<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 1-11437
----------------- ---------
LOCKHEED MARTIN CORPORATION
---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1893632
------------------------------- ----------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6801 ROCKLEDGE DRIVE, BETHESDA, MD 20817
--------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (301) 897-6000
--------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
---------- ----------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AS OF JULY 31, 2000
-------------------------- --------------------------------
COMMON STOCK, $1 PAR VALUE 401,842,266
<PAGE>
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
------------
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Statement of Operations-
Three Months and Six Months Ended June 30, 2000 and 1999..............3
Unaudited Condensed Consolidated Statement of Cash Flows-
Six Months Ended June 30, 2000 and 1999...............................4
Unaudited Condensed Consolidated Balance Sheet-
June 30, 2000 and December 31, 1999...................................5
Notes to Unaudited Condensed Consolidated Financial Statements..........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................17
Item 3. Quantitative and Qualitative Disclosure of Market Risk
(included in Item 2. under the caption "Other Matters")
Part II. Other Information
Item 1. Legal Proceedings.............................................32
Item 4. Submission of Matters to a Vote of Security Holders...........34
Item 6. Exhibits and Reports on Form 8-K..............................34
Signatures....................................................................37
Exhibit 3 Bylaws of Lockheed Martin Corporation, as amended
Exhibit 10 Special agreements with certain employees/consultants
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
2
<PAGE>
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(In millions, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 6,212 $ 6,203 $ 11,774 $ 12,391
Cost of sales 5,784 6,072 11,033 11,773
-------- -------- -------- --------
Earnings from operations 428 131 741 618
Other income and expenses, net (103) 3 (90) 132
-------- -------- -------- --------
325 134 651 750
Interest expense 220 191 447 383
-------- -------- -------- --------
Earnings (loss) before income taxes and
cumulative effect of change in accounting 105 (57) 204 367
Income tax expense (benefit) 63 (16) 108 140
-------- -------- -------- --------
Earnings (loss) before cumulative effect of
change in accounting 42 (41) 96 227
Cumulative effect of change in accounting -- -- -- (355)
-------- -------- -------- --------
Net earnings (loss) $ 42 $ (41) $ 96 $ (128)
======== ======== ======== ========
Earnings (loss) per common share:
--------------------------------
Basic:
Before cumulative effect of change in
accounting $ .11 $ (.11) $ .25 $ .59
Cumulative effect of change in accounting -- -- -- (.93)
-------- -------- -------- --------
$ .11 $ (.11) $ .25 $ (.34)
======== ======== ======== ========
Diluted:
Before cumulative effect of change in
accounting $ .11 $ (.11) $ .25 $ .59
Cumulative effect of change in accounting -- -- -- (.93)
-------- -------- -------- --------
$ .11 $ (.11) $ .25 $ (.34)
======== ======== ======== ========
Cash dividends declared per common share $ .11 $ .22 $ .22 $ .44
======== ======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---- ----
(In millions)
<S> <C> <C>
Operating Activities:
Earnings before cumulative effect of change in accounting $ 96 $ 227
Adjustments to reconcile earnings to net cash provided
by operating activities:
Depreciation and amortization 471 463
Changes in operating assets and liabilities 1,031 (866)
--------- -------
Net cash provided by (used for) operating activities 1,598 (176)
--------- -------
Investing Activities:
Expenditures for property, plant and equipment (185) (276)
Sale of shares in L-3 Communications -- 182
Other (43) 3
---------- ---------
Net cash used for investing activities (228) (91)
---------- --------
Financing Activities:
Net (decrease) increase in short-term borrowings (467) 861
Net repayments related to long-term debt (23) (723)
Issuances of common stock 2 15
Common stock dividends (88) (171)
---------- --------
Net cash used for financing activities (576) (18)
-------- --------
Net increase (decrease) in cash and cash equivalents 794 (285)
Cash and cash equivalents at beginning of period 455 285
-------- --------
Cash and cash equivalents at end of period $ 1,249 $ --
======= =========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
Lockheed Martin Corporation
Unaudited Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(In millions)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,249 $ 455
Receivables 4,182 4,348
Inventories 3,809 4,051
Deferred income taxes 1,167 1,237
Other current assets 570 605
--------- ---------
Total current assets 10,977 10,696
Property, plant and equipment 3,550 3,634
Investments in equity securities 2,200 2,210
Intangible assets related to contracts and programs acquired 1,181 1,259
Cost in excess of net assets acquired 9,027 9,162
Other assets 2,957 3,051
--------- ---------
$ 29,892 $ 30,012
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,037 $ 1,228
Customer advances and amounts in excess of costs incurred 5,145 4,655
Salaries, benefits and payroll taxes 972 941
Income taxes 9 51
Short-term borrowings 8 475
Current maturities of long-term debt 803 52
Other current liabilities 1,557 1,410
--------- ---------
Total current liabilities 9,531 8,812
Long-term debt 10,650 11,427
Post-retirement benefit liabilities 1,758 1,805
Other liabilities 1,514 1,607
Stockholders' equity:
Common stock, $1 par value per share 402 398
Additional paid-in capital 307 222
Retained earnings 5,909 5,901
Unearned ESOP shares (134) (150)
Accumulated other comprehensive loss (45) (10)
--------- ---------
Total stockholders' equity 6,439 6,361
--------- ---------
$ 29,892 $ 30,012
========= =========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2000
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Lockheed Martin Corporation
(Lockheed Martin or the Corporation) has continued to follow the accounting
policies set forth in the consolidated financial statements included in its 1999
Annual Report on Form 10-K filed with the Securities and Exchange Commission. In
the opinion of management, the interim financial information provided herein
reflects all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of the results of operations for the interim periods. The
results of operations for the three months and six months ended June 30, 2000
are not necessarily indicative of results to be expected for the full year.
Certain amounts presented for prior periods have been reclassified to conform
with the 2000 presentation.
NOTE 2 -- BUSINESS COMBINATION WITH COMSAT CORPORATION
In September 1998, the Corporation and COMSAT Corporation (COMSAT)
announced that they had entered into an Agreement and Plan of Merger (the Merger
Agreement) to combine the companies in a two-phase transaction (the Merger).
Subsequent to obtaining all regulatory approvals necessary for the first phase
of the transaction and approval of the Merger by the stockholders of COMSAT, the
Corporation completed a cash tender offer (the Tender Offer) on September 18,
1999. The total value of this phase of the transaction was $1.2 billion, and
such amount was included in investments in equity securities in the Unaudited
Condensed Consolidated Balance Sheet at June 30, 2000. The Corporation accounted
for its 49 percent investment in COMSAT under the equity method of accounting.
In connection with actions necessary to complete the second phase of the
transaction, federal legislation to remove existing restrictions on ownership of
COMSAT voting stock was signed into law on March 17, 2000. In addition, the
Corporation filed separate notification and report forms under the
Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) with the Federal Trade
Commission (FTC) and the U.S. Department of Justice (DOJ) in the first quarter
of 2000 regarding the Corporation's acquisition of minority interests in two
businesses held by COMSAT. On April 22, 2000, the waiting period under the HSR
Act with respect to these acquisitions expired. On March 23, 2000, the
Corporation and COMSAT filed applications with the FCC seeking authority for the
transfer of control of various FCC authorizations held by COMSAT to a
wholly-owned subsidiary of Lockheed Martin. In connection therewith, the FCC
released an order on July 31, 2000, which allowed the Corporation and COMSAT to
complete the Merger.
On August 3, 2000, pursuant to the terms of the Merger Agreement, the
second phase of the transaction was accomplished which resulted in consummation
of the Merger. On that date, each share of COMSAT common stock outstanding
immediately prior to the effective time of the Merger (other than shares held by
the Corporation) was converted into the right to receive one share of Lockheed
Martin common stock. The total amount recorded related to this phase of the
transaction will be approximately $1.3 billion based on the Corporation's
issuance of approximately 27.5 million shares of its common stock (in exchange
for each share of COMSAT's common stock, other than shares held by the
Corporation) at a price of $49 per share. This price per share
6
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
represents the average of the price of Lockheed Martin's common stock a few days
before and after the announcement of the transaction in September 1998. Based on
the above, the total purchase price for COMSAT, including transaction costs and
amounts related to Lockheed Martin's assumption of COMSAT stock options, was
approximately $2.6 billion, net of cash balances acquired.
The COMSAT transaction will be accounted for using the purchase method of
accounting. Preliminary purchase accounting adjustments will be recorded in the
third quarter of 2000 to allocate the purchase price to assets acquired and
liabilities assumed based on their fair values. Such adjustments are expected to
include certain amounts totaling approximately $2.3 billion, composed of
adjustments to record equity investees acquired at their fair values and cost in
excess of net assets acquired, which is expected to be amortized over a
composite estimated life of 30 years. These preliminary adjustments and
estimates are subject to change as a result of the completion of future
analyses.
The following unaudited pro forma combined earnings data presents the
results of operations of the Corporation and COMSAT as if the Merger had been
consummated at the beginning of the periods presented. The pro forma combined
earnings data does not purport to be indicative of the results of operations
that would have resulted if the COMSAT transaction had occurred at the beginning
of the respective periods. Moreover, this data is not intended to be indicative
of future results of operations.
<TABLE>
<CAPTION>
Pro Forma Combined
Earnings Data
Six Months Ended June 30,
2000 1999
---- ----
(In millions, except per share data)
<S> <C> <C>
Net sales $ 12,066 $ 12,664
Earnings before cumulative effect of change in accounting 93 197
Net earnings (loss) 93 (158)
Earnings (loss) per common share:
Basic: .22 .48
Before cumulative effect of change in accounting .22 (.39)
Net earnings (loss) per common share
Diluted:
Before cumulative effect of change in accounting .22 .48
Net earnings (loss) per common share .22 (.38)
</TABLE>
The Corporation will include the operations of COMSAT with the results of
operations of Lockheed Martin Global Telecommunications, Inc. (LMGT), a wholly
owned subsidiary of the Corporation, from August 1, 2000.
NOTE 3 -- EARNINGS PER SHARE
Basic and diluted earnings (loss) per share were computed based on net
earnings (loss). The weighted average number of common shares outstanding during
the period was used in the calculation of basic earnings (loss) per share, and
this number of shares was increased by the
7
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
effects of dilutive stock options based on the treasury stock method in the
calculation of diluted earnings (loss) per share.
