<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 September 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 October 31, 2000
---------------------------- ----------------------------------
COMMON STOCK, $1 PAR VALUE 430,755,869
<PAGE>
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
____________
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Statement of Operations-
Three Months and Nine Months Ended September 30, 2000 and 1999.... 3
Unaudited Condensed Consolidated Statement of Cash Flows-
Nine Months Ended September 30, 2000 and 1999..................... 4
Unaudited Condensed Consolidated Balance Sheet-
September 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....................... 20
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........................................... 37
Item 6. Exhibits and Reports on Form 8-K............................ 38
Signatures............................................................. 41
Exhibit 10.1 Lockheed Martin Management Corporation Incentive
Compensation Plan
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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------ ------ ------- -------
(In millions, except per share data)
<S> <C> <C> <C> <C>
Net sales $5,960 $6,157 $17,734 $18,548
Cost of sales 5,552 5,669 16,585 17,442
------ ------ ------- -------
Earnings from operations 408 488 1,149 1,106
Other income and expenses, net (434) 70 (524) 202
------ ------ ------- -------
(26) 558 625 1,308
Interest expense 229 200 676 583
------ ------ ------- -------
(Loss) earnings before income taxes and
cumulative effect of change in accounting (255) 358 (51) 725
Income tax expense 449 141 557 281
------ ------ ------- -------
(Loss) earnings before cumulative effect of
change in accounting (704) 217 (608) 444
Cumulative effect of change in accounting -- -- -- (355)
------ ------ ------- -------
Net (loss) earnings $ (704) $ 217 $ (608) $ 89
====== ====== ======= =======
(Loss) earnings per common share:
---------------------------------
Basic:
Before cumulative effect of change in
accounting $(1.74) $ .57 $ (1.54) $ 1.16
Cumulative effect of change in accounting -- -- -- (.93)
------ ------ ------- -------
$(1.74) $ .57 $ (1.54) $ .23
====== ====== ======= =======
Diluted:
Before cumulative effect of change in
accounting $(1.74) $ .57 $ (1.54) $ 1.16
Cumulative effect of change in accounting -- -- -- (.93)
------ ------ ------- -------
$(1.74) $ .57 $ (1.54) $ .23
====== ====== ======= =======
Cash dividends declared per common share $ .11 $ .22 $ .33 $ .66
====== ====== ======= =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
------ ------
(In millions)
<S> <C> <C>
Operating Activities:
(Loss) earnings before cumulative effect of change in accounting $ (608) $ 444
Adjustments to reconcile earnings to net cash provided
by operating activities:
Depreciation and amortization 724 705
Changes in operating assets and liabilities 1,629 (766)
------ -------
Net cash provided by operating activities 1,745 383
------ -------
Investing Activities:
Expenditures for property, plant and equipment (283) (442)
Sale of Control Systems 510 --
Sale of shares in Inmarsat 164 --
COMSAT Tender Offer -- (1,197)
Sale of shares in L-3 Communications -- 182
Other (12) (108)
------ -------
Net cash provided by (used for) investing activities 379 (1,565)
------ -------
Financing Activities:
Net (decrease) increase in short-term borrowings (475) 1,881
Net repayments of long-term debt (40) (743)
Issuances of common stock 6 17
Common stock dividends (132) (258)
------ -------
Net cash (used for) provided by financing activities (641) 897
------ -------
Net increase (decrease) in cash and cash equivalents 1,483 (285)
Cash and cash equivalents at beginning of period 455 285
------ -------
Cash and cash equivalents at end of period $1,938 $ --
====== =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
<PAGE>
Lockheed Martin Corporation
Unaudited Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(In millions)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,938 $ 455
Receivables 4,202 4,348
Inventories 4,216 4,051
Net assets held for disposal 1,409 --
Deferred income taxes 950 1,237
Other current assets 623 605
------- -------
Total current assets 13,338 10,696
Property, plant and equipment 3,439 3,634
Investments in equity securities 2,701 2,210
Intangible assets related to contracts and programs acquired 1,113 1,259
Cost in excess of net assets acquired 8,804 9,162
Other assets 2,876 3,051
------- -------
$32,271 $30,012
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,033 $ 1,228
Customer advances and amounts in excess of costs incurred 5,343 4,655
Salaries, benefits and payroll taxes 986 941
Income taxes 165 51
Short-term borrowings 3 475
Current maturities of long-term debt 879 52
Other current liabilities 1,928 1,410
------- -------
Total current liabilities 10,337 8,812
Long-term debt 10,962 11,427
Post-retirement benefit liabilities 1,693 1,805
Noncurrent deferred income taxes 998 517
Other liabilities 1,199 1,090
Stockholders' equity:
Common stock, $1 par value per share 430 398
Additional paid-in capital 1,669 222
Retained earnings 5,161 5,901
Unearned ESOP shares (125) (150)
Accumulated other comprehensive loss (53) (10)
------- -------
Total stockholders' equity 7,082 6,361
------- -------
$32,271 $30,012
======= =======
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
September 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 nine months ended September 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 for 49 percent of the outstanding
stock of COMSAT (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 consolidated balance sheet prior to
consummation of the Merger as discussed below. The Corporation accounted for its
49 percent investment in COMSAT under the equity method of accounting.
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 in a tax-free exchange. The total amount recorded related
to this phase of the transaction was 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.
6
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
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 approximately $75 million in cash balances
acquired. The COMSAT transaction is being accounted for using the purchase
method of accounting. Preliminary purchase accounting adjustments were recorded
in the third quarter of 2000 to allocate the purchase price to assets acquired
and liabilities assumed based on their fair values. These adjustments included
certain amounts totaling approximately $2.0 billion, composed of adjustments to
record equity investments 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. As a result
of the Merger, the Corporation recorded at fair value approximately
$380 million of COMSAT debt obligations in its Unaudited Condensed Consolidated
Balance Sheet.
The Corporation has consolidated the operations of COMSAT with the results of
operations of Lockheed Martin Global Telecommunications, Inc. (LMGT), a wholly-
owned subsidiary of the Corporation, from August 1, 2000.
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.
7
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
Pro Forma Combined
Earnings Data
Nine Months Ended September 30,
2000 1999
------- -------
(In millions, except per share data)
<S> <C> <C>
Net sales $18,079 $18,946
(Loss) earnings before cumulative effect of
change in accounting (594) 369
Net (loss) earnings (594) 14
(Loss) earnings per common share:
Basic:
Before cumulative effect of change in accounting (1.42) .90(a)
Net (loss) earnings per common share (1.42) .03(a)
Diluted:
Before cumulative effect of change in accounting (1.42) .89(a)
Net (loss) earnings per common share (1.42) .03(a)
</TABLE>
(a) The difference between these amounts and the respective earnings per share
amounts presented on the Unaudited Condensed Consolidated Statement of
Operations relates primarily to the effects of interest on the debt
assumed, for purposes of this pro forma presentation, to have been issued
on January 1, 1999 to finance the Tender Offer.
In September 2000, the Corporation completed the sale of approximately one-
third of its interest in Inmarsat Ventures Limited (Inmarsat) for $164 million.
As a result of the transaction, the Corporation's interest in Inmarsat was
reduced from approximately 22.2% to approximately 14%. The investment in
Inmarsat was acquired as part of COMSAT in conjunction with the Merger. The
sale of shares in Inmarsat did not impact the Corporation's results of
operations.
