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    United We Serve Annual Report 2001


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    Financial Highlights (In millions, except per share data and number of employees) 2001 2000 1999 Net sales $23,990 $24,541 $24,999 Operating profit 888 1,251 1,997 Operating profit before amortization of goodwill and other intangibles 1,286 1,674 2,435 Net (loss) earnings (1,046) (519) 382 Diluted (loss) earnings per share (2.42) (1.29) 0.99 Pro forma diluted earnings per share excluding nonrecurring and unusual items: From continuing operations 1.60 1.17 1.48 From discontinued operations (0.14) (0.10) 0.02 1.46 1.07 1.50 Cash dividends per common share 0.44 0.44 0.88 Total assets 27,654 30,426 30,261 Total debt 7,511 9,959 11,954 Stockholders’ equity 6,443 7,160 6,361 Negotiated backlog $71,269 $55,076 $44,807 Employees 125,000 130,000 147,000 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 21 through 41 of this Annual Report. On The Cover: To carry out their critical missions, pilots require a Joint Strike Fighter that is an affordable, stealthy, and highly capable multi-role combat aircraft for decades to come.


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    Defining Moments娃: United We Serve The strength of a company is measured by its performance for customers, shareholders, employees, and the communities it serves. Every day, the men and women of Lockheed Martin renew their commitment to making our company the world’s best advanced technology systems >>> 1 integrator, serving our customers at their Lockheed Martin Annual Report defining moments. Contents To Our Shareholders 3 Financial Section 21 Corporate Directory 71 General Information 73


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    Dear Fellow Shareholder, We, like all Americans, stood united and resolute in a year marked by tragedy and uncertainty. We are proud of the contributions our employees have made before and since September 11 in service to our customers, the nation and the world. Your company is focused on the critical tasks ahead, equipping our armed forces and the forces of our allies, as they secure peace in a changing world. Lockheed Martin is also a united team, focused on its comprehensive strategy to transition from recovery to disciplined growth and to further drive a culture of performance at every level. By all indicators, we achieved our goals with 2001 representing a second consecutive year of consistently strong operational and financial performance and enhanced shareholder value. It also included winning the Joint Strike Fighter program, arguably the most important competition in our Corporation’s history. As a premier systems integrator, we continue to meet the critical priorities of our customers. That singular vision has had its rewards. Last year our achievements included: ◆ Mission success for our customers ◆ Meeting or exceeding financial goals ◆ Winning the critical competitions ◆ Shaping the portfolio to adjust to changing market conditions. >>> 2 >>> 3 We believe our most vital product is our customers’ success. We know that 100 percent mission success is the only satisfactory objective. Anything short of this is not what we want to deliver. Lockheed Martin Annual Report Lockheed Martin Annual Report However, we did improve with hard work and attention to details as our dedicated employees, partners and suppliers have strengthened the confidence customers have in our ability to deliver as promised. Of the 1,434 measurable events in 2001, we can point to a 98 percent rate of mission success, up from 95 percent in 2000. The result: We achieved customer-determined award fees averaging 95 percent, a record level for the Corporation. Among our achievements in 2001: In the Systems Integration business area, our Patriot Advanced Capability-3 (PAC-3) Missile successfully completed development testing and continues in low-rate production; in the Space Systems Company, we delivered the first Atlas V launcher on schedule to Cape Canaveral; and our Technology Services people provided immediate and invaluable service to government agencies and the nation in their response at the sites of the September 11 terrorist attacks. Following a highly successful test-flight program, the Department of Defense on October 26 awarded Lockheed Martin a contract for the design of the Joint Strike Fighter (JSF), a stealthy, supersonic, multi-role fighter for the U.S. Air Force, Navy and Marine Corps, as well as the U.K. Royal Air Force and Royal Navy. <<< For Lockheed Martin, key partners and team members, the program means a significant source (left) Vance D. Coffman, Chairman and Chief Executive Officer of future business. The Joint Strike Fighter also demonstrated the innovations in technology and (right) Robert J. Stevens, President and Chief Operating Officer


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    business that distinguish Lockheed Martin as an advanced technology enterprise—from highly Despite our successes last year, the job is far from finished, and we are not without our challenges efficient lean manufacturing processes, to the revolutionary Lockheed Martin-developed lift fan in 2002. We have ongoing concerns about the market and pricing for the launch vehicle and propulsion system that enables the aircraft to take off from a very short runway or small aircraft commercial satellite manufacturing businesses. We continue to drive out costs in these areas as carrier and land vertically. demonstrated by our success in integrating space-related operations into a single Space Systems Company. In the government launch vehicle business, we are working with our customer to Combined with other new orders, we achieved a record backlog of $71.3 billion in 2001. improve the underlying economics. As for commercial satellites, we are reviewing alternatives to Strong program performance on this backlog is paramount to our future as we continue to focus improving the business model. on core business performance, customer satisfaction, profitable growth and attractive returns on investments to enhance shareholder value. Our strategy has now transitioned from recovery to disciplined growth. The cornerstone of this strategy is continued focus on our core businesses to generate profitable backlog growth, and If there was a first among equals in our financial priorities for 2001, it was to further drive our achieve attractive returns on our investments. We embrace this strategy while never losing our culture to manage for cash and reduce debt, and we exceeded expectations in both. commitment to outstanding program performance, rigorous attention to customer satisfaction, and Lockheed Martin’s ongoing emphasis on strong cash flow resulted in $2.0 billion in free cash flow maximizing cash flow generation throughout the Corporation. We continue to tap the enormous in 2001, compared with $1.8 billion in 2000. Since 1999, we have achieved over $4 billion in talent of our workforce through our LM21 Operating Excellence. In fact, LM21 initiatives in lean debt reduction and in 2001 we lowered our leverage considerably. manufacturing and Six Sigma were instrumental in demonstrating cost and cycle time savings opportunities as we developed the winning bid for Joint Strike Fighter. This performance reflects continued working capital improvements corporatewide, particularly in the area of advance payments on international military aircraft programs. Free cash flow is expected We recognize that this Corporation’s most valuable asset is its people, a point we note with par- to be less during each of the next two years compared with 2001 as we utilize these advance pay- ticular significance in 2001. The tragic events of September 11 deeply affected our management ments to execute our international military aircraft programs. team and our employees, as they did all Americans. We are more committed than ever to serve and support our military customers. In addition, our employees have generously matched a cor- Portfolio shaping in 2001 included our divestiture of IMS Corporation, a business which provides porate donation by contributing more than $1 million to our American Spirit Fund in support of technology services to state and local governments, for $825 million in pre-tax proceeds. Since >>> 4 >>> 5 the victims of the terrorist attacks. 1999, our six key divestitures have contributed more than $3 billion in pre-tax proceeds. The sale of IMS completes our divestiture plans announced in late 1999. As a successful business enterprise, Lockheed Martin continues to attract record numbers of diverse Lockheed Martin Annual Report Lockheed Martin Annual Report and talented people in every discipline. As a Corporation, we are committed to greater diversity We decided in 2001 to exit the global telecommunications services business, consistent with our in our workforce and the competitive edge that diversity brings to every one of our programs. strategy to focus on our core businesses. To take advantage of relevant skills and experience, we have reassigned the satellite networking business to Space Systems and the commercial Information Before closing, we would like to express our gratitude and thanks to James F. Gibbons and Technology (IT) outsourcing business to our IT unit in the Technology Services business area. Our Caleb B. Hurtt, who are retiring from the Board of Directors. Their dedication and service has intention is that remaining operations will be divested and we are in the process of eliminating contributed greatly to the success of Lockheed Martin. the Lockheed Martin Global Telecommunications (LMGT) administrative infrastructure. The past year has been a difficult one for all those who cherish the liberty bestowed by the In December we closed our first acquisition in several years. The integration of OAO Corporation, founders of this nation. As we proceed through the year, we are more mindful of our responsibili- a government IT contractor, should further leverage the Corporation’s IT capabilities, enhance ties and the important work Lockheed Martin’s 125,000 men and women accomplish every day. offerings to our customers, and be accretive to our 2002 results. March 1, 2002 Looking forward, we are confident Lockheed Martin is well positioned in key, attractive markets. Our capabilities are aligned with the priorities of our government customers such as the Department of Defense in critical areas of air power projection, missile defense, naval power, space intelligence, information superiority, and airlift. As a systems integrator we have the expertise to serve the infor- mation technology and automation needs of large federal agencies such as the Social Security Vance D. Coffman Robert J. Stevens Administration, Federal Aviation Administration, and U.S. Postal Service. We serve our NASA Chairman and Chief Executive Officer President and Chief Operating Officer customer in every one of its endeavors, including planetary exploration as demonstrated by the success of the Mars Odyssey spacecraft.


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    America’s Armed Forces: Defending Liberty >>> 6 >>> 7 Lockheed Martin Annual Report Lockheed Martin Annual Report When our nation calls, the men and women of the armed forces respond with a steadfast commitment to serve, inspiring courage and love of the ideals that keep America strong. <<< At Lockheed Martin, we offer our gratitude to those who wear the uniforms of the armed services. Their dedication has united our nation and our allies.


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    Civil Government Agencies: Bravely Meeting New Challenges >>> 8 >>> 9 Lockheed Martin Annual Report Lockheed Martin Annual Report U.S. Government agencies are at the forefront of protecting our shores, delivering services that are vital to the lives of millions and ensur- ing that America remains a beacon — the hope and inspiration for people everywhere. <<< Bringing Mail to Millions: The U.S. Postal Service, <<< Managing the Skies: Air traffic management <<< faced with new challenges, is resolved and dedicated— Protecting Our Shores: The U.S. Coast Guard customers worldwide are responding working around-the-clock to move more than 200 billion is sharply focused on its mission of keeping to new requirements posed by a world pieces of mail a year affordably and effectively under America’s shores and waterways secure, safe in transformation. Lockheed Martin serves every condition. Lockheed Martin assists the U.S. and mobile, as well as its mission in national air traffic management customers, such Postal Service in its important mission with cutting- defense and the protection of natural resources. as the Federal Aviation Administration, edge technologies that speed and improve the sorting, Lockheed Martin is proud to support the with state-of-the-art software and hardware processing and delivery of the mail. dedicated men and women of the U.S. Coast that is modernizing air traffic control for Guard in their important duty. safer, more efficient air travel.


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    Lockheed Martin People: Serving Those Who Guard Freedom >>> 10 >>> 11 Lockheed Martin Annual Report Lockheed Martin Annual Report Lockheed Martin people are dedicated to serving those who are at the front lines of freedom’s fight. We apply transformational technology and systems integration expertise so America and its allies can meet the security challenges of the 21st Century. <<< A program built on strong partnerships and common <<< goals, the U.S. Air Force, Navy and Marine Corps, as well as the U.K. Royal Air Force and Royal Navy will fly <<< Our customers depend on technologically advanced the Joint Strike Fighter. work processes, virtual design, and lean manufacturing to build an affordable aircraft that will be a cornerstone of future defense for the United States and its allies. To carry out their critical missions, pilots require a <<< Joint Strike Fighter that is an affordable, stealthy, and highly capable multi-role combat aircraft for decades to come.


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    Our Responsibility And Commitment: Deliver The Best To The Best Lockheed Martin is united by a clarity of purpose: We help our customers succeed at their defining moments with transformational technology and expertise as a systems integrator. <<< >>> 12 >>> 13 The F-22 Raptor, the next-generation air superiority fighter, will give the U.S. Air Force the ability to deter aggression or control the skies in the event of combat. Lockheed Martin Annual Report Lockheed Martin Annual Report <<< Radars help governments accomplish a diverse range of missions—from managing air and vessel traffic to defend- ing the skies. Lockheed Martin supplies advanced radar to defense and civil government customers worldwide. <<< One of the Department of Defense’s highest-priority programs, the stealthy Joint Air-to-Surface Standoff Missile (JASSM), will allow our military forces to strike Surface ships and submarines depend on <<< their targets on the ground with precision from long high-performance radar, naval combat systems and ranges, reducing the risk to pilots. advanced electronics to keep shipping lanes secure, project power and prevail in combat if called upon. As a premier systems integrator, Lockheed Martin provides these technologies to our naval customers so they can accomplish their crucial missions.


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    Delivering Original Solutions: Helping Customers Achieve The Extraordinary A passion for invention and a relentless dedi- cation to excellence. These are qualities that America’s pioneers in space have used to meet the great challenges of exploration, bringing the benefits of space to people on Earth in their everyday lives. Lockheed Martin has a long history of supporting America’s >>> 14 >>> 15 space program and Lockheed Martin Annual Report Lockheed Martin Annual Report NASA— delivering the <<< The Atlas III serves our commercial launch customers extraordinary to meet worldwide with dependable access to space. Our next- generation Atlas V is set to launch in 2002 and will offer customers increased lift capability and improved reliability the next great challenge. at lower cost. Milstar II is the Department of Defense’s most <<< technologically advanced communications satellite, providing highly secure global communications links for the U.S. military. <<< The External Tank, supplied by Lockheed Martin, has flown on every Space Shuttle since the first mission in 1981 with 100 percent mission success, supporting NASA’s goals of space exploration and habitation. In 2001, the Mars Odyssey spacecraft reached its <<< destination for its mission to map the Martian surface in detail, search for water and answer some of science’s greatest questions about Earth’s nearest planetary neighbor. Lockheed Martin is proud to work with NASA in all its missions, including planetary exploration.


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    Government By The People: Working More Effectively For The People <<< The Social Security Administration delivers benefits to more than 35 million citizens with a customer satisfaction rate that consistently averages above 96 percent. Lockheed Martin assists the agency in meeting those goals with state-of-the-art e-government solutions. The result: efficient, accurate and timely delivery of Social Security benefits. <<< The Integrated Automated Fingerprint Identification System (IAFIS), with its database >>> 16 >>> 17 of more than 400 million fingerprints, is a critical tool for the FBI and law enforcement agencies nationwide. Developed by Lockheed Martin, the IAFIS database can match criminals to fingerprints in just hours, a fraction of the time Lockheed Martin Annual Report Lockheed Martin Annual Report it took previously. <<< The Federal Aviation Administration is modernizing America’s air traffic control infrastructure, calling upon Lockheed Martin to provide cutting-edge hardware and software. U.S. Government agencies are meeting the critical challenges of the 21st Century with high-speed Information Technology, databases and dynamic solutions to address nationally The U.S. Postal Service’s mission is to ensure <<< prompt and efficient delivery of mail—providing a strategic goals. Lockheed Martin’s vital link in our nation’s economic and social fabric. Lockheed Martin supports that mission through automated systems that move, scan and process affinity with vital institutions has <<< The Environmental Protection Agency’s mission mail faster and more accurately. Lockheed Martin is to protect human health and safeguard the environ- also offers solutions to government agencies, made us a trusted partner with ment. Lockheed Martin supports the Environmental Protection Agency by coordinating and integrating such as the U.S. Postal Service, to address the biohazard threat. its computer networks. Government agencies.


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    Global Partnerships: Supporting Nationally Consequential Missions Throughout the world, governments and industry are involved in meeting vital strategic goals to build robust economies, defend the peace or manage large infrastructure projects. Lockheed Martin is the partner of choice, with customers and alliances in over 30 countries, focusing on mutual benefit, as well as new technologies and quality jobs in-country. >>> 18 >>> 19 Lockheed Martin Annual Report Lockheed Martin Annual Report <<< In Japan, Lockheed Martin is partnered with <<< Lockheed Martin and its partners in the United government and business in a variety of programs Kingdom are involved in programs as diverse as fighter and from advanced aircraft, to space exploration, transport aircraft, air traffic management, anti-submarine simulation and maritime defense. warfare helicopters, advanced battlefield information systems, managing the nuclear stockpile, and simulation. In Europe, Lockheed Martin is allied with <<< <<< Ensure a strong national defense with advanced government and industry partners in military and aircraft. Modernize air traffic control systems. Explore civil government programs that help realize vital new opportunities in space and telecommunications. strategic goals. For example, the Medium Extended Lockheed Martin is working in partnership with the Air Defense System (MEADS) is an alliance of Republic of Korea to address these national priorities. Lockheed Martin and partners in Germany and Italy.