The following table sets forth the computations of basic and diluted
earnings (loss) per common share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(In millions, except per share data)
<S> <C> <C> <C> <C>
Net earnings (loss) for basic and diluted computations:
------------------------------------------------------
Earnings (loss) before cumulative effect of change in
accounting $ 42 $ (41) $ 96 $ 227
Cumulative effect of change in accounting -- -- -- (355)
--------- --------- --------- ---------
Net earnings (loss) $ 42 $ (41) $ 96 $ (128)
========= ========= ========= =========
Average common shares outstanding:
---------------------------------
Average number of common shares outstanding for basic
computations 389.5 381.4 388.3 380.8
Effects of dilutive stock options based on the treasury
stock method 1.7 -- (a) 1.0 2.5
--------- --------- --------- ---------
Average number of common shares outstanding for
diluted computations 391.2 381.4 (a) 389.3 383.3
========= ========= ========= =========
Earnings (loss) per common share:
--------------------------------
Basic:
Before cumulative effect of change in accounting $ .11 $ (.11) $ .25 $ .59
Cumulative effect of change in accounting -- -- -- (.93)
--------- --------- --------- ---------
$ .11 $ (.11) $ .25 $ (.34)
========= ========= ========= =========
Diluted:
Before cumulative effect of change in accounting $ .11 $ (.11) $ .25 $ .59
Cumulative effect of change in accounting -- -- -- (.93)
--------- --------- --------- ---------
$ .11 $ (.11) $ .25 $ (.34)
========= ========= ========= =========
</TABLE>
(a) In accordance with Statement of Financial Accounting Standards No. 128, the
average number of common shares used in the calculation of diluted loss per
share before cumulative effect of change in accounting have not been
adjusted for the effects of stock options, as such shares would have an
antidilutive effect.
8
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
NOTE 4 -- INVENTORIES
June 30, December 31,
2000 1999
---- ----
(In millions)
Work in process, commercial launch vehicles $ 1,453 $ 1,514
Work in process, primarily related to other long-term
contracts and programs in progress 3,805 3,879
Less customer advances and progress payments (1,826) (1,848)
--------- --------
3,432 3,545
Other inventories 377 506
--------- --------
$ 3,809 $ 4,051
========= ========
Commercial launch vehicle inventories at June 30, 2000 and December 31,
1999 included amounts advanced to Russian manufacturers, Khrunichev State
Research and Production Space Center and RD AMROSS, a joint venture between
Pratt & Whitney and NPO Energomash, of approximately $880 million and $903
million, respectively, for the manufacture of launch vehicles and related launch
services. Work in process inventories related to commercial launch vehicles also
included costs for launch vehicles, both under contract and not under contract,
including unamortized deferred costs related to the commercial Atlas and the
Evolved Expendable Launch Vehicle (Atlas V) programs.
Work in process inventories related to other long-term contracts and
programs in progress included unamortized deferred costs for aircraft not under
contract related to the Corporation's C-130J program. The total amount of
unamortized deferred costs expected to be recognized related to unsold C-130J
aircraft was $140 million and $150 million at June 30, 2000 and December 31,
1999, respectively.
NOTE 5 -- CONTINGENCIES
The Corporation or its subsidiaries are parties to or have property subject
to litigation and other proceedings, including matters arising under provisions
relating to the protection of the environment. In the opinion of management and
in-house counsel, the probability is remote that the outcome of these matters
will have a material adverse effect on the Corporation's consolidated results of
operations or financial position. These matters include the following items:
Environmental matters - The Corporation is responding to three
administrative orders issued by the California Regional Water Quality Control
Board (the Regional Board) in connection with the Corporation's former Lockheed
Propulsion Company facilities in Redlands, California. Under the orders, the
Corporation is investigating the impact and potential remediation of regional
groundwater contamination by perchlorates and chlorinated solvents. The Regional
Board has approved the Corporation's plan to maintain public water supplies with
respect to chlorinated solvents during this investigation, and the Corporation
is negotiating with local water purveyors to implement this plan, as well as to
address water supply concerns relative to perchlorate contamination. The
Corporation estimates that expenditures required to implement work currently
approved will be approximately $140 million. The Corporation is also
9
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
coordinating with the U.S. Air Force, which is conducting preliminary studies of
the potential health effects of exposure to perchlorates in connection with
several sites across the country, including the Redlands site. The results of
these studies indicate that current efforts with water purveyors regarding
perchlorate issues are appropriate; however, the Corporation currently cannot
project the extent of its ultimate clean-up obligation, if any, with respect to
perchlorates.
The Corporation entered into a consent decree with the U.S. Environmental
Protection Agency (EPA) in 1991 relating to certain property in Burbank,
California, which obligated the Corporation to design and construct facilities
to monitor, extract and treat groundwater, and to operate and maintain such
facilities for approximately eight years. The Corporation entered into a
follow-on consent decree in 1998 which obligates the Corporation to fund the
continued operation and maintenance of these facilities through the year 2018;
however, the responsibility for the actual operations of these facilities will
be assumed by the city of Burbank in the fourth quarter of 2000. The Corporation
has also been operating under a cleanup and abatement order from the Regional
Board affecting its facilities and former facilities in Burbank, California.
This order requires site assessment and action to abate groundwater
contamination by a combination of groundwater and soil cleanup and treatment.
Also as a result of its former operations at the Burbank facilities, the
Corporation is participating as one of several parties to a consent decree with
the EPA (entered August 3, 2000) to fund the operation of a groundwater
treatment system previously designed and built by the group in Glendale,
California as part of the San Fernando Superfund site that includes Burbank. The
consent decree calls for this treatment system to be operated for 12 years, one
year under the direction of the parties who built the facility and thereafter by
the city of Glendale. Under an agreement reached with the U.S. Government and
filed with the U.S. District Court in January 2000 (the Agreement), the
Corporation was reimbursed approximately $100 million in the first quarter of
2000 for past expenditures for certain remediation activities related to the
Burbank and Glendale properties. Also under the Agreement, an amount equal to
approximately 50 percent of future expenditures for certain remediation
activities will be reimbursed by the U.S. Government as a responsible party
under the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA). The Corporation estimates that total expenditures required over the
remaining terms of the consent decrees and the Regional Board order related to
the Burbank property, and the administrative orders related to the city of
Glendale, net of the effects of the Agreement, will be approximately $50
million.
The Corporation is involved in other proceedings and potential proceedings
relating to environmental matters, including disposal of hazardous wastes and
soil and water contamination. The extent of the Corporation's financial exposure
cannot in all cases be reasonably estimated at this time. In addition to the
amounts with respect to the Redlands and Burbank properties and the city of
Glendale described above, a liability of approximately $200 million for the
other properties in which an estimate of financial exposure can be determined
has been recorded.
Under an agreement with the U.S. Government in 1990, the Burbank
groundwater treatment and soil remediation expenditures referenced above are
being allocated to the Corporation's operations as general and administrative
costs and, under existing government regulations, these and other environmental
expenditures related to U.S. Government business, after deducting any recoveries
from insurance or other potentially responsible parties, are allowable in
establishing the prices of the Corporation's products and services. As a result,
a substantial portion of the
10
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
expenditures are being reflected in the Corporation's sales and cost of sales
pursuant to U.S. Government agreement or regulation. Currently, Lockheed Martin
is in discussions with the U.S. Government regarding certain elements of the
Corporation's accounting practices for the treatment of environmental costs;
however, it is management's opinion that the treatment of these environmental
costs is appropriate and consistent with the terms of such agreement and
applicable regulations.
The Corporation has recorded an asset for the portion of environmental
costs that are probable of future recovery in pricing of the Corporation's
products and services for U.S. Government business. The portion that is expected
to be allocated to commercial business has been reflected in cost of sales. The
recorded amounts do not reflect the possible future recovery of portions of the
environmental costs through insurance policy coverage or from other potentially
responsible parties, which the Corporation is pursuing as required by agreement
and U.S. Government regulation. Any such recoveries, when received, would reduce
the allocated amounts to be included in the Corporation's U.S. Government sales
and cost of sales.
Waste remediation contract -- In 1994, the Corporation was awarded a $180
million fixed price contract by the U.S. Department of Energy (DOE) for the
Phase II design, construction and limited test of remediation facilities, and
the Phase III full remediation of waste found in Pit 9, located on the Idaho
National Engineering and Environmental Laboratory reservation. The Corporation
incurred significant unanticipated costs and scheduling issues due to complex
technical and contractual matters which threatened the viability of the overall
Pit 9 program. Based on an investigation by management to identify and quantify
the overall effect of these matters, the Corporation submitted a request for
equitable adjustment (REA) to the DOE in March 1997 that sought, among other
things, the recovery of a portion of unanticipated costs incurred by the
Corporation and the restructuring of the contract to provide for a more
equitable sharing of the risks associated with the Pit 9 project. The
Corporation has been unsuccessful in reaching any agreements with the DOE on
cost recovery or other contract restructuring matters.
In June 1998, the DOE, through Lockheed Martin Idaho Technologies Company
(LMITCO), its management contractor, terminated the Pit 9 contract for default.
On the same date, the Corporation filed a lawsuit against the DOE in the U.S.
Court of Federal Claims in Washington, D.C., challenging and seeking to overturn
the default termination. In addition, in July 1998, the Corporation withdrew the
REA previously submitted to the DOE and replaced it with a certified REA. The
certified REA is similar in substance to the REA previously submitted, but its
certification, based upon more detailed factual and contractual analysis, raises
its status to that of a formal claim. In August 1998, LMITCO, at the DOE's
direction, filed suit against the Corporation in U.S. District Court in Boise,
Idaho, seeking, among other things, recovery of approximately $54 million
previously paid by LMITCO to the Corporation under the Pit 9 contract. The
Corporation is defending this action while continuing to pursue its certified
REA. Discovery has been ongoing since August 2, 1999. In October 1999, the U.S.
Court of Federal Claims stayed the DOE's motion to dismiss the Corporation's
lawsuit, finding that the Court has jurisdiction. The Court ordered discovery to
commence and gave leave to the DOE to convert its motion to dismiss to a motion
for summary judgment if supported by discovery. The Corporation continues to
assert its position in the litigation while continuing its efforts to resolve
the dispute through non-litigation means.