NOTE 3 -- EARNINGS PER SHARE
Basic and diluted per share results were computed based on the net loss or
earnings for the respective periods. The weighted average number of common
shares outstanding during the period was used in the calculation of basic (loss)
earnings per share and, for the three month and nine month periods ended
September 30, 1999, this number of shares was increased by the effects of
dilutive stock options based on the treasury stock method in the calculation of
diluted (loss) earnings per share. The diluted loss per share for the three
month and nine month periods ended September 30, 2000 was computed in the same
manner as the basic loss per share, since adjustments related to the dilutive
effects of stock options would have been antidilutive.
The following table sets forth the computations of basic and diluted loss or
earnings per common share:
8
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------ ------ ------ ------
(In millions, except per share data)
Net (loss) earnings for basic and diluted computations:
-------------------------------------------------------
<S> <C> <C> <C> <C>
(Loss) earnings before cumulative effect of change in
accounting $ (704) $ 217 $ (608) $ 444
Cumulative effect of change in accounting -- -- -- (355)
------ ------ ------ ------
Net (loss) earnings $ (704) $ 217 $ (608) $ 89
====== ====== ====== ======
Average common shares outstanding:
----------------------------------
Average number of common shares outstanding for basic
computations 405.6 382.8 394.1 381.5
Effects of dilutive stock options based on the treasury
stock method --(a) 1.9 --(a) 2.3
------ ------ ------ ------
Average number of common shares outstanding for diluted
computations 405.6 384.7 394.1 383.8
====== ====== ====== ======
(Loss) earnings per common share:
---------------------------------
Basic:
Before cumulative effect of change in accounting $(1.74) $ .57 $(1.54) $ 1.16
Cumulative effect of change in accounting -- -- -- (.93)
------ ------ ------ ------
$(1.74) $ .57 $(1.54) $ .23
====== ====== ====== ======
Diluted:
Before cumulative effect of change in accounting $(1.74) $ .57 $(1.54) $ 1.16
Cumulative effect of change in accounting -- -- -- (.93)
------ ------ ------ ------
$(1.74) $ .57 $(1.54) $ .23
====== ====== ====== ======
</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 has not been
adjusted for the effects of stock options, as such adjustments would have
been antidilutive.
As mentioned in "Note 2 -- Business Combination with COMSAT Corporation," the
Corporation issued 27.5 million shares of its common stock in August 2000 to
consummate the Merger with COMSAT. Due to the impact that the issuance of those
shares had on the weighted average number of shares outstanding for purposes of
computing earnings per share, the earnings per share effects of separately
disclosed transactions in this Form 10-Q may be different for the quarter in
which the transaction occurred and for the nine months ended September 30, 2000.
If such amounts are different, the earnings per share amounts for each period
are disclosed.
9
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
NOTE 4 -- INVENTORIES
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------ ------
(In millions)
<S> <C> <C>
Work in process, commercial launch vehicles $ 1,380 $ 1,514
Work in process, primarily related to other long-term
contracts and programs in progress 4,027 3,879
Less customer advances and progress payments (1,842) (1,848)
------- -------
3,565 3,545
Other inventories 651 506
------- -------
$ 4,216 $ 4,051
======= =======
</TABLE>
Commercial launch vehicle inventories at September 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 $835 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 amounts of unamortized
deferred costs expected to be recognized related to C-130J aircraft not yet
under contract were $140 million and $150 million at September 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
10
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
work currently approved will be approximately $95 million. The Corporation is
also 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 thus far indicate that current efforts with water
purveyors regarding perchlorate issues are appropriate; however, the Corporation
currently cannot predict the final outcome of these studies or the resulting
impact they may have on 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 long-term operation of these facilities will
be assumed by the city of Burbank following an appropriate start-up period that
is now expected to run into 2001. 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 into in August 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 $25 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 (including current operating facilities and certain facilities
operated in prior years) in which an estimate of financial exposure can be
determined has been recorded.
Under agreements reached with the U.S. Government in 1990 and 2000, 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
11
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
regulations, these and other environmental expenditures related to U.S.
Government business, after deducting any recoveries from insurance or other
potentially responsible parties, are allowable in establishing the prices of the
Corporation's products and services. As a result, a substantial portion of the
expenditures are being reflected in the Corporation's sales and cost of sales
pursuant to U.S. Government agreement or regulation.
The Corporation has recorded an asset for the portion of environmental costs
that are probable of future recovery in pricing of the Corporation's products
and services for U.S. Government business. The portion that is expected to be
allocated to commercial business has been reflected in cost of sales. The
recorded amounts do not reflect the possible future recoveries of portions of
the environmental costs through insurance policy coverage or from other
potentially responsible parties, which the Corporation is pursuing as required
by agreement and U.S. Government regulation. Any such recoveries, when
received, would reduce the allocated amounts to be included in the Corporation's
U.S. Government sales and cost of sales.
Waste remediation contract - In 1994, the Corporation was awarded a $180
million fixed price contract by the U.S. Department of Energy (DOE) for the
Phase II design, construction and limited test of remediation facilities, and
the Phase III full remediation of waste found in Pit 9, located on the Idaho
National Engineering and Environmental Laboratory reservation. The Corporation
incurred significant unanticipated costs and scheduling issues due to complex
technical and contractual matters which 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.
12
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
NOTE 6 -- INFORMATION ON BUSINESS SEGMENTS
As mentioned previously, Lockheed Martin consummated its merger with COMSAT,
and COMSAT's operations have been included in the results of operations of LMGT
from August 1, 2000. Prior to the merger, the results of operations of LMGT
included the Corporation's 49 percent investment in COMSAT which was acquired on
September 18, 1999 and accounted for under the equity method of accounting. In
addition to the merger with COMSAT, in October 2000, the Corporation began
including the operations of Integrated Business Solutions (IBS), a business unit
serving commercial information technology markets, in LMGT's results of
operations. In accordance with Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information," LMGT
is being reported as a separate operating segment called Global
Telecommunications beginning in the third quarter of 2000. The operations of
LMGT and the commercial information technology business unit were previously
included in the Corporate and Other segment. Earlier 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 segment descriptions and financial data have been adjusted to
reflect the Corporation's Global Telecommunications business as a separate
segment and the other changes in organizational structure noted above for the
periods indicated.
The Corporation operates in five principal business segments. The five
segments include Systems Integration, Space Systems, Aeronautical Systems,
Technology Services and Global Telecommunications. All other activities of the
Corporation fall within the Corporate and Other segment. Following is a brief
description of the activities of each business segment:
Systems Integration - Engaged in the design, development, integration and
production of high performance electronic systems for undersea, shipboard, land,
and airborne applications. Major product lines include missiles and fire
control systems; air and theater missile defense systems; surface ship and
submarine combat systems; anti-submarine and undersea warfare systems; avionics
and ground combat vehicle integration; platform integration systems; command,
control, communications, computers and intelligence (C4I) systems for naval,
airborne and ground applications; surveillance and reconnaissance systems; air
traffic control systems; and postal automation systems.
Space Systems - Engaged in the design, development, engineering and
production of civil, commercial and military space systems. Major product lines
include spacecraft, space launch vehicles and manned space systems; their
supporting ground systems and services; and strategic fleet ballistic missiles.
In addition to its consolidated business units, the segment has investments in
joint ventures that are principally engaged in businesses which complement and
enhance other activities of the segment.
