results to combine the companies in a two-phase transaction (the of operations, cash flows or financial position due to the Merger). Subsequent to obtaining all regulatory approvals effects of nonrecurring and unusual impairment losses necessary for the first phase of the transaction and approval recorded in 2000 and 1999 related to these business units. of the Merger by the stockholders of COMSAT, the Corpor- These losses were included in other portfolio shaping activi- ation completed a cash tender offer for 49 percent of ties. The Corporation is continuing to evaluate alternatives the outstanding stock of COMSAT (the Tender Offer) on relative to the disposition of all or a portion of its investment September 18, 1999. The total value of this phase of the in a business unit in the state and municipal services line of transaction was $1.2 billion, and such amount was included business, subject to appropriate valuation, negotiation and in investments in equity securities in the consolidated balance approval. Net sales for the year ended December 31, 2000 sheet prior to consummation of the Merger as discussed related to this business unit were $564 million. Management below. The Corporation accounted for its 49 percent invest- cannot predict whether or when a potential divestiture will ment in COMSAT under the equity method of accounting. take place or the amount of proceeds that may ultimately be realized. 23


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2000 On August 3, 2000, pursuant to the terms of the Merger Transaction). The AES Transaction closed in November 2000. Agreement, the second phase of the transaction was accom- The Corporation recorded a nonrecurring and unusual loss, plished and the Merger was consummated. On that date, including state income taxes, of $598 million related to this each share of COMSAT common stock outstanding immedi- transaction which is included in other income and expenses. ately prior to the effective time of the Merger (other than The loss negatively impacted the net loss for 2000 by $878 shares held by the Corporation) was converted into the million, or $2.18 per diluted share. Although the AES Trans- right to receive one share of Lockheed Martin common action resulted in the Corporation recording a pretax loss, stock. The total amount recorded related to this phase of the it resulted in a gain for tax purposes primarily because cost transaction was approximately $1.3 billion based on the in excess of net assets acquired (goodwill) is not deductible Corporation’s issuance of approximately 27.5 million shares for tax purposes and therefore was not included in the tax of its common stock at a price of $49 per share. This price basis of the net assets of AES. Accordingly, the Corporation per share represents the average of the price of Lockheed is required to make state and federal income tax payments Martin’s common stock a few days before and after the associated with the divestiture. The AES Transaction is announcement of the transaction in September 1998. expected to generate net cash proceeds of approximately The total purchase price for COMSAT, including trans- $1.2 billion after related transaction costs and federal and action costs and amounts related to Lockheed Martin’s state income taxes which are expected to be paid in 2001. assumption of COMSAT stock options, was approximately Net sales included in the year 2000 related to the AES $2.6 billion, net of cash balances acquired. The COMSAT businesses totaled approximately $655 million, excluding transaction was accounted for using the purchase method of intercompany sales. accounting. Purchase accounting adjustments were recorded In September 2000, the Corporation completed the in 2000 to allocate the purchase price to assets acquired sale of Control Systems to BAE SYSTEMS for $510 million and liabilities assumed based on their fair values. These in cash. This transaction resulted in the recognition of a adjustments included certain amounts totaling approxi- nonrecurring and unusual gain, net of state income taxes, mately $2.1 billion, composed of adjustments to record of $302 million which is reflected in other income and investments in equity securities acquired at their fair values expenses. The gain favorably impacted the net loss for and cost in excess of net assets acquired, which will be the year ended December 31, 2000 by $180 million, or amortized over an estimated life of 30 years. $.45 per diluted share. Net sales for the first nine months The operations of COMSAT have been consolidated with of 2000 related to Control Systems totaled approximately the results of operations of LMGT since August 1, 2000. $215 million, excluding intercompany sales. This transac- Given the substantial investment necessary for the growth tion generated net cash proceeds of $350 million after of the global telecommunications services business, support related transaction costs and federal and state income from strategic partners for the Corporation’s global telecom- tax payments. munications business area may be sought and public equity In September 2000, the Corporation completed the markets may be accessed to raise capital, although the sale of approximately one-third of its interest in Inmarsat Corporation cannot predict the timing or the outcome of Ventures Limited (Inmarsat) for $164 million. The investment these efforts. in Inmarsat was acquired as part of COMSAT in conjunc- tion with the Merger. As a result of the transaction, the Divestiture Activities Corporation’s interest in Inmarsat was reduced from approxi- In connection with its strategic and organizational review, mately 22% to 14%. The sale of shares in Inmarsat did the Corporation decided in July 2000 to sell its AES busi- not impact the Corporation’s results of operations. The nesses to BAE SYSTEMS for $1.67 billion in cash (the AES transaction generated net cash proceeds of approximately 24


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    Lockheed Martin Corporation (Continued) $115 million after transaction costs and federal and state devoted to defense is at one of its lowest levels in modern income tax payments. history. In addition, worldwide defense budgets have been In 1997, the Corporation repositioned 10 of its non-core declining, with the limited funds available for such budgets business units as a new independent company, L-3 Com- targeted for operational readiness and personnel issues munications Holdings, Inc. (L-3), in which the Corporation instead of acquisition programs. An increasing portion of retained an approximate 35 percent ownership interest expenditures for defense is used for upgrading and mod- at closing. The Corporation’s ownership percentage was ernizing existing equipment rather than acquisition of new reduced to approximately 25 percent in the second quarter equipment. Such trends in defense spending have created of 1998 as a result of an initial public offering of L-3’s com- risks associated with demand and timing of orders relative mon stock. This transaction resulted in the recognition of a to certain of the Corporation’s existing programs. For exam- nonrecurring and unusual gain, net of state income taxes, of ple, though the Corporation received several new orders $18 million, and increased 1998 net earnings by $12 mil- for C-130J airlift aircraft in 2000, the program since incep- lion, or $.03 per diluted share. In 1999, the Corporation tion has not experienced the level of orders anticipated sold its remaining shares of L-3 in two separate transactions. which has resulted in lower than expected production On a combined basis, these two transactions resulted in a levels. The Corporation is continuing to focus its efforts on nonrecurring and unusual gain, net of state income taxes, new orders from domestic and foreign customers, although of $155 million, and increased 1999 net earnings by it cannot predict the outcome of these efforts. $101 million, or $.26 per diluted share. The industry participants reacted to shrinking defense In September 1999, the Corporation sold its interest in budgets by combining to maintain critical mass and Airport Group International Holdings, LLC which resulted in attempting to achieve significant cost savings. The U.S. a nonrecurring and unusual gain, net of state income taxes, Government was supportive of industry consolidation activi- of $33 million. In October 1999, the Corporation exited its ties through 1997, and the Corporation had been at the commercial 3D graphics business through a series of trans- forefront of those activities. Through its own consolidation actions which resulted in the sale of its interest in Real 3D, activities, the Corporation has been able to pass along sav- Inc., a majority-owned subsidiary, and a nonrecurring and ings to its customers, principally the U.S. Department of unusual gain, net of state income taxes, of $33 million. On Defense (DOD). More recently, major aerospace companies a combined basis, these transactions increased 1999 net have focused their efforts on cost savings and efficiency earnings by $43 million, or $.11 per diluted share. improvements, as well as generation of cash to repay debt incurred during the period of consolidation. Further domes- Industry Considerations tic consolidation is possible, as evidenced by the proposed The Corporation’s primary lines of business are in advanced acquisition of Litton Industries, Inc. by Northrop Grumman technology systems, products and services for aerospace and Corporation announced in 2000. defense, serving both government and commercial customers. Ongoing consolidation continues within the European In recent years, domestic and worldwide political and eco- aerospace industry resulting in fewer but larger and more nomic developments have strongly affected these markets, capable competitors, potentially resulting in an environment requiring significant adaptation by market participants. where there could be less demand for products from U.S. The U.S. aerospace and defense industry has experi- companies. Such an environment could affect opportunities enced years of pressures and uncertainties relative to budg- for European partnerships and sales potential for U.S. prod- ets for research, development, test and evaluation, and ucts outside the U.S. In addition, consolidation is beginning procurement. After over a decade of downward trends in to occur between U.S. and European aerospace companies, the U.S. defense budget, the portion of the Federal budget 25


  • Page 18

    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2000 as evidenced by the acquisition in 2000 of the Corporation’s Board (DAB) which were required to be completed prior to AES and Control Systems businesses by a U.S. subsidiary the full contract award for the production of Lot 1 (10 air- of BAE SYSTEMS plc. craft) and the long lead procurement authorization for Lot There are signs that the continuing decline in the defense 2. The Corporation is currently awaiting further direction budget may have ended, with proposals being made for from the U.S. Government regarding authorization to begin modest increases in the next several years. However, the initial production (Lot 1). In January 2001, the Corporation change of administration in Washington, D.C. may result in received partial funding of Lot 1 which is adequate to con- significant alterations to current defense budgets and goals. tinue necessary activities through the end of March 2001. A new administration typically begins by reviewing existing Also in January 2001, the Corporation received advance programs and priorities, and President Bush has instructed procurement funds to protect Lot 2 cost, schedule and the Secretary of Defense to perform a “top-to-bottom” review the supplier base. The U.S. Air Force has advised the of all defense expenditures. He has also indicated a willing- Corporation of its intent to provide additional Lot 2 ness to curtail spending on programs that may become advance procurement funds in monthly increments prior technologically obsolete in the near future and may allocate to the F-22 DAB’s final decision. The second increment was additional funding for research and development projects received in February 2001 which covers efforts through as well as personnel needs. The Corporation cannot predict the end of February. The Corporation cannot predict whether the defense budget will increase or the magnitude whether or when full funding will be received for the Lot 1 of such increases, if any. and Lot 2 phases of the F-22 program. If there are moderate increases in defense spending, the As a government contractor, the Corporation is subject Corporation’s broad mix of programs and capabilities makes to U.S. Government oversight. The government may investi- it a likely beneficiary of any such increases. However, there gate and make inquiries of the Corporation’s business prac- are risks associated with certain of the programs for which tices and conduct audits of contract performance and cost the Corporation is competing and which may be the primary accounting. Depending on the results of these investigations, recipients of significant future U.S. Government spending. the government may make claims against the Corporation. These programs are very large and likely to be well-funded, Under U.S. Government procurement regulations and prac- but may only involve one prime contractor. For example, tices, an indictment of a government contractor could result the Corporation is involved in the competition for the Joint in that contractor being fined and/or suspended for a period Strike Fighter (JSF) tactical aircraft program. Because of the of time from eligibility for bidding on, or for award of, new magnitude of this program, being unsuccessful in the com- government contracts. A conviction could result in debarment petition would be significant to any of the competitors’ future for a specified period of time. Similar government oversight fighter aircraft operations. Additionally, the JSF program and exists in most other countries where the Corporation con- other large, highly visible programs, such as the Corporation’s ducts business. Although the outcome of such investigations F-22 fighter aircraft program, will likely receive significant and inquiries cannot be predicted, in the opinion of man- attention in the Administration’s “top-to-bottom” review, and agement, there are no claims, audits or investigations pend- will continue to attract substantial Congressional focus as ing against the Corporation that are likely to have a material potential targets for reductions and/or extensions of their adverse effect on the Corporation’s business or its consoli- funding to pay for other programs. However, the JSF and dated results of operations, cash flows or financial position. F-22 programs remain a high priority for the DOD and the The Corporation remains exposed to other inherent risks armed services, as well as for the Corporation. associated with U.S. Government contracting, including In February 2001, the F-22 program completed the technological uncertainties and obsolescence, changes in eleven test criteria established by the Defense Acquisition 26