11
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
NOTE 6 -- INFORMATION ON BUSINESS SEGMENTS
The Corporation implemented a new organizational structure, effective
October 1, 1999, that realigned its core lines of business into four principal
business segments. The four principal business segments include Systems
Integration, Space Systems, Aeronautical Systems and Technology Services. All
other activities of the Corporation, including the operations of LMGT and
COMSAT, fall within the Corporate and Other segment. In 2000, the Corporation
reassigned the Management & Data Systems business unit and the space
applications systems line of business from the Systems Integration segment to
the Space Systems segment. Prior period amounts have been adjusted to conform
with the above changes in organizational structure.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
Selected Financial Data by Business Segment
Net sales
---------
Systems Integration $ 2,334 $ 2,367 $ 4,405 $ 4,599
Space Systems 1,780 1,728 3,452 3,618
Aeronautical Systems 1,253 1,346 2,289 2,766
Technology Services 599 537 1,063 985
Corporate and Other 246 225 565 423
-------- --------- ---------- ----------
$ 6,212 $ 6,203 $11,774 $12,391
======= ======= ======= =======
Operating profit (loss)
-----------------------
Systems Integration $ 202 $ 205 $ 370 $ 373
Space Systems 128 46 213 210
Aeronautical Systems 89 (118) 168 46
Technology Services 36 36 62 68
Corporate and Other (130) (35) (162) 53
---------- ---------- ----------- -----------
$ 325 $ 134 $ 651 $ 750
========== ======== ========= =========
Intersegment revenue(a)
-----------------------
Systems Integration $ 118 $ 112 $ 223 $ 227
Space Systems 34 28 62 57
Aeronautical Systems 21 22 39 43
Technology Services 186 154 352 307
Corporate and Other 15 15 30 30
------- -------- -------- --------
$ 374 $ 331 $ 706 $ 664
========== ======== ========= =========
</TABLE>
12
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(In millions)
<S> <C> <C>
Selected Financial Data by Business Segment
Customer advances and amounts in excess of
------------------------------------------
costs incurred/(b)/
-------------------
Systems Integration $ 951 $ 1,039
Space Systems 2,245 2,553
Aeronautical Systems 1,753 899
Technology Services 21 31
Corporate and Other 175 133
------- -------
$ 5,145 $ 4,655
======= =======
</TABLE>
(a) Intercompany transactions between segments are eliminated in consolidation,
and excluded from the net sales and operating profit amounts presented
above.
(b) At June 30, 2000, customer advances and amounts in excess of costs incurred
in the Space Systems segment included approximately $1.2 billion for launch
vehicles and related launch services (approximately $683 million of which
relates to launch vehicles and services from Russian manufacturers) and
approximately $730 million for the manufacture of commercial satellites
(approximately $235 million of which could be refundable with interest if
the related contracts are canceled by the respective customers). Customer
advances and amounts in excess of costs incurred in the Aeronautical Systems
segment included approximately $1.0 billion related to the F-16 fighter
aircraft program (approximately $900 million of which relates to a contract
with the United Arab Emirates).
NOTE 7 -- OTHER
On June 30, 2000, the Corporation was notified that Globalstar
Telecommunications, L.P. (Globalstar) failed to repay borrowings of $250 million
under a revolving credit agreement on which Lockheed Martin was a partial
guarantor. In connection with its contractual obligation under the guarantee, on
June 30, 2000, the Corporation paid $207 million to the lending institutions
from which Globalstar borrowed, which included applicable interest and fees. On
that same date, Loral Space & Communications, Ltd. (Loral Space), under a
separate indemnification agreement between the Corporation and Loral Space, paid
Lockheed Martin $57 million. The Corporation is entitled to repayment by
Globalstar of the remaining $150 million paid under the guarantee, but has not
as yet reached agreement with respect to the form and timing of such repayment.
In light of the uncertainty of the situation regarding the amounts due from
Globalstar, the Corporation recorded a nonrecurring and unusual charge in the
second quarter of 2000, net of state income tax benefits, of approximately $141
million. The charge reduced net earnings by $91 million, or $.23 per diluted
share.
In the fourth quarter of 1998, the Corporation recorded a nonrecurring and
unusual pretax charge, net of state income tax benefits, of $233 million related
to actions surrounding the decision to fund a timely non-bankruptcy shutdown of
the business of CalComp Technology, Inc. (CalComp), a majority-owned subsidiary.
Approximately 10 percent of the original charge was reversed in 1999. As of June
30, 2000, CalComp had, among other actions, consummated
13
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
sales of substantially all of its assets, terminated substantially all of its
work force, and initiated the corporate dissolution process under the applicable
state statutes and, for its foreign subsidiaries, foreign government statutes.
Based on management's assessment of the remaining actions to be taken to
complete initiatives contemplated in the Corporation's original plans and
estimates, the Corporation reversed approximately $33 million of the original
pretax charge in the second quarter of 2000, which increased net earnings by $21
million, or $.05 per diluted share. While uncertainty remains concerning the
resolution of matters in dispute or litigation, management believes that the
remaining amount recorded at June 30, 2000, which represents approximately 10
percent of the original charge, is adequate to provide for resolution of these
matters and to complete the dissolution process.
Effective March 31, 2000, subsequent to receiving applicable regulatory
approval, the Corporation exercised its right to convert its 45.9 million shares
of Loral Space Series A Preferred Stock (the Preferred Stock) into an equal
number of shares of Loral Space common stock. The Corporation's ownership of
45.9 million shares of Loral Space common stock represents an approximate 15
percent interest in Loral Space, or 13 percent on a diluted basis. Subsequent to
conversion, the Corporation began accounting for its investment as an
available-for-sale investment. Accordingly, as of June 30, 2000, the investment
in Loral Space was adjusted to reflect its current market value, and an
unrealized loss, net of income taxes, of approximately $33 million was included
in stockholders' equity as a component of accumulated other comprehensive income
(loss).
In June 1999, the Corporation recorded negative adjustments in the
Aeronautical Systems segment totaling approximately $210 million which resulted
from changes in estimates on the C-130J airlift aircraft program due to cost
growth and a reduction in production rates, based on a current evaluation of the
program's performance. These adjustments, net of state income tax benefits,
negatively impacted earnings (loss) before income taxes and cumulative effect of
change in accounting by $197 million, and increased the net loss by $128
million, or $.33 per diluted share. Also in June 1999, the Corporation recorded
negative adjustments in the Space Systems segment totaling approximately $90
million related to the Titan IV program which included the effects of changes in
estimates for award and incentive fees resulting from the Titan IV launch
failure on April 30, 1999, as well as a more conservative assessment of future
program performance. These adjustments, net of state income tax benefits,
negatively impacted earnings (loss) before income taxes and cumulative effect of
change in accounting by $84 million, and increased the net loss by $54 million,
or $.14 per diluted share.
In February 1999, the Corporation sold 4.5 million of its shares in L-3
Communications Holdings, Inc. (L-3) as part of a secondary public offering by
L-3. This transaction resulted in a reduction in the Corporation's ownership to
approximately seven percent and the recognition of a pretax gain of $114 million
which is reflected in other income and expenses. The gain increased net earnings
by $74 million, or $.19 per diluted share. After this transaction was
consummated, the Corporation began accounting for its remaining investment in
L-3 as an available-for-sale investment. Accordingly, as of June 30, 1999, the
investment in L-3 was adjusted to reflect its current market value, and an
unrealized gain, net of income taxes, of approximately $45 million was included
in stockholders' equity as a component of accumulated other comprehensive
income. In October 1999, the Corporation sold its remaining interest in
14
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
L-3 and reclassified to net earnings $30 million of unrealized gains previously
recorded as comprehensive income.
The components of comprehensive income for the three months and six months
ended June 30, 2000 and 1999 consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
Net earnings (loss) $ 42 $ (41) $ 96 $ (128)
Other comprehensive income:
Net foreign currency translation adjustments -- (11) -- (4)
Net unrealized (loss) gain (85) 3 (35) 45
--------- -------- --------- ---------
(85) (8) (35) 41
--------- ---------- --------- ---------
Comprehensive (loss) income $ (43) $ (49) $ 61 $ (87)
========= ========= ======== =========
</TABLE>
The Corporation's total interest payments were $457 million and $383
million for the six months ended June 30, 2000 and 1999, respectively.
The Corporation's federal and foreign income tax payments, net of refunds
received, were $10 million and $227 million for the six months ended June 30,
2000 and 1999, respectively.
New accounting pronouncements adopted -- Effective January 1, 1999, the
Corporation adopted the American Institute of Certified Public Accountants'
Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP requires that, at the effective date of adoption, costs of
start-up activities previously capitalized be expensed and reported as a
cumulative effect of a change in accounting principle, and further requires that
such costs subsequent to adoption be expensed as incurred. The adoption of SOP
No. 98-5 resulted in the recognition of a cumulative effect adjustment which
negatively impacted net earnings (loss) for the six months ended June 30, 1999
by $355 million, or $.93 per diluted share. The cumulative effect adjustment was
recorded net of income tax benefits of $227 million.
New accounting pronouncement to be adopted -- In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires the recognition of all derivatives as either assets or
liabilities in the Consolidated Balance Sheet, and the periodic measurement of
those instruments at fair value. The classification of gains and losses
resulting from changes in the fair values of derivatives is dependent on the
intended use of the derivative and its resulting designation. At adoption,
existing hedging relationships must be designated anew and documented pursuant
to the provisions of the Statement. The Corporation does not intend to adopt
SFAS No. 133, as amended, prior to the required date of January 1, 2001. The
Corporation currently expects that the adoption of SFAS No. 133 will not have a
material impact on its consolidated results of operations and financial position
at the date of
15
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
adoption. However, adoption of the Statement could result in a greater degree of
income statement volatility than current accounting practice in subsequent
periods.
NOTE 8 -- SUBSEQUENT EVENT
On July 13, 2000, the Corporation made the decision to sell its aerospace
electronics systems (AES) businesses to BAE SYSTEMS North America (BAE SYSTEMS),
and announced that it had reached a definitive agreement to sell these
businesses to BAE SYSTEMS for $1.67 billion in cash. Consummation of the
transaction is conditioned upon regulatory review under the HSR Act and other
antitrust laws, and by the Committee on Foreign Investment in the U.S. under the
Exon Florio Amendment to the Defense Procurement Act of 1950.