Aeronautical Systems - Engaged in design, research and development, and
production of tactical aircraft, surveillance/command systems, reconnaissance
systems, platform systems integration and advanced development programs. Major
programs include the F-22 air-superiority fighter, the Joint Strike Fighter, the
F-16 multi-role fighter, the C-130J airlift aircraft, and Airborne Early Warning
& Control systems programs.
13
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
Technology Services - Provides a wide array of management, engineering,
scientific, logistic and information services to federal agencies and other
customers. Major product lines include engineering, science and information
services for NASA; aircraft maintenance and modification services; operation,
maintenance, training, and logistics support for military and civilian systems;
launch, mission, and analysis services for military, classified and commercial
satellites; and research, development, engineering and science in support of
nuclear weapons stewardship and naval reactor programs.
Global Telecommunications - Provides communications services and advanced
technology solutions through three lines of business: enterprise solutions,
which provides telecommunications services, managed networks and information
technology solutions in the U.S. and international markets; satellite services,
which provides global fixed and mobile satellite services; and systems and
technology, which designs, builds and integrates satellite gateways and provides
systems integration services for telecommunications networks. In addition to its
consolidated business units, the segment also has investments in joint ventures
that are principally engaged in businesses which complement and enhance other
activities of the segment.
Corporate and Other - Includes the state and local government services line
of business. In addition, this segment includes the Corporation's investment in
certain other joint ventures and businesses.
14
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------ ------ ------- -------
(In millions)
<S> <C> <C> <C> <C>
Selected Financial Data by Business Segment
Net sales
---------
Systems Integration $2,325 $2,329 $ 6,730 $ 6,928
Space Systems 1,640 1,779 5,092 5,397
Aeronautical Systems 1,038 1,214 3,327 3,980
Technology Services 566 584 1,629 1,569
Global Telecommunications 214 85 498 260
Corporate and Other 177 166 458 414
------ ------ ------- -------
$5,960 $6,157 $17,734 $18,548
====== ====== ======= =======
Operating (loss) profit
-----------------------
Systems Integration $ (215) $ 271 $ 155 $ 644
Space Systems 113 126 326 336
Aeronautical Systems 77 105 245 151
Technology Services 18 29 80 97
Global Telecommunications (23) (21) (81) (75)
Corporate and Other 4 48 (100) 155
------ ------ ------- -------
$ (26) $ 558 $ 625 $ 1,308
====== ====== ======= =======
Intersegment revenue(a)
-----------------------
Systems Integration $ 133 $ 123 $ 356 $ 350
Space Systems (19) 28 43 85
Aeronautical Systems 18 25 57 68
Technology Services 176 142 528 449
Global Telecommunications 6 (2) 13 7
Corporate and Other 15 9 38 30
------ ------ ------- -------
$ 329 $ 325 $ 1,035 $ 989
====== ====== ======= =======
</TABLE>
15
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------- -------
(In millions)
<S> <C> <C>
Selected Financial Data by Business Segment
Assets
------
Systems Integration $11,861 $12,209
Space Systems 5,735 6,060
Aeronautical Systems 3,439 3,206
Technology Services 1,439 1,484
Global Telecommunications 4,209 2,145
Corporate and Other 5,588 4,908
------- -------
$32,271 $30,012
======= =======
Customer advances and amounts in excess of
costs incurred(b)
------------------------------------------
Systems Integration $ 1,004 $ 1,039
Space Systems 2,346 2,553
Aeronautical Systems 1,791 899
Technology Services 19 31
Global Telecommunications 183 132
Corporate and Other -- 1
------- -------
$ 5,343 $ 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 September 30, 2000, customer advances and amounts in excess of costs
incurred in the Space Systems segment included approximately $1.2 billion
for commercial launch vehicles and related launch services (approximately
$835 million of which relates to launch vehicles and services from Russian
manufacturers) and approximately $924 million for the manufacture of
commercial satellites (approximately $200 million of which was refunded with
interest in October 2000 due to contract cancellation by the respective
customer). 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 -- DIVESTITURES AND OTHER
On July 13, 2000, the Corporation made the decision to sell its aerospace
electronics systems (AES) businesses and announced that it had reached a
definitive agreement to sell these businesses to BAE SYSTEMS, North America,
Inc. (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 classified the assets of these businesses as "held for disposal"
under the provisions of SFAS No. 121,
16
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
"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 recorded 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. Based on preliminary calculations and analyses, the
Corporation recorded a nonrecurring and unusual loss, including state income
taxes, of approximately $755 million in other income and expenses. The loss
negatively impacted net (loss) earnings by approximately $980 million, or $2.42
and $2.49 per diluted share for the three month and nine month periods ended
September 30, 2000, respectively. The amount recorded is subject to change based
on future analyses and closing of the transaction.
On September 25, 2000, the Corporation consummated the sale of Lockheed Martin
Control Systems (Control Systems) to BAE SYSTEMS for $510 million in cash,
subsequent to obtaining all necessary regulatory approvals. This transaction
resulted in the recognition of a nonrecurring and unusual gain, net of
state income taxes, of $302 million which is reflected in other income and
expenses. The gain favorably impacted net (loss) earnings by $180 million, or
$.44 and $.46 per diluted share for the three month and nine month periods ended
September 30, 2000, respectively.
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 in other income and expenses. The charge negatively impacted net (loss)
earnings for the nine month period ended September 30, 2000 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, the Corporation had substantially completed the shutdown of
CalComp's operations. 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 charge in the second quarter of 2000, which favorably impacted
net (loss) 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 September
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.
17
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
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 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 ownership interest in
Loral Space. Subsequent to conversion, the Corporation began accounting for its
investment as an available-for-sale investment. Accordingly, as of September 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 $58 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, reduced earnings before income taxes and cumulative effect of change
in accounting by $197 million, and decreased net earnings 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,
reduced earnings before income taxes and cumulative effect of change in
accounting by $84 million, and decreased net earnings 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). This transaction resulted in the
recognition of a gain, net of state income taxes, of $114 million 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 September 30, 1999, the investment in L-3 was
adjusted to reflect its then-current market value, and an unrealized gain, net
of income taxes, of approximately $30 million was included in stockholders'
equity as a component of accumulated other comprehensive income. In October
1999, the Corporation sold its remaining interest in L-3 and reclassified to net
earnings the $30 million of unrealized gains previously recorded as
comprehensive income.
18
<PAGE>
Lockheed Martin Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
The components of comprehensive (loss) income for the three months and
nine months ended September 30, 2000 and 1999 consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----- ----- ----- -----
(In millions)
<S> <C> <C> <C> <C>
Net (loss) earnings $(704) $ 217 $(608) $ 89
Other comprehensive (loss) income:
Net foreign currency translation adjustments -- (9) -- (13)
Net unrealized (loss) gain on investments (8) (15) (43) 30
----- ----- ----- -----
(8) (24) (43) 17
----- ----- ----- -----
Comprehensive (loss) income $(712) $ 193 $(651) $ 106
===== ===== ===== =====
</TABLE>
The Corporation's total interest payments were $541 million and $490 million
for the nine months ended September 30, 2000 and 1999, respectively.
The Corporation's federal and foreign income tax payments, net of refunds
received, were $29 million and $497 million for the nine months ended September
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 (loss) earnings for the nine months ended September 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 will adopt SFAS No. 133, as
amended, on 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
adoption. However, adoption of the Statement could result in a greater degree
of income statement volatility than current accounting practice in subsequent
periods.