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    FINANCIAL SECTION Financial Highlights Inside Front Cover Management’s Discussion and Analysis of Financial Condition and Results of Operations 21 Management’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 >>> 20 Notes to Consolidated Financial Statements 48 Consolidated Financial Data—Five Year Summary 69 Lockheed Martin Annual Report Forward-Looking Statements—Safe Harbor Provisions 74


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2001 Lockheed Martin Corporation (Lockheed Martin or the Transforming the nation’s defense posture to a capabilities- Corporation) is engaged in the conception, research, design, based approach involves creating the ability for a more development, manufacture, integration and operation of flexible response with greater force mobility, stronger space advanced technology systems, products and services. The capabilities, missile defense, improved information systems Corporation serves customers in both domestic and interna- security and an increased emphasis on homeland defense. tional defense and commercial markets, with its principal The President’s proposed budget for the U.S. Department customers being agencies of the U.S. Government. The fol- of Defense (DoD) for fiscal year 2003 and beyond reflects lowing discussion should be read in conjunction with the the above-mentioned transformation of national defense pol- audited consolidated financial statements included herein. icy and responds to increased needs for homeland security and defeating terrorism. Budget increases are projected for Industry Considerations operational readiness and personnel needs, as well as for In recent years, domestic and worldwide political and both the procurement and the research and development economic developments have significantly affected the mar- accounts. While there is no assurance that the proposed kets for defense and advanced technology systems, products increased DoD budget levels will be approved by Congress, and services. Two events in 2001 had a dramatic impact after over a decade of downward trends, the current defense on the domestic and international political and economic budget outlook is one of growth. The Corporation’s experi- landscape. They impacted Lockheed Martin and the defense ence and capabilities are well aligned with U.S. defense industry generally. First, the events of September 11 created priorities. Uncertainties remain, however, relative to the uncertainty and exposed defense vulnerabilities in security level of growth and the amount of the budget that will be and the overall defense of our homeland. And second, allocated to the investment accounts (i.e., procurement, the conclusions of the Quadrennial Defense Review research and development). The following graph depicts (QDR) reflect a transformation to a policy of developing past expenditures and future increases in the defense budget specific capabilities for overall national defense versus >>> 21 proposed by the President. a policy designed for defeating a specific enemy threat. Lockheed Martin Annual Report Department of Defense Budget (In billions) $500 Proposed Budget $400 $300 Other $200 Investment $100 Operations & Maintenance and Military Personnel FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY $0 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2001 Lockheed Martin’s broad mix of programs and capabili- and efficiency improvements, as well as generation of cash ties makes it a likely beneficiary of any increases in defense to repay debt incurred during the period of consolidation. spending. The Corporation’s product areas and programs Worldwide defense budgets have been declining over include missile defense, space intelligence, precision muni- the past decade. As a result, consolidation activities have tions, combat systems (air, land and sea-based) and aircraft. also occurred within the European aerospace industry, In terms of size and long-term potential impact, two of the resulting in fewer but larger and more capable competitors, Corporation’s most important programs are the F-22 fighter potentially resulting in an environment where there could aircraft program and the Joint Strike Fighter (JSF) program. be less demand abroad for products from U.S. companies. The Corporation was awarded the JSF contract in October Such an environment could affect opportunities for European 2001. In addition, Lockheed Martin is represented in virtually partnerships and sales potential for U.S. exports. In addi- every aspect of land, sea, air and space-based missile tion, there has been some consolidation between U.S. and defense, including the PAC-3 and THAAD programs. In the European aerospace companies. areas of space intelligence and information superiority, it As a government contractor, the Corporation is subject has leadership positions on Milstar, Advanced Extremely to U.S. Government oversight. The government may inves- High Frequency (AEHF) and the Space-Based Infrared System- tigate and make inquiries of the Corporation’s business High (SBIRS-H) programs, along with battle management practices and conduct audits of contract performance and command and control capabilities. In airlift, the Corporation cost accounting. Depending on the results of these audits has the C-130J program and is under contract to upgrade and investigations, the government may make claims against the C-5 strategic airlift aircraft. Many of these programs are the Corporation. Under U.S. Government procurement very large and require significant funding over several budg- regulations and practices, an indictment of a government etary cycles. There are risks associated with these and other contractor could result in that contractor being fined and/or large, highly visible programs that are subject to appropria- suspended for a period of time from eligibility for bidding >>> 22 tion by Congress which, because of their magnitude, could on, or for award of, new government contracts. A convic- attract substantial focus as potential targets for reductions or tion could result in debarment for a specified period of time. extensions of their funding to pay for other programs. Similar government oversight exists in most other countries Lockheed Martin Annual Report In addition, increased emphasis on homeland defense where the Corporation conducts business. Although the out- may increase demand for utilization of the Corporation’s come of such investigations and inquiries cannot be pre- capabilities in areas such as air traffic management, biohaz- dicted, in the opinion of management, there are no claims, ard detection systems for postal equipment, ensuring informa- audits or investigations pending against the Corporation tion systems security and other technical systems solutions. that are likely to have a material adverse effect on the Recent trends have indicated increased demand by federal Corporation’s business or its consolidated results of opera- and civil government agencies for upgrading and investing in tions, cash flows or financial position. new information technology systems, an area in which the Recent procurement policy changes, such as an increase Corporation has continued to focus its resources. in the progress payment rate and the use of performance- Over the past several years, industry participants reacted based payments, have had a positive impact on the to historically shrinking defense budgets for procurement, Corporation’s financial position. However, the Corporation research and development by combining to maintain criti- remains exposed to other inherent risks associated with U.S. cal mass and achieve significant cost savings. The U.S. Government contracting, including technological uncertainties Government has been generally supportive of industry and obsolescence and dependence on annual Congressional consolidation. Through its own consolidation activities, the appropriation and allotment of funds. Many of the Corpora- Corporation has been able to pass along savings to its tion’s programs involve development and application of state- customers, principally the DoD. More recently, major aero- of-the-art technologies aimed at achieving challenging goals. space companies have focused their efforts on cost savings


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    Lockheed Martin Corporation (Continued) As a result, setbacks and failures can occur. It is important The above factors relative to start-up issues and delays for the Corporation to resolve performance issues related in completion of satellite systems also contributed to a to such programs in a timely manner to achieve success on reduction in commercial satellite orders. In addition, similar these programs. to the launch vehicle market, the commercial satellite mar- The Corporation also conducts business in related com- ket is experiencing pricing pressures due to excess capacity mercial and non-defense markets. Although these lines of and reduced demand. Further impacting satellite demand business are not dependent on defense budgets, they share have been the business difficulties encountered by certain many of the risks associated with the Corporation’s defense commercial satellite systems, resulting in increased investor businesses, as well as other risks unique to the commercial scrutiny and reduced access to capital for new ventures, marketplace. Such risks include development of competing and a reduction in the total market size in the near term. products, technological feasibility and product obsolescence. The Corporation is seeking to reduce costs related to its The launch vehicle industry continues to experience a commercial satellite programs and is evaluating alternative reduction in demand due primarily to delays in completing strategies related to those businesses while maintaining its certain satellite systems as a result of continuing overcapac- focus on successful operations, though it cannot predict the ity in the telecommunications industry. Continued economic outcome of these efforts. uncertainty has adversely affected the capital markets and In connection with its portfolio of offered products and has made it difficult for many ventures, especially telecom- services in commercial space, the Corporation has entered munications and other high-technology companies, to attract into various joint venture, teaming and other business the funding needed for new capital investment. Issues such arrangements. Such arrangements generally include a as these were evidenced in 2001 by the inability of Astrolink formal plan for funding of the business which typically International, LLC (Astrolink) to obtain additional funding to requires commitments for funding from the partners, and complete a broadband satellite constellation. The Corporation may require the business to obtain financing from other >>> 23 holds a 31% interest in Astrolink, and was under contract to sources. To the extent the business is unable to obtain such manufacture four satellites and to provide related launch financing, the business partners, including the Corporation, and other services. These contracts were terminated in the would be required to assess alternatives relative to further Lockheed Martin Annual Report fourth quarter of 2001 due to funding considerations. funding for the business. In addition, some of these business Factors such as these have resulted in pricing pressures in arrangements include foreign partners. The conduct of inter- the launch vehicle marketplace associated with reduced national business introduces other risks into the Corporation’s demand and increased competition. This comes at a time operations, including changing economic conditions, fluctu- when the Corporation is making significant investments in ations in relative currency values, regulation by foreign the Evolved Expendable Launch Vehicle (Atlas V) program, jurisdictions and the potential for unanticipated cost the Corporation’s next generation launch vehicle. This pro- increases and timing issues resulting from the possible gram has required investment of funds for research and deterioration of political relations. development, start-up and certain other nonrecurring costs, The nature of the Corporation’s international business and launch facilities. A portion of these expenditures have also makes it subject to export control regulation by the been funded under an agreement with the U.S. Government. U.S. Department of State and the Department of Commerce. Orders to-date for the Atlas V launch vehicle have been Violations of these regulations can result in monetary penal- lower than expected, resulting in lower anticipated produc- ties and denial of export privileges. Management is currently tion levels. unaware of any violations of export control regulations which could have a material adverse effect on the Corporation’s business or its consolidated results of operations, cash flows or financial position.


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2001 Lockheed Martin owns 51 percent of Lockheed- Exit From the Global Telecommunications Services Business Khrunichev-Energia International, Inc. (LKEI), a joint On December 7, 2001, the Corporation announced venture with two Russian government-owned space firms. that it would exit its global telecommunications services LKEI has exclusive rights to market launches of commercial, business as a result of continuing overcapacity in the non-Russian-origin space payloads on the Proton rocket telecommunications industry and deteriorating business and from a launch site in Kazakhstan. In addition, the Corpora- economic conditions in Latin America. In connection with its tion and LKEI each hold a 50 percent ownership interest in decision, the Corporation reassigned certain of the busi- International Launch Services (ILS), a joint venture formed nesses in the Global Telecommunications segment to other to market commercial Atlas and Proton launch services business segments, plans to sell the remaining operations, worldwide. The Corporation consolidates the results of has positioned the remaining investments for monetization, operations of LKEI and ILS into its financial statements. and is eliminating the administrative infrastructure sup- Contracts for Proton launch services typically provide for porting such businesses and investments. Separately, the substantial advances from the customer in advance of Corporation decided in the fourth quarter of 2001 not to launch, and a sizable percentage of these advances are provide further funding to Astrolink and, due primarily to forwarded to Khrunichev State Research and Production Astrolink’s inability to obtain additional funding from other Space Center (Khrunichev), the manufacturer in Russia, to sources, wrote off its investment in Astrolink. As a result of provide for the manufacture of the related launch vehicle. the above actions, the Global Telecommunications segment Significant portions of such advances would be required will no longer be reported as a separate business segment. to be refunded to each customer if launch services were The Corporation recognized nonrecurring and unusual not successfully provided within the contracted time frames. charges, net of state income tax benefits, totaling approxi- At December 31, 2001, $514 million related to launches mately $2.0 billion in the fourth quarter of 2001 related to not yet provided was included in customer advances and these actions. The charges reduced net earnings by approx- >>> 24 amounts in excess of costs incurred, and $672 million of imately $1.7 billion ($3.98 per diluted share). The cash payments to Khrunichev for launches not yet provided was impact of the fourth quarter charges discussed above is not included in inventories. Since inception, launch services expected to be material. Approximately 650 positions were Lockheed Martin Annual Report provided through LKEI and ILS have been in accordance eliminated from the former Global Telecommunications seg- with contract terms. ment as a result of these actions. The Corporation has entered into agreements with RD Lockheed Martin Global Telecommunications (LMGT), a AMROSS, a joint venture of the Pratt & Whitney division of wholly-owned subsidiary of the Corporation, was formed in United Technologies Corporation and the Russian firm NPO 1999 from the combination of investments in several existing Energomash, for the development and purchase, subject to joint ventures and certain other elements of the Corporation certain conditions, of up to 101 RD-180 booster engines for previously included in the Systems Integration and Space use in two models of the Corporation’s Atlas launch vehicle. Systems segments. The Corporation began reporting LMGT Terms of the agreements call for payments to be made to as a separate business segment beginning in the third quar- RD AMROSS upon the achievement of certain milestones in ter of 2000. In August 2000, Lockheed Martin completed the development and manufacturing processes. Payments of its merger with COMSAT Corporation (COMSAT). The oper- $58 million made under these agreements were included in ations of COMSAT have been included in the results of oper- the Corporation’s inventories at December 31, 2001. ations of LMGT since August 1, 2000. The total purchase price for COMSAT was approximately $2.6 billion. The


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    Lockheed Martin Corporation (Continued) COMSAT transaction was accounted for using the purchase Following is a discussion which describes the compo- method of accounting, under which the purchase price was nents of the $2.0 billion in charges based on their classifica- allocated to assets acquired and liabilities assumed based tion in the Corporation’s consolidated financial statements. on their fair values. Included in these allocations were Discontinued Operations adjustments totaling approximately $2.1 billion to record The $2.0 billion in charges recorded in the fourth quar- investments in equity securities at fair value and goodwill. ter of 2001 included charges, net of state income tax bene- The LMGT businesses retained by the Corporation have fits, of approximately $1.4 billion related to certain global been realigned as follows: telecommunications services businesses held for sale and • The Systems & Technology line of business and the exit costs associated with elimination of the administrative COMSAT General telecommunications business unit infrastructure supporting the global telecommunications busi- have been realigned within the Space Systems segment. nesses and investments. These charges, which reduced net • Enterprise Solutions-U.S., a commercial information earnings for the year by $1.3 billion ($3.09 per diluted technology business, has been realigned within the share) are included in discontinued operations in the Technology Services segment. Corporation’s consolidated statement of operations. The businesses held for sale are as follows: The LMGT equity investments positioned for monetization include Intelsat, Ltd. (Intelsat), Inmarsat Ventures plc (Inmarsat), • Satellite Services businesses—includes COMSAT New Skies Satellites, N.V. (New Skies), ACeS International, Mobile Communications, COMSAT World Systems Ltd. (ACeS), Americom Asia-Pacific, LLC and Astrolink. These and Lockheed Martin Intersputnik. In the first quarter investments, which had an aggregate carrying value of of 2002, the Corporation completed the sale of approximately $1.6 billion at December 31, 2001, are now COMSAT Mobile Communications’ operations to reported as part of the Corporate and Other segment. The Telenor. The transaction is not expected to have a >>> 25 investments in Intelsat, Inmarsat and New Skies are subject material impact on the Corporation’s consolidated to regulation by the Federal Communications Commission results of operations in 2002. (FCC). FCC decisions and policies have had, and may con- • COMSAT-International (formerly Enterprise Solutions- Lockheed Martin Annual Report tinue to have, a significant impact on these entities. The ORBIT International)—provides telecommunications network serv- Act, enacted in March 2000, established deadlines for the ices in Latin America, primarily Argentina and Brazil. privatization and completion of initial public offerings by Of the $1.4 billion of charges included in discontinued these companies, as well as specific criteria for determining operations, approximately $1.2 billion related to impair- whether the privatizations of those entities are pro-competi- ment of goodwill in the Global Telecommunications seg- tive. If those criteria are not met, the FCC may limit access ment. The goodwill was recorded in connection with the by U.S. users to the satellite capacity of the privatized enti- Corporation’s acquisition of COMSAT as discussed above. ties for certain services. Intelsat privatized in July 2001 and Approximately $170 million of the $1.4 billion related Inmarsat privatized in 1999. Both have plans to access the to impairment of certain long-lived assets employed by public capital markets. New Skies privatized in 1998 and foreign businesses held for sale, primarily COMSAT- completed an initial public offering in 2000. If Intelsat and International. The remainder of the charges related to Inmarsat were unable to satisfy the ORBIT Act criteria and are costs associated with infrastructure reductions, including denied U.S. market access, the value of the Corporation’s severance and facilities. investment in those entities could be adversely affected.