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    Lockheed Martin Corporation (Continued) government policies, and dependence on annual Congres- The above factors relative to start-up issues and delays sional appropriation and allotment of funds. Many of the in completion of satellite systems also contributed to delays Corporation’s programs involve development and applica- in commercial satellite orders. In addition, similar to the tion of state-of-the-art technology aimed at achieving chal- launch vehicle industry, the commercial satellite industry is lenging goals. As a result, setbacks and failures can occur. experiencing pricing pressures due to excess capacity as It is important for the Corporation to resolve performance well as industry consolidation. Further impacting demand issues related to such programs in a timely manner to have been the business difficulties encountered by certain achieve success on these programs. satellite systems, such as the bankruptcies of the Iridium and The nature of the Corporation’s business also makes it ICO systems in 1999, which have resulted in increased subject to export control regulation by the U.S. Department investor scrutiny of new ventures and a reduction in the of State and the Department of Commerce. Violations of these total market size in the near term. The Corporation has regulations can result in monetary penalties and denial established cost objectives related to its launch vehicle and of export privileges. Management is currently unaware of commercial satellite programs intended to allow it to con- any violations of export control regulations which could tinue to compete in these markets while maintaining its have a material adverse effect on the Corporation’s busi- focus on successful operations, though it cannot predict ness or its consolidated results of operations, cash flows the outcome of these efforts. or financial position. The Corporation’s Global Telecommunications segment The Corporation also conducts business in related com- is subject to regulation by the Federal Communications mercial and non-defense markets. Although these lines of Commission (FCC) with respect to various aspects of the business are not dependent on defense budgets, they share telecommunications services it provides. FCC decisions and many of the risks associated with the Corporation’s defense policies have had, and may continue to have, a significant businesses, as well as other risks unique to the commercial impact on the segment. In March 2000, Congress passed marketplace. Such risks include development of competing the ORBIT Act which permitted the Corporation to complete products, technological feasibility and product obsolescence. its acquisition of COMSAT. The ORBIT Act also established Industry-wide, the launch vehicle industry experienced deadlines for the privatization and completion of initial a reduction in demand beginning in 1999 primarily reflect- public offerings by the International Telecommunications ing start-up issues for certain satellite systems with which the Satellite Organization (INTELSAT), Inmarsat and New Skies Corporation was not involved and delays in completing cer- Satellites, N.V. (New Skies), as well as specific criteria for tain satellite systems due to excess transponder capacity in determining whether the privatizations of those entities are some regions. These factors have resulted in pricing pressures pro-competitive. If those criteria are not met, the FCC may in the launch vehicle industry associated with increased limit access by U.S. users to the satellite capacity of the pri- competition. This comes at a time when the Corporation is vatized entities for certain services. The Corporation owns making significant investments in the Evolved Expendable 22.5% of INTELSAT, 14% of Inmarsat, and 14.3% of New Launch Vehicle (Atlas V) program, the Corporation’s next Skies. INTELSAT is working to complete a timely privatiza- generation of launch vehicles. This program has required tion in 2001 and plans to conduct an initial public offering investment of funds for research and development, start-up in the future as mandated by the ORBIT Act. Inmarsat priva- costs, certain other nonrecurring costs, and launch facilities. tized in 1999 and also plans to access the public capital A portion of these expenditures have been funded under an markets. New Skies privatized in 1998 and completed an agreement with the U.S. Government. Orders to date rela- initial public offering in 2000. If INTELSAT and Inmarsat tive to the program have been lower than expected, result- were unable to satisfy the ORBIT Act criteria and were ing in lower production levels than anticipated. denied U.S. market access, the value of the Corporation’s investment in those entities could be adversely affected. 27


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2000 In addition, pursuant to the ORBIT Act, the FCC commenced currency values, regulation by foreign jurisdictions and the a proceeding in 2000 to determine whether “sufficient potential for unanticipated cost increases and timing issues opportunities” exist to directly access INTELSAT from the U.S. resulting from the possible deterioration of political relations. If the FCC determines that such opportunities do not exist, it In 1992, the Corporation entered into a joint venture may take actions that could adversely affect the Corporation’s with two Russian government-owned space firms to form ability to utilize contractually committed future capacity on Lockheed-Khrunichev-Energia International, Inc. (LKEI). the INTELSAT system. A decision is expected in 2001. Lockheed Martin owns 51 percent of LKEI and consolidates The Global Telecommunications segment is also subject the operations of LKEI into its financial statements. LKEI has to substantial and increasing competition on a variety exclusive rights to market launches of commercial, non- of fronts. There has been an increase in the number of Russian-origin space payloads on the Proton rocket from a competing satellite systems and other telecommunications launch site in Kazakhstan. In 1995, another joint venture services providers in recent years, including a substantial was formed, International Launch Services (ILS), with the deployment of undersea fiber cables. Many of those com- Corporation and LKEI each holding a 50 percent owner- panies have plans to substantially increase capacity. A ship. ILS was formed to market commercial Atlas and number of the new satellite systems have had difficulty Proton launch services worldwide. Contracts for Proton attracting customers and financing at the levels contem- launch services typically provide for substantial advances plated by their business plans following the bankruptcies of from the customer in advance of launch, and a sizable per- the Iridium and ICO satellite systems mentioned previously. centage of these advances are forwarded to Khrunichev LMGT has investments in a number of new or development- State Research and Production Space Center (Khrunichev), stage satellite systems, such as ACeS International, Ltd. the manufacturer in Russia, to provide for the manufacture (ACeS) and Astrolink International, LLC. In addition, the of the related launch vehicle. Significant portions of such Corporation owns approximately 15% of Loral Space & advances would be required to be refunded to each cus- Communications Ltd. (Loral Space), which is a major investor tomer if launch services were not successfully provided in Globalstar Telecommunications Limited (Globalstar). There within the contracted time frames. At December 31, 2000, can be no assurance that these ventures will be successful approximately $409 million related to launches not yet pro- in attracting the financing necessary to complete and vided was included in customer advances and amounts in operate their systems or the customer bases required for excess of costs incurred, and approximately $602 million of profitable operations. payments to Khrunichev for launches not yet provided was In connection with expanding its portfolio of offered included in inventories. Through year-end 2000, launch products and services in commercial space and telecommu- services provided through LKEI and ILS have been in accor- nications activities, the Corporation has entered into various dance with contract terms. joint venture, teaming and other business arrangements. Such The Corporation has entered into agreements with RD arrangements generally include a formal plan for funding AMROSS, a joint venture of the Pratt & Whitney division of the business which typically requires commitments for of United Technologies Corporation and the Russian firm funding from the partners, and may require the business to NPO Energomash, for the development and purchase, sub- obtain financing from other sources. To the extent the busi- ject to certain conditions, of up to 101 RD-180 booster ness is unable to obtain such financing, the business part- engines for use in two models of the Corporation’s Atlas ners, including the Corporation, would be required to assess launch vehicle. Terms of the agreements call for payments alternatives relative to further funding for the business. In to be made to RD AMROSS upon the achievement of cer- addition, some of these business arrangements include for- tain milestones in the development and manufacturing eign partners. The conduct of international business intro- processes. Approximately $55 million of payments made duces other risks into the Corporation’s operations, including under these agreements were included in the Corporation’s fluctuating economic conditions, fluctuations in relative inventories at December 31, 2000. 28


  • Page 21

    Lockheed Martin Corporation (Continued) three years presented include the financial impacts of various Net Sales nonrecurring and unusual items. The impact of these items (In millions) $30,000 on operating profit, net (loss) earnings and (loss) earnings per diluted share is as follows: $24,000 Effects of nonrecurring and unusual items: (Loss) Operating Net earnings $18,000 (loss) (loss) per diluted (In millions) profit earnings share $12,000 Year ended December 31, 2000 Loss related to AES Transaction (see Note 3) $(598) $ (878) $(2.18) $6,000 Gain on sale of Control Systems (see Note 3) 302 180 .45 ’00 ’99 ’98 Charge related to Globalstar $0 guarantee (see Note 10) (141) (91) (.23) Impairment charge related to ACeS (see Note 9) (117) (77) (.19) Results of Operations Partial reversal of CalComp The Corporation’s operating cycle is long-term and involves reserve (see Note 4) 33 21 .05 Gain on sales of surplus real estate 28 19 .05 many types of production contracts with varying production Other portfolio shaping items (46) (30) (.07) delivery schedules. Accordingly, the results of a particular Extraordinary loss on year, or year-to-year comparisons of recorded sales and early extinguishment of debt (see Note 10) — (95) (.24) profits, may not be indicative of future operating results. The following comparative analysis should be viewed in $(539) $ (951) $(2.36) this context. Year ended December 31, 1999 The Corporation’s consolidated net sales for 2000 were Divestiture of interest in L-3 (see Note 3) $ 155 $ 101 $ .26 $25.3 billion, a decrease of one percent compared to 1999. Gain on sales of surplus real estate 57 37 .10 Net sales for 1999 were $25.5 billion, a decrease of three Partial reversal of CalComp percent compared to 1998. During 2000, increases in net reserve (see Note 4) 20 12 .03 sales in the Systems Integration, Technology Services and Divestitures and other portfolio shaping items 17 12 .03 Global Telecommunications segments compared to 1999 Cumulative effect of change in were more than offset by decreases in the remaining busi- accounting principle (see Note 1) — (355) (.93) ness segments. In 1999, net sales decreases in the Space $ 249 $(193) $ (.51) Systems and Corporate and Other segments more than off- Year ended December 31, 1998 set increases in the remaining business segments. The U.S. Charge for shutdown of Government remained the Corporation’s largest customer, CalComp (see Note 4) $(233) $(183) $ (.48) comprising approximately 70 percent of the Corporation’s Gain on sales of surplus real estate 35 23 .06 Initial public offering net sales for 2000 compared to 71 percent in 1999 and of L-3 (see Note 3) 18 12 .03 70 percent in 1998. Divestitures and other The Corporation’s operating profit (earnings before inter- portfolio shaping items 18 12 .03 est and taxes) for 2000 was approximately $1.2 billion, a $(162) $(136) $ (.36) decrease of 40 percent compared to 1999. Operating profit for 1999 was approximately $2.0 billion, a decrease of 20 percent compared to 1998. The reported amounts for the 29


  • Page 22

    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2000 The note references in the preceding table refer to the as compared to the beginning of 1999, in accordance with Notes to Consolidated Financial Statements included in this the provisions of SFAS No. 87, “Employers’ Accounting For Annual Report. Pensions.” Additionally, favorable actual investment returns Excluding the effects of these nonrecurring and unusual in comparison to expected returns on plan assets in 1999 items for each year, operating profit for 2000 would have resulted in an increase in the recognition of actuarial gains in decreased by one percent compared to 1999, and would 2000. These increases were partially offset by an increase have decreased by 34 percent for 1999 compared to in the interest cost component of pension income associated 1998. For 2000 compared to 1999, reductions in operat- with the Corporation’s total estimated benefit obligation. ing profit at the Space Systems, Global Telecommunications For 1999 compared to 1998, decreases in operating and Corporate and Other segments more than offset profit at the Space Systems, Aeronautics and Global Tele- increases in operating profit at the remaining business seg- communications segments more than offset the increases ments. Operating profit for 2000 compared to 1999 in the in operating profit at the remaining business segments. Aeronautics and Space Systems segments were favorably Operating profits for 1999 compared to 1998 in the impacted by the absence in 2000 of negative adjustments Aeronautics and Space Systems segments were negatively recorded in 1999 on the C-130J airlift aircraft and Titan IV impacted by the adjustments recorded on the C-130J and Titan IV programs mentioned above, and by the absence in 1999 of a favorable adjustment recorded during 1998 Net Earnings (In millions) in the Space Systems segment related to the Atlas launch $1,200 vehicle program. $900 Diluted Earnings (Loss) Per Share $600 (In dollars) $3.00 $300 (a) (a) (a) $2.00 $0 ’00 ’99 ’98 $1.00 -$300 (a) (a) (a) $0 ’00 ’99 ’98 -$600 a. Excluding the effects of the items presented in the preceding -$1.00 table entitled “Effects of nonrecurring and unusual items,” net earnings for 2000, 1999 and 1998 would have been $432 million, $575 million and $1,137 million, respectively. -$2.00 launch vehicle programs, respectively. In addition, as more a. Excluding the effects of the items presented in the preceding table entitled “Effects of nonrecurring and unusual items,” fully discussed in Note 14, “Post-Retirement Benefit Plans,” diluted earnings per share for 2000, 1999 and 1998 would operating profit for 2000 was favorably impacted by an have been $1.07, $1.50 and $2.99, respectively. increase in net pension income of $213 million as compared to 1999. This increase was due primarily to an increase in For a more detailed discussion of the operating results the expected return on plan assets resulting from an increase of the business segments, see “Discussion of Business in the fair value of plan assets at the beginning of 2000 Segments” below. 30