As a result of its decision to sell the AES businesses to BAE SYSTEMS, the
Corporation will classify the assets of these businesses as "held for disposal"
under the provisions of SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and Assets to be Disposed Of." The sum of the carrying value of the
net assets of the AES businesses and estimated transaction costs exceeds the
sales price per the agreement with BAE SYSTEMS. Therefore, the Corporation is
expected to record an impairment loss in the third quarter of 2000 to adjust the
book values of the assets to be disposed of to their fair values in accordance
with SFAS No. 121. Based on preliminary calculations and analyses, the
Corporation estimates that the resulting pretax loss, net of state income tax
benefits, will be approximately $750 million, or approximately $1 billion on an
after-tax basis. These estimates are subject to change based on future analyses
and closing of the transaction. If consummated, this transaction is expected to
close in the fourth quarter of 2000.
16
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 2000
STRATEGIC AND ORGANIZATIONAL REVIEW
In September 1999, Lockheed Martin announced the results to date of its
strategic and organizational review that began in June 1999. As a result of this
review, the Corporation has implemented a new organizational structure (as more
fully described in "Note 6 -- Information on Business Segments" of the Notes to
Unaudited Condensed Consolidated Financial Statements), and announced plans to
evaluate the repositioning of certain businesses to maximize their value and
growth potential and the divestiture of certain non-core business units.
The Corporation is continuing to evaluate alternatives relative to
maximizing the value of two business units that serve the commercial information
technology markets, including Lockheed Martin's internal information technology
needs. These units have been identified by management as having high growth
potential, but are distinct from the Corporation's core business segments. The
Corporation may seek to maximize the value of these business units through
strategic partnerships or joint ventures, or by accessing public equity markets,
although the outcome of those efforts cannot be predicted.
In connection with its decision to evaluate the divestiture of certain
non-core business units, the Corporation made the decision on July 13, 2000 to
sell its aerospace electronics systems (AES) businesses to BAE SYSTEMS North
America (BAE SYSTEMS), and announced that it had reached a definitive agreement
to sell these businesses to BAE SYSTEMS for $1.67 billion in cash. Consummation
of the transaction is conditioned upon regulatory review under the
Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) and other antitrust laws,
and by the Committee on Foreign Investment in the U.S. under the Exon Florio
Amendment to the Defense Procurement Act of 1950. Net sales for the first six
months of 2000 related to the AES businesses totaled approximately $340 million
excluding intercompany sales. As more fully discussed in "Note 8 - Subsequent
Event" of the Notes to Unaudited Condensed Consolidated Financial Statements,
the Corporation is expected to record an impairment loss in the third quarter of
2000 to adjust the book values of the assets of the AES businesses to their fair
values. Based on preliminary calculations and analyses, the Corporation
currently estimates that the resulting pretax loss, net of state income tax
benefits, will be approximately $750 million, or approximately $1 billion on an
after-tax basis. If consummated, this transaction is expected to close in the
fourth quarter of 2000 and generate net cash proceeds of $1.2 billion to $1.3
billion after related transaction costs and federal and state tax payments.
These estimates are subject to change based on future analyses and closing of
the transaction.
In addition, the Corporation announced in April 2000 that it had reached a
definitive agreement to sell Lockheed Martin Control Systems (Control Systems)
to BAE SYSTEMS for $510 million in cash. Consummation of this transaction is
also conditioned upon regulatory review under the HSR Act and other antitrust
laws, and by the Committee on Foreign Investment in the U.S. under the Exon
Florio Amendment to the Defense Procurement Act of 1950. On June 9, 2000, the
Antitrust Division of the Department of Justice (DOJ) issued a request to
Lockheed Martin and BAE SYSTEMS for additional information and documents. This
request extends the waiting period during which the proposed transaction may not
be consummated for 20 days from the date of receipt by the DOJ of the requested
materials. Net sales for the first six months of 2000 related to Control Systems
totaled approximately $140 million excluding intercompany sales. If consummated,
this transaction is expected to close in the second half of 2000. The
Corporation currently estimates
17
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
that this transaction will result in a pretax gain, net of state income taxes,
of approximately $300 million, or approximately $175 million on an after tax
basis, and generate net cash proceeds of $325 million to $375 million after
related transaction costs and federal and state tax payments. These estimates
are subject to change based on future analyses and the closing of the
transaction.
The Corporation is continuing its evaluation of the divestiture, subject to
appropriate valuation, negotiation and approval, of certain other business units
in the environmental management and state and local government services lines of
business. On a combined basis, net sales for the first six months of 2000
related to such business units being evaluated for divestiture totaled
approximately $300 million. Based on preliminary data, assuming that the
remaining potential divestiture transactions are approved by the Corporation's
Board of Directors and ultimately consummated in the future, management
estimates that the potential one-time effects, if combined, could result in a
net gain on disposition. Financial effects that may result, if any, would be
recorded when the transactions are consummated or when losses can be estimated.
Management cannot predict the timing of these potential divestitures, the amount
of proceeds that may ultimately be realized or whether any or all of the
potential transactions will take place.
On an ongoing basis, the Corporation will continue to explore the sale of
various investment holdings and surplus real estate, review its businesses to
identify ways to improve organizational effectiveness and performance, and
clarify and focus on its core business strategy.
BUSINESS COMBINATION WITH COMSAT CORPORATION
In September 1998, the Corporation and COMSAT Corporation (COMSAT)
announced that they had entered into an Agreement and Plan of Merger (the Merger
Agreement) to combine the companies in a two-phase transaction (the Merger).
Subsequent to obtaining all regulatory approvals necessary for the first phase
of the transaction and approval of the Merger by the stockholders of COMSAT, the
Corporation completed a cash tender offer (the Tender Offer) on September 18,
1999. The total value of this phase of the transaction was $1.2 billion, and
such amount was included in investments in equity securities in the Unaudited
Condensed Consolidated Balance Sheet at June 30, 2000. The Corporation accounted
for its 49 percent investment in COMSAT under the equity method of accounting.
On August 3, 2000, subsequent to the passage of federal legislation to
remove existing restrictions on ownership of COMSAT voting stock and obtaining
the additional required regulatory approvals, the second phase of the
transaction was accomplished pursuant to the terms of the Merger Agreement,
which resulted in consummation of the Merger. On that date, each share of COMSAT
common stock outstanding immediately prior to the effective time of the Merger
(other than shares held by the Corporation) was converted into the right to
receive one share of Lockheed Martin common stock. The total amount recorded
related to this phase of the transaction will be approximately $1.3 billion
based on the Corporation's issuance of approximately 27.5 million shares of its
common stock (in exchange for each share of COMSAT's common stock, other than
shares held by the Corporation) at a price of $49 per share. This price per
share represents the average of the price of Lockheed Martin's common stock a
few days before and after the announcement of the transaction in September 1998.
Based on the above, the total purchase price for COMSAT, including transaction
costs and amounts related to Lockheed Martin's assumption of COMSAT stock
options, was approximately $2.6 billion, net of cash balances acquired.
18
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
The COMSAT transaction will be accounted for using the purchase method of
accounting. Preliminary purchase accounting adjustments will be recorded in the
third quarter of 2000 to allocate the purchase price to assets acquired and
liabilities assumed based on their fair values. Such adjustments are expected to
include certain amounts totaling approximately $2.3 billion, composed of
adjustments to record equity investees acquired at their fair values and cost
in excess of net assets acquired, which is expected to be amortized over a
composite estimated life of 30 years. These preliminary adjustments and
estimates are subject to change as a result of the completion of future
analyses.
The Corporation will include the operations of COMSAT with the results of
operations of Lockheed Martin Global Telecommunications, Inc. (LMGT), a wholly
owned subsidiary of the Corporation, from August 1, 2000. Given the substantial
investment necessary for the growth of the global telecommunications services
business, support from strategic partners for LMGT may be sought and public
equity markets may be accessed to raise capital, although the Corporation cannot
predict the outcome of these efforts.
RESULTS OF OPERATIONS
Consolidated Results of Operations
The Corporation's operating cycle is long-term and involves various types
of production contracts and varying production delivery schedules. Accordingly,
results of a particular quarter, or quarter-to-quarter comparisons of recorded
sales and profits, may not be indicative of future operating results. The
following comparative analysis should be viewed in this context.
Consolidated net sales for both of the second quarters of 2000 and 1999
were $6.2 billion. Consolidated net sales for the six months ended June 30, 2000
were $11.8 billion, a five percent decrease from the $12.4 billion reported for
the same period in 1999. Quarter-to-quarter net sales decreases in the
Aeronautical Systems and Systems Integration segments were offset by increases
in the remaining segments. For the six months ended June 30, 2000, as compared
to the respective 1999 period, net sales increases in the Technology Services
and Corporate and Other segments were more than offset by decreases in the
remaining segments. The Corporation's operating profit (earnings before interest
and taxes) for the second quarter of 2000 was $325 million versus $134 million
for the comparable 1999 period. The Corporation's operating profit for the six
months ended June 30, 2000 was $651 million, a 13 percent decrease from the $750
million reported for the comparable 1999 period. Increases in operating profit
in the second quarter of 2000 as compared to the second quarter of 1999 in the
Aeronautical Systems and Space Systems segments more than offset the decrease in
the Corporate and Other segment, while the other segments remained relatively
constant. For the six months ended June 30, 2000, an operating profit increase
in the Aeronautical Systems segment was more than offset by the decrease in the
Corporate and Other segment, while the other segments remained relatively
constant. Operating profit for the comparative quarter and year-to-date periods
in the Aeronautical Systems and Space Systems segments were favorably impacted
by the absence in 2000 of negative adjustments recorded during the second
quarter of 1999 on the C-130J airlift aircraft and Titan IV launch vehicle
programs, respectively. The reported amounts above also include the financial
impacts of various nonrecurring and unusual items, the details of which are
described below. Excluding the effects of these nonrecurring and unusual items
for each year,
19
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
operating profit for second quarter of 2000 would have been $433 million, an
increase from the $154 million reported for the second quarter 1999. Similarly,
excluding the effects of these nonrecurring and unusual items, operating profit
for the six months ended June 30, 2000 would have been $749 million, a 14
percent increase over the $656 million reported in the comparable 1999 period.