19
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Position
and Results of Operations
September 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 implemented a new organizational structure, and
announced plans to evaluate the divestiture of certain non-core business units
and the repositioning of certain businesses to maximize their value and growth
potential.
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, Inc. (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 nine months of 2000
related to the AES businesses totaled approximately $510 million, excluding
intercompany sales. As a result of the decision to sell the AES businesses to
BAE SYSTEMS, the Corporation classified the assets of these businesses as "held
for disposal" under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121. The sum of the carrying value of the net assets of the
AES businesses and estimated transaction costs exceeds the sales price per the
definitive agreement with BAE SYSTEMS. Therefore, the Corporation recorded 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. Based on preliminary calculations
and analyses, the Corporation recorded a nonrecurring and unusual loss,
including state income taxes, of approximately $755 million in other income and
expenses. The loss negatively impacted net (loss) earnings by approximately $980
million, or $2.42 and $2.49 per diluted share for the three month and nine month
periods ended September 30, 2000, respectively. This transaction is expected to
close in the fourth quarter of 2000 and to generate net cash proceeds of $1.2
billion to $1.3 billion after related transaction costs and federal and state
income tax payments. These amounts are subject to change based on future
analyses and closing of the transaction.
On September 25, 2000, the Corporation completed the sale of Lockheed Martin
Control Systems (Control Systems) to BAE SYSTEMS for $510 million in cash,
subsequent to obtaining all necessary regulatory approvals. This transaction
resulted in the recognition of a nonrecurring and unusual gain, net of state
income taxes, of $302 million which is reflected in other income and expenses.
The gain favorably impacted net (loss) earnings by $180 million, or $.44 and
$.46 per diluted share for the three month and nine month periods ended
September 30, 2000, respectively. Net sales for the first nine months of 2000
related to Control Systems totaled approximately $215 million, excluding
intercompany sales. The Corporation estimates that this transaction will
generate net cash proceeds of $350 million after related transaction costs and
federal and state income taxes, which are expected to be paid in the fourth
quarter of 2000.
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 nine months of 2000
related to these business units totaled approximately $470 million. 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.
20
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Position
and Results of Operations
(continued)
In addition, on an ongoing basis, the Corporation will continue to explore the
sale of various investment holdings and surplus real estate. If the Corporation
were to decide to sell any investment holdings or surplus real estate, the
financial effects that may result, if any, would be recorded when the
transactions are consummated or when the losses can be estimated. The
Corporation will also continue to review its businesses to identify ways to
improve organizational effectiveness and performance, and to clarify and focus
on its core business strategy, on an ongoing basis.
In the third quarter of 2000, the Corporation completed its evaluation of
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. In October 2000, the operations of one
of the two business units, Integrated Business Solutions (IBS), were combined
with the operations of Lockheed Martin Global Telecommunications (LMGT), a
wholly-owned subsidiary of the Corporation. The remaining business unit, which
provides Lockheed Martin's internal information technology needs, will continue
to be operated as part of Lockheed Martin's Corporate and Other segment,
consistent with prior periods.
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 for 49 percent of the outstanding
stock of COMSAT (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 consolidated balance sheet prior to
consummation of the Merger as discussed below. The Corporation accounted for its
49 percent investment in COMSAT under the equity method of accounting.
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 was 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.
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 is being accounted for using the purchase method of accounting.
Preliminary purchase accounting adjustments were recorded in the third quarter
of 2000 to allocate the purchase price to assets acquired and liabilities
assumed based on their fair values. These adjustments included certain amounts
totaling approximately $2.0 billion, composed of adjustments to record equity
investments acquired at their fair values and cost
21
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Position
and Results of Operations
(continued)
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 operations of COMSAT have been consolidated with the results of operations
of LMGT since August 1, 2000. Given the substantial investment necessary for the
anticipated 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 the third quarter of 2000 were $6.0 billion, a
three percent decrease from the $6.2 billion recorded for the comparable period
in 1999. Quarter-to-quarter net sales increases in the Global
Telecommunications and Corporate and Other segments were more than offset by
decreases in the remaining business segments. Consolidated net sales for the
nine months ended September 30, 2000 were $17.7 billion, a four percent decrease
from the $18.5 billion reported for the same period in 1999. For the nine
months ended September 30, 2000 as compared to the respective 1999 period,
decreases in net sales in the Systems Integration, Space Systems and
Aeronautical Systems segments more than offset increases in the remaining
business segments. The Corporation incurred an operating loss (loss before
interest and taxes) for the third quarter of 2000 of $26 million as compared to
operating profit (earnings before interest and taxes) of $558 million recorded
for the comparable 1999 period. The Corporation's operating profit for the nine
months ended September 30, 2000 was $625 million, a 52 percent decrease from the
$1.3 billion reported for the comparable 1999 period. Operating profit declined
in all segments during the third quarter of 2000 from the comparable 1999
period. For the nine months ended September 30, 2000, as compared to the
respective 1999 period, an operating profit increase in the Aeronautical Systems
segment was more than offset by decreases in the remaining business segments.
Operating profit for the comparative year-to-year 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. See
"Note 7 -- Divestitures and Other" of the Notes to Unaudited Condensed
Consolidated Financial Statements (Note 7) for more information on these
adjustments. 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
period, operating profit for third quarter of 2000 would have been $457 million,
a 10 percent decrease from the $505 million in the third quarter 1999.
Similarly, excluding the effects of these nonrecurring and unusual items,
operating profit for the nine months ended September 30, 2000 would have been
$1.21 billion, a four
22
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Position
and Results of Operations
(continued)
percent increase over the $1.16 billion 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 mentioned above, operating profit in the third 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 $483 million. These items
included: a $755 million impairment loss related to the AES businesses (see Note
7); a gain of $302 million on the sale of Control Systems (see Note 7); losses
of $34 million associated with other portfolio shaping actions; and a net gain
of $4 million associated with the sale of surplus real estate. Operating profit
in the third quarter of 1999 included the effects of nonrecurring and unusual
items which on a combined basis, net of state income taxes, increased operating
profit by $53 million. These items included a $24 million gain related to the
sale of surplus real estate and a $29 million gain associated with other
portfolio shaping activities. Operating profit for the nine months ended
September 30, 2000 included the effects of nonrecurring and unusual items which,
on a combined basis, net of state income taxes, decreased operating profit by
$581 million. In addition to the nonrecurring and unusual items recorded during
the third quarter, operating profit for the 2000 period also included the
following: 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
(see Note 7); 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 (see Note 7); 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 nine months ended September 30, 1999 included the effects of nonrecurring
and unusual items which, on a combined basis, net of state income taxes,
increased operating profit by $147 million. In addition to the aforementioned
nonrecurring and unusual items recorded during the third quarter of 1999,
operating profit for the 1999 period also included a net gain of $114 million
resulting from the sale of 4.5 million shares of stock in L-3 Communications
Holdings, Inc. (L-3) (see Note 7), and a $20 million loss related to portfolio
shaping activities.
The relationship of income tax expense to (loss) earnings before income taxes
and cumulative effect of change in accounting for the quarter and nine months
ended September 30, 2000 is due primarily to the effects of the nonrecurring and
unusual items mentioned above. Excluding the effects of those items, the
effective tax rate would have been approximately 49 percent and 48 percent for
the respective periods.