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2001 The Corporation elected to early adopt, effective investments in satellite joint ventures, primarily ACeS and January 1, 2001, Statement of Financial Accounting Americom Asia-Pacific, LLC. The Corporation had previ- Standards (SFAS) No. 144, “Accounting for the Impairment ously recorded nonrecurring and unusual charges related to or Disposal of Long-Lived Assets.” The LMGT operating busi- other than temporary declines in the values of these invest- nesses identified for divestiture meet the requirements of ments as follows: in the first quarter of 2001, a charge, net SFAS No. 144 for treatment as discontinued operations. of state income tax benefits, of $100 million was recorded Accordingly, the results of operations of these businesses, related to Americom Asia-Pacific; and in the fourth quarter as well as the impairment and other charges related to the of 2000, a charge, net of state income tax benefits, of decision to exit these businesses, have been classified as $117 million was recorded related to ACeS (see “Note 9— discontinued operations in the Corporation’s consolidated Investments in Equity Securities” for additional discussion of statement of operations for all periods presented, and have these charges). been excluded from business segment information. Similarly, In addition, the fourth quarter 2001 charges included the assets and liabilities of these businesses have been approximately $43 million for severance, facilities costs separately identified in the consolidated balance sheet as and impairment of certain fixed assets associated with the being held for sale. The Corporation expects to complete realigned business units. On a combined basis, these non- the sale of these businesses by the end of 2002. Deprecia- recurring and unusual charges reduced net earnings for tion and amortization expense are no longer being recorded 2001 by $117 million ($0.27 per diluted share). with respect to the assets of the businesses in accordance Write-off of Investment in Astrolink with the Statement. These businesses are recorded at esti- The Corporation completed funding of its $400 million mated fair value less cost to sell at December 31, 2001. investment commitment to Astrolink, a joint venture in which Changes in the estimated fair value will be recorded in the Corporation holds a 31% interest, in 2001. In October future periods as determined. 2001, the Corporation made the decision and so advised >>> 26 In addition, the Corporation completed the sale of Astrolink that it did not plan to make any additional invest- Lockheed Martin IMS Corporation (IMS), a wholly-owned ment in the joint venture. In addition to its equity investment, subsidiary, for $825 million in cash on August 24, 2001. Lockheed Martin’s Space Systems segment had contracts Lockheed Martin Annual Report The transaction resulted in a gain, net of state income taxes, with Astrolink to manufacture four satellites and provide of $476 million and increased net earnings by $309 million related launch services, and LMGT had contracts to perform ($0.71 per diluted share). The results of IMS’ operations for system development and other services. Those contracts all periods presented, as well as the gain on the sale, have were terminated due to Astrolink’s funding considerations. been reclassified to discontinued operations in accordance As part of the $2.0 billion in charges recorded in the with SFAS No. 144. IMS’ assets and liabilities as of fourth quarter of 2001, the Corporation recognized a non- December 31, 2000 have been reclassified as held for sale. recurring and unusual charge, net of state income tax bene- The results of operations and related gains or losses fits, of $367 million in other income and expenses which associated with businesses divested prior to January 1, reflects the other than temporary decline in value of its 2001, the effective date of the Corporation’s adoption of investment in Astrolink based on the above circumstances. SFAS No. 144, including the divestitures of the Corpora- In addition, charges of approximately $20 million were tion’s Aerospace Electronics Systems (AES) businesses and recorded in cost of sales for certain other costs related to Lockheed Martin Control Systems in 2000, have not been Astrolink. On a combined basis, these charges reduced reclassified to discontinued operations in accordance with net earnings for 2001 by approximately $267 million the Statement. ($0.62 per diluted share). The Corporation continues to Other Charges Related to Global Telecommunications monitor its business relationships related to Astrolink. The charges recorded in the fourth quarter of 2001 also included nonrecurring and unusual charges, net of state income tax benefits, of approximately $132 million related to commitments to and impairment in the values of


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    Lockheed Martin Corporation (Continued) Other Divestiture Activities In September 2000, the Corporation sold Lockheed As part of a strategic and organizational review begun Martin Control Systems (Control Systems) to BAE SYSTEMS in 1999 the Corporation decided to evaluate the divestiture for $510 million in cash. This transaction resulted in the of certain non-core business units. recognition of a nonrecurring and unusual gain, net of state In connection with this review and as described more income taxes, of $302 million which is reflected in other fully under the caption “Discontinued Operations” above, income and expenses. The gain increased net earnings the Corporation completed the sale of IMS on August 24, for the year ended December 31, 2000 by $180 million 2001. The resulting gain increased net earnings by $309 ($0.45 per diluted share). Net sales for the first nine months million ($0.71 per diluted share). Net sales for the seven of 2000 related to Control Systems totaled approximately months ended July 31, 2001, the effective date of the $215 million, excluding intercompany sales. This transac- divestiture, related to the IMS businesses totaled approxi- tion generated net cash proceeds of $350 million after mately $355 million, excluding intercompany sales. This related transaction costs and federal and state income transaction generated net cash proceeds of approximately tax payments. $560 million after related transaction costs and federal IMS was the final business unit specifically identified and state income tax payments. for divestiture as part of the strategic and organizational In January 2001, the Corporation completed the divesti- review initiated in 1999; however, on an ongoing basis, ture of two business units in the environmental management the Corporation will continue to explore the sale of various line of business. The impact of these divestitures was not non-core businesses, passive equity investments and surplus material to the Corporation’s 2001 consolidated results of real estate. If the Corporation were to decide to sell any operations, cash flows or financial position due to the effects such holdings or real estate, the resulting gains, if any, of nonrecurring and unusual impairment losses recorded would be recorded when the transactions are consummated in 2000 and 1999 related to these business units. Those and losses, if any, would be recorded when they are prob- >>> 27 losses were included in other income and expenses as part able and estimable. The Corporation also continues to of other portfolio shaping activities in the respective years. review its businesses on an ongoing basis to identify ways In November 2000, the Corporation sold its to improve organizational effectiveness and performance, Lockheed Martin Annual Report Aerospace Electronics Systems (AES) businesses to BAE and to focus on its core business strategy. SYSTEMS for $1.67 billion in cash (the AES Transaction). In September 2000, the Corporation sold approxi- The Corporation recorded a nonrecurring and unusual loss, mately one-third of its interest in Inmarsat for $164 million. including state income taxes, of $598 million related to this The investment in Inmarsat was acquired as part of the transaction which is included in other income and expenses. merger with COMSAT. As a result of the transaction, the The loss reduced net earnings for 2000 by $878 million Corporation’s interest in Inmarsat was reduced from approxi- ($2.18 per diluted share). Although the AES Transaction mately 22% to 14%. The sale of shares in Inmarsat did not resulted in the Corporation recording a pretax loss, it resulted impact the Corporation’s results of operations. The transac- in a gain for tax purposes primarily because goodwill related tion generated net cash proceeds of approximately $115 to the AES businesses was not included in the tax basis of million after transaction costs and federal and state income the net assets of AES. Accordingly, the Corporation was tax payments. required to make state and federal income tax payments In 1997, the Corporation repositioned 10 of its non- associated with the divestiture. The AES Transaction gener- core business units as a new independent company, L-3 ated net cash proceeds of approximately $1.2 billion after Communications Holdings, Inc. (L-3). In 1999, the Corporation related transaction costs and federal and state income tax sold its remaining interest in L-3 in two separate transac- payments. Net sales included in the year 2000 related to tions. On a combined basis, these two transactions resulted the AES businesses totaled approximately $655 million, in a nonrecurring and unusual gain, net of state income excluding intercompany sales. taxes, of $155 million, and increased 1999 net earnings by $101 million ($0.26 per diluted share).


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2001 In September 1999, the Corporation sold its interest in to the size and nature of many of the Corporation’s con- Airport Group International Holdings, LLC which resulted in tracts, the estimation of cost at completion is complicated a nonrecurring and unusual gain, net of state income taxes, and subject to numerous variables. Contract costs include of $33 million. In October 1999, the Corporation exited its material, labor and subcontracting costs, as well as an allo- commercial 3D graphics business through a series of trans- cation of indirect costs. Assumptions must be made relative actions which resulted in the sale of its interest in Real 3D, to the length of time to complete the contract, as estimated Inc., a majority-owned subsidiary, and a nonrecurring and costs also include anticipated increases in wages and unusual gain, net of state income taxes, of $33 million. On prices for materials. With respect to contract change a combined basis, these transactions increased 1999 net orders, claims or similar items, judgment must be used in earnings by $43 million ($0.11 per diluted share). estimating related amounts and assessing the potential for realization. Such amounts are only included in contract Results of Operations value when they can be reliably estimated and realization A significant portion of the Corporation’s business is is probable. Incentives or penalties and awards applicable derived from long-term development and production contracts to performance on contracts are considered in estimating which are accounted for under the provisions of the American sales and profit rates, and are recorded when there is suffi- Institute of Certified Public Accountants’ (AICPA) audit and cient information to assess anticipated performance. accounting guide, “Audits of Federal Government Con- Goods and services provided under long-term develop- tractors,” and the AICPA’s Statement of Position No. 81-1, ment and production contracts represent a significant por- “Accounting for Performance of Construction-Type and tion of the Corporation’s business, and therefore amounts Certain Production-Type Contracts.” The nature of these recorded in its consolidated financial statements using con- contracts and the types of products and services provided tract accounting methodologies and cost accounting stan- are considered in determining the proper accounting for a dards are material. U.S. Government procurement standards given contract. Generally, long-term fixed-price contracts >>> 28 are followed relative to assessing the allowability as well as are recorded on a percentage of completion basis using the allocability of costs. Given the significance of the judg- units of delivery as the measurement basis for progress ments and estimation processes described above, it is likely toward completion and revenue recognition; however, cer- Lockheed Martin Annual Report that materially different amounts could be recorded if differ- tain other long-term fixed-price contracts which, among ent assumptions were used or if underlying circumstances other things, provide for the delivery of minimal quantities were to change. The Corporation closely monitors compliance over a longer period of time, or require a significant amount and consistency of application of its critical accounting poli- of development effort in relation to total contract value, are cies related to contract accounting. Reviews of the status of recorded upon achievement of performance milestones or contracts are performed by business segment personnel using the cost-to-cost method of accounting where revenue through periodic contract status and performance reviews. is recognized based on the ratio of costs incurred to When adjustments in contract value or estimated costs are estimated total costs at completion. Sales under cost- determined, any changes from prior estimates are generally reimbursement-type contracts are recorded as costs are reflected in earnings in the current period. In addition, reg- incurred. As a general rule, sales and profits are recog- ular and recurring evaluations of contract cost, scheduling nized earlier in a production cycle under the cost-to-cost and technical matters are performed by management per- and milestone methods of percentage of completion sonnel who are independent from the business area per- accounting. The Corporation has accounting policies in forming under the contract. Costs incurred and allocated to place to address the complexities involved in accounting contracts with the U.S. Government are closely scrutinized for long-term contracts. For additional information on criti- for compliance with underlying regulatory standards by cal accounting policies in place for recognizing sales and Lockheed Martin personnel, and are subject to audit by profits, see the discussion under the caption “Sales and the Defense Contract Audit Agency. earnings” in “Note 1—Significant Accounting Policies.” Since the Corporation’s operating cycle is long-term Contract accounting requires significant judgment rela- and involves many types of development and production tive to assessing risks, estimating contract costs and making contracts with varying production delivery schedules, the related assumptions for schedule and technical issues. Due results of operations of a particular year, or year-to-year


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    Lockheed Martin Corporation (Continued) comparisons of recorded sales and profits, may not be Effects of nonrecurring and unusual items: (Loss) indicative of future operating results. The following discus- Operating Net earnings sions of comparative results among periods should be (loss) (loss) per diluted (In millions) profit earnings share viewed in this context. Year ended December 31, 2001 Continuing operations Write-off of investment in Net Sales Astrolink and related costs $ (387) $ (267) $ (0.62) (In millions) Write-down of investment $25,000 in Loral Space (361) (235) (0.54) Other charges related to global telecommunications (176) (117) (0.27) $20,000 Gain on sale of surplus real estate 111 72 0.17 Impairment charge related to Americom Asia-Pacific (100) (65) (0.15) $15,000 Other portfolio shaping activities (5) (3) (0.01) (918) (615) (1.42) $10,000 Discontinued operations—charges related to discontinued businesses, net of IMS gain — (1,027) (2.38) $5,000 Extraordinary item—loss on early extinguishment of debt — (36) (0.08) $ (918) $(1,678) $ (3.88) $0 ’01 ’00 ’99 Year ended December 31, 2000 Continuing operations Continuing Operations Loss related to AES Transaction $(598) $ (878) $(2.18) Gain on sale of Control Systems 302 180 0.45 The Corporation’s consolidated net sales for 2001 Charge related to >>> 29 were $24.0 billion, a decrease of two percent compared Globalstar guarantee (141) (91) (0.23) Impairment charge related to ACeS (117) (77) (0.19) to 2000. Sales for 2000 were $24.5 billion, a decrease Partial reversal of CalComp reserve 33 21 0.05 of two percent compared to 1999. Sales growth in the Gain on sales of surplus real estate 28 19 0.05 Lockheed Martin Annual Report Aeronautics and Technology Services segments during Other portfolio shaping items (46) (30) (0.07) 2001 were more than offset by decreases in the remaining (539) (856) (2.12) Extraordinary item—loss on early business segments as compared to 2000. In 2000, extinguishment of debt — (95) (0.24) increased sales in the Systems Integration, Space Systems $(539) $ (951) $(2.36) and Technology Services segments were more than offset Year ended December 31, 1999 by lower sales in the Aeronautics segment. Adjusting for Continuing operations acquisitions and divestitures, sales remained comparable Gain on divestiture of interest in L-3 $ 155 $ 101 $ 0.26 when comparing 2001 to 2000 and 2000 to 1999. Gain on sales of surplus real estate 57 37 0.10 Partial reversal of CalComp reserve 20 12 0.03 The U.S. Government remained the Corporation’s largest Divestitures and other customer, accounting for approximately 78 percent of the portfolio shaping items 17 12 0.03 Corporation’s sales for 2001 compared to 72 percent in 249 162 0.42 both 2000 and 1999. Cumulative effect of change in accounting principle — (355) (0.93) The Corporation’s operating profit (earnings from con- $ 249 $ (193) $(0.51) tinuing operations before interest and taxes) for 2001 was $888 million, a decrease of 29 percent compared to 2000. Excluding the effects of these nonrecurring and unusual Operating profit for 2000 was approximately $1.3 billion, items for each year, operating profit for 2001 would have a decrease of 37 percent compared to 1999. The reported increased one percent as compared to 2000. Increases in amounts for the three years presented include various non- operating profit in the Aeronautics, Space Systems and recurring and unusual items. The impact of these items on Technology Services segments more than offset decreases operating profit, net (loss) earnings and amounts per in operating profit at the remaining business segments. diluted share is as follows:


  • Page 23

    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2001 Operating profit increased two percent in 2000 over operations include the impact of the nonrecurring and 1999 after excluding the effects of nonrecurring and unusual items presented above. Excluding such items, unusual items. Improved results in the Aeronautics, Systems earnings from continuing operations would have been Integration and Corporate and Other segments more than $694 million ($1.60 per diluted share) in 2001, $474 mil- offset decreases in operating profit in the Space Systems lion ($1.17 per diluted share) in 2000 and $567 million and Technology Services segments. Operating profit for ($1.48 per diluted share) in 1999. 2000 compared to 1999 in the Aeronautics and Space Discontinued Operations Systems segments was favorably impacted by the absence The Corporation reported a loss from discontinued oper- in 2000 of negative adjustments recorded in 1999 on the ations of $1.1 billion ($2.52 per diluted share) in 2001, a C-130J airlift aircraft and Titan IV launch vehicle programs, loss of $42 million ($0.10 per diluted share) in 2000 and respectively. income of $8 million ($0.02 per diluted share) in 1999. As further discussed in “Note 14—Post-Retirement Benefit Included in the 2001 loss from discontinued operations is Plans,” operating profit in 2001 included approximately a nonrecurring and unusual after-tax charge of $1.3 billion $200 million in income related to the Corporation’s quali- ($3.09 per diluted share) related to the Corporation’s deci- fied defined benefit plans and its retiree medical and life sion to exit the Global Telecommunications services busi- insurance plans on a combined basis, a decrease of ness. The 2001 results also include a nonrecurring and approximately $85 million over the comparable 2000 unusual after-tax gain of $309 million ($0.71 per diluted amount. The decrease related primarily to the absence share) from the third quarter 2001 sale of Lockheed Martin in 2001 of a nonrecurring and unusual curtailment IMS Corporation. gain associated with divestiture activities in 2000. The The operating results for the businesses reported in dis- Corporation’s earnings will continue to be affected posi- continued operations were a loss of $62 million ($0.14 per tively or negatively by the level of income or expense diluted share) in 2001, a loss of $42 million ($0.10 per >>> 30 related to employee benefit plans. As detailed in Note 14, diluted share) in 2000 and income of $8 million ($0.02 various factors affect the calculation of the income or per diluted share) in 1999. expense, including the actual rate of return on plan assets Lockheed Martin Annual Report and the actuarial assumptions that are used to calculate Net (Loss) Earnings benefit obligations (e.g., the assumed discount rate, expected future rates of return on plan assets, future pay Net Earnings (Loss) increases and the demographics of our workforce). Based (In millions) on actuarial assumptions and projected rates of return on $800 plan assets, the Corporation anticipates that its income $600 related to employee benefit plans will decline substantially $400 in 2002 and generate a net expense in 2003. $200 (a) (a) (a) Interest expense for 2001 was $700 million, $219 $0 ’01 ’00 ’99 million lower than the comparable balance in 2000 as -$200 a result of reductions in the Corporation’s debt portfolio. -$400 Interest expense for 2000 was $919 million, $110 million -$600 higher than the comparable balance in 1999 primarily as a result of increases in the Corporation’s debt portfolio -$800 associated with the merger with COMSAT. -$1,000 For 2001, the Corporation reported earnings from con- -$1,200 tinuing operations before extraordinary items and cumula- tive effect of change in accounting of $79 million ($0.18 per a. Excluding the effects of the items presented in the preceding table entitled “Effects of nonrecurring and unusual items,” diluted share), compared to a loss in 2000 of $382 million net earnings for 2001, 2000 and 1999 would have been ($0.95 per diluted share). In 1999, the Corporation reported $632 million, $432 million and $575 million, respectively. earnings on a comparable basis of $729 million ($1.90 per diluted share). The reported results from continuing