For a more detailed discussion of the operating results of the business
segments, see "Discussion of Business Segments" below.
As discussed above, operating profit in the second quarter of 2000 included
the effects of nonrecurring and unusual items which on a combined basis, net of
state income taxes, decreased operating profit by $108 million. These items, as
more fully described in "Note 7 -- Other" of the Notes to Unaudited Condensed
Consolidated Financial Statements, included 1) a charge of $141 million
associated with amounts due from Globalstar Telecommunications, L.P.
(Globalstar) in connection with a net $150 million payment made by the
Corporation related to its guarantee of Globalstar's debt, and 2) a favorable
adjustment of $33 million associated with the reversal of a portion of the
previously recorded charge related to the shutdown of CalComp Technology Inc.'s
(CalComp) operations. Operating profit in the second quarter of 1999 included
the effect of a nonrecurring and unusual item related to portfolio shaping
activities which, net of state income taxes, decreased operating profit by $20
million. Operating profit for the six months ended June 30, 2000 included the
effects of nonrecurring and unusual items which on a combined basis, net of
state income taxes, decreased operating profit by $98 million. In addition to
the previously mentioned items related to Globalstar and CalComp, these items
included a net gain of $16 million associated with the sale of surplus real
estate and losses of $6 million associated with other portfolio shaping actions.
Operating profit for the six months ended June 30, 1999 included the effects of
nonrecurring and unusual items which on a combined basis, net of state income
taxes, increased operating profit by $94 million. This net gain is comprised of
an increase in operating profit, net of state income taxes, of $114 million
resulting from the sale of 4.5 million shares of stock in L-3 Communications
Holdings, Inc. (L-3), partially offset by the previously mentioned portfolio
shaping actions recorded in the second quarter of 1999.
The Corporation's reported net earnings for the quarter and six months
ended June 30, 2000 were $42 million and $96 million, respectively, as compared
to net losses of $41 million and $128 million reported in the comparable 1999
periods. The after-tax effects of the second quarter 2000 nonrecurring and
unusual items discussed in the preceding paragraph included $91 million related
to the charge for amounts due from Globalstar and $21 million related to the
favorable adjustment associated with the reversal of a portion of the previously
recorded CalComp charge. On a combined basis, these nonrecurring and unusual
items decreased second quarter 2000 net earnings by $70 million, or $.18 per
diluted share. The after-tax effects of the second quarter of 1999 nonrecurring
and unusual item associated with other portfolio shaping actions discussed in
the preceding paragraph reduced net earnings by $12 million, or $.03 per diluted
share. In addition to the second quarter 2000 items discussed above, the
after-tax effects of the nonrecurring and unusual items for the six months ended
June 30, 2000 also included a net gain of $10 million associated with the sale
of surplus real estate and net loss of $4 million associated with other
portfolio shaping activities. On a combined basis, these nonrecurring and
unusual items decreased net earnings for the six months ended June 30, 2000 by
$64 million, or $.16 per diluted share. In addition to the second quarter 1999
item discussed above, the after-tax effects of the nonrecurring and unusual
items for the six months ended June 30, 1999, included $74 million
20
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
related to the gain on the sale of the Corporation's remaining interest in L-3.
Nonrecurring and unusual items for 1999 also included the effects of the
Corporation's adoption of Statement of Position No. 98-5, "Reporting on the
Costs of Start-Up Activities," effective January 1, 1999, which resulted in the
recognition of a cumulative effect adjustment that reduced net earnings by $355
million. On a combined basis, these nonrecurring and unusual items decreased net
earnings for the six months ended June 30, 1999 by $293 million, or $.77 per
diluted share.
The Corporation reported diluted earnings (loss) per share of $.11 and $.25
for the quarter and six months ended June 30, 2000, respectively, as compared to
$(.11) and $(.34) for the comparable 1999 periods. If the nonrecurring and
unusual items described above were excluded from the calculation of earnings per
share, diluted earnings per share for the quarter and six months ended June 30,
2000 would have been $.29 and $.41 respectively, and diluted earnings (loss) per
share for the quarter and six months ended June 30, 1999 would have been $(.08)
and $.43, respectively.
The Corporation's backlog of undelivered orders was approximately $57.1
billion at June 30, 2000 as compared to $45.9 billion reported at December 31,
1999. The Corporation received orders for approximately $22.9 billion in new and
follow-on business during the first six months of 2000 that were partially
offset by sales during the period. Significant new orders received during the
2000 period principally related to $8.9 billion in F-16 fighter aircraft orders
for the United Arab Emirates (UAE), Israel and Greece. Additionally, the
Corporation received a total of approximately $4.0 billion in orders for the
following: the THAAD Engineering, Manufacturing, and Development (EMD) contract;
Integrated Weapons Systems for the Royal Norwegian Navy's New Frigate Program;
and two U.S. C-130J airlift aircraft and two Italian C-130J airlift aircraft.
Discussion of Business Segments
As discussed previously, the Corporation has implemented a new
organizational structure, effective October 1, 1999, that realigns its core
lines of business into four principal business segments. The four principal
business segments are Systems Integration, Space Systems, Aeronautical Systems,
and Technology Services. All other activities of the Corporation fall within the
Corporate and Other segment. In 2000, the Corporation reassigned the Management
& Data Systems business unit and the space applications systems line of business
from the Systems Integration segment to the Space Systems segment. The following
discussion of the results of operations of the Corporation's business segments
reflects these organizational changes based on information in "Note 6 --
Information on Business Segments" of the Notes to Unaudited Condensed
Consolidated Financial Statements included in this Form 10-Q, including the
financial data in the tables under the headings "Net sales" and "Operating
profit (loss)."
In addition, the following table displays the pretax impact of the
nonrecurring and unusual items discussed earlier and the related effects on each
segment's operating profit (loss) for each of the periods presented:
21
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
Nonrecurring and unusual items - profit (loss):
Consolidated effects
Charge related to Globalstar guarantee $ (141) $ -- $ (141) $ --
Partial reversal of CalComp reserve 33 -- 33 --
Sales of surplus real estate -- -- 16 --
Divestitures and other portfolio shaping items -- (20) (6) (20)
Sale of remaining interest in L-3 -- -- -- 114
------- ------- ------- ------
$ (108) $ (20) $ (98) $ 94
======= ====== ====== ======
Segment effects
Systems Integration $ -- $ -- $ -- $ --
Space Systems -- (20) 17 (20)
Aeronautical Systems -- -- -- --
Technology Services -- -- (6) --
Corporate and Other (108) -- (109) 114
-------- ------- -------- ------
$ (108) $ (20) $ (98) $ 94
======== ======= ======== ======
</TABLE>
In an effort to make the following discussion of significant operating
results of each business segment more understandable, the effects of these
nonrecurring and unusual items discussed earlier have been excluded. The Space
Systems and Aeronautical Systems segments generally include programs that are
substantially larger in terms of sales and operating results than those included
in the other segments. Accordingly, due to the significant number of relatively
smaller programs in the Systems Integration and Technology Services segments,
the impacts of performance by individual programs typically are not as material
to these segments' overall results of operations.
Systems Integration
Net sales of the Systems Integration segment decreased by one percent and
four percent for the quarter and six months ended June 30, 2000, respectively,
from the comparable 1999 periods. For the quarter, net sales decreased by
approximately $160 million related to declines in volume on aerospace
electronics systems programs and the segment's Command, Control, Communications,
Computers, and Intelligence (C4I) line of business. These decreases were
partially offset by increases in volume of approximately $100 million in naval
electronics and surveillance systems and by approximately $40 million in
missiles and fire control activities over the comparable 1999 period, with the
remainder of the variance due to various other systems integration activities.
For the first six months of 2000 as compared to 1999, net sales decreased by
approximately $235 million due to volume declines in aerospace electronics
systems program activities and the segment's C4I line of business. In addition,
net sales decreased approximately $85 million related to volume declines in
electronic platform integration programs, which include distribution
technologies (formerly known as postal systems). These decreases were partially
offset by an approximate $90 million increase in missiles and fire control
activities and an approximate $80 million increase in naval electronics and
surveillance systems volume.
22
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
Operating profit for the segment decreased by one percent for both the
quarter and six months ended June 30, 2000, as compared to the respective 1999
periods. The relationship of quarter-to-quarter operating profit is due to the
same factors that impacted quarter-to-quarter net sales as discussed above. For
the first six months of 2000 compared to the respective 1999 period, operating
profit decreased approximately $30 million related to aerospace electronics
systems program activities, the C4I line of business and electronic platform
integration programs, including distribution technologies, as a result of the
volume declines discussed in the preceding paragraph. The operating profit
impact of volume declines on certain tactical missile programs contributed
another approximate $15 million to the year-to-year decrease. These decreases
were partially offset by an approximate $15 million increase in operating profit
on naval electronics and surveillance systems activities related to the volume
increases during this period as discussed above. Further mitigating the
year-to-year decrease was the absence in 2000 of $35 million in charges related
to the Theater High Altitude Area Defense (THAAD) missile program recorded in
the first quarter of 1999. These charges included a performance penalty for the
failure to intercept the target during a test firing as well as a provision for
further potential exposure related to this program. The remainder of the
year-to-year fluctuation is due to the operating profit impact of volume
declines on certain other systems integration programs.
Space Systems
Net sales of the Space Systems segment increased by three percent for the
second quarter 2000 as compared to the second quarter 1999 and decreased five
percent for the six months ended June 30, 2000 from the comparable 1999 period.
Net sales increased by approximately $120 million due to higher Atlas launch
vehicle volume in the second quarter of 2000 as compared to the respective 1999
period. Quarter-to-quarter net sales also increased due to the absence in 2000
of approximately $90 million in negative adjustments recorded during the second
quarter of 1999 related to the Titan IV program. These adjustments included the
effects of changes in estimates for award and incentive fees resulting from the
Titan IV launch failure on April 30, 1999, as well as a more conservative
assessment of future program performance. These increases in quarter-to-quarter
net sales were partially offset by an approximate $95 million decrease in volume
related to Titan and other government launch vehicle activities, partially
offset an approximate $50 million adjustment recorded on the Titan IV program as
a result of contract modifications and improved performance on the program as
discussed in more detail below. The remainder of the variance in net sales for
the second quarter of 2000 related primarily to declines in volume of
approximately $70 million on military satellites and classified programs as well
as approximately $40 million on commercial satellites.