As mentioned in "Note 3 -- Earnings Per Share" of the Notes to Unaudited
Condensed Consolidated Financial Statements, due to the issuance of common stock
in conjunction with the consummation of the Merger with COMSAT and the impact
that the issuance of those shares had on the weighted average number of shares
outstanding for purposes of computing earnings per share, the earnings per share
effects of separately disclosed transactions in this Form 10-Q may be different
for the quarter in which the transaction occurred and for the nine months ended
September 30, 2000. In the following discussion, where such amounts are
different, the earnings per share amounts for both periods are disclosed.
23
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Position
and Results of Operations
(continued)
The Corporation reported net losses for the quarter and nine months ended
September 30, 2000 of $704 million and $608 million, respectively, as compared
to net earnings of $217 million and $89 million in the comparable 1999 periods.
The after-tax effects of the third quarter 2000 nonrecurring and unusual items
discussed above included: $980 million related to the impairment loss on the AES
businesses, or $2.42 and $2.49 per diluted share for the three month and nine
month periods ended September 30, 2000, respectively; $180 million attributable
to the gain on the sale of Control Systems, or $.44 and $.46 per diluted share
for the three month and nine month periods ended September 30, 2000,
respectively; $22 million in losses on portfolio shaping activities; and $3
million associated with the gain on the sale of surplus real estate. The
combination of these nonrecurring and unusual items reduced third quarter 2000
earnings by $819 million, or $2.02 per diluted share. In the third quarter of
1999, after-tax earnings included a $19 million gain associated with portfolio
shaping activities and a $15 million gain from the sale of surplus real estate.
The combination of these nonrecurring and unusual items increased third quarter
1999 earnings by $34 million, or $0.09 per diluted share. In addition to the
nonrecurring and unusual items recorded in the third quarter, after-tax earnings
for the nine months ended September 30, 2000 included: $91 million related to
the charge for amounts due from Globalstar; a $21 million favorable adjustment
associated with the reversal of a portion of the previously recorded CalComp
charge; $10 million in net gains attributable to the sale of surplus real
estate; and $4 million resulting from losses on other portfolio shaping
activities. On a combined basis, these items reduced 2000 net earnings by $883
million, or $2.24 per diluted share. In addition to the third quarter 1999 items
discussed above, the after-tax effects of the nonrecurring and unusual items for
the nine months ended September 30, 1999 included $74 million related to the
gain on the sale of the Corporation's remaining interest in L-3 and $12 million
in losses related to other portfolio shaping activities. 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 nine months ended September 30, 1999 by $259 million, or $.68 per diluted
share.
The Corporation reported diluted (loss) earnings per share of $(1.74) and
$(1.54) for the quarter and nine months ended September 30, 2000, respectively,
as compared to $.57 and $.23 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 nine months ended September 30, 2000 would have been $.28 and $.70,
respectively, and diluted earnings per share for the quarter and nine months
ended September 30, 1999 would have been $.48 and $.91, respectively.
The Corporation's backlog of undelivered orders was approximately $55.9
billion at September 30, 2000 as compared to $45.9 billion reported at December
31, 1999. The backlog as of September 30, 2000 reflected an approximate $300
million reduction associated with the divestiture of Control Systems. The
Corporation received orders for approximately $28 billion in new and follow-on
business during the nine months ended September 30, 2000 that were partially
offset by sales during the period. Significant new orders received during the
2000 period principally related to $9.5 billion in F-16 fighter aircraft orders
for the United Arab Emirates (UAE), Israel, Greece, Korea and the U.S.
Government. Additionally, the Corporation received a total of approximately $5.7
billion in
24
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Position
and Results of Operations
(continued)
orders for the following: the Theater High Altitude Area Defense (THAAD)
Engineering, Manufacturing, and Development (EMD) contract; sixteen launch
vehicles; three satellites; the Integrated Weapons Systems for the Royal
Norwegian Navy's New Frigate Program; and two U.S. and two Italian C-130J
airlift aircraft.
Discussion of Business Segments
In the third quarter of 2000, Lockheed Martin began presenting LMGT, which
includes the operations of COMSAT and IBS, as a separate segment called Global
Telecommunications. The operations of LMGT and IBS were previously included in
the Corporate and Other segment. Earlier 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 Corporation operates in five principal business segments: Systems
Integration, Space Systems, Aeronautical Systems, Technology Services and Global
Telecommunications. All other activities of the Corporation fall within the
Corporate and Other segment.
The following discussion of the results of operations of the Corporation's
business segments reflects Global Telecommunications as a separate segment and
other 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 (loss) profit."
In addition, the following table displays the impact of the nonrecurring and
unusual items discussed earlier and the related effects on each segment's
operating (loss) profit for each of the periods presented:
25
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Position
and Results of Operations
(continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----- ----- ----- -----
(In millions)
<S> <C> <C> <C> <C>
Nonrecurring and unusual items - (loss) profit:
Consolidated effects
Impairment loss on AES $(755) $ -- $(755) $ --
Gain on sale of Control Systems 302 -- 302 --
Charge related to Globalstar guarantee -- -- (141) --
Partial reversal of CalComp reserve -- -- 33 --
Sales of surplus real estate -- 24 20 24
Divestitures and other portfolio shaping
items (34) 29 (40) 9
Gain on sale of shares in L-3 -- -- -- 114
----- ----- ----- -----
$(483) $ 53 $(581) $ 147
===== ===== ===== =====
Segment effects
Systems Integration $(455) $ -- $(455) $ --
Space Systems -- 19 17 (1)
Aeronautical Systems -- -- -- --
Technology Services (28) -- (34) --
Global Telecommunications -- -- -- --
Corporate and Other -- 34 (109) 148
----- ----- ----- -----
$(483) $ 53 $(581) $ 147
===== ===== ===== =====
</TABLE>
In an effort to make the following discussion of significant operating results
of each business segment more comparable, the effects of these nonrecurring and
unusual items 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, Technology Services and Global Telecommunications 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 for the quarter ended September
30, 2000 remained consistent with the comparable 1999 period. Net sales for the
nine months ended September 30, 2000 decreased by three percent from the
respective 1999 period. Approximately $200 million of the year-to-year decrease
was attributable to volume declines in aerospace electronics systems activities.
Increases in net sales in certain other Systems Integration lines of business
were essentially offset by decreases in various other lines of business in the
segment.
Operating profit for the segment decreased by 11 percent and 5 percent for the
quarter and nine months ended September 30, 2000, respectively, from the
comparable 1999 periods. The majority of the quarter-to-quarter decrease is due
to an approximate $30 million decline in operating profit on the segment's
missiles and air defense product line. Approximately $20
26
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Position
and Results of Operations
(continued)
million of this decline was due to the absence in 2000 of a favorable adjustment
recorded in the third quarter of 1999 related to performance on the THAAD
program. The remainder of the quarter-to-quarter decrease in the missiles and
air defense product line is primarily due to the operating profit impact of
volume declines on certain fire control and sensor programs. For the nine months
ended September 30, 2000, the operating profit impact of the volume declines in
the segment's aerospace electronics systems activities discussed above accounted
for approximately $20 million of the decrease from the comparable 1999 period.
The remainder of the year-to-year decrease is attributable to an approximate $15
million decline in operating profit on the segment's missiles and air defense
product line. Included in this decline are the absences in 2000 of a $35 million
charge recorded in the second quarter of 1999 on the THAAD program partially
offset by the aforementioned $20 million adjustment in 1999 on the same program.