  • Page 24

    Lockheed Martin Corporation (Continued) In 2001, the Corporation’s net loss included an Discussion of Business Segments extraordinary loss of $36 million (net of a $22 million The Corporation operates in four principal business income tax benefit), or $0.08 per diluted share, on the segments: Systems Integration, Space Systems, Aeronautics early retirement of $117 million of 7% debentures due in and Technology Services. Other activities of the Corpora- 2011. In 2000, the Corporation’s net loss included an tion fall within the Corporate and Other segment. The fol- extraordinary loss of $95 million (net of a $61 million lowing tables of financial information and related discussions income tax benefit), or $0.24 per diluted share, on the early of the results of operations of the Corporation’s business retirement of approximately $1.9 billion in debt securities. segments have been adjusted to reflect the elimination of During 1999, the Corporation adopted the American the Corporation’s Global Telecommunications segment dis- Institute of Certified Public Accountants’ Statement of Position cussed previously, and correspond to additional segment (SOP) No. 98-5, “Reporting on the Costs of Start-Up information presented in “Note 17—Information on Industry Activities.” The adoption of SOP No. 98-5 resulted in the Segments and Major Customers.” recognition of a cumulative effect adjustment which reduced Prior period amounts have been reclassified to conform net earnings for the year ended December 31, 1999 by to the realignment of the Global Telecommunications busi- nesses and telecommunications equity investments retained Diluted Earnings by the Corporation, as previously discussed. (Loss) Per Share (In dollars) (In millions) 2001 2000 1999 $2.00 Net sales $1.50 Systems Integration $ 9,014 $ 9,647 $ 9,570 $1.00 Space Systems 6,836 7,339 7,285 Aeronautics 5,355 4,885 5,499 $0.50 (a) (a) (a) Technology Services 2,763 2,649 2,574 Corporate and Other 22 21 71 ’01 ’00 ’99 >>> 31 $0 $23,990 $24,541 $24,999 -$0.50 -$1.00 (In millions) 2001 2000 1999 Lockheed Martin Annual Report Operating profit (loss) -$1.50 Systems Integration $ 836 $ 583 $ 880 -$2.00 Space Systems 405 401 506 Aeronautics 416 343 247 -$2.50 Technology Services 130 82 137 Corporate and Other (899) (158) 227 a. Excluding the the effects effects of of the the items items presented presented in in the the preceding $ 888 $ 1,251 $ 1,997 table entitled “Effects of nonrecurring and unusual items,” diluted earnings per share for 2001, 2000 and 1999 would have been $1.46, $1.07 and $1.50, respectively. The following table displays the total impact on each segment’s operating profit (loss) of the nonrecurring and $355 million (net of a $227 million income tax benefit), unusual items presented earlier for each of the three or $0.93 per diluted share. years presented: The Corporation reported a net loss of $1 billion (In millions) 2001 2000 1999 ($2.42 per diluted share) in 2001, a net loss of $519 mil- Segment effects of nonrecurring lion ($1.29 per diluted share) in 2000 and net income of and unusual items—operating $382 million ($0.99 per diluted share) in 1999. Excluding (loss) profit Systems Integration $ — $ (304) $ 13 the effects of the previously mentioned nonrecurring and Space Systems (3) 25 21 unusual items, net earnings would have been $632 million Aeronautics — — — ($1.46 per diluted share) in 2001, $432 million ($1.07 Technology Services — (34) — per diluted share) in 2000 and $575 million ($1.50 per Corporate and Other (915) (226) 215 diluted share) in 1999. $ (918) $ (539) $ 249


  • Page 25

    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2001 In an effort to make the following discussion of sig- Operating profit for the segment decreased six percent nificant operating results of each business segment more in 2001 compared to 2000. Operating profit would have understandable, the effects of these nonrecurring and increased by six percent for 2001 from the year-ago period unusual items have been excluded. The Space Systems and had the operating profit related to the divested Aerospace Aeronautics segments generally include a smaller number Electronic Systems and Controls Systems businesses, as well of programs that are substantially larger in terms of sales as the PLV contract transfer, been excluded from the com- and operating results than those included in the other seg- parisons. Increased operating profit of $75 million from the ments. Accordingly, due to the large number of relatively sales growth in the segment’s Missiles & Air Defense and small programs in the Systems Integration and Technology Naval Electronic and Surveillance Systems product lines Services segments, the discussions of the results of opera- was partially offset by the volume declines at Systems tions of these business segments focus on lines of business. Integration-Owego. Operating profit increased two percent in 2000 as Systems Integration compared to 1999. In 2000, the previously mentioned Net sales of the Systems Integration segment declined volume increases in the segment’s Naval Electronic and by seven percent in 2001 compared to 2000. Sales would Surveillance Systems product line and Systems Integration- have increased four percent for 2001 from the comparable Owego activities contributed $40 million to the increase in year-ago period had the sales attributable to the segment’s operating profit from 1999. This increase was partially off- Aerospace Electronic Systems and Controls Systems busi- set by an approximate $20 million decline in operating nesses, which were divested in the second half of 2000, profit related to the divestiture of the AES and Control and the transfer of the Payload Launch Vehicle (PLV) con- Systems businesses in 2000. Also during 2000, increases in tract to the Space Systems segment at the start of 2001, operating profit attributable to the THAAD program’s move- been excluded from the comparisons. Sales increased by ment into the EMD phase, as well as the absence in 2000 $350 million as a result of volume increases in the seg- >>> 32 of a $15 million penalty recorded on that program in the ment’s Missiles & Air Defense product line primarily due to second quarter of 1999, were offset by declines in operat- higher volumes on certain tactical missile programs and the ing profit on certain fire control and sensor programs due Theater High Altitude Area Defense (THAAD) missile pro- Lockheed Martin Annual Report to program maturity. gram. Naval Electronic and Surveillance Systems sales in 2001 increased by $220 million over the prior year, pri- Space Systems marily due to higher volumes on surface systems programs, Net sales for the Space Systems segment decreased and undersea and radar systems activities. Sales in the by seven percent for the year from the comparable 2000 Command, Control, Communications, Computers and period. Sales declined by $600 million due to volume Intelligence (C4I) product line increased slightly year over reductions in commercial space activities, by $150 million year. These increases were partially offset by a $250 mil- related to reduced volume in government launch vehicle lion decrease in sales related to volume declines in the activity, primarily due to program maturities, and by $50 Systems Integration-Owego line of business. million due to the absence in 2001 of favorable adjustments The segment’s net sales increased one percent in 2000 recorded on the Titan IV program as discussed in more detail as compared to 1999. Sales increased by $360 million as below. These reductions were partially offset by a combined a result of volume increases in the segment’s Naval Electronic increase in sales of $315 million related to volume on gov- and Surveillance Systems product line, primarily radar sys- ernment satellite programs and ground systems activities. tems, and the Systems Integration-Owego line of business. Net sales in the Space Systems segment increased by Sales also increased by $115 million in the segment’s one percent in 2000 compared to 1999. In 2000, sales Missiles & Air Defense product line, principally due to the decreased by $440 million due to volume declines in gov- THAAD program’s movement into the engineering, manu- ernment satellite activities, and by $40 million due to facturing and development (EMD) phase. These increases decreased ground systems activities. An additional $140 were partially offset by a reduction in sales of $410 million million decrease related to reduced volume in government primarily related to the divestiture of the AES and Control launch vehicle programs. These decreases were partially Systems businesses in 2000. offset by $490 million related to increased volume on


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    Lockheed Martin Corporation (Continued) commercial space activities as well as an approximate investment in certain launch vehicle programs and reduced $50 million increase in various other space system activi- margins on commercial satellites decreased 2000 operating ties. Year-over-year sales also increased due to the absence profit by $180 million from 1999. This decrease included in 2000 of $90 million in negative adjustments recorded charges of $85 million recorded in 2000 on the Atlas during 1999 related to the Titan IV program. These adjust- launch vehicle program related to continued market and ments included the effects of changes in estimates for award pricing pressures. In addition, 2000 operating profit was and incentive fees resulting from a second quarter 1999 further reduced by $35 million due to the impact of the vol- Titan IV launch failure, as well as a more conservative ume declines on government satellite programs mentioned assessment of future program performance. In addition, previously. Consistent with the change in sales, the absence 2000 sales were also favorably impacted by an approxi- in 2000 of the negative adjustments recorded during 1999 mate $50 million adjustment recorded in 2000 on the Titan on the Titan IV program, combined with the favorable adjust- IV program as a result of contract modifications and improved ments recorded in 2000 on the same program, had an performance on the program. The contract modifications, approximate $140 million positive impact on 2000 operat- which resulted primarily from the U.S. Government’s Broad ing profit. The remainder of the decrease is primarily attrib- Area Review team recommendations, provided for a more utable to an approximate $55 million decrease in operating balanced sharing of future risk. The improved performance profit related to a more conservative assessment of future on the program resulted from the successful implementation performance on government launch vehicle programs. of corrective actions and initiatives taken since the previ- Aeronautics ously mentioned 1999 Titan IV launch failure. Net sales for the Aeronautics segment increased by 10 Space Systems operating profit increased by nine per- percent in 2001 compared to 2000. During 2001, sales cent as compared to 2000. The segment’s 2001 operating increased approximately $400 million primarily due to the profit increased by approximately $70 million due to the initial ramp up on F-22 production and increased develop- >>> 33 volume increases and improved performance in ground ment activities related to international F-16 programs. systems, government satellite programs and other space Volume increases from F-16 and C-130 support activities segment activities. These increases were partially offset by also increased sales by approximately $230 million. Lockheed Martin Annual Report higher year-over-year losses in Commercial Space. The These increases were partially offset by declines in sales commercial launch vehicle business included $60 million in of $260 million resulting from fewer F-16 and C-130J higher charges for market and pricing pressures when com- deliveries in 2001. pared to 2000 and a $40 million loss provision recorded Net sales of the Aeronautics segment decreased by in the first quarter of 2001 for certain commercial satellite 11 percent in 2000 compared to 1999. Approximately contracts related to schedule and technical issues. These 95 percent of the decrease in 2000 sales is attributable negative adjustments were somewhat offset by $50 million to declines in F-16 and C-130J sales and deliveries. These of favorable contract adjustments on certain launch vehicle decreases more than offset increases in sales related to the contracts. Additionally, operating profit was negatively F-22 program. impacted by lower production activities for government Aeronautics operating profit increased by 21 percent launch vehicles. The year-to-year comparison of operating for the year when compared to the same period of 2000. profit was not affected by the $50 million favorable Titan For the year, operating profit increased by approximately IV adjustment recorded in 2000 as discussed above, due $115 million due to increased volume and performance on to a $55 million charge related to a more conservative the F-22 program, development activities on international assessment of government launch vehicle programs that F-16 programs and other aeronautical programs. This was recorded in the fourth quarter of 2000. increase was partially offset by a decline in F-16 deliveries. Operating profit for the segment decreased by 22 per- The net change in C-130J deliveries did not impact EBIT cent in 2000 compared to 1999. Continued market and for the comparative periods due to the previously reported pricing pressures on commercial space programs, increased suspension of earnings recognition on the program.


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2001 Operating profit for the segment increased by 39 per- profit is attributable directly to a loss of approximately $40 cent in 2000 compared to 1999. The current year increase million incurred in the realigned commercial information is primarily attributable to the absence in 2000 of a $210 technology lines of business and the impact of the previ- million negative adjustment recorded during the second ously mentioned volume declines on certain energy-related quarter of 1999 that resulted from changes in estimates contracts. Somewhat offsetting the decline was increased related to the C-130J program due to cost growth and a operating profit attributable to various federal technology reduction in production rates. This increase was partially services programs including the impact of the volume offset by an approximate $115 million reduction in 2000 increases discussed above and increased profitability on operating profit resulting from the decrease in aircraft sales certain information services contracts, and improved perform- and deliveries mentioned in the preceding paragraph. ance on certain aircraft maintenance and logistics contracts. In December 2001, the Corporation completed its acqui- Technology Services sition of all of the outstanding stock of OAO Corporation Net sales for the Technology Services segment (OAO), a provider of information technology solutions to increased by four percent in 2001 compared to 2000. the federal government. OAO will be included in the Excluding the sales attributable to Lockheed Martin Technology Services segment. OAO’s revenues for all of Energy Technologies and Retech, two business units that 2001 approximated 1% of the Corporation’s 2001 net sales. were divested in 2000, and the acquisition of OAO The segment has a business unit which provides serv- Corporation in December of 2001, sales would have ices to the government of Argentina, and in which the increased seven percent for the year. Sales increased $190 Corporation’s net investment at December 31, 2001 was million primarily due to increased volume on the segment’s approximately $25 million. Relative to this business unit, government information technology and aircraft and logis- the Corporation does not expect that the current economic tics programs. This growth was partially offset by lower situation in Argentina, including the devaluation of the sales volume of $15 million associated with the segment’s >>> 34 Argentine peso, will have a material impact on its results energy-related contracts due to program completions. of operations, cash flows or financial position. Net sales of the Technology Services segment increased by three percent in 2000 as compared to 1999. The Corporate and Other Lockheed Martin Annual Report increase in 2000 sales is comprised of an approximate Net sales in the Corporate and Other segment were $150 million increase in various federal technology services immaterial for 2001 and 2000 due to the reclassification programs including the Consolidated Space Operations of IMS results of operations to discontinued operations in Contract and the Rapid Response contract. These increases connection with its divestiture in July 2001. The decline in were partially offset by an approximate $95 million decline net sales from 1999 was primarily due to reduced volume in volume on aircraft maintenance and logistics contracts and in the segment’s properties line of business and the absence certain energy-related contracts due to program completions. in 2000 of sales attributable to the Corporation’s commer- Operating profit for the segment increased by 12 per- cial graphics company, Real 3D, which was divested in the cent for the year compared to 2000. Absent the earnings fourth quarter of 1999. from the divested and acquired businesses, operating profit Operating profit for the Corporate and Other segment would have increased 11 percent for the year. Operating decreased by $52 million when comparing 2001 to 2000. profit increased by approximately $25 million in 2001 from The decline was principally due to lower equity earnings higher volumes in the segment’s government information tech- from investments and an increase in miscellaneous corpo- nology and aircraft maintenance and logistics contracts. This rate expenses including stock-based compensation costs. improvement was somewhat offset by a reduction in operat- Operating profit for the segment increased by $56 million ing profit due to the completion of energy-related contracts. in 2000 compared to 1999 mainly due to increased equity Operating profit for the segment decreased by 15 per- earnings from investments, primarily related to the merger cent in 2000 compared to 1999. The decline in operating with COMSAT.