Net sales for the six months ended June 30, 2000 decreased from the
comparable 1999 period due to volume declines of approximately $215 million in
military satellites and classified programs, approximately $170 million in Titan
and other government launch vehicle activities, excluding the Titan program
adjustments discussed above, and approximately $135 million in Proton launch
vehicle activities. Lower volume on ground reconnaissance systems activities
contributed another approximately $55 million to the year-to-year decline. These
decreases were partially offset by increased volume of approximately $180
million on Atlas launch vehicles, the aforementioned adjustments related to the
Titan IV program, and approximately $90 million related to increased commercial
satellite activities.
23
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
Operating profit for the segment increased by approximately $62 million in
the second quarter of 2000 and decreased by approximately $34 million for the
six months ended June 30, 2000 from the comparable 1999 periods. Consistent with
the change in net sales, the absence in 2000 of the approximately $90 million in
negative adjustments recorded during the second quarter of 1999 on the Titan IV
program had a corresponding and equivalent positive impact on the increase in
quarter-to-quarter operating profit. In addition, operating profit during the
second quarter of 2000 was favorably impacted by the approximate $50 million
adjustment recorded on the Titan IV program as a result of contract
modifications and improved performance on the program. The contract
modifications, which resulted primarily from the U.S. Government's Broad Area
Review team recommendations, provide for a more balanced sharing of risk in the
future. The improved performance on the program resulted from the successful
implementation of corrective actions and initiatives taken since the previously
mentioned 1999 Titan IV launch failure. The absence in 2000 of an approximate
$20 million assessment on the performance on a military satellite program
recorded in 1999 accounted for an additional increase in quarter-to-quarter net
profit. Partially offsetting these increases was an approximate $50 million
decrease in operating profit related to commercial satellite performance and
ground reconnaissance systems activities. The operating profit impact of the
reduced volume of Proton, Titan, and other government launch vehicle activities
discussed above also offset the quarter-to-quarter increase in operating profit
by approximately $45 million. The remainder of the quarter-to-quarter variance
is primarily attributable to the operating profit impact of the increase in
Atlas sales volume discussed in the preceding paragraph, partially offset by the
expensing of higher levels of start-up costs associated with the EELV program
and decreases in volume on certain other space systems programs.
For the six months ended June 30, 2000 as compared to the same 1999 period,
operating profit decreased approximately $55 million due to performance on
commercial satellites, and by approximately $50 million associated with the
decline in volume on Proton, Titan, and government launch vehicle activities
discussed in the preceding paragraph. Additionally, the operating profit impact
of the year-to-year declines in volume on military and classified satellites as
well as ground reconnaissance systems activities accounted for approximately $35
million of the decrease. Increases in operating profit on Atlas launch vehicle
activities related to the higher year-to-year volume discussed above were offset
by the expensing of start-up costs associated with the EELV program and by an
approximate $35 million charge due to market and pricing pressures related to
the Atlas program recorded during the first quarter of 2000. The accumulated
total of the previously mentioned decreases in year-to-year operating profit
more than offset the favorable impact of the Titan IV adjustments discussed
above.
Aeronautical Systems
Net sales of the Aeronautical Systems segment decreased by 7 percent and 17
percent for the quarter and six months ended June 30, 2000, respectively, from
the comparable 1999 periods. Volume declines in F-16 fighter aircraft programs,
primarily due to a 60 percent reduction in deliveries, accounted for
approximately $130 million of the decrease in quarter-to-quarter net sales. This
decrease was partially offset by an approximate $30 million increase in net
sales related to an increase in C-130J airlift aircraft deliveries during the
second quarter of 2000 over
24
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
the comparable 1999 period. Increases in the volume of aircraft modification
programs accounted for the remainder of the quarter-to-quarter variance. The
decrease in net sales for the six months ended June 30, 2000 from the comparable
1999 period is attributable to lower volume on tactical aircraft and air
mobility programs, primarily related to an approximate 55 percent reduction in
deliveries of F-16 fighter aircraft.
Operating profit for the segment increased by approximately $207 million
and approximately $122 million for the quarter and six months ended June 30,
2000, respectively, from the comparable 1999 periods. The quarter-to-quarter
increase in operating profit is due to the absence in 2000 of an approximate
$210 million negative adjustment recorded during the second quarter of 1999 that
resulted from changes in estimates on the C-130J program due to cost growth and
a reduction in production rates. This adjustment included the reversal of
previously recorded profit on the program. This increase in quarter-to-quarter
operating profit was partially offset by lower operating profit associated with
the decline in aircraft deliveries discussed in the preceding paragraph.
Consistent with the quarter-to-quarter increase, the aforementioned $210 million
charge related to the C-130J program, net of profit recorded on the program in
the first quarter of 1999, accounted for the majority of the increase in
operating profit for the six months ended June 30, 2000 over the respective 1999
period. The Corporation decided in the fourth quarter 1999 not to record profit
on C-130J airlift aircraft deliveries, as a result of changes in estimates due
to cost growth and reduced production rates, until further favorable progress
occurs in terms of orders and cost. The increase resulting from the absence in
2000 of the charge on the C-130J program was partially offset by an approximate
$50 million reduction in year-to-year operating profit resulting from the
decrease in aircraft programs discussed in the preceding paragraph.
Technology Services
Net sales of the Technology Services segment increased by 12 percent and 8
percent for the quarter and six months ended June 30, 2000, respectively, over
the comparable 1999 periods. Approximately $60 million of the increase in second
quarter 2000 net sales resulted from increased volume on various federal
technology services programs, primarily the Consolidated Space Operations
Contract. The remainder of the quarter-to-quarter variance resulted from
increased net sales in the segment's aircraft maintenance and logistics lines of
business, which were offset by declines in volume on certain energy related
contracts due to program maturity and the effects of the fourth quarter of 1999
divestiture of Lockheed Martin Hanford Company. The increase in net sales for
the six months ended June 30, 2000 was primarily attributable to an approximate
$90 million increase over the comparable 1999 period in volume on various
federal technology services programs, primarily the Consolidated Space
Operations Contract. The remainder of the year-to-year variances was comprised
of an approximate $35 million decline in volume on certain energy related
contracts due to program maturity partially offset by an approximate $20 million
increase in the segment's aircraft maintenance and logistics lines of business.
Operating profit for the segment remained consistent for both the quarter
and six months ended June 30, 2000 as compared to the respective 1999 periods.
The quarter-to-quarter and year-to-year operating profit impact of the increased
volume on various federal technology
25
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
services programs and the segment's aircraft maintenance and logistics lines of
business discussed above were entirely offset by lower profit on certain energy-
related contracts.
Corporate and Other
Net sales of the Corporate and Other segment increased by 9 percent and 34
percent for the quarter and six months ended June 30, 2000, respectively, over
the comparable 1999 periods. Quarter-to-quarter net sales increased by
approximately $20 million as the result of higher volume on state and municipal
services programs and by approximately $15 million due to the operations of
LMGT. These quarter-to-quarter increases were partially offset by a second
quarter 2000 decline in volume from the comparable 1999 period on certain
international services activities. Approximately 70 percent of the increase in
year-to-year net sales was attributable to the operations of LMGT and was
primarily associated with the recognition of revenue on a Proton launch vehicle,
which successfully launched the ACeS 1 satellite in the first quarter of 2000.
Increased volume related to state and municipal services contributed another
approximately $40 million to the increase in net sales. Year-to-year increases
in information technology outsourcing programs were offset by the absence in
2000 of sales attributable to the Corporation's commercial graphics company,
Real 3D, which was divested in the fourth quarter of 1999.
Operating profit for the segment increased by approximately $13 million and
approximately $8 million for the quarter and six months ended June 30, 2000 over
the respective 1999 periods. Quarter-to-quarter operating profit increased
approximately $25 million due to improved performance on state and municipal
services programs, the absence in 2000 of a second quarter 1999 negative
adjustment related to performance on an information outsourcing contract, as
well as the absence in 2000 of losses associated with the segment's Real 3D
operating unit. These increases were partially offset by the operating profit
impact of the volume declines on certain international services activities
discussed in the preceding paragraph. The majority of the increase in operating
profit for the six months ended June 30, 2000 over the comparable 1999 period is
due to the absence in 2000 of approximately $30 million in operating losses
associated with the segment's Real 3D operating unit. This increase was
partially offset by negative adjustments recorded in the first quarter of 2000
related to performance on an information technology-outsourcing contract as well
as the absence in 2000 of a favorable adjustment recorded by the segment's
Communications Industry Services line of business in the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 2000, $1.6 billion of cash was provided by
operating activities, compared to $176 million used for operating activities
during the first six months of 1999. This fluctuation was primarily attributable
to an advance received in the second quarter of 2000 from the United Arab
Emirates (UAE) for the purchase of 80 F-16 fighter aircraft which increased cash
from operating activities by approximately $900 million, and reimbursements of
approximately $100 million in connection with the remediation agreement related
to the Burbank and Glendale properties discussed in "Note 5-- Contingencies" of
the Notes to Unaudited Condensed Consolidated Financial Statements. These
increases were partially offset by the $150 million net payment related to the
Corporation's guarantee of
26
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
Globalstar's indebtedness as described more fully in "Note 7 -- Other" of the
Notes to Unaudited Condensed Consolidated Financial Statements. The remainder of
the variance was primarily due to accelerated payments received in the first six
months of 2000 on certain aircraft and space systems programs as a result of
exceeding performance expectations. Net cash used for investing activities
during the six months of 2000 was $228 million as compared to $91 million used
during the comparable 1999 period. The 2000 amount included approximately $185
million in cash used for additions to property, plant and equipment, and
approximately $43 million of net cash used for additional investments in
Astrolink International, LLC, a joint venture in which Lockheed Martin holds an
approximate 31 percent interest, and other acquisition and divestiture
activities. The 1999 amount included the receipt of $182 million of proceeds
from the sale of L-3 common stock mentioned previously, which was more than
offset by approximately $276 million used for additions to property, plant and
equipment. Net cash used for financing activities in the first six months of
2000 was $576 million as compared to $18 million used during the comparable 1999
period. The variance between periods was primarily due to an approximate $490
million decrease in the Corporation's total debt position during the first six
months of 2000 versus an increase in total debt of $138 million, net of acquired
debt, during the first six months of 1999. This increase in cash used for
financing activities was partially offset by an approximate $83 million decrease
in dividend payments during the first six month of 2000 versus the respective
1999 period.