Space Systems
Net sales of the Space Systems segment decreased by eight percent and six
percent for the quarter and nine months ended September 30, 2000, respectively,
from the comparable 1999 periods. Quarter-to-quarter net sales decreased
primarily due to lower volume of military, civil, and classified satellite
activities, and due to volume declines in ground system activities, a line of
business that includes reconnaissance systems activities. Net sales for the nine
months ended September 30, 2000 decreased from the comparable 1999 period due to
volume declines of approximately $330 million in military, civil, and classified
satellite activities, and approximately $160 million in ground system
activities. These decreases were partially offset by increased volume of
approximately $200 million on commercial space vehicle activities, primarily
Atlas launch vehicles. The remainder of the year-to-year variance in net sales
primarily relates to decreased volume in government launch vehicle activity
which was partially offset by the favorable impact of previously recorded
adjustments on the Titan IV program discussed below.
Operating profit for the segment increased by six percent in the third quarter
of 2000 and decreased by eight percent for the nine months ended September 30,
2000, respectively, from the comparable 1999 periods. Quarter-to-quarter
operating profit increased by approximately $30 million due to the absence in
2000 of a launch vehicle contract cancellation charge recorded in the third
quarter of 1999. This increase was partially offset by an approximate $25
million decrease in operating profit related to the volume declines in military
satellites discussed above and the absence in 2000 of an award fee recorded in
the third quarter of 1999 on a military satellite contract. Approximately 70
percent of the decline in operating profit for the nine months ended September
30, 2000 from the comparable 1999 period was due to the impact of volume
declines on the military, civil, and classified satellite programs discussed
above. Continued pressures on commercial space programs reduced year-to-year
operating profit by approximately $90 million. Several items contributed to the
reduction, including reduced operating profit on commercial satellites, slight
increases in the expensing of start-up costs associated with the Atlas V (EELV)
program, reduced profitability on launch vehicle volume, and the net
effect of charges taken in each year on the Atlas program due to market and
pricing pressures.
27
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Position
and Results of Operations
(continued)
The Corporation expects continued market and pricing pressures related to its
commercial launch vehicle programs, including the Atlas V program. On a combined
basis, the aforementioned decreases more than offset the increases in operating
profit on commercial space programs due to the higher Atlas launch vehicle
activities discussed above. Offsetting the year-to-year impact of the declines
in commercial space programs were increases in operating profit due to the
absence in 2000 of an approximate $90 million negative adjustment recorded in
the second quarter of 1999 related to the Titan IV program (see Note 7), and the
favorable effect of an approximate $50 million contract modification recorded in
the second quarter of 2000 related to the same program. The remainder of the
year-to-year variance was mainly attributable to the approximate $50 million
operating profit impact of the aforementioned volume declines in government
launch vehicle activity.
Aeronautical Systems
Net sales of the Aeronautical Systems segment decreased by 14 percent and 16
percent for the quarter and nine months ended September 30, 2000, respectively,
from the comparable 1999 periods. Volume declines in various F-16 fighter
aircraft programs, primarily due to an approximate 70 percent reduction in
deliveries partially offset by other F-16 program activities, accounted for
approximately $145 million of the decrease in quarter-to-quarter net sales. The
remainder of the decrease is primarily the result of a decline in volume on
strategic alliance programs and a 50 percent reduction in C-130J airlift
aircraft deliveries during the third quarter of 2000 from the comparable 1999
period. The decrease in net sales for the nine months ended September 30, 2000
from the comparable 1999 period was primarily the result of an approximate $475
million decrease in volume on F-16 fighter aircraft programs, primarily due to
an approximate 60 percent reduction in deliveries. Approximately $175 million of
the remainder of the decrease in year-to-year net sales was due to a decline in
volume on C-130J airlift aircraft programs.
Operating profit for the segment decreased by approximately 27 percent and
increased by approximately 62 percent for the quarter and nine months ended
September 30, 2000, respectively, from the comparable 1999 periods. The quarter-
to-quarter decrease was mainly attributable to approximately $28 million in
lower operating profits associated with the decline in aircraft deliveries
discussed in the preceding paragraph. The year-to-year increase in operating
profit was primarily due to the absence in 2000 of an approximate $210 million
negative adjustment recorded during the second quarter of 1999 (see Note 7). The
increase resulting from the absence in 2000 of this charge was partially offset
by an approximate $140 million reduction in year-to-year operating profit
resulting from the decline in aircraft deliveries discussed in the preceding
paragraph.
Technology Services
Net sales of the Technology Services segment decreased by approximately three
percent and increased by approximately four percent for the quarter and nine
months ended September 30, 2000, respectively, from the comparable 1999 periods.
Approximately 75 percent of the decrease in third quarter 2000 net sales
resulted from a net decrease in volume on various federal technology services
programs. This net decrease was comprised of declines in volume on aircraft
maintenance and logistics contracts partially offset by increases in certain
government services
28
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Position
and Results of Operations
(continued)
contracts, primarily the Consolidated Space Operations Contract. The remainder
of the quarter-to-quarter variance was mainly the result of declines in volume
on certain defense and science energy services contracts due to program
completion. The increase in net sales for the nine months ended September 30,
2000 over the comparable 1999 period was primarily attributable to an
approximate $100 million net increase in volume on various federal technology
services programs partially offset by an approximate $40 million decline in
volume on certain defense and science energy services contracts principally due
to program completion.
Operating profit for the segment increased by approximately 59 percent and 18
percent for the quarter and nine months ended September 30, 2000, respectively,
over the comparable 1999 periods. Excluding the effects of operating profit
recorded in 1999 related to Lockheed Martin Hanford Company, which was divested
in the fourth quarter of 1999, operating profit for the segment would have
increased by approximately 70 percent and 23 percent for the quarter and nine
months ended September 30, 2000, respectively, over the comparable 1999 periods.
The operating profit impact of the increased volume on certain government
services contracts discussed in the preceding paragraph accounted for
approximately 80 percent of the increase in operating profit for the quarter,
partially offset by declines in volume on certain defense and science energy
services contracts due to program completion. The year-to-year increase in
operating profit was also consistent with the discussion of net sales in the
preceding paragraph, with approximately 80 percent of the variance due to
increases on various federal technology services programs partially offset by
declines on certain defense and science energy services contracts.
Global Telecommunications
Net sales of the Global Telecommunications segment increased by $129 million
and $238 million for the quarter and nine months ended September 30, 2000,
respectively, over the comparable 1999 periods. Quarter-to-quarter net sales
increased by approximately $110 million as a result of the Corporation's Merger
with COMSAT and the inclusion of COMSAT's consolidated operations into the
segment's results since August 1, 2000. The remainder of the quarter-to-quarter
increase was primarily attributable to the increased volume on systems and
technology programs. Consistent with the quarter, the increase in net sales for
the nine months ended September 30, 2000 over the comparable 1999 period was
primarily attributable to the inclusion of COMSAT's consolidated operations into
the segment's results. COMSAT's operations, including a COMSAT business acquired
as part of the Tender Offer in September 1999, accounted for approximately $140
million of the segment's year-to-year increase in net sales. Approximately 65
percent of the remaining increase in year-to-year net sales was attributable to
telecommunications satellite operations 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
systems and technology programs contributed another approximately $30 million to
the year-to-year increase in net sales.