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    Lockheed Martin Corporation (Continued) 2000. The remainder of the 2000 variance from 1999 Negotiated Backlog was primarily due to sales on existing orders and (In millions) $75,000 decreases in new orders on C4I programs. Space Systems backlog decreased by 16 percent in 2001 compared to 2000 and by six percent in 2000 com- $60,000 pared to 1999. The decrease in 2001 was primarily attribut- able to declines in backlog on commercial space programs $45,000 due to decreases in new orders and sales on existing orders. The decrease in commercial space backlog also includes $30,000 the effect of terminating the Astrolink satellite program and launch vehicle contracts. Additional decreases in orders for $15,000 fleet ballistic missiles and government launch vehicles were partially offset by increases in orders for government satellite programs and ground systems. The decrease in 2000 was $0 ’01 ’00 ’99 primarily attributable to declines in backlog on government launch vehicles and commercial satellites due to decreases Backlog in new orders and sales on existing orders, respectively. Total negotiated backlog of $71.3 billion at December 31, Additional decreases in orders of government satellite pro- 2001 included both firm orders for the Corporation’s products grams were partially offset by an increase in orders for for which funding has been appropriated by the customer commercial launch vehicles. (Congress, in the case of U.S. Government agencies) and Aeronautics backlog increased by 106 percent in 2001 firm orders for which funding has not been appropriated. compared to 2000 and by 95 percent in 2000 compared The following table shows total backlog by segment at >>> 35 to 1999. The 2001 increase is primarily due to the approx- the end of each of the last three years: imate $19 billion order for the Joint Strike Fighter, or F-35, (In millions) 2001 2000 1999 aircraft program related to the System Demonstration and Backlog Lockheed Martin Annual Report Development (SDD) phase of the program. The SDD phase Systems Integration $17,027 $16,706 $13,971 has a performance period of 10.5 years and provides Space Systems 12,977 15,505 16,508 Aeronautics 36,149 17,570 9,003 for the production of 22 test aircraft. The Low Rate Initial Technology Services 5,116 5,295 5,325 Production phase of the program is expected to begin in $71,269 $55,076 $44,807 the 2005 to 2006 time frame, with high rate production planned to begin in the 2012 time frame. The remaining Systems Integration backlog increased by two percent fluctuation in backlog in 2001 compared to 2000 is due to in 2001 compared to 2000, and by 20 percent in 2000 decreased orders on C-130 programs offset by increased compared to 1999. The majority of the 2001 increase backlog associated with the F-16 and F-22 programs. The was attributable to new orders for C4I programs. Increased 2000 increase is primarily due to approximately $10.6 bil- backlog associated with the Naval Electronic and Surveil- lion in orders related to the F-16 program, including new lance Systems product line and various Systems Integration- F-16 contracts with the U.S. Government, the United Arab Owego activities were more than offset by a decline in Emirates (UAE), Israel, Greece, Singapore and Korea, col- orders and increased sales on missiles and air defense sys- lectively. This increase was partially offset by a reduction tems. The majority of the 2000 increase was attributable to in backlog for the F-22 program as a result of increased new orders for missile and air defense systems, primarily sales on existing orders. orders received on the THAAD program as a result of that Technology Services backlog decreased by three per- program’s movement into the EMD phase. Increased orders cent in 2001 compared to 2000 and by one percent in for naval electronic and surveillance systems and various 2000 compared to 1999. The decrease in 2001 was Systems Integration-Owego activities were partially offset by mainly attributable to sales on existing orders in the seg- the absence of backlog associated with the segment’s AES ment’s aircraft and logistics line of business, primarily the and Control Systems businesses, which were divested during Kelly Aviation Center contract, and sales on existing orders


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2001 for NASA programs, primarily the Consolidated Space Investing Activities Operations Contract. This decrease was mostly offset by Investing activities provided $139 million in cash dur- increased orders associated with government information ing 2001 compared to $1.8 billion provided in 2000 and technology services and the backlog recorded in connec- $1.6 billion used during 1999. Cash used for property, tion with the acquisition of OAO Corporation. The decrease plant and equipment expenditures increased 24 percent in in 2000 was primarily associated with sales on existing 2001 after having declined 25 percent in 2000. Included federal technology services contracts, principally the in expenditures for property, plant, and equipment were Consolidated Space Operations Contract. $74 million in 2001, $58 million in 2000 and $89 million in 1999 related to the discontinued businesses. During Net Cash Provided By 2001, the Corporation recorded proceeds of $825 million Operating Activities from the sale of its IMS business. Also in 2001, $192 (In millions) $2,500 million of cash was used for additional investments in affili- ated companies, including $140 million to complete the Corporation’s funding commitment to Astrolink. The remain- $2,000 der of the 2001 activity was attributable to proceeds from the disposal of property and various other investing activi- $1,500 ties. The majority of the $3.4 billion change in cash pro- vided by investing activities in 2000 from the cash used $1,000 by investing activities in 1999 reflects the Corporation’s receipt of proceeds during 2000 from the divestiture of AES and Control Systems businesses, as well as the sale of a $500 portion of the Corporation’s investment in Inmarsat, which >>> 36 generated approximately $1.7 billion, $510 million, and $0 ’01 ’00 ’99 $164 million, respectively, contrasted with the Corporation’s disbursement in 1999 of $1.2 billion used to acquire the ini- Lockheed Martin Annual Report tial 49% investment in COMSAT. The remaining fluctuation Liquidity and Cash Flows between years is primarily attributable to the 1999 receipt Operating Activities of $263 million related to the sale of the Corporation’s inter- Operating activities provided $1.8 billion in cash during est in L-3 which was partially offset by a $169 million 2001, compared to $2.0 billion and $1.1 billion provided decrease in 2000 of expenditures for property, plant, in 2000 and 1999, respectively. The decrease in cash pro- and equipment. vided by operations in 2001 compared to 2000 is primarily Financing Activities attributable to the impact of increased net federal income tax The Corporation used $2.6 billion in cash for financing payments primarily related to the divestiture of non-core busi- activities during 2001 compared to $2.7 billion used and nesses. Partially offsetting this decrease were cash flows from $731 million provided by financing activities during 2000 working capital improvements, primarily inventory reductions, and 1999, respectively. During 2001, improved operating the increase in pretax proceeds from sales of surplus real cash flows and cash provided by investing activities allowed estate, distributions from equity investees and increased earn- the Corporation to reduce its long-term debt by approxi- ings. The significant increase in 2000 operating cash flows mately $2.4 billion. As discussed in more detail under the compared to 1999 was primarily the result of lower working caption “Capital Structure and Resources,” the reduction in capital requirements and reduced net federal income tax long-term debt was primarily attributable to the pre-payment payments. Included in operating activities is cash provided of notes issued to a wholly-owned subsidiary of General from discontinued operations of $34 million in 2001, Electric Company (GE), payments on scheduled debt $25 million in 2000, and $14 million in 1999. maturities, and the early retirement of certain other debt instruments. Approximately $89 million of long-term debt will mature in 2002. The $3.5 billion change in cash used


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    Lockheed Martin Corporation (Continued) by financing activities in 2000 from the cash provided by notes issued to GE mentioned previously, originally sched- financing activities in 1999 reflects the Corporation’s uled to mature in November 2002, payments of $825 issuance of $3.0 billion in long-term debt in 1999 and the million in scheduled debt maturities, the early redemption $1.0 billion increase in debt retirements in 2000 versus of $200 million of 8.125% Monthly Income Preferred 1999, partially offset by a $405 million decrease in short- Securities (MIPS) due in 2025, issued by a wholly-owned term debt repayments and a $162 million decrease in subsidiary of COMSAT, and the early retirement of $117 dividend payments. The increase in debt retirements was million of 7.0% debentures due in 2011. The Corporation primarily attributable to the Corporation’s completion of ten- recorded an extraordinary loss, net of $22 million in der offers for certain of its long-term debt securities during income tax benefits, of $36 million associated with the the fourth quarter of 2000. The Corporation used $2.1 bil- early retirement of the 7.0% debentures. The Corporation’s lion to consummate the tender offers, resulting in the early long-term debt is primarily in the form of publicly issued, extinguishment of $1.9 billion in long-term debt and an fixed-rate notes and debentures. At December 31, 2001, extraordinary loss of $156 million, or $95 million after tax. the Corporation held cash and cash equivalents of $912 The Corporation paid dividends of $192 million in million, a portion of which will be used to meet scheduled 2001 compared to $183 million in 2000 and $345 long-term debt maturities in 2002. million in 1999. Total stockholders’ equity was $6.4 billion at December 31, 2001, a decrease of $717 million from December 31, Other 2000. This decrease resulted primarily from the net loss of The Corporation receives advances on certain contracts $1.0 billion and the payment of dividends of $192 million. to finance inventories. At December 31, 2001, approxi- The decline was partially offset by employee stock option mately $2.9 billion in advances and progress payments and ESOP activities of $394 million and other comprehen- related to work in process were received from customers and sive income of $127 million. Other comprehensive income recorded as a reduction to inventories in the Corporation’s >>> 37 was largely due to the Corporation’s decision to write-down consolidated balance sheet. Also at December 31, 2001, its investment in Loral Space which resulted in a reclassifica- $566 million of customer advances and progress payments tion of unrealized losses on Loral Space to the net loss for were recorded in receivables as a reduction to unbilled costs Lockheed Martin Annual Report 2001. As a result of the above factors, the Corporation’s and accrued profits. Approximately $5.0 billion of customer total debt to capitalization ratio decreased from 58.2 advances and amounts in excess of costs incurred, which percent at December 31, 2000 to 53.8 percent at are typically from foreign governments and commercial December 31, 2001. customers, were included in current liabilities at the end At the end of 2001, the Corporation had in place a of 2001. $1.0 billion 1-year revolving credit facility and a $1.5 bil- The Corporation uses “free cash flow” as a measure to lion 5-year revolving credit facility (the Credit Facilities). No evaluate its performance. The calculation of free cash flow borrowings were outstanding under the Credit Facilities at begins with net cash provided by operating activities from December 31, 2001. Borrowings under the Credit Facilities the consolidated statement of cash flows. This amount is would be unsecured and bear interest at rates based, at the then decreased by expenditures for property, plant and Corporation’s option, on the Eurodollar rate or a bank Base equipment, and increased by proceeds from the disposal of Rate (as defined). Each bank’s obligation to make loans property, plant and equipment and by income taxes paid under the Credit Facilities is subject to, among other things, related to divested businesses and investments. Free cash compliance by the Corporation with various representa- flow was $2.0 billion for 2001 and $1.8 billion for 2000. tions, warranties and covenants, including, but not limited Capital Structure and Resources to, covenants limiting the ability of the Corporation and Total debt, including short-term borrowings, decreased certain of its subsidiaries to encumber their assets and a by approximately $2.4 billion during 2001 from a balance covenant not to exceed a maximum leverage ratio. The of $10.0 billion at December 31, 2000. The decrease was Credit Facilities replaced a $3.5 billion revolving credit primarily attributable to the pre-payment of $1.26 billion in facility which expired in December 2001.


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2001 The Corporation has agreements in place with certain subsidiaries to encumber their assets. Payments due under banking institutions which provide for the issuance of com- these long-term obligations are as follows: mercial paper. There were no commercial paper borrow- Payments Due by Period ings outstanding at December 31, 2001. If the Corporation Less were to issue commercial paper, such borrowings would be than 1 1–3 4–5 After 5 supported by the Credit Facilities. (In millions) Total year years years years The Corporation has an effective shelf registration state- Long-term debt and ment on file with the Securities and Exchange Commission capital lease obligations $7,511 $ 89 $ 922 $ 795 $5,705 to provide for the issuance of up to $1 billion in debt Operating lease securities. Were the Corporation to issue debt securities commitments(a) 855 139 254 220 242 under this shelf registration, it would expect to use the net Total contractual proceeds for general corporate purposes. These purposes cash obligations $8,366 $228 $1,176 $1,015 $5,947 may include repayment of other debt, working capital (a) Amounts include future payments related to a leasing arrange- needs, capital expenditures, acquisitions and any other ment with a state government authority for Atlas V launch facili- ties. Total payments over the 10-year term of the lease are general corporate purpose. expected to be approximately $320 million. Lease payments The Corporation actively seeks to finance its business are expected to begin in the second half of 2002. Amounts in a manner that preserves financial flexibility while mini- exclude lease commitments related to discontinued operations, as such commitments are expected to be transferred upon the mizing borrowing costs to the extent practicable. The sale of the discontinued businesses. Corporation’s management continually reviews changes in financial, market and economic conditions to manage the The Corporation has entered into standby letter of credit types, amounts and maturities of the Corporation’s indebt- agreements and other arrangements with financial institu- edness. Periodically, the Corporation may refinance exist- tions and customers primarily relating to the guarantee of future performance on certain contracts to provide products >>> 38 ing indebtedness, vary its mix of variable rate and fixed rate debt, or seek alternative financing sources for its cash and services to customers. At December 31, 2001, the and operational needs. Corporation had contingent liabilities on outstanding letters of credit, guarantees and other arrangements, as follows: Lockheed Martin Annual Report Cash and cash equivalents (including temporary invest- ments), internally generated cash flow from operations Commitment Expiration per Period and other available financing resources, including those Total Less described above, are expected to be sufficient to meet Commit- than 1 1–3 4–5 After 5 anticipated operating, capital expenditure and debt service (In millions) ment year years years years requirements, and discretionary investment needs, during the Surety bonds(a) $425 $247 $117 $ 61 $— Standby letters next twelve months. In addition to the businesses held for sale of credit(a) 307 192 40 64 11 discussed previously and consistent with the Corporation’s Guarantees 167 15 152 — — desire to generate cash to reduce debt and invest in its Total commitments $899 $454 $309 $125 $11 core businesses, management anticipates that, subject to (a) Approximately $118 million of surety bonds in the “less than prevailing financial, market and economic conditions, the 1 year” period, and approximately $127 million and $8 Corporation will continue to explore the sale of non-core million of standby letters of credit in the “less than 1 year” and “1–3 year” periods, respectively, are expected to auto- businesses, passive equity investments and surplus real estate. matically renew for additional one to two year periods until At December 31, 2001, the Corporation had contrac- completion of the underlying contractual obligation. tual commitments to repay debt (including capital lease The Corporation has issued standby letters of credit obligations), and to make payments under operating and surety bonds totaling $3.9 billion related to advances leases. Generally, the Corporation’s long-term debt obliga- received from customers and/or to secure the Corporation’s tions are subject to, among other things, compliance with performance under long-term contracts. Amounts included certain covenants, including, but not limited to, covenants in the table above totaling $732 million are those amounts limiting the ability of the Corporation and certain of its over and above advances received from customers


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    Lockheed Martin Corporation (Continued) which are recorded in the consolidated balance sheet at Loral Space stock and the potential impact of underlying December 31, 2001 as either offsets against “Inventories” market and industry conditions on Loral Space’s ability to or in “Customer advances and amounts in excess of costs execute its current business plans, the Corporation recorded incurred.” Of the $3.2 billion recorded in the consolidated a nonrecurring and unusual charge, net of state income tax balance sheet, $2 billion relates to a standby letter of benefits, of $361 million in the third quarter of 2001 related credit to secure advance payments received under an to its investment in Loral Space. The charge reduced net F-16 contract from an international customer. This letter of earnings by $235 million ($0.54 per diluted share). credit is available for draw down only in the event of the Realization of the Corporation’s investments in equity Corporation’s nonperformance. Similar to the letter of credit securities, including those discussed above as well as the supporting the F-16 contract, letters of credit and surety global telecommunications equity investments expected to be bonds for other contracts are available for draw down only monetized mentioned previously, may be affected by the in the event of the Corporation’s nonperformance. investee’s ability to obtain adequate funding and execute its The Corporation satisfied its contractual obligation with business plans, general market conditions, industry considera- respect to its guarantee of certain indebtedness of Globalstar, tions specific to the investee’s business, and/or other factors. L.P. (Globalstar) with a net payment of $150 million on June The inability of an investee to obtain future funding or success- 30, 2000 to repay a portion of Globalstar’s borrowings fully execute its business plan could adversely affect the Cor- under a revolving credit agreement. This payment resulted in poration’s earnings in the periods affected by those events. the Corporation recording a nonrecurring and unusual Environmental Matters charge, net of state income tax benefits, of approximately The Corporation records appropriate financial state- $141 million in 2000 which reduced net earnings for the ment accruals for environmental issues in the period in year by $91 million, or $0.23 per diluted share (see which it is probable that a liability has been incurred and “Note 10—Debt” for further discussion). The Corporation the amounts can be reasonably estimated (see related dis- >>> 39 has no remaining guarantees related to Globalstar. On cussion in “Note 1—Significant Accounting Policies” under February 15, 2002, Globalstar and certain of its affiliates the caption “Environmental matters”). Significant judgment filed a voluntary petition under Chapter 11 of the U.S. is required in developing assumptions and estimating costs Lockheed Martin Annual Report Bankruptcy Code. to be incurred for environmental remediation activities due The Corporation continues to guarantee up to $150 to, among other factors, the complexity of environmental million in borrowings of Space Imaging LLC (Space Imaging), regulations, remediation technologies and agreements a joint venture in which it holds a 46 percent ownership among Potentially Responsible Parties (PRPs) to share in interest. The amount of borrowings outstanding as of remediation efforts as discussed below. The Corporation December 31, 2001 for which Lockheed Martin was guaran- enters into agreements (e.g., administrative orders, consent tor was approximately $140 million. This amount is included decrees) which must be fully analyzed to determine the in the amounts related to guarantees included in the table extent of its obligation. The agreements generally cover sev- above. The Corporation’s investment in Space Imaging is eral years which makes compliance cost estimation more accounted for under the equity method of accounting. At judgmental due, for example, to changing technologies. December 31, 2001, the Corporation’s investment in and Management must assess the type of technology to be used receivables from Space Imaging amounted to approximately to accomplish the remediation and continually evolving reg- $111 million. Space Imaging is pursuing its business plan, ulatory environmental standards in evaluating costs associ- including assessments relative to future investment in replace- ated with these sites. These factors are considered in ment satellites and related financing requirements, and management’s estimates of the timing and amount of any Lockheed Martin, as an investor and partner, is working future costs that may be necessary for remedial actions. with its other partners and Space Imaging in this regard. Given the level of judgments and estimation which must Effective March 31, 2000, the Corporation converted occur as described above, it is likely that materially differ- its 45.9 million shares of Loral Space & Communications ent amounts could be recorded if different assumptions Ltd. (Loral Space) Series A Preferred Stock into an equal were used or if underlying circumstances were to change number of shares of Loral Space common stock in prepara- (e.g., a significant change in environmental standards). tion for divestiture of the shares. Due to the market price of