As discussed above, total debt, including short-term borrowings, decreased
by approximately $490 million during the first six months of 2000 from
approximately $12 billion at December 31, 1999. This decrease was primarily
attributable to net repayments of short-term debt of approximately $467 million.
The Corporation's long-term debt is primarily in the form of publicly issued,
fixed-rate notes and debentures. At the end of the first six months of 2000, the
Corporation held cash and cash equivalents of $1.2 billion, approximately $900
million of which represents the cash advance received on the UAE F-16 fighter
aircraft contract. The majority of this advance will be used for subcontractor
payments and other disbursements related to the contract. The remainder of the
cash and cash equivalents held by the Corporation as of June 30, 2000 is
expected to be used to pay down debt in future periods. Total stockholders'
equity was approximately $6.4 billion at June 30, 2000, an increase of
approximately $78 million from the December 31, 1999 balance. This increase
resulted from 2000 net earnings of $96 million, employee stock option and ESOP
activities of $105 million, partially offset by the payment of dividends of $88
million and other comprehensive losses of $35 million. As a result of the above
factors, the Corporation's debt to total capitalization ratio decreased from 65
percent at December 31, 1999 to 64 percent at June 30, 2000.
Commercial paper borrowings outstanding at June 30, 2000 were approximately
$8 million and are supported by a revolving credit facility in the amount of
$3.5 billion which expires on December 20, 2001. No borrowings were outstanding
under this credit facility at June 30, 2000.
In March 2000, the Corporation filed a shelf registration with the
Securities and Exchange Commission to provide for the issuance of up to $1
billion in debt securities. The registration statement was declared effective on
April 14, 2000. Were the Corporation to issue debt securities under this shelf
registration, it would expect to use the net proceeds for general
27
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
corporate purposes. These purposes may include repayment of debt, working
capital needs, capital expenditures, acquisitions and any other general
corporate purpose.
The Corporation actively seeks to finance its business in a manner that
preserves financial flexibility while minimizing borrowing costs to the extent
practicable. The Corporation's management continually reviews the changing
financial, market and economic conditions to manage the types, amounts and
maturities of the Corporation's indebtedness. Periodically, the Corporation may
refinance existing indebtedness, vary its mix of variable rate and fixed rate
debt, or seek alternative financing sources for its cash and operational needs.
Cash and cash equivalents including temporary investments, internally
generated cash flow from operations and other available financing resources are
expected to be sufficient to meet anticipated operating, capital expenditure and
debt service requirements and discretionary investment needs during the next
twelve months. Consistent with the Corporation's desire to generate cash to
reduce debt and invest in its core businesses, management anticipates that,
subject to prevailing financial, market and economic conditions, the Corporation
may continue to divest certain non-core businesses, passive equity investments
and surplus properties.
In connection with the UAE's order for F-16 fighter aircraft discussed
previously, in June 2000, the Corporation issued a letter of credit in the
amount of $2 billion related to advance payments to be received under the
contract. At June 30, 2000, in accordance with the terms of the agreement with
the UAE, the amount of the letter of credit available for draw down in the event
of the Corporation's nonperformance under the contract was limited to the amount
of advance payments received to date, or approximately $900 million. These
advance payments were recorded in customer advances and amounts in excess of
costs incurred in the Unaudited Condensed Consolidated Balance Sheet at that
date.
As discussed previously, the Corporation satisfied its contractual
obligation with respect to its guarantee of certain indebtedness of Globalstar
with a net payment of $150 million on June 30, 2000 to repay a portion of
Globalstar's borrowings under a revolving credit agreement. The Corporation has
no remaining guarantees in place related to Globalstar. The Corporation
continues to guarantee up to $150 million of the borrowings of Space Imaging
LLC, a joint venture in which the Corporation holds a 46 percent investment,
under its line of credit. The amount of borrowings outstanding as of June 30,
2000 for which Lockheed Martin was guarantor was $145 million. There were no
other significant guarantees outstanding at that date.
Effective March 31, 2000, the Corporation converted its 45.9 million shares
of Loral Space & Communications, Ltd. (Loral Space) Series A Preferred Stock
(the Preferred Stock) into an equal number of shares of Loral Space common
stock. In addition, the Corporation and Loral Space entered into an agreement
which will facilitate the Corporation's ability to divest its interest in Loral
Space. In connection with this agreement, Loral Space filed a registration
statement with the Securities and Exchange Commission to register for possible
sale the common shares owned by the Corporation. Such registration statement
became effective in May 2000. The Corporation expects to divest its shares of
Loral Space; however, the timing of such divestitures and the related amount of
cash received will depend on market conditions.
28
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
OTHER MATTERS
The Corporation's primary exposure to market risk relates to interest rates
and foreign currency exchange rates. The Corporation's financial instruments
which are subject to interest rate risk principally include variable rate
commercial paper and fixed rate long-term debt. The Corporation's long-term debt
obligations are generally not callable until maturity. The Corporation may use
interest rate swaps to manage its exposure to fluctuations in interest rates;
however, there were no such agreements outstanding at June 30, 2000. Based on
its portfolio of variable rate short-term debt and fixed rate long-term debt
outstanding at June 30, 2000, the Corporation's exposure to interest rate risk
is not material.
The Corporation uses forward exchange contracts to manage its exposure to
fluctuations in foreign exchange rates. These contracts are designated as
qualifying hedges of firm commitments or specific anticipated transactions, and
related gains and losses on the contracts are recognized in income when the
hedged transaction occurs. At June 30, 2000, the amounts of forward exchange
contracts outstanding, as well as the amounts of gains and losses recorded
during the first six months of 2000, were not material. Based on the above, the
Corporation's exposure to foreign currency exchange risk is not material. The
Corporation does not hold or issue derivative financial instruments for trading
purposes.
As more fully described in "Note 5 -- Contingencies" of the Notes to
Unaudited Condensed Consolidated Financial Statements, the Corporation is
continuing to pursue recovery of a significant portion of the unanticipated
costs incurred in connection with the $180 million fixed price contract with the
U.S. Department of Energy (DOE) for the remediation of waste found in Pit 9. The
Corporation has been unsuccessful to date in reaching any agreements with the
DOE on cost recovery or other contract restructuring matters. In 1998, the
management contractor for the project, a wholly-owned subsidiary of the
Corporation, at the DOE's direction, terminated the Pit 9 contract for default.
At the same time, the Corporation filed a lawsuit seeking to overturn the
default termination. Subsequently, the Corporation took actions to raise the
status of its request for equitable adjustment to a formal claim. Also in 1998,
the management contractor, again at the DOE's direction, filed suit against the
Corporation seeking recovery of approximately $54 million previously paid to the
Corporation under the Pit 9 contract. The Corporation is defending this action
in which discovery has been pending since August 1999. In October 1999, the U.S.
Court of Federal Claims stayed the DOE's motion to dismiss the Corporation's
lawsuit, finding that the Court has jurisdiction. The Court ordered discovery to
commence and gave leave to the DOE to convert its motion to dismiss to a motion
for summary judgment if supported by discovery. The Corporation continues to
assert its position in the litigation while continuing its efforts to resolve
the dispute through non-litigation means.
As more fully described in Management's Discussion and Analysis in Lockheed
Martin's 1999 Annual Report on Form 10-K, the Corporation is involved in two
joint ventures with Russian government-owned space firms. The operations of
these joint ventures include marketing Proton launch services, which are subject
to a U.S.-imposed quota on the number of Russian launches of U.S. built
satellites into certain orbits. The majority of customer advances received for
Proton launch vehicle services is forwarded to a launch vehicle manufacturer in
Russia. Significant portions of these advances would be required to be refunded
to customers if launch
29
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
services were not provided within the contracted time frame. At June 30, 2000,
approximately $683 million related to launches not yet provided was included in
customer advances and amounts in excess of costs incurred, and approximately
$829 million of payments to the Russian manufacturer for launches not yet
provided was included in inventories. At June 30, 2000, less than $10 million of
the customer advances were associated with launches in excess of the quota, and
approximately $254 million of the $829 million of payments to the aforementioned
Russian manufacturer were associated with launches in excess of the number
currently allowed under the quota. Through June 30, 2000, launch services
provided through these joint ventures have been in accordance with contract
terms. The quota is currently scheduled to expire on December 31, 2000. Based on
its current plans, the Corporation does not expect that its business objectives
related to launch services, satellite manufacture or telecommunications market
penetration will be materially impacted based on the current limit on the number
of launches imposed by the quota. However, management is continuing to work
toward achieving a favorable resolution to raise or eliminate the limitation on
the number of Russian launches covered by the quota.
Also as more fully described in Management's Discussion and Analysis in its
Form 10-K, the Corporation is involved in agreements with RD AMROSS, a Russian
manufacturer of booster engines, for the development and purchase, subject to
certain conditions, of up to 101 RD-180 booster engines for use in two models of
the Corporation's Atlas launch vehicles. Terms of the agreements call for
payments to be made to RD AMROSS upon the achievement of certain milestones in
the development and manufacturing processes. Included in inventories at June 30,
2000 and December 31, 1999 were payments made under these agreements of
approximately $51 million and $55 million, respectively.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). The words "estimate," "anticipate," "project," "intend,"
"expect," and similar expressions are intended to identify forward looking
statements. All forward looking statements involve risks and uncertainties,
including, without limitation, statements and assumptions with respect to future
revenues, program performance and cash flows, the outcome of contingencies
including litigation and environmental remediation, and anticipated costs of
capital investments and planned dispositions. Our operations are necessarily
subject to various risks and uncertainties and, therefore, actual outcomes are
dependent upon many factors, including, without limitation, our successful
performance of internal plans and reorganization efforts; government customers'
budgetary constraints and the timing of awards and contracts; customer changes
in short-range and long-range plans; domestic and international competition in
the defense, space and commercial areas; continued development and acceptance of
new products; timing and customer acceptance of product delivery and launches;
product performance; performance issues with the U.S. Government, key suppliers
and subcontractors; government import and export policies; termination of
government contracts; the outcome of political and legal processes; the outcome
of contingencies, including completion of acquisitions and divestitures,
litigation and environmental remediation; legal, financial, and governmental
risks related to international transactions and global needs for military and
commercial aircraft
30
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
and electronic systems and support; as well as other economic, political and
technological risks and uncertainties. Readers are cautioned not to place undue
reliance on these forward looking statements which speak only as of the date of
this Form 10-Q. The Corporation does not undertake any obligation to publicly
release any revisions to these forward looking statements to reflect events,
circumstances or changes in expectations after the date of this Form 10-Q, or to
reflect the occurrence of unanticipated events. The forward looking statements
in this document are intended to be subject to the safe harbor protection
provided by Sections 27A of the Securities Act and 21E of the Exchange Act.