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    Lockheed Martin Corporation (Continued) The Corporation reported a net loss for 2000 of $519 (In millions) 2000 1999 1998 million, a decrease of approximately $900 million compared Net sales to 1999 results. Reported net earnings for 1999 were $382 Systems Integration $ 9,647 $ 9,570 $ 9,334 Space Systems 7,127 7,209 8,600 million, a decrease of 62 percent compared to 1998. The Aeronautics 4,885 5,499 5,459 2000 reported amount included the combined after-tax Technology Services 2,318 2,261 1,935 effects of the nonrecurring and unusual items presented Global Telecommunications 766 389 251 above. The combination of these nonrecurring and unusual Corporate and Other 586 602 687 items reduced 2000 net earnings by $951 million, or $2.36 $25,329 $25,530 $26,266 per diluted share. The after-tax effects of the 1999 and (In millions) 2000 1999 1998 1998 nonrecurring and unusual items are also presented Operating profit (loss) above. On a combined basis, these nonrecurring and Systems Integration $ 583 $ 880 $ 858 unusual items decreased 1999 and 1998 net earnings by Space Systems 416 561 1,045 $193 million, or $.51 per diluted share, and $136 million, Aeronautics 343 247 649 or $.36 per diluted share, respectively. Technology Services 126 137 135 Global Telecommunications (215) (97) (4) The Corporation reported diluted (loss) earnings per Corporate and Other (48) 281 (161) share of $(1.29), $.99, and $2.63 for 2000, 1999, and $ 1,205 $ 2,009 $ 2,522 1998, respectively. If the nonrecurring and unusual items described above were excluded from the calculation of The following table displays the total impact on each seg- earnings per share, diluted earnings per share for 2000, ment’s operating profit (loss) of the nonrecurring and unusual 1999 and 1998 would have been $1.07, $1.50, and items presented earlier for each of the three years presented: $2.99, respectively. (In millions) 2000 1999 1998 Discussion of Business Segments Segment effects of non- The Corporation operates in five principal business segments: recurring and unusual items—operating (loss) profit Systems Integration, Space Systems, Aeronautics, Technology Systems Integration $ (304) $ 13 $ 4 Services and Global Telecommunications. All other activities Space Systems 25 21 — of the Corporation fall within the Corporate and Other seg- Aeronautics — — — ment. The following tables of financial information and related Technology Services (34) — — Global Telecommunications (117) — — discussions of the results of operations of the Corporation’s Corporate and Other (109) 215 (166) business segments correspond to additional segment infor- $ (539) $ 249 $ (162) mation presented in “Note 17—Information on Industry Segments and Major Customers” of the Notes to Consoli- In an effort to make the following discussion of significant dated Financial Statements. operating results of each business segment more understand- In the third quarter of 2000, Lockheed Martin began able, the effects of these nonrecurring and unusual items presenting LMGT, which includes the operations of COMSAT have been excluded. The Space Systems and Aeronautics and IBS, as a separate segment called Global Telecommuni- segments generally include programs that are substantially cations. The operations of LMGT and IBS were previously larger in terms of sales and operating results than those included in the Corporate and Other segment. Earlier in included in the other segments. Accordingly, due to the 2000, the Corporation reassigned the Management & Data large number of relatively smaller programs in the Systems Systems business unit and the space applications systems Integration, Technology Services and Global Telecommuni- line of business from the Systems Integration segment to the cations segments, the impacts of performance by individual Space Systems segment. Prior period amounts have been programs typically are not as significant to these segments’ reclassified to conform to these organizational changes. overall results of operations. 31


  • Page 24

    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2000 Systems Integration increase was comprised of a $50 million increase related Net sales of the Systems Integration segment increased by to the tactical training systems and postal systems volume one percent in 2000 compared to 1999, and increased increases discussed in the preceding paragraph as well as by three percent in 1999 compared to 1998. For the year improved performance on missile and fire control programs. ended December 31, 2000 compared to 1999, net sales These increases were offset by the aforementioned $15 million increased by approximately $360 million as a result of penalty on the THAAD program and the absence in 1999 volume increases in the segment’s Naval Electronic and of a $16 million favorable arbitration resolution recorded Surveillance Systems product line and electronic platform in 1998. The remaining fluctuation in 1999 year-over-year integration activities. Net sales also increased by approxi- operating profit related to declines in volume on various mately $115 million in the segment’s Missiles & Air Defense other systems integration activities. product line, primarily as a result of the Theater High Altitude Space Systems Area Defense (THAAD) program’s movement into the engi- Net sales of the Space Systems segment decreased by one neering, manufacturing and development (EMD) phase. These percent in 2000 compared to 1999, and by 16 percent in increases were partially offset by a reduction in net sales of 1999 compared to 1998. In 2000, net sales decreased by approximately $410 million related to the AES and Control approximately $440 million due to volume declines in mili- Systems businesses primarily due to the divestiture of these tary, civil, and classified satellite activities, and by $180 businesses in 2000. The increase in 1999 was comprised million due to decreased ground systems activities. An addi- of a $100 million increase related to increased volume on tional $140 million decrease related to reduced volume in surface systems activities, an $80 million increase in volume government launch vehicle programs. These decreases were on tactical training systems and a $65 million increase in partially offset by approximately $490 million related to postal systems program activities. These increases were increased volume on commercial space activities as well as partially offset by a decrease of $100 million in classified an approximate $50 million increase in various other space activities and space electronics programs. The remaining system activities. Year-over-year net sales also increased increase was primarily attributable to increased electronics due to the absence in 2000 of approximately $90 million activities in the United Kingdom. in negative adjustments recorded during 1999 related to Operating profit for the segment increased by two per- the Titan IV program. These adjustments included the effects cent both in 2000 compared to 1999 and in 1999 com- of changes in estimates for award and incentive fees result- pared to 1998. In 2000, the previously mentioned volume ing from a second quarter 1999 Titan IV launch failure, as increases in the segment’s Naval Electronic and Surveillance well as a more conservative assessment of future program Systems product line and electronic platform integration performance. In addition, 2000 net sales were also favor- activities contributed approximately $40 million to the ably impacted by an approximate $50 million adjustment increase in operating profit from 1999. This increase was recorded in 2000 on the Titan IV program as a result of partially offset by an approximate $20 million decline in contract modifications and improved performance on the operating profit related to the AES and Control Systems program. The contract modifications, which resulted prima- businesses due to their divestiture in 2000. Also during rily from the U.S. Government’s Broad Area Review team 2000, increases in operating profit attributable to the recommendations, provided for a more balanced sharing of THAAD program’s movement into the EMD phase, as well risk in the future. The improved performance on the program as the absence in 2000 of a $15 million penalty recorded resulted from the successful implementation of corrective on that program in the second quarter of 1999, were offset actions and initiatives taken since the previously mentioned by declines in operating profit on certain fire control and 1999 Titan IV launch failure. During 1999, almost half of the sensor programs due to program maturity. The 1999 segment’s net sales decrease resulted from volume decreases 32


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    Lockheed Martin Corporation (Continued) on military satellite programs and classified activities. Net adjustment discussed above. Operating profit in 1999 was sales were also reduced by a $185 million decrease in com- also adversely impacted by increased period costs (princi- mercial and civil satellite activities as a result of the maturity pally start-up costs) related to launch vehicle investments of certain programs and lower market demand. Net sales which accounted for approximately 15 percent of the were further reduced by an approximate $175 million decrease, by a reduction in Trident fleet ballistic missile decrease from 1998 related to ground systems activities, activities that reduced operating profit by approximately and by a $50 million decrease in launch vehicle activities. $30 million, and by a launch vehicle contract cancellation As mentioned previously, during 1999 the segment recorded which resulted in a charge of $30 million. The remainder a negative adjustment related to the Titan IV program of the decrease is attributable to the decline in sales related which reduced net sales by approximately $90 million. The to military satellite and classified activities mentioned above remaining decrease in 1999 net sales was related to a as well as a reduction in commercial satellite activities. decline in volume on various other space systems activities. Aeronautics Operating profit for the segment decreased by 28 per- Net sales of the Aeronautics segment decreased by 11 per- cent in 2000 compared to 1999, and decreased by 48 cent in 2000 compared to 1999, after having increased by percent in 1999 compared to 1998. Continued market one percent in 1999 compared to 1998. Approximately and pricing pressures on commercial space programs, 95 percent of the decrease in 2000 net sales is attributable increased investment in certain launch vehicle programs to declines in F-16 fighter aircraft and C-130J airlift aircraft and reduced margins on commercial satellites decreased sales and deliveries. These decreases more than offset 2000 operating profit by approximately $180 million from increases in net sales related to the F-22 fighter aircraft pro- 1999. This decrease included charges of approximately gram. The 1999 increase was comprised of $715 million $85 million recorded in 2000 on the Atlas launch vehicle in increased sales related to C-130J program activities off- program related to continued market and pricing pressures. set by a $717 million decrease in F-16 sales and deliver- In addition, 2000 operating profit was further reduced by ies. The remaining increase was attributable to increased approximately $35 million due to the impact of the volume sales on various other aircraft programs. declines on military, civil, and classified satellite programs Operating profit for the segment increased by 39 per- mentioned previously. Consistent with the change in net cent in 2000 compared to 1999 after decreasing by 62 per- sales, the absence in 2000 of the negative adjustments cent in 1999 compared to 1998. The current year increase recorded during 1999 on the Titan IV program, combined is primarily attributable to the absence in 2000 of a $210 with the favorable adjustments recorded in 2000 on the million negative adjustment recorded during the second same program, had an approximate $140 million positive quarter of 1999 that resulted from changes in estimates impact on 2000 operating profit. The remainder of the related to the C-130J program due to cost growth and a decrease is primarily attributable to an approximate $55 reduction in production rates. This increase was partially million decrease in operating profit related to a more con- offset by an approximate $115 million reduction in 2000 servative assessment of future performance on government operating profit resulting from the decrease in aircraft sales launch vehicle programs. A contributing factor to the decrease and deliveries mentioned in the preceding paragraph. The in the segment’s operating profit in 1999 compared to 1998 1999 decrease from 1998 principally reflects the $210 was the impact of a third quarter 1998 favorable adjust- million negative impact of the previously mentioned C-130J ment of approximately $120 million, net of state income program adjustment. Additionally, the Corporation decided taxes, which resulted from a significant improvement in the in the fourth quarter of 1999 not to record profit on C-130J Atlas program related to the retirement of technical and pro- deliveries, as a result of changes in estimates due to gram risk. In addition, 1999 operating profit was adversely cost growth and reduced production rates, until further affected by the impact of the $90 million Titan IV program 33


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2000 favorable progress occurs in terms of orders and cost. Global Telecommunications Of the remaining decrease in 1999 operating profit, Net sales of the Global Telecommunications segment $80 million resulted from reduced F-16 deliveries, with the increased by 97 percent in 2000 compared to 1999, and remainder due to volume decreases on various other by 55 percent in 1999 compared to 1998. The increase in aircraft programs. 2000 net sales was primarily attributable to the Corporation’s consummation of the merger with COMSAT and the inclusion Technology Services of COMSAT’s consolidated operations in the segment’s Net sales of the Technology Services segment increased by results beginning August 1, 2000. COMSAT contributed three percent in 2000 as compared to 1999, and by 17 approximately $250 million to the increase in 2000 net percent in 1999 compared to 1998. The increase in 2000 sales. The majority of the remaining increase was associated net sales is comprised of an approximate $150 million with the recognition of approximately $65 million in net sales increase in various federal technology services programs on a Proton launch vehicle, which successfully launched the including the Consolidated Space Operations Contract and ACeS 1 satellite in the first quarter of 2000. The remainder the Rapid Response contract. These increases were partially of the increase was mainly related to an approximate $35 offset by an approximate $95 million decline in volume on million increase in volume on various network systems and aircraft maintenance and logistics contracts and certain technology programs. The 1999 increase was comprised defense and science energy services contracts due to pro- of $75 million related to increased volume on information gram completions. The increase in 1999 net sales was technology outsourcing contracts and $75 million in inter- mainly the result of an approximate $300 million increase in national telecommunications contracts, government services volume on the Consolidated Space Operations Contract, programs and various systems and technology programs. which was awarded in September 1998. These increases more than offset declines in other Global Operating profit for the segment increased by 17 per- Telecommunications activities. cent in 2000 compared to 1999, and by one percent in Global Telecommunications’ operating loss increased 1999 compared to 1998. The increase in 2000 is prima- by approximately $1 million in 2000 compared to 1999, rily attributable to various federal technology services pro- and by approximately $93 million in 1999 compared to grams including the impact of the volume increases discussed 1998. During 2000, pricing pressures and the impact of above and increased profitability on certain information negative adjustments related to performance on certain services contracts, and improved performance on certain information outsourcing programs resulted in an approxi- aircraft maintenance and logistics contracts. These increases mate $30 million increase in the segment’s operating loss. were partially offset by the operating profit impact of the This increase in the operating loss was almost entirely offset previously mentioned volume declines on certain defense by reduced operating expenses at LMGT headquarters as a and science energy services contracts. The increase in 1999 result of synergies realized through the merger with COMSAT, operating profit was primarily attributable to the Consolidated and the impact of increased volume on network systems and Space Operations Contract. The remaining change was com- technology programs discussed in the preceding paragraph. prised of increases related to improved performance on air- The increase in the operating loss in 1999 reflects $103 craft maintenance and logistics contracts that were partially million in operating losses related to LMGT which began offset by decreases attributable to the timing of award fees operations effective January 1, 1999, partially offset by on certain defense and science energy services contracts. increased operating profit related to the volume increases on information technology outsourcing contracts discussed in the preceding paragraph. 34