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    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lockheed Martin Corporation December 31, 2001 As more fully described in “Note 16—Commitments The Corporation is a party to various other proceed- and Contingencies,” the Corporation is responding to three ings and potential proceedings related to environmental administrative orders issued by the California Regional clean-up issues, including matters at various sites where Water Quality Control Board (the Regional Board) in con- it has been designated a PRP by the EPA or by a state nection with its former facilities in Redlands, California. agency. In the event the Corporation is ultimately found The Corporation estimates that expenditures required to to have liability at those sites where it has been designated implement work currently approved by the Regional Board a PRP, it anticipates that the actual burden for the costs of related to the Redlands facilities will be approximately $85 remediation will be shared with other liable PRPs. Generally, million. In addition, the Corporation is coordinating with PRPs that are ultimately determined to be responsible par- the U.S. Air Force, which is working with the aerospace ties are strictly liable for site clean-up and usually agree and defense industry to conduct preliminary studies of the among themselves to share, on an allocated basis, the costs potential health effects of perchlorate exposure associated and expenses for investigation and remediation of haz- with several sites across the country, including the Redlands ardous materials. Under existing environmental laws, how- site. The results of these studies are intended to assist the ever, responsible parties are jointly and severally liable Corporation in determining its ultimate clean-up obligation, and, therefore, the Corporation is potentially liable for the if any, with respect to perchlorates. In January 2002, the full cost of funding such remediation. In the unlikely event State of California reduced its provisional standard for per- that the Corporation was required to fund the entire cost of chlorate concentration in water from 18 parts per billion such remediation, the statutory framework provides that the (ppb) to four ppb. This provisional standard may be used Corporation may pursue rights of contribution from the by the State in providing guidelines to water purveyors; other PRPs. however, until such time as it is formally adopted after a In addition to the matters with respect to the Redlands public notice and comment period, it is not a legally and Burbank properties and the city of Glendale described >>> 40 enforceable standard. If formally adopted as a regulation, above, the Corporation has accrued approximately $165 this change would lead to increased clean-up costs for the million at December 31, 2001 for other matters in which Corporation related to the Redlands site. an estimate of financial exposure could be determined. Lockheed Martin Annual Report Also as described in Note 16, since 1990, the Management believes that it is unlikely that any additional Corporation has been responding to various consent decrees liability the Corporation may incur for known environmental and orders relating to soil and regional groundwater contam- issues would have a material adverse effect on its consoli- ination in the San Fernando Valley (including the cities of dated results of operations or financial position. Burbank and Glendale) associated with the Corporation’s Also as more fully described in Note 16, the Corpora- former operations in Burbank, California. Under an agree- tion is continuing to pursue recovery of a significant portion ment reached with the U.S. Government and filed with the of the unanticipated costs incurred in connection with the U.S. District Court in January 2000 (the Agreement), an $180 million fixed-price contract with the U.S. Department amount equal to approximately 50 percent of future expen- of Energy (DoE) for the remediation of waste found in Pit 9. ditures for certain remediation activities will be reimbursed The Corporation has been unsuccessful to date in reaching by the U.S. Government as a responsible party under the agreements with the DoE on cost recovery or other contract Comprehensive Environmental Response, Compensation restructuring matters. In 1998, the DoE terminated the Pit 9 and Liability Act (CERCLA). The Corporation estimates that contract for default and filed suit against the Corporation total expenditures required over the remaining terms of the seeking recovery of approximately $54 million previously consent decrees and orders related to the Burbank and paid to the Corporation under the contract. The Corporation Glendale sites, net of the effects of the Agreement, will be is defending this action while continuing with its efforts to approximately $50 million. resolve the dispute through non-litigation means.


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    Lockheed Martin Corporation (Continued) Other Matters The Corporation uses forward exchange contracts to The Corporation’s primary exposure to market risk manage its exposure to fluctuations in foreign exchange relates to interest rates and, to a lesser extent, foreign cur- rates. These contracts are designated as qualifying hedges rency exchange rates. The Corporation’s financial instru- of the cash flows associated with firm commitments or ments which are subject to interest rate risk principally specific anticipated transactions, and related gains and include commercial paper and fixed rate long-term debt. losses on the contracts are recognized in income when the At December 31, 2001, the Corporation had no commer- hedged transaction occurs. Effective January 1, 2001, the cial paper outstanding. The Corporation’s long-term debt Corporation began accounting for these contracts under obligations are generally not callable until maturity. The the provisions of SFAS No. 133, “Accounting for Derivative Corporation uses interest rate swaps to manage its expo- Instruments and Hedging Activities,” as amended. At sure to fixed and variable interest rates. At year-end 2001, December 31, 2001, the fair value of forward exchange the Corporation had such instruments in place to swap contracts outstanding, as well as the amounts of gains and fixed interest rates on approximately $670 million of its losses recorded during the year then ended, were not mate- long-term debt for variable interest rates based on LIBOR. rial. The Corporation does not hold or issue derivative The interest rate swap agreements are designated as effec- financial instruments for trading purposes. tive hedges of the fair value of the underlying fixed rate The Corporation adopted SFAS No. 142, “Accounting debt instruments (see the discussion under the caption for Goodwill and Other Intangible Assets,” as of January 1, “Derivative financial instruments” in “Note 1—Significant 2002. Among other things, the Statement prohibits the Accounting Policies”). At December 31, 2001, the fair val- amortization of goodwill and sets forth a new methodology ues of interest rate swap agreements outstanding were not for periodically assessing and, if warranted, recording material. The amounts of gains and losses from changes in impairment of goodwill. In connection with the impairment the fair values of the swap agreements were entirely offset provisions of the new rules, the Corporation has completed >>> 41 by those from changes in the fair value of the associated the initial step of the goodwill impairment test and has con- debt obligations. The interest rate swaps create a market cluded that no adjustment to the balance of goodwill at the exposure to changes in the LIBOR rate. To the extent that date of adoption is required. In addition, the Corporation Lockheed Martin Annual Report the LIBOR index upon which the swaps are based increases reassessed the estimated remaining useful lives of other by 1%, the Corporation’s interest expense would increase intangible assets as part of its adoption of the Statement. by $6.7 million on a pretax basis. A decline in the LIBOR As a result of that review, the estimated useful life of the index of 1% would lower interest expense by a like amount. intangible asset related to the F-16 fighter aircraft program Changes in swap rates would affect the market value of the has been extended. This change is expected to decrease agreements, but such changes in value would be offset by annual amortization expense associated with that intangi- changes in value of the underlying debt obligations. A 1% ble asset by approximately $30 million on a pretax basis. rise in swap rates from those prevailing at December 31, If the Statement had been adopted at the beginning of 2001, 2001 would result in a decrease in market value of approxi- the extension of the estimated useful life of that intangible mately $12 million. A 1% decline would increase the market asset and the absence of goodwill amortization would value by a like amount. In January 2002, the Corporation have increased earnings from continuing operations before entered into additional interest rate swap agreements to extraordinary item by approximately $240 million swap fixed interest rates for variable rates on approxi- ($0.55 per diluted share). mately $250 million of its long-term debt.


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    MANAGEMENT’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, based on an appropriate cost to benefit relationship, 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 independent auditors in connection with their reviews of interim financial information and 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 Audit and Ethics Committee recommends to the Board of Directors the selection of the independent auditors, which >>> 42 is then submitted to the stockholders of the Corporation for ratification. The consolidated financial statements included in this Annual Report have been audited by Ernst & Young LLP, whose report follows. Lockheed Martin Annual Report Christopher E. Kubasik Senior Vice President and Chief Financial Officer Rajeev Bhalla Vice President and Controller


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    REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Lockheed Martin Corporation Board of Directors and Stockholders Lockheed Martin Corporation We have audited the accompanying consolidated balance sheet of Lockheed Martin Corporation as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 disclo- sures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits pro- vide 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, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 of the Notes to Consolidated Financial Statements, in 2001 the Corporation adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and in 1999 adopted the provisions of the American Institute of Certified Public Accountants’ Statement of Position No. 98-5, “Reporting on the Costs of Start-Up Activities.” >>> 43 Lockheed Martin Annual Report McLean, Virginia January 21, 2002


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    CONSOLIDATED STATEMENT OF OPERATIONS Lockheed Martin Corporation Year ended December 31, (In millions, except per share data) 2001 2000 1999 Net sales $23,990 $24,541 $24,999 Cost of sales 22,447 22,881 23,346 Earnings from operations 1,543 1,660 1,653 Other income and expenses, net (655) (409) 344 888 1,251 1,997 Interest expense 700 919 809 Earnings from continuing operations before income taxes, extraordinary items and cumulative effect of change in accounting 188 332 1,188 Income tax expense 109 714 459 Earnings (loss) from continuing operations before extraordinary items and cumulative effect of change in accounting 79 (382) 729 Discontinued operations (1,089) (42) 8 Extraordinary loss on early extinguishments of debt (36) (95) — Cumulative effect of change in accounting — — (355) Net (loss) earnings $ (1,046) $ (519) $ 382 Earnings (loss) per common share: Basic: Continuing operations before extraordinary items and cumulative effect of change in accounting $ 0.18 $ (0.95) $ 1.91 Discontinued operations (2.55) (0.10) 0.02 Extraordinary loss on early extinguishments of debt (0.08) (0.24) — Cumulative effect of change in accounting — — (0.93) >>> 44 $ (2.45) $ (1.29) $ 1.00 Diluted: Continuing operations before extraordinary items and Lockheed Martin Annual Report cumulative effect of change in accounting $ 0.18 $ (0.95) $ 1.90 Discontinued operations (2.52) (0.10) 0.02 Extraordinary loss on early extinguishments of debt (0.08) (0.24) — Cumulative effect of change in accounting — — (0.93) $ (2.42) $ (1.29) $ 0.99 See accompanying Notes to Consolidated Financial Statements.


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    CONSOLIDATED STATEMENT OF CASH FLOWS Lockheed Martin Corporation Year ended December 31, (In millions) 2001 2000 1999 Operating Activities Earnings (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting $ 79 $ (382) $ 729 Adjustments to reconcile earnings (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting to net cash provided by operating activities: (Loss) earnings from discontinued operations (1,089) (42) 8 Depreciation and amortization 425 464 514 Amortization of goodwill and other intangible assets 398 423 438 Deferred federal income taxes (118) (96) 299 Net charges related to discontinued operations, write-off of Astrolink and other charges 1,511 — — Write-down of other investments 476 125 — Loss related to AES Transaction — 547 — Gain on sale of Control Systems business — (325) — Changes in operating assets and liabilities: Receivables (34) 239 146 Inventories 651 (194) (386) Customer advances and amounts in excess of costs incurred 318 352 353 Income taxes (456) 522 (284) Other (336) 383 (740) Net cash provided by operating activities 1,825 2,016 1,077 Investing Activities >>> 45 Expenditures for property, plant and equipment (619) (500) (669) Sale of IMS 825 — — Investments in affiliated companies (192) (257) (170) AES Transaction — 1,670 — Lockheed Martin Annual Report Sale of Control Systems business — 510 — Sale of shares of Inmarsat — 164 — COMSAT tender offer — — (1,203) Sale of interest in L-3 — — 263 Other 125 175 141 Net cash provided by (used for) investing activities 139 1,762 (1,638) Financing Activities Net decrease in short-term borrowings (12) (463) (868) Increases in long-term debt — — 2,994 Repayments and early extinguishment of long-term debt (2,566) (2,096) (1,067) Issuances of common stock 213 14 17 Common stock dividends (192) (183) (345) Net cash (used for) provided by financing activities (2,557) (2,728) 731 Net (decrease) increase in cash and cash equivalents (593) 1,050 170 Cash and cash equivalents at beginning of year 1,505 455 285 Cash and cash equivalents at end of year $ 912 $ 1,505 $ 455 See accompanying Notes to Consolidated Financial Statements.


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    CONSOLIDATED BALANCE SHEET Lockheed Martin Corporation December 31, (In millions) 2001 2000 Assets Current assets: Cash and cash equivalents $ 912 $ 1,505 Receivables 4,049 3,986 Inventories 3,140 3,805 Deferred income taxes 1,566 1,213 Assets of businesses held for sale 638 2,332 Other current assets 473 498 Total current assets 10,778 13,339 Property, plant and equipment, net 2,991 2,941 Investments in equity securities 1,884 2,433 Intangible assets related to contracts and programs acquired 939 1,073 Goodwill 7,371 7,479 Prepaid pension cost 2,081 1,794 Other assets 1,610 1,367 $27,654 $30,426 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,419 $ 1,106 Customer advances and amounts in excess of costs incurred 5,002 4,697 Salaries, benefits and payroll taxes 1,100 978 Income taxes 63 519 >>> 46 Current maturities of long-term debt 89 882 Liabilities of businesses held for sale 387 467 Other current liabilities 1,629 1,653 Lockheed Martin Annual Report Total current liabilities 9,689 10,302 Long-term debt 7,422 9,065 Post-retirement benefit liabilities 1,565 1,647 Deferred income taxes 992 790 Other liabilities 1,543 1,462 Stockholders’ equity: Common stock, $1 par value per share 441 431 Additional paid-in capital 2,142 1,789 Retained earnings 3,961 5,199 Unearned ESOP shares (84) (115) Accumulated other comprehensive loss (17) (144) Total stockholders’ equity 6,443 7,160 $27,654 $30,426 See accompanying Notes to Consolidated Financial Statements.


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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, 1998 $393 $ 70 $ 5,864 $(182) $ (8) $ 6,137 Net earnings — — 382 — — 382 $ 382 Common stock dividends declared ($0.88 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 ($0.44 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: Net unrealized loss from available-for-sale investments — — — — (129) (129) (129) Other — — — — (5) (5) (5) Balance at December 31, 2000 431 1,789 5,199 (115) (144) 7,160 $ (653) >>> 47 Net loss — — (1,046) — — (1,046) $(1,046) Common stock dividends declared ($0.44 per share) — — (192) — — (192) — Stock awards and options, Lockheed Martin Annual Report and ESOP activity 10 353 — 31 — 394 — Other comprehensive income (loss): Net unrealized gain from available-for-sale investments — — — — 23 23 23 Loral Space reclassification adjustment — — — — 151 151 151 Minimum pension liability — — — — (33) (33) (33) Other — — — — (14) (14) (14) Balance at December 31, 2001 $ 441 $2,142 $ 3,961 $ (84) $ (17) $ 6,443 $ (919) See accompanying Notes to Consolidated Financial Statements.


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lockheed Martin Corporation December 31, 2001 Note 1—Significant Accounting Policies Inventories—Inventories are stated at the lower of cost or estimated net realizable value. Costs on long-term contracts Organization—Lockheed Martin Corporation (Lockheed and programs in progress represent recoverable costs Martin or the Corporation) is engaged in the conception, incurred for production, allocable operating overhead and, research, design, development, manufacture, integration where appropriate, research and development and general and operation of advanced technology systems, products and administrative expenses. Pursuant to contract provisions, and services. Its products and services range from aircraft, agencies of the U.S. Government and certain other customers spacecraft and launch vehicles to missiles, electronics and have title to, or a security interest in, inventories related to information systems. The Corporation serves customers in such contracts as a result of advances and progress pay- both domestic and international defense and commercial ments. Such advances and progress payments are reflected markets, with its principal customers being agencies of the as an offset against the related inventory balances. General U.S. Government. and administrative expenses related to commercial products Basis of consolidation and use of estimates—The consoli- and services provided essentially under commercial terms dated financial statements include the accounts of wholly- and conditions are expensed as incurred. Costs of other owned subsidiaries and majority-owned entities which the product and supply inventories are principally determined Corporation controls. Intercompany balances and transac- by the first-in, first-out or average cost methods. tions have been eliminated in consolidation. The prepara- Property, plant and equipment—Property, plant and equip- tion of consolidated financial statements in conformity with ment are carried principally at cost. Depreciation is pro- accounting principles generally accepted in the United States vided on plant and equipment generally using accelerated requires management to make estimates and assumptions, methods during the first half of the estimated useful lives of including estimates of anticipated contract costs and revenues the assets; thereafter, straight-line depreciation generally is utilized in the earnings recognition process, that affect the used. Estimated useful lives generally range from 10 years >>> 48 reported amounts in the financial statements and accompa- to 40 years for buildings and 5 years to 15 years for nying notes. Actual results could differ from those estimates. machinery and equipment. Classifications—Receivables and inventories are primarily Lockheed Martin Annual Report Investments in equity securities—Investments in equity securi- attributable to long-term contracts or programs in progress ties include the Corporation’s ownership interests in affili- for which the related operating cycles are longer than one ated companies accounted for under the equity method of year. In accordance with industry practice, these items are accounting. Under this method of accounting, which gener- included in current assets. Certain amounts for prior years ally applies to investments that represent a 20 to 50 per- have been reclassified to conform with the 2001 presentation. cent ownership of the equity securities of the investees, the Cash and cash equivalents—Cash equivalents are generally Corporation’s share of the earnings or losses of the affiliated composed of highly liquid instruments with maturities of three companies is included in other income and expenses. The months or less when purchased. Due to the short maturity of Corporation recognizes currently gains or losses arising these instruments, carrying value on the Corporation’s from issuances of stock by wholly-owned or majority-owned consolidated balance sheet approximates fair value. subsidiaries, or by equity method investees. These gains or losses are also included in other income and expenses. Receivables—Receivables consist of amounts billed and cur- Investments in equity securities also include the Corporation’s rently due from customers, and include unbilled costs and ownership interests in companies in which its investment accrued profits primarily related to revenues on long-term represents less than 20 percent. If classified as available for contracts that have been recognized for accounting pur- sale, these investments are accounted for at fair value, with poses but not yet billed to customers. As such revenues are unrealized gains and losses recorded in other comprehen- recognized, appropriate amounts of customer advances sive income, in accordance with Statement of Financial and progress payments are reflected as an offset to the Accounting Standards (SFAS) No. 115, “Accounting related accounts receivable balance. for Certain Investments in Debt and Equity Securities.”


