Business Context and Reporting Period
Company: Lockheed Martin Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2000
Business Overview: Lockheed Martin is a diversified global enterprise integrating, researching, designing, developing, and manufacturing advanced technology systems for defense, civil government, and commercial markets. The company operates through five principal segments: Systems Integration, Space Systems, Aeronautics, Technology Services, and Global Telecommunications (which includes the newly acquired COMSAT Corporation).
Key Financial Metrics
| Metric (in millions, except per share) | 2000 | 1999 |
|---|---|---|
| Net Sales | $25,329 | $25,530 |
| Earnings from Operations | $1,614 | $1,665 |
| Net (Loss) Earnings | $(519) | $382 |
| Diluted EPS (Loss) | $(1.29) | $0.99 |
| Operating Cash Flow | $2,016 | $1,077 |
| Total Debt (Short + Long Term) | $9,947 | $11,952 |
| Cash and Cash Equivalents | $1,505 | $455 |
| Total Stockholders' Equity | $7,160 | $6,361 |
Backlog: Total negotiated backlog was $56.4 billion at year-end 2000, an increase from $45.9 billion in 1999.
Material Changes vs. Prior Period
- Net Loss: The company reported a net loss of $519 million in 2000, a significant decline from $382 million in net earnings in 1999. This was primarily driven by nonrecurring and unusual items totaling $951 million in after-tax charges.
- Divestitures: The company sold its Aerospace Electronics Systems (AES) business for $1.67 billion and Control Systems for $510 million. The AES sale resulted in a nonrecurring loss of $598 million (pretax), while the Control Systems sale generated a gain of $302 million (pretax).
- Acquisition: Completed the merger with COMSAT Corporation in August 2000, creating the new Global Telecommunications segment. The total purchase price was approximately $2.6 billion.
- Debt Reduction: Total debt decreased by approximately 17% (from ~$12.0 billion to ~$9.9 billion) due to tender offers for long-term debt and proceeds from divestitures.
- Segment Performance: Operating profit decreased 40% year-over-year. Excluding nonrecurring items, operating profit would have decreased only 1%. The Space Systems and Global Telecommunications segments saw significant profit declines, while Systems Integration and Technology Services saw modest increases.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items Impacting 2000 Results
- AES Transaction Loss: $598 million pretax loss ($878 million after-tax) related to the sale of Aerospace Electronics Systems.
- Globalstar Guarantee: $141 million pretax charge ($91 million after-tax) for guaranteeing Globalstar indebtedness.
- ACeS Impairment: $117 million pretax charge ($77 million after-tax) due to an anomaly with the ACeS satellite and market conditions.
- Debt Extinguishment: $95 million after-tax extraordinary loss on the early extinguishment of debt.
Outlook and Management Commentary
- F-22 Program: Completed all 11 Defense Acquisition Board test criteria required for Production Lot 1. Awaiting final authorization from the U.S. Air Force and Office of the Secretary of Defense to begin production.
- Joint Strike Fighter (JSF): Completed flight tests for the conventional take-off and landing version. Down-select decision expected in late 2001.
- Defense Budget: Management notes the new Bush Administration is conducting a "top-to-bottom" review of defense expenditures. While the decline in defense budgets may have ended, the outcome of the review is uncertain.
- Commercial Space: Facing pricing pressures and reduced demand due to excess capacity and bankruptcies of competitors (Iridium, ICO).
Risks and Contingencies
- Government Dependence: Approximately 70% of net sales are to the U.S. Government, subject to funding uncertainties and contract terminations.
- Environmental Liabilities: Accrued approximately $190 million for environmental remediation at various sites, plus specific obligations of ~$90 million (Redlands) and ~$45 million (Burbank/Glendale). Total exposure is difficult to estimate due to evolving regulations.
- Legal Proceedings: Subject to various investigations (e.g., LANTIRN program, Unisys facility, securities litigation) and litigation regarding environmental contamination and employment discrimination.
Investor Verification Checklist
- F-22 Production Authorization: Verify the timeline and certainty of the U.S. Government's decision to authorize full-rate production of the F-22 fighter aircraft.
- Nonrecurring Item Recurrence: Assess whether the charges related to Globalstar, ACeS, and AES divestitures are truly one-time events or indicative of ongoing structural issues in those business lines.
- Environmental Accrual Adequacy: Review the sufficiency of the $190 million environmental accrual and the potential for increased liabilities at Redlands and Burbank sites as regulatory standards evolve.
- COMSAT Integration: Evaluate the financial performance and synergy realization of the newly integrated Global Telecommunications segment post-merger.
- Debt Maturities: Confirm the company's ability to service $882 million in long-term debt maturing in 2001 and manage its leverage ratio.