Operating profit for the segment decreased by approximately $2 million and
approximately $6 million for the quarter and nine months ended September 30,
2000 from the respective 1999 periods. Quarter-to-quarter operating profit
decreased approximately $20 million due to performance on certain IBS
information outsourcing programs. These decreases were partially
29
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Position
and Results of Operations
(continued)
offset by approximately $10 million related to operating profit increases
attributable to the addition of COMSAT's operating results into the segment as
discussed in the preceding paragraph. The remainder of the quarter-to-quarter
variance was mainly the result of reduced operating expenses at LMGT
headquarters. Operating profit for the nine months ended September 30, 2000
decreased by approximately $25 million from the comparable 1999 period due to
pricing pressures and the impact of a 2000 negative adjustment related to
changes in estimates for award and incentive fees resulting from performance on
IBS information outsourcing programs. This decrease was partially offset by the
aforementioned approximate $10 million operating profit impact of the addition
of COMSAT's operating results since August 1, 2000, and by approximately $10
million related to the operating profit impact of increased volume on systems
and technology programs discussed in the preceding paragraph.
Corporate and Other
Net sales of the Corporate and Other segment increased by 7 percent and 11
percent for the quarter and nine months ended September 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 certain international services contracts. These quarter-
to-quarter increases were partially offset by the absence in 2000 of
approximately $5 million in net sales attributable to the Corporation's
commercial graphics company, Real 3D, which was divested in the fourth quarter
of 1999. Year-to-year net sales increased by approximately $60 million as a
result of higher volume on state and municipal services programs and certain
international services contracts. These year-to-year increases were partially
offset by the absence in 2000 of approximately $15 million in sales attributable
to the segment's Real 3D operating unit.
Operating profit for the segment decreased for the quarter and increased for
the nine months ended September 30, 2000 over the respective 1999 periods.
Quarter-to-quarter operating profit increases due to a higher volume of state
and municipal services programs were more than offset by the absence in 2000 of
operating profit associated with the segment's Real 3D operating unit and
reduced operating profit at other Corporate units. The majority of the increase
in operating profit for the nine months ended September 30, 2000 over the
comparable 1999 period was due to the absence in 2000 of operating losses
associated with the segment's Real 3D operating unit and the operating profit
impact of the higher volume on state and municipal services programs discussed
above. These increases were partially offset by 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 as well as reduced operating
profit at other Corporate units.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, $1.7 billion of cash was
provided by operating activities, compared to $383 million during the comparable
1999 period. This fluctuation was attributable in part 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 $500 million (after payments to subcontractors and
other expenditures associated with the contract totaling approximately $400
million), and
30
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
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. Cash provided by operating activities also increased due to
accelerated payments received in the first nine months of 2000 on certain
aircraft and space systems programs as a result of exceeding performance
expectations, and due to the Corporation's continued focus on working capital
improvements. These increases were partially offset by the $150 million net
payment related to the Corporation's guarantee of Globalstar's indebtedness as
described more fully in Note 7.
Net cash provided by investing activities during the first nine months of 2000
was $379 million as compared to $1.6 billion used during the comparable 1999
period. The 2000 amount included $510 million in cash provided by the
Corporation's divestiture of Control Systems, $164 million provided by the sale
of approximately one-third of the Corporation's 22.2 percent interest in
Inmarsat Ventures Limited and approximately $75 million of cash acquired in the
Merger (see Note 2). These items were partially offset by approximately $283
million in cash used for additions to property, plant and equipment, and
approximately $107 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. The remainder of cash provided by investing
activities for 2000 was attributable to other acquisition and divestiture
activities. The 1999 amount included approximately $1.2 billion in cash used for
the acquisition of 49 percent of the outstanding stock of COMSAT as discussed in
"Note 2 --Business Combination with COMSAT Corporation" of the Notes to
Unaudited Condensed Consolidated Financial Statements (Note 2), and
approximately $442 million in cash used for additions to property, plant and
equipment. These uses of cash for investing activities were partially offset by
the receipt of $182 million resulting from the sale of L-3 common stock
discussed above.
Net cash used for financing activities during the nine months ended September
30, 2000 was $641 million as compared to $897 million provided by financing
activities during the comparable 1999 period. The variance between periods was
primarily due to net repayments of commercial paper and long-term debt totaling
$515 million during the first nine months of 2000 versus an approximate $1.1
billion net increase in total debt during the comparable 1999 period used to
finance the COMSAT Tender Offer. This increase in cash used for financing
activities was partially offset by an approximate $126 million decrease in
dividend payments during the nine months ended September 30, 2000 from the
comparable 1999 period.
Total debt, including short-term borrowings, decreased by approximately $110
million during the first nine months of 2000 from approximately $12 billion at
December 31, 1999. This decrease was primarily attributable to net repayments of
commercial paper and long-term debt of approximately $515 million, partially
offset by approximately $380 million of debt obligations recorded at fair value
as a result of the Merger with COMSAT (see Note 2). The Corporation's long-term
debt is primarily in the form of publicly issued, fixed-rate notes and
debentures. During the first nine months of 2000, cash and cash equivalents
increased by $1.5 billion. Significant transactions contributing to the increase
include the $510 million in cash proceeds received from the sale of Control
Systems, and the approximate $500 million net cash advance received on the
UAE F-16
31
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
fighter aircraft contract. The majority of the cash and cash equivalents held by
the Corporation as of September 30, 2000 are expected to be used to pay down
debt in future periods.
Total stockholders' equity was approximately $7.1 billion at September 30,
2000, an increase of approximately 11 percent from the December 31, 1999
balance. As discussed previously in Note 2, the Corporation issued
approximately 27.5 million shares of its common stock (in exchange for each
outstanding share of COMSAT's common stock, other than shares held by the
Corporation) at a price of $49 per share. This transaction resulted in a $1.346
billion increase in stockholders' equity. An additional increase in
stockholders' equity of $158 million was attributable to employee stock option
and ESOP activities. These increases were partially offset by the year-to-date
2000 net loss of $608 million, dividend payments of $132 million, and other
comprehensive losses of $43 million. As a result of the above factors, the
Corporation's debt to total capitalization ratio decreased from 65.3 percent at
December 31, 1999 to 62.6 percent at September 30, 2000.
There were no commercial paper borrowings outstanding at September 30, 2000.
The Corporation maintains 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 as of September 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 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 changes in
financial, market and economic conditions to manage the types, amounts and
maturities of the Corporation's indebtedness. Periodically, the Corporation may
refinance existing indebtedness, vary its mix of variable rate and fixed rate
debt, or seek alternative financing sources for its cash and operational needs.
Cash and cash equivalents (including temporary investments), internally
generated cash flow from operations and other available financing resources are
expected to be sufficient to meet anticipated operating, capital expenditure and
debt service requirements and discretionary investment needs during the next
twelve months. Consistent with the Corporation's desire to generate cash to
reduce debt and invest in its core businesses, management anticipates that,
subject to prevailing financial, market and economic conditions, the Corporation
may continue to divest certain non-core businesses, passive equity investments
and surplus properties.
In connection with 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 September
32
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
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 September 30,
2000.
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 certain borrowings
of Space Imaging LLC (Space Imaging), a joint venture in which the Corporation
holds a 46 percent ownership interest. The amount of borrowings outstanding as
of September 30, 2000 for which Lockheed Martin was guarantor was approximately
$125 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 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 plans 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.
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 September 30, 2000.