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    Lockheed Martin Corporation (Continued) Otherwise, these investments are generally accounted for Sales and earnings—Sales and anticipated profits under long- under the cost method of accounting. term fixed-price production contracts are recorded on a per- centage of completion basis, generally using units of delivery Goodwill and other intangible assets—Intangible assets as the measurement basis for effort accomplished. Estimated related to contracts and programs acquired are amortized contract profits are taken into earnings in proportion to over the estimated periods of benefit (15 years or less) and recorded sales. Sales under certain long-term fixed-price are displayed in the consolidated balance sheet net of contracts which, among other things, provide for the deliv- accumulated amortization of $1,239 million and $1,085 ery of minimal quantities or require a significant amount of million at December 31, 2001 and 2000, respectively. development effort in relation to total contract value, are In periods prior to the adoption of SFAS No. 142 (see dis- recorded upon achievement of performance milestones or cussion under the caption “New accounting pronounce- using the cost-to-cost method of accounting where sales and ments” in this Note), goodwill was amortized ratably over profits are recorded based on the ratio of costs incurred to appropriate periods, generally 30 to 40 years; however, estimated total costs at completion. beginning January 1, 2002, goodwill will no longer be amor- Sales under cost-reimbursement-type contracts are tized. Goodwill is displayed on the consolidated balance recorded as costs are incurred. Applicable estimated profits sheet net of accumulated amortization of $1,380 million and are included in earnings in the proportion that incurred $1,160 million at December 31, 2001 and 2000, respec- costs bear to total estimated costs. Sales of products and tively. Under SFAS No. 142, goodwill will be evaluated for services provided essentially under commercial terms and potential impairment annually by comparing the fair value conditions are recorded upon shipment or completion of of a reporting unit to its carrying value, including goodwill specified tasks. recorded by the reporting unit. If the carrying value exceeds Amounts representing contract change orders, claims or the fair value, impairment is measured by comparing the other items are included in sales only when they can be reli- derived fair value of goodwill to its carrying value, and any >>> 49 ably estimated and realization is probable. Incentives or impairment determined is recorded in the current period. penalties and awards applicable to performance on contracts Customer advances and amounts in excess of costs incurred— are considered in estimating sales and profit rates, and are Lockheed Martin Annual Report The Corporation receives advances and progress payments recorded when there is sufficient information to assess antic- from customers in excess of costs incurred on certain contracts, ipated contract performance. Incentive provisions which including contracts with agencies of the U.S. Government. increase or decrease earnings based solely on a single signifi- Such advances and progress payments, other than those cant event are generally not recognized until the event occurs. reflected as an offset to accounts receivable or inventories When adjustments in contract value or estimated costs as discussed above, are classified as current liabilities. are determined, any changes from prior estimates are gener- ally reflected in earnings in the current period. Anticipated Environmental matters—The Corporation records a liability losses on contracts are charged to earnings when identified. for environmental matters when it is probable that a liability has been incurred and the amount can be reasonably esti- Research and development and similar costs—Corporation- mated. A substantial portion of these costs are expected sponsored research and development costs primarily to be reflected in sales and cost of sales pursuant to U.S. include independent research and development and bid Government agreement or regulation. At the time a liability and proposal efforts related to government products and is recorded for future environmental costs, an asset is services. Except for certain arrangements described below, recorded for estimated future recovery considered probable these costs are generally included as part of the general through the pricing of products and services to agencies of and administrative costs that are allocated among all con- the U.S. Government. The portion of those costs expected tracts and programs in progress under U.S. Government to be allocated to commercial business is reflected in cost contractual arrangements. Corporation-sponsored product of sales at the time the liability is established. development costs not otherwise allocable are charged to expense when incurred. Under certain arrangements in


  • Page 43

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lockheed Martin Corporation December 31, 2001 which a customer shares in product development costs, outstanding, as well as the amounts of gains and losses the Corporation’s portion of such unreimbursed costs is recorded during the year, were not material. The Corporation expensed as incurred. Customer-sponsored research and does not hold or issue derivative financial instruments for development costs incurred pursuant to contracts are trading purposes. accounted for as contract costs. Stock-based compensation—The Corporation measures Impairment of certain long-lived assets—Generally, the car- compensation cost for stock-based compensation plans rying values of long-lived assets other than goodwill are using the intrinsic value method of accounting as prescribed reviewed for impairment if events or changes in the facts in Accounting Principles Board Opinion No. 25, “Accounting and circumstances indicate that their carrying values may for Stock Issued to Employees,” and related interpretations. not be recoverable. Any impairment determined is recorded The Corporation has adopted those provisions of SFAS No. in the current period and is measured by comparing the 123, “Accounting for Stock-Based Compensation,” which fair value of the related asset to its carrying value. require disclosure of the pro forma effects on net earnings and earnings per share as if compensation cost had been Derivative financial instruments—The Corporation sometimes recognized based upon the estimated fair value at the date uses derivative financial instruments to manage its exposure of grant for options awarded. to fluctuations in interest rates and foreign exchange rates. Effective January 1, 2001, the Corporation began to account Comprehensive income—Comprehensive income (loss) for for derivative financial instruments in accordance with SFAS the Corporation consists primarily of net earnings (loss), No. 133, “Accounting for Derivative Instruments and Hedging after-tax foreign currency translation adjustments, after-tax Activities.” The effect of adopting SFAS No. 133 was not unrealized gains and losses related to hedging activities material to the Corporation’s consolidated results of opera- and available-for-sale securities, and the after-tax impact tions, cash flows or financial position. Under SFAS No. of additional minimum pension liabilities. Income taxes >>> 50 133, all derivatives are recorded as either assets or liabili- related to components of other comprehensive income are ties in the consolidated balance sheet, and periodically generally recorded based on an effective tax rate of 39 adjusted to fair value. The classification of gains and losses percent. At December 31, 2001, 2000 and 1999, the accumulated balances of other comprehensive income related Lockheed Martin Annual Report resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its to foreign currency translation adjustments were not mate- resulting designation. Adjustments to reflect changes in fair rial and, at December 31, 2001, the accumulated balance values of derivatives that are not considered highly effective related to net unrealized gains and losses from hedging hedges are reflected in earnings. Adjustments to reflect activities was not material. For the year ended December changes in fair values of derivatives that are considered 31, 2001, other comprehensive income included a net highly effective hedges are either reflected in earnings and unrealized gain of $23 million primarily related to the largely offset by corresponding adjustments related to the Corporation’s investments in Loral Space & Communications, fair values of the hedged items, or reflected in other com- Ltd. (Loral Space) and New Skies Satellites, N.V. (New prehensive income until the hedged transaction matures Skies), a reclassification adjustment of $151 million related and the entire transaction is recognized in earnings. The to the realization of the loss in value of its investment in change in fair value of the ineffective portion of a hedge is Loral Space in the third quarter of 2001, and an additional immediately recognized in earnings. minimum pension liability of $33 million related to certain Interest rate swap agreements are designated as effec- of the Corporation’s defined benefit pension plans. Other tive hedges of the fair value of certain existing fixed rate comprehensive loss in 2000 consisted primarily of a $129 debt instruments. Forward currency exchange contracts are million unrealized loss related to the decline in value of the designated as qualifying hedges of cash flows associated Corporation’s investment in Loral Space. with firm commitments or specific anticipated transactions. New accounting pronouncements—The Corporation At December 31, 2001, the fair values of interest rate adopted SFAS No. 142, “Accounting for Goodwill and swap agreements and forward currency exchange contracts Other Intangible Assets,” as of January 1, 2002. Among


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    Lockheed Martin Corporation (Continued) other things, the Statement prohibits the amortization of The results of operations and related gains or losses associ- goodwill and sets forth a new methodology for periodically ated with businesses divested prior to the effective date of assessing and, if warranted, recording impairment of good- the Corporation’s adoption of SFAS No. 144, including will. The Statement also requires completion of the initial the divestitures of the Corporation’s Aerospace Electronics step of a transitional impairment test within six months of Systems (AES) businesses and Lockheed Martin Control the adoption of SFAS No. 142 and, if applicable, comple- Systems in 2000, have not been reclassified to discontin- tion of the final step of the impairment test by the end of the ued operations in accordance with the Statement. fiscal year of adoption. In connection with the impairment Effective January 1, 1999, the Corporation adopted provisions of the new rules, the Corporation has completed the American Institute of Certified Public Accountants’ the initial step of the goodwill impairment test and has con- Statement of Position (SOP) No. 98-5, “Reporting on the cluded that no adjustment to the balance of goodwill at the Costs of Start-Up Activities.” This SOP requires that, at the date of adoption is required. In addition, the Corporation effective date of adoption, costs of start-up activities previ- reassessed the estimated remaining useful lives of other ously capitalized be expensed and reported as a cumula- intangible assets as part of its adoption of the Statement. tive effect of a change in accounting principle, and further As a result of that review, the estimated useful life of the requires that such costs subsequent to adoption be expensed intangible asset related to the F-16 fighter aircraft program as incurred. The adoption of SOP No. 98-5 resulted in the has been extended. This change is expected to decrease recognition of a cumulative effect adjustment which reduced annual amortization expense associated with that intangi- net earnings for the year ended December 31, 1999 by ble asset by approximately $30 million on a pretax basis. $355 million ($0.93 per diluted share). The cumulative If the Statement had been adopted at the beginning of effect adjustment was recorded net of income tax benefits of 2001, the extension of the estimated useful life of that $227 million, and was primarily composed of approximately intangible asset and the absence of goodwill amortization $560 million of costs previously included in inventories. >>> 51 would have increased earnings from continuing operations before extraordinary item by approximately $240 million Note 2—Exit From the Global Telecommunications ($0.55 per diluted share). Services Business Lockheed Martin Annual Report The Corporation elected to early adopt, effective January On December 7, 2001, the Corporation announced that 1, 2001, SFAS No. 144, “Accounting for the Impairment it would exit its global telecommunications services business or Disposal of Long-Lived Assets.” The new Statement as a result of continuing overcapacity in the telecommunica- supercedes previous accounting guidance related to impair- tions industry and deteriorating business and economic condi- ment of long-lived assets and provides a single accounting tions in Latin America. In connection with its decision, the methodology for the disposal of long-lived assets, and also Corporation reassigned certain of the businesses in the Global supercedes previous guidance with respect to reporting the Telecommunications segment to other business segments, effects of the disposal of a business. In connection with the plans to sell the remaining operations, has positioned the Corporation’s decision to exit its global telecommunications remaining investments for monetization, and is eliminating the services business and divest certain of the related business administrative infrastructure supporting such businesses and units (see “Note 2—Exit From the Global Telecommunica- investments. Separately, the Corporation decided not to pro- tions Services Business”), the results of operations and cash vide further funding to Astrolink International, LLC (Astrolink) flows of certain businesses identified as held for sale, as and, due primarily to Astrolink’s inability to obtain additional well as the impairment and other charges related to the funding from other sources, wrote off its investment in Astrolink decision to exit these businesses, are classified as discontin- (see “Note 9—Investments” for a discussion of the write-off of ued operations in the Corporation’s consolidated financial statements for all periods presented, and are excluded from business segment information. Similarly, the assets and lia- bilities of these businesses are separately identified in the consolidated financial statements as being held for sale.


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lockheed Martin Corporation December 31, 2001 Astrolink). As a result of these actions, the Global Telecom- in the consolidated balance sheet as being held for sale. munications segment will no longer be reported as a separate The Corporation expects to complete the sale of these business segment. businesses by the end of 2002. Depreciation and amortiza- The Corporation recognized nonrecurring and unusual tion expense are no longer being recorded with respect charges, net of state income tax benefits, totaling approxi- to the assets of these businesses in accordance with SFAS mately $2.0 billion in the fourth quarter of 2001 related No. 144. These businesses are recorded at estimated fair to these actions. The charges decreased net earnings by value less cost to sell at December 31, 2001. Changes in approximately $1.7 billion ($3.98 per diluted share). the estimated fair value will be recorded in future periods The Global Telecommunications segment businesses as determined. The businesses held for sale are as follows: retained by the Corporation have been realigned as follows: • Satellite Services businesses—includes COMSAT • The Systems & Technology line of business and the Mobile Communications, COMSAT World Systems COMSAT General telecommunications business unit and Lockheed Martin Intersputnik. In the first quarter has been realigned within the Space Systems segment. of 2002, the Corporation completed the sale of • Enterprise Solutions-U.S., a commercial information COMSAT Mobile Communications. The transaction technology business, has been realigned within the is not expected to have a material impact on the Technology Services segment. Corporation’s consolidated results of operations. • COMSAT-International (formerly Enterprise Solutions- The Global Telecommunications segment equity invest- International)—provides telecommunications network serv- ments positioned for monetization include Intelsat, Ltd. ices in Latin America, primarily Argentina and Brazil. (Intelsat), Inmarsat Ventures plc (Inmarsat), New Skies, ACeS International, Ltd. (ACeS), Americom Asia-Pacific, LLC and Of the $1.4 billion of charges included in discontinued Astrolink. These investments are now reported as part of operations, approximately $1.2 billion related to impairment >>> 52 the Corporate and Other segment. of goodwill recorded in the Global Telecommunications Following is a discussion which describes the compo- segment. The goodwill was recorded in connection with nents of the $2.0 billion in charges based on their classifica- the Corporation’s acquisition of COMSAT as discussed in Lockheed Martin Annual Report tion in the Corporation’s consolidated financial statements. “Note 3—Acquisitions and Other Divestiture Activities.” The write-down of the goodwill was based on the relationship Discontinued Operations of its carrying value to the Corporation’s estimated realiz- The $2.0 billion in charges recorded in the fourth quar- able value. Approximately $170 million of the $1.4 billion ter of 2001 included charges, net of state income tax bene- related to impairment of certain long-lived assets employed fits, of approximately $1.4 billion related to certain global by foreign businesses held for sale, primarily COMSAT- telecommunications services businesses held for sale and International. The remainder of the charges included in dis- exit costs associated with elimination of the administrative continued operations are related to costs associated with infrastructure supporting the global telecommunications infrastructure reductions, including severance and facilities. businesses and investments. These charges, which reduced In addition, the Corporation completed the sale of net earnings for 2001 by $1.3 billion ($3.09 per diluted Lockheed Martin IMS Corporation (IMS), a wholly-owned share), are included in discontinued operations in the subsidiary, for $825 million in cash on August 24, 2001. Corporation’s statement of operations in accordance with The transaction resulted in a gain, net of state income taxes, SFAS No. 144. In addition, the results of operations of of $476 million and increased net earnings by $309 million these businesses have been classified as discontinued ($0.71 per diluted share). The results of IMS’ operations operations in the Corporation’s consolidated statements of for all periods presented, as well as the gain on the sale, operations for all periods presented, and excluded from have been reclassified to discontinued operations in accor- business segment information. Similarly, the assets and lia- dance with SFAS No. 144. IMS’ assets and liabilities as of bilities of these businesses have been separately identified December 31, 2000 have been reclassified as held for sale.