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    Lockheed Martin Corporation (Continued) Corporate and Other Net sales of the Corporate and Other segment decreased Negotiated Backlog (In millions) by three percent in 2000 compared to 1999, and by 12 $60,000 percent in 1999 compared to 1998. The decline in net sales for the year was attributable to reduced volume in the $50,000 segment’s properties line of business and the absence in $40,000 2000 of sales attributable to the Corporation’s commercial graphics company, Real 3D, which was divested in the $30,000 fourth quarter of 1999. These decreases in net sales more than offset increased volume on state and municipal services $20,000 programs. The majority of the 1999 decrease related to the absence in 1999 of $155 million in net sales attributable $10,000 to the segment’s CalComp subsidiary, which shut down $0 ’00 ’99 ’98 operations during 1999. This decrease was partially offset by $65 million in increased volume on various state and municipal services contracts. The following table shows total backlog by segment at Operating profit for the segment decreased by $5 mil- the end of each of the last three years: lion in 2000 compared to 1999, after increasing by $61 million in 1999 compared to 1998. The majority of the (In millions) 2000 1999 1998 decrease in 2000 operating profit was due to the expensing Backlog Systems Integration $16,706 $13,971 $12,524 of start-up costs associated with the Corporation’s e-commerce Space Systems 14,976 15,998 17,330 investment and the absence in 2000 of a favorable adjust- Aeronautics 17,570 9,003 10,265 ment recorded by the segment’s Communications Industry Technology Services 4,371 4,399 3,503 Services line of business in the first quarter of 1999. The Global Telecommunications 1,625 1,533 763 Corporate and Other 1,176 1,009 960 decreases in the segment were partially offset by increases $56,424 $45,913 $45,345 in interest income, the absence in 2000 of losses associ- ated with Real 3D, and the impact of the higher volume on Total Systems Integration backlog increased by 20 percent state and municipal services programs discussed previously. in 2000 compared to 1999, and by 12 percent in 1999 The increase in 1999 was primarily attributable to the compared to 1998. The majority of the 2000 increase absence in 1999 of operating losses incurred by the seg- was attributable to new orders for missile and air defense ment’s CalComp and Real 3D operating units in 1998. systems, primarily orders received on the THAAD program Backlog as a result of that program’s movement into the EMD phase. Total negotiated backlog of $56.4 billion at December 31, Increased orders for naval electronic and surveillance systems 2000 included both unfilled firm orders for the Corporation’s and various platform integration activities were partially products for which funding has been authorized and appro- offset by the absence of backlog associated with the seg- priated by the customer (Congress, in the case of U.S. ment’s AES and Control Systems businesses, which were Government agencies) and firm orders for which funding divested during 2000. The remainder of the 2000 variance has not been appropriated. from 1999 was primarily due to sales on existing orders 35


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2000 and decreases in new orders on Command, Control, Total Technology Services backlog decreased by one Communications, Computers and Intelligence (C4I) pro- percent in 2000 compared to 1999 after having increased grams. Approximately one half of the 1999 increase from by 26 percent in 1999 compared to 1998. The decrease 1998 was comprised of new orders for missile systems, with in 2000 was primarily associated with sales on existing the remaining increase primarily attributable to increased federal technology services contracts, principally the orders for various platform integration activities and Consolidated Space Operations Contract. The increase in increased surface ship system awards. 1999 was attributable to new orders associated with the Total Space Systems backlog decreased by six percent 1999 award of an aircraft engine maintenance contract by in 2000 compared to 1999, and by eight percent in 1999 the U.S. Air Force which was partially offset by sales on the compared to 1998. The decrease in 2000 was primarily Consolidated Space Operations Contract. attributable to declines in backlog on government launch Total Global Telecommunications backlog increased vehicles and commercial satellites due to decreases in new approximately six percent in 2000 compared to 1999, and orders and sales on existing orders, respectively. Additional increased significantly in 1999 compared to 1998. The 2000 decreases in orders of military, civil, and classified satellites increase was primarily the result of the acquisition of COMSAT were partially offset by an increase in orders for commer- in 2000 and new orders on network systems and technology cial launch vehicles. The decrease in 1999 was mainly programs. The 1999 increase was primarily the result of attributable to significant decreases in launch vehicle back- new orders on information outsourcing contracts with the log as a result of a decline in new orders and sales on remainder of the increase reflecting new orders on various existing orders, as well as in backlog associated with mili- network systems and technology programs. tary satellites and classified activities. Approximately one Total Corporate and Other backlog increased by 17 half of these decreases were partially offset by new orders percent in 2000 compared to 1999, and increased by five for commercial and civil satellites. percent in 1999 compared to 1998. The 2000 increase Total Aeronautics backlog increased by 95 percent in was mainly attributable to new orders on various state and 2000 compared to 1999 after decreasing by 12 percent in municipal services programs. The 1999 increase was pri- 1999 compared to 1998. The 2000 increase is primarily marily the result of increases on various state and municipal due to approximately $10.6 billion in orders related to the services programs which were partially offset by the absence F-16 fighter aircraft program, including new F-16 contracts at year-end 1999 of backlog related to the Corporation’s with the U.S. Government, the United Arab Emirates (UAE), Real 3D business unit, which was divested in the fourth Israel, Greece, Singapore and Korea, collectively. This quarter of 1999. increase was partially offset by a reduction in backlog for the F-22 fighter aircraft program as a result of increased sales on existing orders. The decline in 1999 backlog was a result of approximately equal decreases on F-16 programs and C-130J airlift aircraft programs related to the timing of new orders and sales recorded during 1999. An increase in orders associated with the F-22 program offset approxi- mately one-third of the aforementioned decreases. 36


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    Lockheed Martin Corporation (Continued) Net Cash Provided By previously under the caption “Divestiture Activities,” the Operating Activities Corporation’s sale of its AES and Control Systems busi- (In millions) $2,500 nesses, as well as the sale of a portion of its investment in Inmarsat, generated approximately $1.7 billion, $510 mil- $2,000 lion, and $164 million, respectively. Also in 2000, $257 million of cash was used for additional investments in affili- $1,500 ated companies, including $127 million of net cash used for additional investments in Astrolink International, LLC, a joint venture in which Lockheed Martin holds an approxi- $1,000 mate 31 percent interest. The remainder of the 2000 activ- ity was attributable to various other investing activities. $500 During 1999, as discussed previously under the caption “Business Combination with COMSAT Corporation,” $1.2 $0 ’00 ’99 ’98 billion was used to acquire the Corporation’s initial 49 per- cent investment in COMSAT, which was the primary reason for the increase in the use of cash in 1999 compared to 1998. Also in 1999, $263 million of cash was provided Liquidity and Cash Flows related to the sale of the Corporation’s interest in L-3, which Operating Activities was partially offset by $103 million of cash used for addi- Operating activities provided $2.0 billion in cash during tional investments in Astrolink International, LLC and other 2000, compared to $1.1 billion and $2.0 billion provided affiliated companies. in 1999 and 1998, respectively. The significant increase in Financing Activities 2000 compared to 1999 was primarily the result of lower The Corporation used $2.7 billion in cash for financing working capital requirements and reduced net federal income activities during 2000, compared to $731 million provided tax payments. The significant decrease in cash provided by by financing activities during 1999 and $1.3 billion used operations during 1999 compared to 1998 resulted from during 1998. During 2000, improved operating cash flows the decrease in earnings before cumulative effect of change and cash provided by investing activities allowed the Cor- in accounting between the periods and increased working poration to reduce its long-term debt by approximately $2.1 capital requirements. billion and decrease its net short-term borrowings by $463 Investing Activities million. The reduction in long-term debt was primarily Investing activities provided $1.8 billion in cash during attributable to the Corporation’s completion of tender 2000, compared to $1.6 billion used and $455 million offers for certain of its long-term debt securities during the used during 1999 and 1998, respectively. Cash used fourth quarter of 2000. The Corporation used $2.1 billion for additions to property, plant and equipment declined to consummate the tender offers, resulting in the early extin- 25 percent in 2000 after a four percent decrease in 1999. guishment of $1.9 billion in long-term debt and an extra- During 2000, the divestiture of certain non-core businesses ordinary loss of $156 million, or $95 million after tax. and the sale of investments accounted for the majority Approximately $882 million of long-term debt will mature of cash provided by investing activities. As discussed in 2001. The $2.0 billion increase in cash provided by 37


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2000 financing activities in 1999 as compared to the cash used debt is primarily in the form of publicly issued, fixed-rate during 1998 reflects the Corporation’s issuance of $3.0 bil- notes and debentures. At year-end 2000, the Corporation lion in long-term debt securities in the fourth quarter of 1999, held cash and cash equivalents of approximately $1.5 bil- partially offset by repayments of long-term debt totaling $1.1 lion, a portion of which is expected to be used to meet billion and a net decrease of $868 million in short-term scheduled long-term debt maturities in 2001. borrowings outstanding. During 1998, operating activities Total stockholders’ equity was $7.2 billion at generated a significant amount of cash which allowed the December 31, 2000, an increase of approximately Corporation to reduce its total debt by more than $1.0 billion. $800 million from the December 31, 1999 balance. This The Corporation paid dividends of $183 million in increase resulted from the issuance of 27.5 million shares 2000 compared to $345 million in 1999 and $310 mil- of the Corporation’s common stock and the assumption of lion in 1998. 4.3 million COMSAT stock options related to the comple- tion of the Merger with COMSAT. On a combined basis, Other these non-cash items increased stockholders’ equity by The Corporation receives advances on certain contracts to approximately $1.4 billion. Employee stock option and finance inventories. At December 31, 2000, approximately ESOP activities accounted for a further increase of approxi- $1.9 billion in advances and progress payments related to mately $218 million. These increases were partially offset work in process were received from customers and recorded by the 2000 net loss of $519 million, the payment of divi- as a reduction to inventories in the Corporation’s Consoli- dends of $183 million and other comprehensive losses of dated Balance Sheet. Also at December 31, 2000, approx- approximately $134 million primarily related to the tem- imately $626 million of customer advances and progress porary decline in value of the Corporation’s investment payments were recorded in receivables as an offset to in Loral Space. As a result of the above factors, the unbilled costs and accrued profits. Approximately $4.8 Corporation’s total debt to capitalization ratio decreased billion of customer advances and amounts in excess of from 65 percent at December 31, 1999 to 58 percent at costs incurred, which are typically from foreign govern- December 31, 2000. ments and commercial customers, were included in current At the end of 2000, the Corporation had in place a liabilities at the end of 2000. revolving credit facility in the amount of $3.5 billion, which Capital Structure and Resources expires on December 20, 2001 (the Credit Facility). No bor- Total debt, including short-term borrowings, decreased by rowings were outstanding under this facility at December 31, approximately 17 percent during 2000 from approximately 2000. In March 2000, the Corporation filed a shelf regis- $12.0 billion at December 31, 1999. The decrease was tration with the Securities and Exchange Commission (SEC) primarily the result of the completion of the tender offers to provide for the issuance of up to $1 billion in debt secu- mentioned previously. The remaining change in debt was rities. The registration statement was declared effective on comprised of scheduled repayments of long-term debt April 14, 2000. Were the Corporation to issue debt securi- totaling approximately $50 million and net repayments of ties under this shelf registration, it would expect to use the short-term debt of approximately $463 million, primarily net proceeds for general corporate purposes. These pur- attributable to commercial paper repayments of approxi- poses may include repayment of other debt, working capi- mately $475 million. These decreases were partially offset tal needs, capital expenditures, acquisitions and any other by approximately $410 million in debt assumed in conjunc- general corporate purpose. tion with the COMSAT Merger. The Corporation’s long-term 38


