Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Business Overview: Lockheed Martin researches, designs, develops, manufactures, and operates advanced technology systems for domestic and international defense and commercial markets. Principal customers are U.S. Government agencies. The Corporation operates through four principal segments: Systems Integration, Space Systems, Aeronautics, and Technology Services. In December 2001, the Company announced an exit from its Global Telecommunications services business, reclassifying certain operations as discontinued.
Key Financial Metrics
| Metric (in millions) | 2001 | 2000 |
|---|---|---|
| Net Sales | $23,990 | $24,541 |
| Earnings from Operations | $1,543 | $1,660 |
| Net (Loss) Earnings | $(1,046) | $(519) |
| Diluted EPS (Net) | $(2.42) | $(1.29) |
| Operating Cash Flow | $1,825 | $2,016 |
| Total Debt (Long-term + Current) | $7,511 | $9,947 |
| Cash and Cash Equivalents | $912 | $1,505 |
| Backlog (Total Negotiated) | $71,269 | $55,076 |
Note: 2001 results include significant nonrecurring charges related to the exit from Global Telecommunications and investment write-downs.
Material Changes vs. Prior Period
- Revenue: Net sales decreased 2% to $23.99 billion, driven by declines in Systems Integration and Space Systems, partially offset by growth in Aeronautics and Technology Services.
- Profitability: Operating profit declined 29% to $888 million. Excluding nonrecurring items, operating profit would have increased 1% year-over-year.
- Net Loss: The net loss widened significantly to $1.046 billion (from $519 million in 2000). This was primarily due to:
- Discontinued Operations: A $1.3 billion after-tax charge related to the exit from Global Telecommunications services.
- Investment Write-downs: Charges of $367 million for Astrolink and $361 million for Loral Space & Communications.
- Extraordinary Item: A $36 million loss on the early extinguishment of debt.
- Debt Reduction: Total debt decreased by approximately $2.4 billion due to pre-payments of notes to GE, scheduled maturities, and early retirements of other debt instruments.
- Backlog Growth: Total negotiated backlog increased 29% to $71.3 billion, largely driven by a $19 billion order for the F-35 Joint Strike Fighter System Development and Demonstration (SDD) contract.
Guidance, Outlook, and Risks
- Outlook: Management anticipates a growth trend in the defense budget following the September 11 attacks and the Quadrennial Defense Review (QDR), focusing on homeland security, missile defense, and space capabilities. However, no assurance exists that Congress will approve increased funding.
- Segment Realignment: The Global Telecommunications segment has been eliminated. Remaining businesses were realigned into Space Systems, Technology Services, and Corporate & Other. The Company expects to complete the sale of held-for-sale telecommunications businesses by the end of 2002.
- Key Programs:
- F-35 (JSF): Awarded the SDD contract in October 2001; low-rate initial production scheduled for 2005-2006.
- F-22: Received authorization for Production Lot 1 (10 aircraft) in September 2001.
- Commercial Space: Facing pricing pressures and reduced demand due to overcapacity in the telecommunications industry.
- Risks and Contingencies:
- Government Funding: 78% of sales are to the U.S. Government; programs are subject to annual appropriations and potential termination.
- Environmental: Significant exposure at former facilities in Redlands and Burbank, California. Estimated future expenditures are approximately $85 million (Redlands) and $50 million (Burbank/Glendale), with additional accrued liabilities of $165 million for other sites.
- Legal: Ongoing investigations by the SEC and Department of Justice regarding accounting practices and contract pricing (e.g., LANTIRN program). Class action securities litigation is pending.
- Investments: Value of satellite investments (Intelsat, Inmarsat, New Skies) is subject to FCC regulations and market conditions.
Investor Verification Checklist
- Nonrecurring Charges: Verify the magnitude and tax impact of the $2.0 billion in charges related to the Global Telecommunications exit and investment write-downs to understand core operating performance.
- F-35 Contract Status: Confirm the funding certainty and timeline for the $19 billion F-35 SDD contract, which significantly boosted backlog but has a long performance period.
- Debt Maturities: Review the schedule of debt repayments, noting $89 million due in 2002 and the Company's ability to service debt given the net loss.
- Environmental Liabilities: Assess the potential for increased costs at the Redlands site if California adopts the stricter perchlorate standard (4 ppb).
- Discontinued Operations: Monitor the progress of the sale of Global Telecommunications businesses held for sale to realize value and close the segment.
- Legal Proceedings: Track the status of the SEC investigation regarding the Northrop Grumman merger disclosures and the DOJ investigation into LANTIRN contract pricing.