For a discussion identifying some important factors that could cause actual
results to vary materially from those anticipated in the forward looking
statements, see the Corporation's Securities and Exchange Commission filings
including, but not limited to, the discussion of the "Transaction Agreement with
COMSAT Corporation", the discussion of "Competition and Risk" and the discussion
of "Government Contracts and Regulations" on pages 3 through 6, pages 23 through
26 and pages 26 through 28, respectively, of the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (Form 10-K); "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 17 through 31 of this Form 10-Q; and "Note 2 - Business Combination with
COMSAT Corporation," "Note 5 -- Contingencies," "Note 7 -- Other" and "Note 8 --
Subsequent Event" of the Notes to Unaudited Condensed Consolidated Financial
Statements on pages 6 through 7, pages 9 through 11, pages 13 through 16 and
page 16, respectively, of the Unaudited Condensed Consolidated Financial
Statements included in this Form 10-Q.
31
<PAGE>
Lockheed Martin Corporation
Part II - Other Information
Item 1. Legal Proceedings
The Corporation is a party to or has property subject to litigation and
other proceedings, including matters arising under provisions relating to the
protection of the environment, both as specifically described below and in the
Corporation's 1999 Annual Report on Form 10-K (Form 10-K), the Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (First
Quarter Form 10-Q), or arising in the ordinary course of business. In the
opinion of management, the probability is remote that the outcome of any such
litigation or other proceedings will have a material adverse effect on the
Corporation's results of operations or financial position.
The Corporation is primarily engaged in providing products and services
under contracts with the U.S. Government and, to a lesser degree, under direct
foreign sales contracts, some of which are funded by the U.S. Government. These
contracts are subject to extensive legal and regulatory requirements and, from
time to time, agencies of the U.S. Government investigate whether the
Corporation's operations are being conducted in accordance with these
requirements. U.S. Government investigations of the Corporation, whether
relating to these contracts or conducted for other reasons, could result in
administrative, civil or criminal liabilities, including repayments, fines or
penalties being imposed upon the Corporation, or could lead to suspension or
debarment from future U.S. Government contracting. U.S. Government
investigations often take years to complete and many result in no adverse action
against the Corporation. For the U.S. Government investigations described in the
Corporation's Form 10-K or First Quarter Form 10-Q, it is too early for Lockheed
Martin to determine whether adverse decisions relating to these investigations
could ultimately have a material adverse effect on its results of operations or
financial condition.
The following describes new matters not previously disclosed as well as
developments of previously reported matters that have occurred since filing of
the Corporation's Form 10-K and First Quarter Form 10-Q. See the "Legal
Proceedings" section of the Form 10-K and First Quarter Form 10-Q for a
description of previously reported matters.
On May 10, 2000, two purported class action lawsuits alleging race
discrimination were filed against the Corporation in the United States District
Court for the Northern District of Georgia in Atlanta. One lawsuit, Melvin Reid
et al. v. Lockheed Martin Corporation et al., was filed on behalf of salaried
employees and the other, Farris Yarbrough et al. v. Lockheed Martin Corporation
et al., was filed on behalf of hourly employees. The individually-named
plaintiffs in the complaints are current and former employees of the
Corporation's Aeronautics Company - Marietta Operations located in Marietta,
Georgia.
The plaintiffs allege race discrimination in connection with promotions,
training opportunities, and compensation, the existence of a hostile work
environment, and retaliation, on behalf of African American employees employed
by the Corporation at Marietta and elsewhere from 1996 to the present. The
plaintiffs seek compensatory and punitive damages and injunctive relief.
32
<PAGE>
Lockheed Martin Corporation
Part II - Other Information (continued)
The Corporation filed its answer to each lawsuit on June 26, 2000. The
Corporation denies the allegations and will vigorously defend the lawsuits in
court. The Corporation believes that the individual allegations are without
merit and further that class certification is not appropriate in either case
because, among many reasons, the claims of the named plaintiffs lack commonality
with and are not typical of the claims of other African American employees of
the Corporation at Marietta and elsewhere.
The Corporation is the principal defendant in a series of consolidated
actions filed in 1997 entitled Carrillo v. Lockheed Martin Corporation involving
over 800 individuals and two putative classes claiming personal injury and
property damage as a result of environmental releases from historical operations
at the former Lockheed Propulsion Company in Redlands, California. The
Corporation denies any liability in the matter and has been defending the
consolidated actions vigorously. In May 1999, the trial court certified a
medical monitoring class and a punitive damages class in the consolidated
actions, which were subsequently decertified by the California Court of Appeal
in April 2000. On July 12, 2000, the California Supreme Court granted
plaintiffs' petition for review of the class de-certification and set a briefing
schedule. Although it is not possible to predict how the California Supreme
Court will ultimately rule on this matter, the issue of class certification
could have a significant impact on the extent of the risk to the Corporation
presented by this litigation.
On July 27, 2000, the Department of Justice Antitrust Division advised the
Corporation that it has closed its investigation of Lockheed Martin Technical
Operations, a wholly-owned subsidiary, and certain of its current and former
employees. The Antitrust Division advised the Corporation that it will not take
enforcement action in connection with the previously reported investigation of
the manner in which Technical Operations obtained and performed a contract with
the U.S. Air Force for space operations, maintenance, and support services.
33
<PAGE>
Lockheed Martin Corporation
Part II - Other Information (continued)
Item 4. Submission of Matters to a Vote of Security Holders
On April 27, 2000, the Corporation held its Annual Meeting of
Stockholders. A description of matters voted upon by stockholders at this
meeting, and the results of such votes, were disclosed in Item 4 of Lockheed
Martin Corporation's Form 10-Q for the quarter ended March 31, 2000 filed with
the Securities and Exchange Commission on May 5, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Exhibit 3. Bylaws of Lockheed Martin Corporation, as amended
On June 14, 2000, the Board of Directors amended the Bylaws of the
Corporation, and in particular the provisions relating to the Audit
and Ethics Committee to reflect new rules and regulations resulting
from the recommendations of the Blue Ribbon Committee on Improving the
Effectiveness of Corporate Audit Committees.
2. Exhibit 10(a). Special Agreement between Lockheed Martin Corporation
and Louis R. Hughes
3. Exhibit 10(b). Covenant Not to Compete, Confidentiality and Release
Agreement and Consulting Services Agreement between Lockheed Martin
Corporation and Peter B. Teets
4. Exhibit 12. Computation of Ratio of Earnings to Fixed Charges for the
six months ended June 30, 2000.
5. Exhibit 27. Financial Data Schedule for the six months ended June 30,
2000.
(b) Reports on Form 8-K filed in the second quarter of 2000.
1. Current report on Form 8-K filed on April 4, 2000.
Item 5. Other Events
The Corporation filed information contained in its press
release dated March 10, 2000 regarding the passage of
Congressional legislation related to the proposed merger
with COMSAT Corporation.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated March 10,
2000.
2. Current report on Form 8-K filed on April 5, 2000.
Item 5. Other Events
34
<PAGE>
Lockheed Martin Corporation
Part II - Other Information (continued)
The Corporation filed information contained in its press
release dated April 3, 2000 which announces the selection of
Louis R. Hughes as President and Chief Operating Officer,
effective April 27, 2000.
Item 7. Financial Statements and Exhibits
Lockheed Martin Press Release dated April 3, 2000.
3. Current report on Form 8-K filed on April 28, 2000.
Item 5. Other Events
The Corporation filed information contained in its press
release dated April 25, 2000 regarding its results of
operations for the quarter ended March 31, 2000.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated April 25,
2000.
(c) Reports on Form 8-K filed subsequent to the second quarter of 2000.
1. Current report on Form 8-K filed on July 7, 2000.
Item 5. Other Events
The Corporation filed information contained in its press
release dated June 30, 2000 concerning its repayment of debt
in connection with its guarantee of a revolving credit
agreement for Globalstar Telecommunications.
Item 7. Financial Statements and Exhibits
Lockheed Martin Press Release dated June 30, 2000
2. Current report on Form 8-K filed on July 18, 2000.
Item 5. Other Events
The Corporation filed information contained in its press
release dated July 13, 2000 concerning its announcement of an
agreement to sell its Aerospace Electronics Business to BAE
Systems, North America.
Item 7. Financial Statements and Exhibits
Lockheed Martin Press Release dated July 13, 2000
3. Current report on Form 8-K filed on July 26, 2000.
35
<PAGE>
Lockheed Martin Corporation
Part II - Other Information (continued)
Item 5. Other Events
The Corporation filed information contained in its press
release dated July 20, 2000 regarding its results of
operations for the quarter ended June 30, 2000.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated July 20, 2000.
4. Current report on Form 8-K filed on August 2, 2000.
Item 5. Other Events
The Corporation filed information contained in its press
release dated July 31, 2000 concerning its receipt of final
regulatory approvals necessary to complete the transaction
with COMSAT Corporation.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated July 31, 2000.
5. Current report on Form 8-K filed on August 4, 2000.
Item 5. Other Events
The Corporation filed information contained in its press
release dated August 3, 2000 concerning the closing of its
merger with COMSAT Corporation.
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release Dated August 3,
2000.
36
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LOCKHEED MARTIN CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOCKHEED MARTIN CORPORATION
---------------------------
(Registrant)
Date: August 11, 2000 by: /s/ Christopher E. Kubasik
------------------------------- --------------------------
Christopher E. Kubasik
Vice President and Controller
(Chief Accounting Officer)
37