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    Lockheed Martin Corporation (Continued) The Corporation actively seeks to finance its business in The Corporation satisfied its contractual obligation with a manner that preserves financial flexibility while minimizing respect to its guarantee of certain indebtedness of Globalstar borrowing costs to the extent practicable. The Corporation’s with a net payment of $150 million on June 30, 2000 to management continually reviews changes in financial, mar- repay a portion of Globalstar’s borrowings under a revolv- ket and economic conditions to manage the types, amounts ing credit agreement. The Corporation has no remaining and maturities of the Corporation’s indebtedness. Periodi- guarantees in place related to Globalstar. The Corporation cally, the Corporation may refinance existing indebtedness, continues to guarantee certain borrowings of Space Imaging vary its mix of variable rate and fixed rate debt, or seek alter- LLC (Space Imaging), a joint venture in which the Corporation native financing sources for its cash and operational needs. holds a 46 percent ownership interest. The amount of bor- Cash and cash equivalents (including temporary invest- rowings outstanding as of December 31, 2000 for which ments), internally generated cash flow from operations and Lockheed Martin was guarantor was approximately $120 other available financing resources are expected to be suffi- million. This amount is included in the aggregate amount of cient to meet anticipated operating, capital expenditure and contingent liabilities mentioned in the preceding paragraph. debt service requirements and discretionary investment needs The Corporation’s investment in Space Imaging is during the next twelve months. Consistent with the Corpora- accounted for under the equity method of accounting. At tion’s desire to generate cash to reduce debt and invest in December 31, 2000, the Corporation’s investment in and its core businesses, management anticipates that, subject to receivables from Space Imaging amounted to approximately prevailing financial, market and economic conditions, the $131 million. The Corporation expects to continue to provide Corporation may continue to divest certain non-core busi- debt guarantees of up to $150 million in connection with a nesses, passive equity investments and surplus properties. new loan facility which Space Imaging is negotiating. In connection with the UAE’s order for F-16 fighter air- Effective March 31, 2000, the Corporation converted its craft discussed previously, in June 2000, the Corporation 45.9 million shares of Loral Space Series A Preferred Stock issued a letter of credit in the amount of $2 billion related into an equal number of shares of Loral Space common stock. to advance payments to be received under the contract. At The Corporation plans to divest its shares of Loral Space; December 31, 2000, in accordance with the terms of the however, the timing of such divestitures and the related agreement with the UAE, the amount of the letter of credit amount of cash received will depend on market conditions. available for draw down in the event of the Corporation’s Environmental Matters nonperformance under the contract was limited to the amount As more fully described in “Note 16—Commitments and of advance payments received to date, or approximately Contingencies” of the Notes to Consolidated Financial $900 million. These advance payments were recorded in Statements (Note 16), the Corporation is responding to customer advances and amounts in excess of costs incurred three administrative orders issued by the California Regional in the Consolidated Balance Sheet at December 31, 2000. Water Quality Control Board (the Regional Board) in con- The Corporation has entered into standby letter of credit nection with its former facilities in Redlands, California. The agreements and other arrangements with financial institu- Corporation estimates that expenditures required to imple- tions primarily relating to the guarantee of future perform- ment work currently approved by the Regional Board related ance on certain other contracts. At December 31, 2000, to the Redlands facilities will be approximately $90 million. the Corporation had contingent liabilities on outstanding Also in connection with the Redlands facilities, the Corpora- letters of credit, guarantees and other arrangements aggre- tion is coordinating with the U.S. Air Force, which is work- gating approximately $940 million. ing with the aerospace and defense industry to conduct 39


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2000 preliminary studies of the potential health effects of perchlo- Corporation is potentially liable for the full cost of funding rate exposure in connection with several sites across the such remediation. In the unlikely event that the Corporation country, including the Redlands site. The results of these was required to fund the entire cost of such remediation, studies will assist state and federal regulators in setting the statutory framework provides that the Corporation may appropriate action levels for perchlorates in groundwater, pursue rights of contribution from the other PRPs. Among which will in turn assist the Corporation in determining its the variables management must assess in evaluating costs ultimate clean-up obligation, if any, with respect to perchlo- associated with these sites are changing cost estimates, rates. Also as mentioned in Note 16, since 1990, the Cor- continually evolving governmental environmental standards poration has been responding to various consent decrees and cost allowability issues. Therefore, the nature of these and orders relating to soil and regional groundwater con- environmental matters makes it extremely difficult to esti- tamination in the San Fernando Valley (including the cities of mate the timing and amount of any future costs that may Burbank and Glendale) associated with the Corporation’s for- be necessary for remedial actions. mer operations in Burbank, California. Under an agreement The Corporation records appropriate financial statement reached with the U.S. Government and filed with the U.S. accruals for environmental issues in the period in which it is District Court in January 2000 (the Agreement), an amount probable that a liability has been incurred and the amounts equal to approximately 50 percent of future expenditures can be reasonably estimated. In addition to the matters with for certain remediation activities will be reimbursed by the respect to the Redlands and Burbank properties and the city U.S. Government as a responsible party under the Compre- of Glendale described above, the Corporation has accrued hensive Environmental Response, Compensation and Liability approximately $190 million at December 31, 2000 for Act (CERCLA). The Corporation estimates that total expendi- other matters in which an estimate of financial exposure tures required over the remaining terms of the consent could be determined. Management believes, however, that decrees and orders related to the Burbank and Glendale it is unlikely that any additional liability the Corporation facilities, net of the effects of the Agreement, will be may incur for known environmental issues would have a approximately $45 million. material adverse effect on its consolidated results of opera- The Corporation is a party to various other proceed- tions or financial position. ings and potential proceedings related to environmental Also as more fully described in Note 16, the Corpora- clean-up issues, including matters at various sites where it tion is continuing to pursue recovery of a significant portion has been designated a Potentially Responsible Party (PRP) of the unanticipated costs incurred in connection with the by the EPA or by a state agency. In the event the Corpora- $180 million fixed price contract with the U.S. Department tion is ultimately found to have liability at those sites where of Energy (DOE) for the remediation of waste found in Pit 9. it has been designated a PRP, the Corporation anticipates The Corporation has been unsuccessful to date in reaching that the actual burden for the costs of remediation will be any agreements with the DOE on cost recovery or other shared with other liable PRPs. Generally, PRPs that are ulti- contract restructuring matters. In 1998, the management mately determined to be responsible parties are strictly liable contractor for the project, a wholly-owned subsidiary of the for site clean-up and usually agree among themselves to Corporation, at the DOE’s direction, terminated the Pit 9 share, on an allocated basis, the costs and expenses for contract for default. At the same time, the Corporation filed investigation and remediation of hazardous materials. a lawsuit seeking to overturn the default termination. Subse- Under existing environmental laws, however, responsible quently, the Corporation took actions to raise the status of parties are jointly and severally liable and, therefore, the its request for equitable adjustment to a formal claim. Also 40


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    Lockheed Martin Corporation (Continued) in 1998, the management contractor, again at the DOE’s long-term debt obligations are generally not callable until direction, filed suit against the Corporation seeking recovery maturity. The Corporation may use interest rate swaps to of approximately $54 million previously paid to the Corpor- manage its exposure to fluctuations in interest rates; how- ation under the Pit 9 contract. The Corporation is defending ever, there were no such agreements outstanding at this action in which discovery has been pending since August December 31, 2000. 1999. In October 1999, the U.S. Court of Federal Claims The Corporation uses forward exchange contracts to stayed the DOE’s motion to dismiss the Corporation’s law- manage its exposure to fluctuations in foreign exchange suit, finding that the Court has jurisdiction. The Court ordered rates. These contracts are designated as qualifying hedges discovery to commence and gave leave to the DOE to con- of firm commitments or specific anticipated transactions, vert its motion to dismiss to a motion for summary judgment and related gains and losses on the contracts are recognized if supported by discovery. The Corporation continues to in income when the hedged transaction occurs. Effective assert its position in the litigation while continuing its efforts January 1, 2001, the Corporation began accounting for to resolve the dispute through non-litigation means. these contracts under the provisions of SFAS No. 133, as amended. At December 31, 2000, the fair value of forward Other Matters exchange contracts outstanding, as well as the amounts of The Corporation’s primary exposure to market risk relates gains and losses recorded during the year then ended, to interest rates and foreign currency exchange rates. The were not material. The Corporation does not hold or issue Corporation’s financial instruments which are subject to derivative financial instruments for trading purposes. interest rate risk principally include variable rate commer- cial paper and fixed rate long-term debt. The Corporation’s 41


  • Page 34

    THE CORPORATION’S RESPONSIBILITY FOR FINANCIAL REPORTING Lockheed Martin Corporation The management of Lockheed Martin prepared and is responsible for the consolidated financial statements and all related financial information contained in this Annual 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. In recognition of its responsibility for the integrity and objectivity of data in the financial statements, the Corporation maintains a system of internal accounting controls designed and intended to provide reasonable assurance that assets are safeguarded and transactions are properly executed and recorded. An environment that provides for an appropriate level of control consciousness is maintained and monitored and includes examinations by an internal audit staff and by the inde- pendent auditors in connection with their annual audit. Essential to the Corporation’s internal control system is management’s dedication to the highest standards of integrity, ethics and social responsibility. In connection therewith, management has issued the Code of Ethics and Business Conduct and written policy statements that cover, among other topics, environmental protection, potentially conflicting outside inter- ests of employees, proper business practices, and adherence to high standards of conduct and practices in dealings with customers, including the U.S. Government. The importance of ethical behavior is regularly communicated to all employees through the distribution of the Code of Ethics and Business Conduct, 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 six 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. Robert J. Stevens President and Chief Operating Officer Christopher E. Kubasik Vice President and Chief Financial Officer Acting Controller 42


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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, 2000 and 1999, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 esti- mates 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 consol- idated financial position of Lockheed Martin Corporation at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, 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 provi- sions of the American Institute of Certified Public Accountants’ Statement of Position No. 98-5, “Reporting on the Costs of Start-Up Activities.” Washington D.C. January 22, 2001 43


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    CONSOLIDATED STATEMENT OF OPERATIONS Lockheed Martin Corporation Year ended December 31, (In millions, except per share data) 2000 1999 1998 Net sales $25,329 $25,530 $26,266 Cost of sales 23,715 23,865 23,914 Earnings from operations 1,614 1,665 2,352 Other income and expenses, net (409) 344 170 1,205 2,009 2,522 Interest expense 919 809 861 Earnings before income taxes, extraordinary item and cumulative effect of change in accounting 286 1,200 1,661 Income tax expense 710 463 660 (Loss) earnings before extraordinary item and cumulative effect of change in accounting (424) 737 1,001 Extraordinary loss on early extinguishment of debt (95) — — Cumulative effect of change in accounting — (355) — Net (loss) earnings $ (519) $ 382 $ 1,001 (Loss) earnings per common share: Basic: Before extraordinary item and cumulative effect of change in accounting $ (1.05) $ 1.93 $ 2.66 Extraordinary loss on early extinguishment of debt (.24) — — Cumulative effect of change in accounting — (.93) — $ (1.29) $ 1.00 $ 2.66 Diluted: Before extraordinary item and cumulative effect of change in accounting $ (1.05) $ 1.92 $ 2.63 Extraordinary loss on early extinguishment of debt (.24) — — Cumulative effect of change in accounting — (.93) — $ (1.29) $ .99 $ 2.63 See accompanying Notes to Consolidated Financial Statements. 44


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    CONSOLIDATED STATEMENT OF CASH FLOWS Lockheed Martin Corporation Year ended December 31, (In millions) 2000 1999 1998 Operating Activities (Loss) earnings before extraordinary item and cumulative effect of change in accounting $ (424) $ 737 $ 1,001 Adjustments to reconcile (loss) earnings before extraordinary item and cumulative effect of change in accounting to net cash provided by operating activities: Depreciation and amortization 518 529 569 Amortization of intangible assets 450 440 436 Deferred federal income taxes (84) 293 203 Loss related to AES Transaction 547 — — Gain on sale of Control Systems business (325) — — Impairment loss related to ACeS 125 — — Changes in operating assets and liabilities: Receivables 108 130 809 Inventories (187) (404) (1,183) Customer advances and amounts in excess of costs incurred 387 313 329 Income taxes 522 (284) 189 Other 379 (677) (322) Net cash provided by operating activities 2,016 1,077 2,031 Investing Activities Expenditures for property, plant and equipment (500) (669) (697) AES Transaction 1,670 — — Sale of Control Systems business 510 — — Sale of shares of Inmarsat 164 — — COMSAT Tender Offer — (1,203) — Sale of interest in L-3 — 263 — Additional investments in affiliated companies (257) (170) — Other 175 141 242 Net cash provided by (used for) investing activities 1,762 (1,638) (455) Financing Activities Net decrease in short-term borrowings (463) (868) (151) Increases in long-term debt — 2,994 266 Repayments and early extinguishment of long-term debt (2,096) (1,067) (1,136) Issuances of common stock 14 17 91 Common stock dividends (183) (345) (310) Other — — (51) Net cash (used for) provided by financing activities (2,728) 731 (1,291) Net increase in cash and cash equivalents 1,050 170 285 Cash and cash equivalents at beginning of year 455 285 — Cash and cash equivalents at end of year $ 1,505 $ 455 $ 285 See accompanying Notes to Consolidated Financial Statements. 45


