LMT

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2001
Business Overview: The Corporation operates in five principal segments: Systems Integration, Space Systems, Aeronautics, Technology Services, and Global Telecommunications. The period includes the consolidation of COMSAT Corporation operations (acquired August 2000) and ongoing strategic divestitures of non-core businesses.

Key Financial Metrics

Note: Total Debt includes short-term borrowings and long-term debt. Free Cash Flow calculated as Operating Cash Flow less Capital Expenditures ($193M for 6 Mo 2001).

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 4% in Q2 and 7% year-to-date (YTD) compared to 2000. Adjusted for acquisitions and divestitures, sales declined 2% (Q2) and 5% (YTD).
  • Aeronautics: Sales dropped 16% due to reduced deliveries of F-16 and C-130J aircraft.
  • Space Systems: Sales declined 10% YTD due to lower commercial space volume and the absence of favorable Titan IV adjustments recorded in 2000.
• Profitability Improvement: Despite lower sales, Operating Profit increased 29% in Q2 and 22% YTD. This was driven by cost controls and the absence of a $141M Globalstar guarantee charge recorded in Q2 2000.
  • Unusual Items (6 Mo 2001): Net earnings included a $111M gain from the sale of surplus real estate (Space Systems) and a $100M impairment charge related to an investment in Americom Asia-Pacific (Global Telecommunications).
• Debt Reduction: Total debt decreased by approximately $1.2 billion YTD, primarily due to $825M in debt maturities and a $300M pre-payment of private placement debt. The debt-to-total-capitalization ratio improved from 58% to 54%.

Guidance, Outlook, and Risks

• Divestitures: The Company announced a definitive agreement to sell Lockheed Martin IMS Corporation for $825 million (expected to close Q3 2001), generating an estimated after-tax gain of $250M-$300M. It also agreed to sell COMSAT Mobile Communications for $116.5M.
• Accounting Changes: Adoption of SFAS No. 142 (effective Jan 1, 2002) will eliminate goodwill amortization, expected to increase 2002 net earnings by approximately $270 million ($0.60 per share).
• Backlog: Undelivered orders stood at $53.8 billion, down from $56.4 billion at year-end 2000, largely due to a $450M reduction in the Global Telecommunications segment related to the deferral of the ACeS 2 satellite contract.
• Contingencies:
  • Environmental: Estimated expenditures of $90M for Redlands, CA groundwater remediation and $45M for Burbank/Glendale, CA (net of government reimbursements). A liability of $190M is recorded for other properties.
  • Legal: Ongoing litigation with the U.S. Department of Energy regarding the Pit 9 waste remediation contract; the Company is seeking cost recovery for unanticipated expenses.
• Liquidity: Management anticipates cash flow from operations and available financing will be sufficient to meet requirements for the next 12 months. A $3.5 billion revolving credit facility is in place with no borrowings outstanding.

Investor Verification Checklist

• Divestiture Timing: Confirm the closing dates and final proceeds for the IMS Corporation ($825M) and COMSAT Mobile Communications ($116.5M) sales.
• Space Systems Volatility: Monitor the commercial launch vehicle market and the status of the ACeS 2 satellite contract deferral.
• Environmental Liabilities: Track regulatory updates on perchlorate action levels in Redlands, CA, which could increase remediation costs beyond the current $90M estimate.
• DOE Litigation: Review developments in the Pit 9 contract dispute with the Department of Energy regarding cost recovery.
• Goodwill Impact: Assess the impact of the SFAS No. 142 adoption on 2002 earnings and potential future goodwill impairment charges.