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. Beginning January 1, 2001, the Corporation will
account for these contracts under the provisions of SFAS No. 133, as amended. At
September 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. 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
33
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
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 services were not provided within the contracted time
frame. At September 30, 2000, approximately $668 million related to launches
not yet provided was included in customer advances and amounts in excess of
costs incurred, and approximately $784 million of payments to the Russian
manufacturer for launches not yet provided was included in inventories. At
September 30, 2000, approximately $28 million of the customer advances were
associated with launches in excess of the quota, and approximately $254 million
of the $784 million of payments to the aforementioned Russian manufacturer were
associated with launches in excess of the number currently allowed under the
quota. Through September 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, if the quota were to be extended or if a new quota were
to be imposed, future launches could be impacted. Management is continuing to
work toward achieving a favorable resolution to eliminate the quota or to raise
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
1999 Annual Report on Form 10-K, the Corporation has entered into agreements
with RD AMROSS, a joint venture between Pratt & Whitney and the Russian firm NPO
Energomash, for the development and purchase, subject to certain conditions, of
up to 101 RD-180 booster engines for use in two models of the Corporation's
Atlas launch 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 September 30, 2000 and
December 31, 1999
34
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
were payments made under these agreements of approximately $51 million and $55
million, respectively.
As mentioned previously, the Corporation holds a 46 percent ownership interest
in Space Imaging and guarantees approximately $125 million of Space Imaging's
borrowings. The investment is accounted for under the equity method of
accounting. As a result of continued competitive pressures in the commercial
imaging market and financial market conditions related to space-based
information systems, Space Imaging's business and financing plans are currently
under review by its investors, including the Corporation. At September 30, 2000,
the Corporation's investment in and receivables from Space Imaging amounted to
approximately $160 million.
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 and electronic systems and support; domestic and
international telecommunications regulatory developments; market conditions and
other factors affecting the value of the Corporation's equity investments; as
well as other economic, political and technological risks and uncertainties.
Readers are cautioned not to place undue reliance on these forward looking
statements which speak only as of the date of this Form 10-Q. The Corporation
does not undertake any obligation to publicly release any revisions to these
forward looking statements to reflect events, circumstances or changes in
expectations after the date of this Form 10-Q, or to reflect the occurrence of
unanticipated events. The forward looking statements in this document are
intended to be subject to the safe harbor protection provided by Sections 27A of
the Securities Act and 21E of the Exchange Act.
For a discussion identifying some important factors that could cause actual
results to vary materially from those anticipated in the forward looking
statements, see the Corporation's Securities and Exchange Commission filings
including, but not limited to, the discussion of
35
<PAGE>
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
"Competition and Risk" and the discussion of "Government Contracts and
Regulations" on 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 20 through 36 of this
Form 10-Q; and "Note 2 -- Business Combination with COMSAT Corporation,"
"Note 5 -- Contingencies," and "Note 7 -- Divestitures and Other" of the Notes
to Unaudited Condensed Consolidated Financial Statements on pages 6 through 8,
pages 10 through 12 and pages 16 through 19, respectively, of the Unaudited
Condensed Consolidated Financial Statements included in this Form 10-Q.
36
<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, as described in "Note 5 -- Contingencies" of the
Notes to Unaudited Condensed Consolidated Financial Statements in this Form 10-Q
and in the Corporation's 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), the Corporation's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 (Second 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, the First Quarter Form 10-Q and the Second
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, the First Quarter Form 10-Q and the Second Quarter
Form 10-Q. See the "Legal Proceedings" section of the Form 10-K, the First
Quarter Form 10-Q and the Second Quarter Form 10-Q for a description of
previously reported matters.
As previously reported, the Corporation and certain of its current or former
officers and directors are defendants in two consolidated class action
complaints filed by shareholders in the United States District Court for the
Central District of California, Kops v. Lockheed Martin Corp. and In re Lockheed
Martin Corp. Securities Litigation. On October 2, 2000, the Court dismissed,
with leave to amend, all of the plaintiffs' allegations in the Kops complaint
with the exception of an allegation that the Corporation improperly recognized
revenue related to a government contract in the first quarter of 1999. The
Corporation plans to continue to contest the remaining allegation. On October 4,
2000, the Court dismissed with prejudice plaintiffs' allegations in the Lockheed
Martin Corp. Securities Litigation complaint that the Corporation failed to
disclose properly accounting adjustments in 1998 relating to its CalComp
subsidiary and the reversal of a reserve on the Atlas program. The Court also
dismissed the remainder of plaintiffs' allegations in that complaint with leave
to amend.
37
<PAGE>
Lockheed Martin Corporation
Part II - Other Information (continued)
On August 3, 2000, Electromechanical Systems, Inc. (EMS), a subsidiary of
COMSAT Corporation that became part of the LMGT business segment as a result of
the Corporation's acquisition of COMSAT, entered a plea of guilty in the United
States District Court for the Middle District of Florida in Tampa to one-count
charging obstruction of federal audit in violation of 18 U.S.C. (S) 1516 related
to work performed for the United States Navy on radar pedestals from 1988
through February 1999. As part of a plea agreement, EMS agreed to pay the
government $7.5 million in restitution, and the United States Attorney's Office
for the Middle District of Florida agreed that it will not charge COMSAT, any
COMSAT successor corporation, or any current or former COMSAT affiliate with any
criminal offense relating to the conduct giving rise to the plea. On November 6,
2000, the Court ordered EMS to pay $7.5 million in restitution, as agreed in the
plea agreement, assessed a $500 thousand fine against EMS, and placed EMS on
probation for five years.
As previously reported by COMSAT, in January 1999, the United States
Department of Justice announced that it intended to join a lawsuit filed by
former employees of EMS under the qui tam provisions of the Civil False Claims
Act. The lawsuit, which alleges conduct similar to that charged in the criminal
count and fraudulent billing practices, names EMS, COMSAT, and several current
or former employees of EMS and seeks potential damages estimated at up to $40
million. The lawsuit has been stayed pending completion of the criminal
investigation by the United States Attorney's Office.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. Exhibit 10.1. Lockheed Martin Corporation Management Incentive
Compensation Plan.
2. Exhibit 10.2. COMSAT Corporation Non-Employee Directors Stock Plan
(incorporated by reference from Exhibit 10.11 to the Form 10-K of
COMSAT Corporation, SEC File No. 1-4929, for the fiscal year ended
December 31, 1996).
3. Exhibit 10.3. COMSAT Corporation Directors and Officers Deferred
Compensation Plan (incorporated by reference from Exhibit 10.24 to Form
10-K of COMSAT Corporation, SEC File No. 1-4929, for the fiscal year
ended December 31, 1996).
4. Exhibit 12. Computation of Ratio of Earnings to Fixed Charges for the
nine months ended September 30, 2000.
5. Exhibit 27. Financial Data Schedule for the nine months ended September
30, 2000.
(b) Reports on Form 8-K filed in the third 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.
38
<PAGE>
Lockheed Martin Corporation
Part II - Other Information (continued)
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.
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 merger 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.
39
<PAGE>
Lockheed Martin Corporation
Part II - Other Information (continued)
Item 7. Financial Statements and Exhibits
Lockheed Martin Corporation Press Release dated August 3,
2000.
(c) Reports on Form 8-K filed subsequent to the third quarter of 2000.
1. Current report on Form 8-K filed on October 24, 2000.
Item 5. Other Events
The Corporation filed certain restated financial information
to reflect its Global Telecommunications business as a
separate business segment.
40
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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: November 13, 2000 by: /s/ Christopher E. Kubasik
----------------- -------------------------
Christopher E. Kubasik
Vice President and Controller
(Chief Accounting Officer)
41