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    CONSOLIDATED BALANCE SHEET Lockheed Martin Corporation December 31, (In millions) 2000 1999 Assets Current assets: Cash and cash equivalents $ 1,505 $ 455 Receivables 4,195 4,348 Inventories 3,825 4,051 Deferred income taxes 1,236 1,237 Other current assets 498 605 Total current assets 11,259 10,696 Property, plant and equipment 3,446 3,634 Investments in equity securities 2,433 2,210 Intangible assets related to contracts and programs acquired 1,088 1,259 Cost in excess of net assets acquired 8,855 9,162 Prepaid pension cost 1,794 1,397 Other assets 1,474 1,903 $30,349 $30,261 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,184 $ 1,228 Customer advances and amounts in excess of costs incurred 4,780 4,655 Salaries, benefits and payroll taxes 1,038 941 Income taxes 519 51 Short-term borrowings 12 475 Current maturities of long-term debt 882 52 Other current liabilities 1,760 1,410 Total current liabilities 10,175 8,812 Long-term debt 9,065 11,427 Post-retirement benefit liabilities 1,647 1,805 Deferred income taxes 736 517 Other liabilities 1,566 1,339 Stockholders’ equity: Common stock, $1 par value per share 431 398 Additional paid-in capital 1,789 222 Retained earnings 5,199 5,901 Unearned ESOP shares (115) (150) Accumulated other comprehensive loss (144) (10) Total stockholders’ equity 7,160 6,361 $30,349 $30,261 See accompanying Notes to Consolidated Financial Statements. 46


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    CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY Lockheed Martin Corporation Accumulated Additional Unearned Other Total Common Paid-In Retained ESOP Comprehensive Stockholders’ Comprehensive (In millions, except per share data) Stock Capital Earnings Shares Loss Equity Income (Loss) Balance at December 31, 1997 $194 $ 25 $5,173 $(216) $ — $5,176 Net earnings — — 1,001 — — 1,001 $1,001 Common stock dividends declared ($.82 per share) — — (310) — — (310) — Stock awards and options, and ESOP activity 2 204 — 34 — 240 — Stock issued for acquisitions — 38 — — — 38 — Other comprehensive loss — — — — (8) (8) (8) Two-for-one stock split 197 (197) — — — — — Balance at December 31, 1998 393 70 5,864 (182) (8) 6,137 $ 993 Net earnings — — 382 — — 382 $ 382 Common stock dividends declared ($.88 per share) — — (345) — — (345) — Stock awards and options, and ESOP activity 5 152 — 32 — 189 — Other comprehensive loss — — — — (2) (2) (2) Balance at December 31, 1999 398 222 5,901 (150) (10) 6,361 $ 380 Net loss — — (519) — — (519) $ (519) Common stock dividends declared ($.44 per share) — — (183) — — (183) — Stock awards and options, and ESOP activity 6 177 — 35 — 218 — Stock issued in COMSAT Merger 27 1,319 — — — 1,346 — COMSAT stock options assumed — 71 — — — 71 — Other comprehensive loss — — — — (134) (134) (134) Balance at December 31, 2000 $431 $1,789 $5,199 $(115) $(144) $7,160 $ (653) See accompanying Notes to Consolidated Financial Statements. 47


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lockheed Martin Corporation December 31, 2000 Note 1—Summary of Significant Accounting Policies contracts that have been recognized for accounting pur- poses but not yet billed to customers. As such revenues are Organization—Lockheed Martin Corporation (Lockheed recognized, appropriate amounts of customer advances Martin or the Corporation) is engaged in the conception, and progress payments are reflected as an offset to the research, design, development, manufacture, integration related accounts receivable balance. and operation of advanced technology systems, products and services. Its products and services range from aircraft, Inventories—Inventories are stated at the lower of cost or spacecraft and launch vehicles to missiles, electronics, infor- estimated net realizable value. Costs on long-term contracts mation systems and telecommunications. The Corporation and programs in progress represent recoverable costs serves customers in both domestic and international defense incurred for production, allocable operating overhead and, and commercial markets, with its principal customers being where appropriate, research and development and general agencies of the U.S. Government. and administrative expenses. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers Basis of consolidation and use of estimates—The consoli- have title to, or a security interest in, inventories related to dated financial statements include the accounts of wholly- such contracts as a result of advances and progress pay- owned and majority-owned subsidiaries. Intercompany ments. Such advances and progress payments are reflected balances and transactions have been eliminated in consoli- as an offset against the related inventory balances. General dation. The preparation of consolidated financial statements and administrative expenses related to commercial products in conformity with accounting principles generally accepted and services provided essentially under commercial terms in the United States requires management to make estimates and conditions are expensed as incurred. Costs of other and assumptions, including estimates of anticipated con- product and supply inventories are principally determined tract costs and revenues utilized in the earnings recognition by the first-in, first-out or average cost methods. process, that affect the reported amounts in the financial statements and accompanying notes. Actual results could Property, plant and equipment—Property, plant and equip- differ from those estimates. ment are carried principally at cost. Depreciation is pro- vided on plant and equipment generally using accelerated Classifications—Receivables and inventories are primarily methods during the first half of the estimated useful lives of attributable to long-term contracts or programs in progress for the assets; thereafter, straight-line depreciation generally which the related operating cycles are longer than one year. is used. Estimated useful lives generally range from 10 In accordance with industry practice, these items are included years to 40 years for buildings and 5 years to 15 years in current assets. Certain amounts for prior years have been for machinery and equipment. reclassified to conform with the 2000 presentation. Investments in equity securities—Investments in equity securi- Cash and cash equivalents—Cash and cash equivalents ties include the Corporation’s ownership interests in affili- are net of outstanding checks that are funded daily as pre- ated companies accounted for under the equity method of sented for payment. Cash equivalents are generally com- accounting. Under this method of accounting, which gener- prised of highly liquid instruments with maturities of three ally applies to investments that represent a 20 percent to months or less when purchased. Due to the short maturity 50 percent ownership of the equity securities of the investees, of these instruments, carrying value on the Corporation’s the Corporation’s share of the earnings of the affiliated Consolidated Balance Sheet approximates fair value. companies is included in other income and expenses. The Receivables—Receivables consist of amounts billed and cur- Corporation recognizes currently gains or losses arising rently due from customers, and include unbilled costs and from issuances of stock by wholly-owned or majority-owned accrued profits primarily related to revenues on long-term subsidiaries, or by equity method investees. These gains 48


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    Lockheed Martin Corporation (Continued) or losses are also included in other income and expenses. the pricing of products and services to agencies of the U.S. Investments in equity securities also include the Corporation’s Government. The portion of those costs expected to be allo- ownership interests in companies in which its investment cated to commercial business is reflected in cost of sales at represents less than 20 percent. These investments are gen- the time the liability is established. erally accounted for under the cost method of accounting. Sales and earnings—Sales and anticipated profits under Intangible assets —Intangible assets related to contracts and long-term fixed-price production contracts are recorded on programs acquired are amortized over the estimated peri- a percentage of completion basis, generally using units of ods of benefit (15 years or less) and are displayed in the delivery as the measurement basis for effort accomplished. Consolidated Balance Sheet net of accumulated amortiza- Estimated contract profits are taken into earnings in propor- tion of $1,085 million and $958 million at December 31, tion to recorded sales. Sales under certain long-term fixed- 2000 and 1999, respectively. Cost in excess of net assets price contracts which, among other things, provide for the acquired (goodwill) is amortized ratably over appropriate delivery of minimal quantities or require a significant amount periods, generally 30 to 40 years, and is displayed on the of development effort in relation to total contract value, are Consolidated Balance Sheet net of accumulated amortiza- recorded upon achievement of performance milestones or tion of $1,184 million and $1,373 million at December 31, using the cost-to-cost method of accounting where sales and 2000 and 1999, respectively. The carrying values of intan- profits are recorded based on the ratio of costs incurred to gible assets, as well as other long-lived assets, are reviewed estimated total costs at completion. for impairment if changes in the facts and circumstances Sales under cost-reimbursement-type contracts are indicate potential impairment of their carrying values. Any recorded as costs are incurred. Applicable estimated profits impairment determined is recorded in the current period are included in earnings in the proportion that incurred and is measured by comparing the discounted cash flows costs bear to total estimated costs. Sales of products and of the related business operations to the appropriate carry- services provided essentially under commercial terms and ing values. conditions are recorded upon shipment or completion of specified tasks. Customer advances and amounts in excess of costs incurred— Amounts representing contract change orders, claims The Corporation receives advances and progress payments or other items are included in sales only when they can be from customers in excess of costs incurred on certain con- reliably estimated and realization is probable. Incentives or tracts, including contracts with agencies of the U.S. Govern- penalties and awards applicable to performance on con- ment. Such advances and progress payments, other than tracts are considered in estimating sales and profit rates, those reflected as an offset to accounts receivable or inven- and are recorded when there is sufficient information to tories as discussed above, are classified as current liabilities. assess anticipated contract performance. Incentive provi- Environmental matters—The Corporation records a liability sions which increase or decrease earnings based solely for environmental matters when it is probable that a liability on a single significant event are generally not recognized has been incurred and the amount can be reasonably esti- until the event occurs. mated. A substantial portion of these costs are expected When adjustments in contract value or estimated costs to be reflected in sales and cost of sales pursuant to U.S. are determined, any changes from prior estimates are Government agreement or regulation. At the time a liability is reflected in earnings in the current period. Anticipated recorded for future environmental costs, an asset is recorded losses on contracts or programs in progress are charged for estimated future recovery considered probable through to earnings when identified. 49


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lockheed Martin Corporation December 31, 2000 Research and development and similar costs—Corporation- and earnings per share as if compensation cost had been sponsored research and development costs primarily include recognized based upon the estimated fair value at the date research and development and bid and proposal efforts of grant for options awarded. related to government products and services. Except for cer- Comprehensive income—Comprehensive income (loss) for tain arrangements described below, these costs are gener- the Corporation consists primarily of net earnings (loss), after- ally included as part of the general and administrative costs tax foreign currency translation adjustments and after-tax that are allocated among all contracts and programs in unrealized gains and losses on available-for-sale securities. progress under U.S. Government contractual arrangements. At December 31, 2000, 1999 and 1998, the accumulated Corporation-sponsored product development costs not oth- balances of other comprehensive income related to foreign erwise allocable are charged to expense when incurred. currency translation adjustments were insignificant. For the Under certain arrangements in which a customer shares in year ended December 31, 2000, other comprehensive loss product development costs, the Corporation’s portion of included net unrealized losses, net of income tax benefits, such unreimbursed costs is expensed as incurred. Customer- of $129 million, primarily related to the temporary decline sponsored research and development costs incurred pur- in value of the Corporation’s investment in Loral Space & suant to contracts are accounted for as contract costs. Communications, Ltd. (Loral Space). Derivative financial instruments—The Corporation may use New accounting pronouncements—Effective January 1, 2001, derivative financial instruments to manage its exposure to fluc- the Corporation adopted SFAS No. 133. This Statement tuations in interest rates and foreign exchange rates. Forward requires the recognition of all derivative financial instru- exchange contracts are designated as qualifying hedges of ments as either assets or liabilities in the Consolidated firm commitments or specific anticipated transactions. Gains Balance Sheet, and the periodic adjustment of those instru- and losses on these contracts are recognized in income when ments to fair value. The classification of gains and losses the hedged transactions occur. At December 31, 2000, the resulting from changes in the fair values of derivatives is fair values of forward exchange contracts outstanding, as dependent on the intended use of the derivative and its well as the amounts of gains and losses recorded during the resulting designation. Adjustments to reflect changes in fair year, were not material. The Corporation does not hold or values of derivatives that are not considered highly effective issue derivative financial instruments for trading purposes. hedges are reflected in earnings. Adjustments to reflect Effective January 1, 2001, the Corporation began to changes in fair values of derivatives that are considered account for derivative financial instruments in accordance highly effective hedges are either reflected in earnings and with Statement of Financial Accounting Standards (SFAS) largely offset by corresponding adjustments related to the No. 133, “Accounting for Derivative Instruments and fair values of the hedged items, or reflected in other com- Hedging Activities.” prehensive income until the hedged transaction matures Stock-based compensation—The Corporation measures com- and the entire transaction is recognized in earnings. The pensation cost for stock-based compensation plans using change in fair value of the ineffective portion of a hedge is the intrinsic value method of accounting as prescribed in immediately recognized in earnings. The effect of adopting Accounting Principles Board Opinion No. 25, “Accounting SFAS No. 133 was not material to the Corporation’s consoli- for Stock Issued to Employees,” and related interpretations. dated results of operations, cash flows, or financial position. The Corporation has adopted those provisions of SFAS No. Effective January 1, 1999, the Corporation adopted 123, “Accounting for Stock-Based Compensation,” which the American Institute of Certified Public Accountants’ State- require disclosure of the pro forma effects on net earnings ment of Position (SOP) No. 98-5, “Reporting on the Costs 50