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    Lockheed Martin Corporation (Continued) Net sales and earnings (loss) before income taxes into an Agreement and Plan of Merger to combine the related to the discontinued businesses were as follows: companies in a two-phase transaction. The Corporation Year ended December 31, completed a cash tender offer for 49 percent of the (In millions) 2001 2000 1999 outstanding stock of COMSAT on September 18, 1999. Net sales $ 803 $788 $531 The total value of this phase of the transaction was $1.2 (Loss) earnings before income taxes: billion. The Corporation accounted for its 49 percent Results of operations of investment in COMSAT under the equity method discontinued businesses $ (52) $ (46) $ 12 Charges related to discontinued of accounting. businesses, net of IMS gain (970) — — On August 3, 2000, the second phase of the trans- $(1,022) $ (46) $ 12 action was completed. The total amount recorded related to this phase of the transaction was approximately $1.3 bil- lion based on the Corporation’s issuance of approximately The major classes of assets and liabilities of the discon- 27.5 million shares of its common stock at a price of $49 tinued businesses classified as held for sale and included in per share. This price per share represents the average of the consolidated balance sheet were as follows: the price of Lockheed Martin’s common stock a few days December 31, before and after the announcement of the transaction in (In millions) 2001 2000 September 1998. Assets Receivables $ 81 $ 210 The total purchase price for COMSAT, including trans- Deferred income taxes 149 91 action costs and amounts related to Lockheed Martin’s Property, plant and equipment 277 504 assumption of COMSAT stock options, was approximately Goodwill 84 1,376 $2.6 billion, net of $76 million in cash balances acquired. Other assets 47 151 The COMSAT transaction was accounted for using the pur- $638 $2,332 >>> 53 chase method of accounting, under which the purchase Liabilities price was allocated to assets acquired and liabilities assumed Accounts payable $ 28 $ 78 Customer advances 75 82 based on their fair values. Included in these allocations were Lockheed Martin Annual Report Other liabilities 284 307 adjustments totaling approximately $2.1 billion to record $387 $ 467 investments in equity securities at fair value and goodwill. The Corporation consolidated the operations of COMSAT Other Charges Related to Global Telecommunications with the results of operations of Lockheed Martin Global The charges recorded in the fourth quarter also included Telecommunications, Inc. (LMGT), a wholly-owned subsidiary nonrecurring and unusual charges, net of state income tax of the Corporation, from August 1, 2000. benefits, of approximately $132 million related to commit- Divestiture Activities ments to and impairment in the values of investments in In November 2000, the Corporation sold its Aerospace satellite joint ventures, primarily ACeS and Americom Asia- Electronics Systems (AES) businesses for $1.67 billion in Pacific, LLC. In addition, approximately $43 million was cash (the AES Transaction). The Corporation recorded a recorded for severance and facilities costs, and impairment nonrecurring and unusual loss of $598 million related to of certain fixed assets, associated with the business units the AES Transaction which is included in other income and that have been realigned. On a combined basis, these expenses. The loss reduced net earnings for 2000 by $878 nonrecurring and unusual charges reduced net earnings million ($2.18 per diluted share). for 2001 by $117 million ($0.27 per diluted share). In September 2000, the Corporation sold Lockheed Martin Control Systems (Control Systems) for $510 million Note 3—Acquisitions and Other Divestiture Activities in cash. This transaction resulted in the recognition of a Business Combination with COMSAT Corporation nonrecurring and unusual gain, net of state income taxes, In September 1998, the Corporation and COMSAT of $302 million which is reflected in other income and Corporation (COMSAT) announced that they had entered expenses. The gain increased net earnings for 2000 by $180 million ($0.45 per diluted share).


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lockheed Martin Corporation December 31, 2001 Also in September 2000, the Corporation sold approxi- were less than anticipated in the Corporation’s plans and mately one-third of its interest in Inmarsat for $164 million. estimates and, in the fourth quarter of 1999, the Corporation The investment in Inmarsat was acquired as part of the reversed approximately 10 percent of the original charge merger with COMSAT. As a result of the transaction, the recorded in 1998. Based on management’s assessment of Corporation’s interest in Inmarsat was reduced from approxi- the remaining actions to be taken as of December 31, 2000 mately 22% to 14%. The sale of shares in Inmarsat did not to complete initiatives contemplated in the Corporation’s impact the Corporation’s results of operations for 2000. original plans and estimates, the Corporation reversed In March 1997, the Corporation repositioned 10 of approximately $33 million of the original charge, which its non-core business units as a new independent company, increased net earnings for 2000 by $21 million ($0.05 per L-3 Communications Holdings, Inc. (L-3). In 1999, the diluted share). As of December 31, 2001, the Corporation Corporation sold its remaining interest in L-3 in two sepa- had substantially completed the shutdown of CalComp’s rate transactions. On a combined basis, these transactions operations and related initiatives. resulted in a nonrecurring and unusual gain, net of state Under existing U.S. Government regulations, certain income taxes, of $155 million which increased net earn- costs incurred for consolidation actions that can be demon- ings by $101 million ($0.26 per diluted share). strated to result in savings in excess of the cost to implement In September 1999, the Corporation sold its interest in can be deferred and amortized for government contracting Airport Group International Holdings, LLC which resulted in purposes and included as allowable costs in future pricing a nonrecurring and unusual gain, net of state income taxes, of the Corporation’s products and services. Included in the of $33 million in other income and expenses. In October consolidated balance sheet at December 31, 2001 is 1999, the Corporation exited its commercial 3D graphics approximately $260 million of deferred costs related to business through consummation of a series of transactions various consolidation actions. which resulted in the sale of its interest in Real 3D, Inc., a >>> 54 majority-owned subsidiary, and a nonrecurring and unusual Note 5—Earnings Per Share gain, net of state income taxes, of $33 million in other Basic and diluted per share results for all periods pre- income and expenses. On a combined basis, these trans- sented were computed based on the net earnings or loss Lockheed Martin Annual Report actions increased net earnings by $43 million ($0.11 per for the respective periods. The weighted average number diluted share). of common shares outstanding during the period was used in the calculation of basic earnings (loss) per share. In Note 4—Restructuring and Other Charges accordance with SFAS No. 128, “Earnings Per Share,” the In the fourth quarter of 1998, the Corporation recorded weighted average number of common shares used in the a nonrecurring and unusual pretax charge, net of state calculation of diluted per share amounts is adjusted for income tax benefits, of $233 million related to actions the dilutive effects of stock options based on the treasury surrounding the decision to fund a timely non-bankruptcy stock method only if an entity records earnings from con- shutdown of the business of CalComp Technology, Inc. tinuing operations (i.e., before discontinued operations, (CalComp), a majority-owned subsidiary. The financial extraordinary items and cumulative effects of changes in impacts of actions taken in 1999 to shut down the business accounting), as such adjustments would otherwise be anti- dilutive to earnings per share from continuing operations.


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    Lockheed Martin Corporation (Continued) The following table sets forth the computations of basic Note 6—Receivables and diluted earnings (loss) per share: (In millions) 2001 2000 (In millions, except per share data) 2001 2000 1999 U.S. Government: Net earnings (loss): Amounts billed $ 1,107 $ 1,126 Earnings (loss) from continuing Unbilled costs and accrued profits 2,423 2,278 operations before extraordinary Less customer advances items and cumulative effect of and progress payments (551) (457) change in accounting $ 79 $ (382) $ 729 Commercial and foreign governments: Discontinued operations: Amounts billed 583 608 Results of operations from Unbilled costs and accrued profits 502 600 discontinued businesses (62) (42) 8 Less customer advances and Charges related to discontinued progress payments (15) (169) businesses, net of IMS gain (1,027) — — Extraordinary loss on early $ 4,049 $ 3,986 extinguishments of debt (36) (95) — Cumulative effect of change in accounting — — (355) Approximately $178 million of the December 31, Net (loss) earnings for basic 2001 unbilled costs and accrued profits are not expected and diluted computations $(1,046) $ (519) $ 382 to be recovered within one year. Average common shares outstanding: Average number of common shares Note 7—Inventories outstanding for basic computations 427.4 400.8 382.3 Dilutive stock options—based (In millions) 2001 2000 on the treasury stock method 5.1 — (a) 1.8 Work in process, commercial Average number of common shares launch vehicles $ 1,205 $ 1,175 outstanding for diluted computations 432.5 400.8 (a) 384.1 Work in process, primarily related Earnings (loss) per share: to other long-term contracts and >>> 55 Basic: programs in progress 4,279 3,816 From continuing operations before Less customer advances and extraordinary items and cumulative progress payments (2,931) (1,864) effect of change in accounting $ 0.18 $ (0.95) $ 1.91 Discontinued operations: 2,553 3,127 Lockheed Martin Annual Report Results of operations from Other inventories 587 678 discontinued businesses (0.15) (0.10) 0.02 $ 3,140 $ 3,805 Charges related to discontinued businesses, net of IMS gain (2.40) — — Extraordinary loss on early Work in process inventories at December 31, 2001 extinguishments of debt (0.08) (0.24) — and 2000 related to commercial launch vehicles include Cumulative effect of change in accounting — — (0.93) costs for launch vehicles, both under contract and not under $ (2.45) $ (1.29) $ 1.00 contract, including approximately $135 million and $100 Diluted: million, respectively, of unamortized deferred costs for From continuing operations before launch vehicles not under contract related to the commer- extraordinary items and cumulative effect of change in accounting $ 0.18 $ (0.95) $ 1.90 cial Atlas and the Evolved Expendable Launch Vehicle Discontinued operations: (Atlas V) programs. At December 31, 2001 and 2000, Results of operations from discontinued businesses (0.14) (0.10) 0.02 commercial launch vehicle inventories included amounts Charges related to discontinued advanced to Russian manufacturers, Khrunichev State businesses, net of IMS gain (2.38) — — Research and Production Space Center and RD AMROSS, Extraordinary loss on early extinguishments of debt (0.08) (0.24) — a joint venture between Pratt & Whitney and NPO Cumulative effect of Energomash, of approximately $730 million and $657 change in accounting — — (0.93) million, respectively, for the manufacture of launch vehicles $ (2.42) $ (1.29) $ 0.99 and related launch services. (a) The average number of common shares used in the calcula- tion of the diluted loss per share for 2000 has not been adjusted for the effects of 2.3 million dilutive stock options.


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lockheed Martin Corporation December 31, 2001 Work in process inventories at December 31, 2001 Note 9—Investments in Equity Securities and 2000 related to other long-term contracts and programs (In millions) 2001 2000 in progress included approximately $45 million and $50 Equity method investments: million, respectively, of unamortized deferred costs for Intelsat, Ltd. $1,206 $1,201 aircraft not under contract related to the Corporation’s Satellite ventures 47 503 C-130J program. Other 89 79 Approximately $1.3 billion of costs included in 2001 1,342 1,783 Cost method investments: inventories, including approximately $522 million advanced Inmarsat Ventures plc 270 270 to Russian manufacturers, are not expected to be recovered Loral Space & Communications, Ltd. 137 146 within one year. New Skies Satellites, N.V. 117 188 An analysis of general and administrative costs, includ- Other 18 46 ing research and development costs, included in work in 542 650 process inventories follows: $1,884 $2,433 (In millions) 2001 2000 1999 Satellite ventures includes the Corporation’s investments Beginning of year $ 393 $ 482 $ 669 in Space Imaging, LLC, Astrolink, Americom Asia-Pacific Incurred during the year 1,818 1,941 2,348 Charged to cost of and ACeS. The carrying values of the Corporation’s invest- sales during the year: ments in Loral Space and New Skies are marked-to-market. Research and development (607) (647) (822) The carrying value of the Corporation’s 24 percent Other general and administrative (1,224) (1,383) (1,713) investment in Intelsat, which was acquired in connection with the merger with COMSAT, exceeded the Corporation’s End of year $ 380 $ 393 $ 482 share of Intelsat’s net assets by approximately $700 million as a result of purchase accounting adjustments to record >>> 56 In addition, included in cost of sales in 2001, 2000 and 1999 were general and administrative costs, including the investment at fair value. Prior to the adoption of SFAS research and development costs, of approximately $679 No. 142, this amount was being amortized ratably over 30 years; however, as discussed in “Note 1—Significant Lockheed Martin Annual Report million, $632 million and $466 million, respectively, related to commercial programs and activities. Accounting Policies,” this amount will no longer be amor- tized beginning January 1, 2002. Note 8—Property, Plant and Equipment The Corporation completed funding of its $400 million investment commitment to Astrolink, a joint venture in which (In millions) 2001 2000 the Corporation holds a 31 percent interest, in 2001. Land $ 95 $ 170 Astrolink had received a total of $1.3 billion in equity funding Buildings 3,117 2,884 Machinery and equipment 4,830 4,823 from its partners which, in addition to the Corporation, include 8,042 7,877 Liberty Media, TRW and Telespazio. The Astrolink business Less accumulated depreciation plan contemplated obtaining further funding from a combina- and amortization (5,051) (4,936) tion of strategic equity, public equity and debt funding sources. $ 2,991 $ 2,941


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    Lockheed Martin Corporation (Continued) In October 2001, the Corporation made the decision and Corporation’s decision to exit the global telecommunica- so advised Astrolink that it did not plan to make any addi- tions services business. tional investment in the joint venture. In addition to its equity In the fourth quarter of 2000, the Corporation recorded investment, Lockheed Martin’s Space Systems segment had a nonrecurring and unusual charge, net of state income tax contracts with Astrolink to manufacture four satellites and benefits, of $117 million related to impairment of its invest- provide related launch services, and LMGT had contracts ment in ACeS due to an other than temporary decline in the to perform system development and other services. Those value of the investment. ACeS is a joint venture in which contracts were terminated due to Astrolink’s funding consid- the Corporation holds a 33 percent interest at December 31, erations. In the fourth quarter of 2001, the Corporation 2001. ACeS operates the Asian Cellular Satellite System, a recognized a nonrecurring and unusual charge, net of state geostationary mobile satellite system serving Southeast Asia income tax benefits, of approximately $367 million in other which was placed in commercial operation in the fourth income and expenses which reflects the other than temporary quarter of 2000. The spacecraft experienced an anomaly decline in value of its investment in Astrolink based on the that may reduce the overall capacity of the system by about above circumstances. In addition, approximately $20 million 30 to 35 percent. The decline in the value of the investment of charges were recorded in cost of sales for certain other costs was assessed to be other than temporary as a result of the related to Astrolink. On a combined basis, these charges reduced business prospects due to this anomaly as well as reduced net earnings for the year ended December 31, 2001 overall market conditions. The adjustment reduced net earn- by approximately $267 million ($0.62 per diluted share). ings by $77 million ($0.19 per share). In the third quarter of 2001, the Corporation recorded a nonrecurring and unusual charge, net of state income tax Note 10—Debt benefits, of $361 million in other income and expenses The Corporation’s long-term debt is primarily in the related to its investment in Loral Space. The charge, form of publicly-issued, fixed-rate notes and debentures, >>> 57 which was recorded due to a decline in the value of the summarized as follows: Corporation’s investment, reduced net earnings by $235 million ($0.54 per diluted share). The decline in value of Type (Maturity Dates) Range of Lockheed Martin Annual Report the investment was assessed to be other than temporary (In millions, except interest rate data) Interest Rates 2001 2000 due to the downward trend in the market price of Loral Notes (2002–2022) 6.5–9.0% $3,114 $5,202 Space stock and the potential impact of underlying market Debentures (2011–2036) 7.0–9.1% 4,198 4,312 and industry conditions on Loral Space’s ability to execute Monthly Income its current business plans. Preferred Securities 8.125% — 200 In the first quarter of 2001, the Corporation recorded ESOP obligations (2002–2004) 8.4% 132 177 Other obligations (2002–2016) 1.0–13.1% 67 56 a nonrecurring and unusual charge, net of state income tax 7,511 9,947 benefits, of $100 million in other income and expenses Less current maturities (89) (882) related to impairment of its investment in Americom Asia- $7,422 $9,065 Pacific, LLC, a joint venture in which the Corporation holds a 50 percent interest. The charge reduced net earnings for In September 2001, the Corporation redeemed the year ended December 31, 2001 by $65 million ($0.15 approximately $117 million of 7% debentures ($175 mil- per diluted share). The satellite operated by Americom Asia- lion at face value) due in 2011 which were originally sold Pacific, which serves Southeast Asia, was placed in com- at approximately 54 percent of their principal amount. The mercial operation late in the fourth quarter of 2000. The debentures were redeemed at face value, resulting in an decline in value of the investment was assessed to be other extraordinary loss on early extinguishment of debt, net of than temporary as a result of lower transponder pricing, $22 million in income tax benefits, of $36 million ($0.08 lower than expected demand and overall market condi- per diluted share). tions. The remaining value of the investment was written off in the fourth quarter of 2001 in connection with the

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