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    Lockheed Martin Corporation (Continued) of Start-Up Activities.” This SOP requires that, at the effec- $1.3 billion based on the Corporation’s issuance of approxi- tive date of adoption, costs of start-up activities previously mately 27.5 million shares of its common stock at a price of capitalized be expensed and reported as a cumulative effect $49 per share. This price per share represents the average of a change in accounting principle, and further requires that of the price of Lockheed Martin’s common stock a few days such costs subsequent to adoption be expensed as incurred. before and after the announcement of the transaction in The adoption of SOP No. 98-5 resulted in the recognition of September 1998. a cumulative effect adjustment which reduced net earnings The total purchase price for COMSAT, including trans- for the year ended December 31, 1999 by $355 million, action costs and amounts related to Lockheed Martin’s or $.93 per diluted share. The cumulative effect adjustment assumption of COMSAT stock options, was approximately was recorded net of income tax benefits of $227 million, $2.6 billion, net of $76 million in cash balances acquired. and was primarily composed of approximately $560 mil- The COMSAT transaction was accounted for using the pur- lion of costs previously included in inventories. chase method of accounting. Purchase accounting adjust- ments were recorded in 2000 to allocate the purchase price Note 2—Business Combination with COMSAT Corporation to assets acquired and liabilities assumed based on their fair values. These adjustments included certain amounts In September 1998, the Corporation and COMSAT Corpora- totaling approximately $2.1 billion, composed of adjust- tion (COMSAT) announced that they had entered into an ments to record investments in equity securities acquired at Agreement and Plan of Merger (the Merger Agreement) their fair values and cost in excess of net assets acquired, to combine the companies in a two-phase transaction (the which will be amortized over an estimated life of 30 years. Merger). Subsequent to obtaining all regulatory approvals A summary of assets acquired and liabilities assumed as of necessary for the first phase of the transaction and approval of the acquisition date follows: the Merger by the stockholders of COMSAT, the Corporation (In millions) completed a cash tender offer for 49 percent of the outstand- ing stock of COMSAT (the Tender Offer) on September 18, Working capital, excluding cash acquired $ (99) Property, plant and equipment 243 1999. The total value of this phase of the transaction was Investments in equity securities 1,793 $1.2 billion, and such amount was included in investments Cost in excess of net assets acquired 1,439 in equity securities in the consolidated balance sheet prior Other assets 171 to consummation of the Merger as discussed below. The Long-term debt (334) Post-retirement benefit liabilities (38) Corporation accounted for its 49 percent investment in Deferred income taxes (455) COMSAT under the equity method of accounting. Other liabilities (165) On August 3, 2000, pursuant to the terms of the Merger Net investment 2,555 Agreement, the second phase of the transaction was accom- Cash acquired 76 plished and the Merger was consummated. On that date, Total cost of acquisition $2,631 each share of COMSAT common stock outstanding immedi- ately prior to the effective time of the Merger (other than The following unaudited pro forma combined earnings shares held by the Corporation) was converted into the data present the results of operations of the Corporation right to receive one share of Lockheed Martin common and COMSAT for the years ended December 31, 2000 stock in a tax-free exchange. The total amount recorded and 1999, as if the Merger had been consummated at related to this phase of the transaction was approximately the beginning of the periods presented. The pro forma 51


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lockheed Martin Corporation December 31, 2000 combined earnings data does not purport to be indicative businesses as “held for disposal” under the provisions of of the results of operations that would have resulted if the SFAS No. 121, “Accounting for the Impairment of Long- COMSAT transaction had occurred at the beginning of the Lived Assets and for Long-Lived Assets to Be Disposed Of.” respective periods. Moreover, this data is not intended to The sum of the carrying value of the net assets of the AES be indicative of future results of operations. businesses and estimated transaction costs exceeded the (In millions, except per share data) 2000 1999 sales price per the definitive sales agreement. Therefore, Net sales $25,674 $26,072 the Corporation recorded an impairment loss in the third (Loss) earnings before quarter of 2000 to adjust the book values of the assets to extraordinary item and cumulative be disposed of to their fair values. Based on preliminary effect of change in accounting (413) 639 calculations and analyses, the Corporation recorded a loss, Net (loss) earnings (508) 284 including state income taxes, of approximately $755 mil- (Loss) earnings per common share: Basic: lion. The loss negatively impacted the net loss for the third Before extraordinary item and quarter by approximately $980 million, or $2.42 per cumulative effect of change diluted share. The AES Transaction closed in November in accounting (.98) 1.56(a) 2000. In connection with the closing, the Corporation (Loss) earnings per common share (1.21) .69(a) refined certain estimates included in its calculation of the Diluted: loss on the transaction based on more current information Before extraordinary item and cumulative effect of change and analyses. As a result, the Corporation recorded an in accounting (.98) 1.55(a) adjustment in the fourth quarter of 2000 to reduce the (Loss) earnings per common share (1.21) .69(a) amount of the loss, net of state income taxes, by $157 mil- (a) The differences between these amounts and the respective lion, which increased fourth quarter net earnings by $102 earnings per share amounts presented on the Consolidated Statement of Operations relate primarily to the estimated million. In total for the year ended December 31, 2000, effects of interest on the debt to finance the Tender Offer the Corporation recorded a nonrecurring and unusual loss which was, for purposes of this pro forma presentation, of $598 million related to the AES Transaction which is assumed to have been issued on January 1, 1999. included in other income and expenses. The loss negatively The Corporation has consolidated the operations of impacted the net loss for 2000 by $878 million, or $2.18 COMSAT with the results of operations of Lockheed Martin per diluted share. Global Telecommunications, Inc. (LMGT), a wholly-owned On September 25, 2000, the Corporation consummated subsidiary of the Corporation, from August 1, 2000. the sale of Lockheed Martin Control Systems (Control Systems) to BAE SYSTEMS for $510 million in cash. This transaction Note 3—Divestiture Activities resulted in the recognition of a nonrecurring and unusual gain, net of state income taxes, of $302 million which is In July 2000, the Corporation decided to sell its Aerospace reflected in other income and expenses. The gain favorably Electronics Systems (AES) businesses and announced that it impacted the net loss for 2000 by $180 million, or $.45 had reached a definitive agreement to sell these businesses per diluted share. to BAE SYSTEMS, North America Inc. (BAE SYSTEMS) for In September 2000, the Corporation completed the $1.67 billion in cash (the AES Transaction). As a result of sale of approximately one-third of its interest in Inmarsat this decision, the Corporation classified the assets of these Ventures Limited (Inmarsat) for $164 million. The investment 52


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    Lockheed Martin Corporation (Continued) in Inmarsat was acquired as part of COMSAT in conjunc- the business of CalComp Technology, Inc. (CalComp), a tion with the Merger. As a result of the transaction, the majority-owned subsidiary. This charge decreased net earn- Corporation’s interest in Inmarsat was reduced from approxi- ings by $183 million, or $.48 per diluted share. As of mately 22% to 14%. The sale of shares in Inmarsat did not December 31, 1999, CalComp had, among other actions, impact the Corporation’s results of operations for 2000. sold substantially all of its assets, terminated substantially In March 1997, the Corporation repositioned 10 of its all of its work force, and initiated the corporate dissolution non-core business units as a new independent company, L-3 process under the applicable state and foreign government Communications Holdings, Inc. (L-3), in which the Corpor- statutes. The financial impacts of these actions were less than ation retained an approximate 35 percent ownership inter- anticipated in the Corporation’s plans and estimates and, in est at closing. In May 1998, L-3 completed an initial public the fourth quarter of 1999, the Corporation reversed offering which resulted in a reduction in the Corporation’s approximately 10 percent of the original charge recorded ownership to approximately 25 percent and the recognition in 1998. As of December 31, 2000, the Corporation had of a gain, net of state income taxes, of $18 million. The gain substantially completed the shutdown of CalComp’s opera- increased net earnings by $12 million, or $.03 per diluted tions. Based on management’s assessment of the remaining share. In 1999, the Corporation sold its remaining interest actions to be taken to complete initiatives contemplated in in L-3 in two separate transactions. On a combined basis, the Corporation’s original plans and estimates, the Corpor- these transactions resulted in a nonrecurring and unusual ation reversed approximately $33 million of the original gain, net of state income taxes, of $155 million which charge, which favorably impacted the net loss for 2000 by increased net earnings by $101 million, or $.26 per $21 million, or $.05 per diluted share. While uncertainty diluted share. remains concerning the resolution of matters in dispute or In September 1999, the Corporation sold its interest in litigation, management believes that the remaining amount Airport Group International Holdings, LLC which resulted in recorded at December 31, 2000, which represents approx- a nonrecurring and unusual gain, net of state income taxes, imately 10 percent of the original charge, is adequate to of $33 million in other income and expenses. In October provide for resolution of these matters and to complete the 1999, the Corporation exited its commercial 3D graphics dissolution process. business through consummation of a series of transactions During 1997 and 1996, the Corporation recorded which resulted in the sale of its interest in Real 3D, Inc., nonrecurring and unusual charges, net of state income tax a majority-owned subsidiary, and a nonrecurring and benefits, which in the aggregate totaled $764 million. These unusual gain, net of state income taxes, of $33 million in charges reflected the estimated effects of exiting non-strate- other income and expenses. On a combined basis, these gic lines of business and impairment in the values of various transactions increased net earnings by $43 million, or non-core investments and certain other assets, and included $.11 per diluted share. estimated costs for facility closings and transfers of programs related to the Corporation’s acquisition of Loral Corporation Note 4—Restructuring and Other Charges in April 1996. All initiatives undertaken as part of the 1997 and 1996 charges had been completed as of December 31, In the fourth quarter of 1998, the Corporation recorded a 2000, other than actions contemplated as part of the Cor- nonrecurring and unusual pretax charge, net of state income poration’s exit from a certain environmental remediation tax benefits, of $233 million related to actions surrounding line of business and a fixed price systems development line the decision to fund a timely non-bankruptcy shutdown of 53


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lockheed Martin Corporation December 31, 2000 of business in the area of children and family services. In The following table sets forth the computations of basic 1999, the Corporation recorded an additional charge and diluted (loss) earnings per share: of approximately $40 million related to these remaining (In millions, except per share data) 2000 1999 1998 initiatives. The estimated costs related to these remaining Net (loss) earnings: initiatives represent approximately 30 percent of the total (Loss) earnings before amounts recorded. During 2000, there were no further extraordinary item and cumulative effect of change adjustments associated with these charges. The amounts in accounting $ (424) $ 737 $1,001 recorded in the Consolidated Balance Sheet at December 31, Extraordinary loss on early 2000 related to these actions are, in the opinion of man- extinguishment of debt (95) — — agement, adequate to complete the remaining initiatives Cumulative effect of change in accounting — (355) — originally contemplated in the 1997 and 1996 charges. Net (loss) earnings for basic Under existing U.S. Government regulations, certain and diluted computations $ (519) $ 382 $1,001 costs incurred for consolidation actions that can be demon- Average common shares strated to result in savings in excess of the cost to implement outstanding: can be deferred and amortized for government contracting Average number of common purposes and included as allowable costs in future pricing shares outstanding for of the Corporation’s products and services. Included in the basic computations 400.8 382.3 376.5 Dilutive stock options—based Consolidated Balance Sheet at December 31, 2000 is on the treasury stock method —(a) 1.8 4.6 approximately $300 million of deferred costs related prima- Average number of common rily to consolidation actions undertaken in connection with shares outstanding for the formation of Lockheed Martin in 1995 that will be rec- diluted computations 400.8(a) 384.1 381.1 ognized in future sales and cost of sales. (Loss) earnings per share: Basic: Before extraordinary item Note 5—Earnings Per Share and cumulative effect of Basic and diluted per share results for all periods presented change in accounting $ (1.05) $ 1.93 $ 2.66 Extraordinary loss on early were computed based on the net loss or net earnings for extinguishment of debt (.24) — — the respective periods. The weighted average number of Cumulative effect of change common shares outstanding during the period was used in in accounting — (.93) — the calculation of basic (loss) earnings per share and, for $ (1.29) $ 1.00 $ 2.66 1999 and 1998, this number of shares was increased by Diluted: Before extraordinary item the effects of dilutive stock options based on the treasury and cumulative effect of stock method in the calculation of diluted (loss) earnings per change in accounting $ (1.05) $ 1.92 $ 2.63 share. The diluted loss per share for 2000 was computed Extraordinary loss on early in the same manner as the basic loss per share, since extinguishment of debt (.24) — — Cumulative effect of change adjustments related to the dilutive effects of stock options in accounting — (.93) — would have been antidilutive. $ (1.29) $ .99 $ 2.63 (a) In accordance with SFAS No. 128, the average number of common shares used in the calculation of the diluted loss per share before extraordinary item and cumulative effect of change in accounting has not been adjusted for the effects of 2.3 million dilutive stock options, as such adjustment would have been antidilutive. 54


  • Page 47

    Lockheed Martin Corporation (Continued) Note 6—Receivables (Atlas V) programs. At December 31, 2000 and 1999, (In millions) 2000 1999 commercial launch vehicle inventories included amounts advanced to Russian manufacturers, Khrunichev State U.S. Government: Amounts billed $ 1,143 $ 927 Research and Production Space Center and RD AMROSS, Unbilled costs and accrued profits 2,289 2,300 a joint venture between Pratt & Whitney and NPO Less customer advances and Energomash, of approximately $657 million and $903 progress payments (457) (395) Commercial and foreign governments: million, respectively, for the manufacture of launch vehicles Amounts billed 725 644 and related launch services. Unbilled costs and accrued profits, Work in process inventories at December 31, 2000 primarily related to related to other long-term contracts and programs in commercial contracts 664 963 Less customer advances and progress included approximately $50 million of unamor- progress payments (169) (91) tized deferred costs for aircraft not under contract related $ 4,195 $ 4,348 to the Corporation’s C-130J program. Approximately $1.5 billion of costs included in 2000 Approximately $169 million of the December 31, 2000 inventories, including approximately $565 million advanced unbilled costs and accrued profits are not expected to be to Russian manufacturers, are not expected to be recovered recovered within one year. within one year. An analysis of general and administrative costs, includ- Note 7—Inventories ing research and development costs, included in work in (In millions) 2000 1999 process inventories follows: Work in process, commercial (In millions) 2000 1999 1998 launch vehicles $ 1,175 $ 1,514 Beginning of year $ 493 $ 693 $ 533 Work in process, primarily related Incurred during the year 1,950 2,354 2,469 to other long-term contracts and Charged to cost of programs in progress 3,834 3,879 sales during the year: Less customer advances and Research and progress payments (1,864) (1,848) development (647) (822) (864) 3,145 3,545 Other general and Other inventories 680 506 administrative (1,401) (1,732) (1,445) $ 3,825 $ 4,051 End of year $ 395 $ 493 $ 693 Work in process inventories related to commercial launch In addition, included in cost of sales in 2000, 1999 vehicles include costs for launch vehicles, both under con- and 1998 were general and administrative costs, including tract and not under contract, including approximately $120 research and development costs, of approximately $672 million of unamortized deferred costs at December 31, 2000 million, $509 million and $490 million, respectively, for launch vehicles not under contract related to the com- incurred by commercial business units or programs. mercial Atlas and the Evolved Expendable Launch Vehicle 55


  • Page 48

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lockheed Martin Corporation December 31, 2000 Note 8—Property, Plant and Equipment temporary decline in the value of the investment. ACeS is a (In millions) 2000 1999 joint venture in which the Corporation holds a 33 percent interest at December 31, 2000. ACeS operates the Asian Land $ 174 $ 218 Buildings 2,931 3,027 Cellular Satellite System, a geostationary mobile satellite Machinery and equipment 5,334 5,662 system serving Southeast Asia which was placed in com- 8,439 8,907 mercial operation in the fourth quarter of 2000. The space- Less accumulated depreciation craft has experienced an anomaly that may reduce the and amortization (4,993) (5,273) overall capacity of the system by about 30 to 35 percent. $ 3,446 $ 3,634 The decline in the value of the investment was assessed to be other than temporary as a result of the reduced business Note 9—Investments in Equity Securities prospects due to this anomaly as well as overall market conditions. The adjustment reduced net earnings by $77 (In millions) 2000 1999 million, or $0.19 per share. Equity method investments: International Telecommunications Satellite Organization (INTELSAT) $ 1,201 $ — Note 10—Debt Astrolink International, LLC 266 148 Americom Asia-Pacific, LLC 138 114 Type (Maturity Dates) Space Imaging, LLC 67 86 (In millions, except Range of ACeS International, Ltd. 32 163 interest rate data) Interest Rates 2000 1999 COMSAT — 1,188 Notes (2001–2022) 5.7 – 9.4% $5,202 $ 6,778 Other 79 72 Debentures (2011–2036) 7.0 – 9.1% 4,312 4,407 1,783 1,771 Monthly Income Cost method investments: Preferred Securities 8.125% 200 — Inmarsat 270 — ESOP obligations New Skies Satellites, N.V. 188 — (2001–2004) 8.4% 177 217 Loral Space 146 393 Other obligations Other 46 46 (2001–2016) 1.0 –12.7% 56 77 650 439 9,947 11,479 Less current maturities (882) (52) $ 2,433 $ 2,210 $9,065 $11,427 The carrying value of the Corporation’s 22.5 percent investment in INTELSAT exceeds the Corporation’s share of In November 2000, the Corporation commenced ten- INTELSAT’s net assets by approximately $700 million, and der offers for the purchase of up to $1.95 billion in princi- this amount is being amortized ratably over 30 years. The pal amount of six issues of debt securities then outstanding. Corporation has commitments to provide additional funding Such debt securities included a combination of notes and to Astrolink International, LLC totaling approximately $140 debentures. In December 2000, the Corporation purchased million at December 31, 2000. approximately $1.9 billion in principal amount of the debt In the fourth quarter of 2000, the Corporation recorded securities included in the tender offers, the majority of which a nonrecurring and unusual charge, net of state income tax were notes. The repurchase of the debt securities resulted in benefits, of $117 million related to impairment of its invest- an extraordinary loss on early extinguishment of debt, net ment in ACeS International, Ltd. (ACeS) due to an other than of $61 million in income tax benefits, of $95 million. 56


  • Page 49

    Lockheed Martin Corporation (Continued) In connection with the Merger, the Corporation recorded assigned to the Corporation’s long-term senior unsecured at fair value approximately $410 million of COMSAT debt debt are below investment grade, holders of the notes may obligations in its Consolidated Balance Sheet. COMSAT’s require the Corporation to purchase the notes and pay debt obligations consisted of approximately $210 million accrued interest. These notes are obligations of the ESOP in notes, and $200 million in Monthly Income Preferred but are guaranteed by the Corporation and included as Securities (MIPS) issued by a wholly-owned subsidiary of debt in the Corporation’s Consolidated Balance Sheet. COMSAT. The MIPS, which were issued at a par value of At the end of 2000, the Corporation had a $3.5 bil- $25 per share, require the payment of dividends at an lion revolving credit facility which matures on December 20, annual rate of 8.125%, and became callable beginning 2001 (the Credit Facility). Borrowings under the Credit in July 2000. The MIPS are fully and unconditionally guar- Facility would be unsecured and bear interest at rates based, anteed by COMSAT and the Corporation. at the Corporation’s option, on the Eurodollar rate or a bank As of December 31, 2000, the Corporation had $1.3 Base Rate (as defined). Each bank’s obligation to make loans billion of notes outstanding which had been issued to a under the Credit Facility is subject to, among other things, wholly-owned subsidiary of General Electric Company compliance by the Corporation with various representa- (GE). The notes are due November 17, 2002 and bear tions, warranties and covenants, including, but not limited interest at a rate of approximately 6%. The agreements to, covenants limiting the ability of the Corporation and relating to these notes require that, so long as the aggre- certain of its subsidiaries to encumber their assets and a gate principal amount of the notes exceeds $1.0 billion, covenant not to exceed a maximum leverage ratio. There the Corporation will recommend to its stockholders the were no borrowings outstanding under the Credit Facility election of one person designated by GE to serve as a at December 31, 2000. director of the Corporation. The Credit Facility supported commercial paper bor- The registered holders of $300 million of 40 year rowings of approximately $475 million outstanding at Debentures issued in 1996 may elect, between March 1 December 31, 1999. The weighted average interest rate and April 1, 2008, to have their Debentures repaid by for commercial paper outstanding at December 31, 1999 the Corporation on May 1, 2008. was 6.6%. Included in Debentures are $114 million of 7% obliga- The Corporation’s long-term debt maturities for the five tions ($175 million at face value) which were originally years following December 31, 2000 are: $882 million in sold at approximately 54 percent of their principal amount. 2001; $1,334 million in 2002; $767 million in 2003; These Debentures, which are redeemable in whole or in $137 million in 2004; $16 million in 2005; and $6,811 part at the Corporation’s option at 100 percent of their million thereafter. face value, have an effective yield of 13.25%. Certain of the Corporation’s other financing agreements A leveraged employee stock ownership plan (ESOP) contain restrictive covenants relating to debt, limitations on incorporated into the Corporation’s salaried savings plan encumbrances and sale and lease-back transactions, and borrowed $500 million through a private placement of provisions which relate to certain changes in control. notes in 1989. These notes are being repaid in quarterly The estimated fair values of the Corporation’s long- installments over terms ending in 2004. The ESOP note term debt instruments at December 31, 2000, aggregated agreement stipulates that, in the event that the ratings approximately $10.4 billion, compared with a carrying 57


  • Page 50

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lockheed Martin Corporation December 31, 2000 amount of approximately $9.9 billion. The fair values were Note 11—Income Taxes estimated based on quoted market prices for those instru- The provision for federal and foreign income taxes consisted ments publicly traded. For privately placed debt, the fair of the following components: values were estimated based on the quoted market prices (In millions) 2000 1999 1998 for similar issues, or on current rates offered to the Corpor- ation for debt with similar remaining maturities. Unless oth- Federal income taxes: Current $763 $136 $432 erwise indicated elsewhere in the Notes to Consolidated Deferred (84) 293 203 Financial Statements, the carrying values of the Corporation’s Total federal income taxes 679 429 635 other financial instruments approximate their fair values. Foreign income taxes 31 34 25 In June 2000, the Corporation was notified that Total income taxes provided $710 $463 $660 Globalstar Telecommunications, L.P. (Globalstar) failed to repay borrowings of $250 million under a revolving credit Net provisions for state income taxes are included in agreement on which Lockheed Martin was a partial guar- general and administrative expenses, which are primarily antor. In connection with its contractual obligation under allocable to government contracts. Such state income taxes the guarantee, on June 30, 2000, the Corporation paid were $100 million for 2000, $22 million for 1999 and $207 million to the lending institutions from which Globalstar $70 million for 1998. had borrowed, which included applicable interest and fees. The Corporation’s effective income tax rate varied from On that same date, Loral Space & Communications, Ltd. the statutory federal income tax rate because of the follow- (Loral Space), under a separate indemnification agreement ing differences: between the Corporation and Loral Space, paid Lockheed 2000 1999 1998 Martin $57 million. The Corporation is entitled to repayment Statutory federal tax rate 35.0% 35.0% 35.0% Increase (reduction) by Globalstar of the remaining $150 million paid under in tax rate from: the guarantee, but has not as yet reached agreement with Nondeductible respect to the form and timing of such repayment. In light of amortization 29.5 7.6 5.5 the uncertainty of the situation regarding the amounts due Revisions to prior years’ estimated liabilities 4.4 (6.0) (2.4) from Globalstar, the Corporation recorded a nonrecurring and Divestitures 176.7 — 1.1 unusual charge in the second quarter of 2000, net of state Other, net 2.4 2.0 .5 income tax benefits, of approximately $141 million in other 248.0% 38.6% 39.7% income and expenses. The charge negatively impacted the net loss for 2000 by $91 million, or $.23 per diluted share. Interest payments were $947 million in 2000, $790 million in 1999 and $856 million in 1998. 58

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