LMT

Lockheed Martin Corporation 2002 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: Lockheed Martin Corporation
Reporting Period: Fiscal year ended December 31, 2002
Filing Date: March 6, 2003
Business Overview: Lockheed Martin is a global aerospace and defense contractor. Approximately 80% of net sales in 2002 were derived from the U.S. Government, with 14% from foreign governments and 6% from commercial customers. The company operates through four principal segments: Systems Integration, Space Systems, Aeronautics, and Technology Services. In Q4 2002, the company changed its segment reporting presentation to align with senior management's evaluation criteria, eliminating the "Corporate and Other" segment.

Key Financial Metrics (2002)

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 11% to $26.6 billion, driven by volume increases across all segments, particularly in Aeronautics (F-35, F/A-22) and Systems Integration.
• Profitability: Operating profit rose 39% to $1.2 billion. Adjusted for unusual items and the adoption of FAS 142 (which eliminated goodwill amortization), operating profit increased 9% over 2001.
• Turnaround from Loss: The company returned to net earnings of $500 million in 2002, compared to a net loss of $1.0 billion in 2001. The 2001 loss was heavily impacted by a $1.3 billion charge related to the exit from global telecommunications services (discontinued operations).
• Unusual Items Impact: 2002 results were reduced by $1.1 billion in unusual items, primarily due to a $776 million write-down of telecommunications investments (Intelsat, Inmarsat, New Skies), a $173 million charge related to Russian launch vehicle advances, and a $163 million charge for the Space Imaging investment and guarantee.
• Accounting Changes: Adoption of FAS 142 in 2002 eliminated goodwill amortization, resulting in a $274 million increase in operating profit compared to 2001.

Guidance, Outlook, Risks, and Contingencies

Outlook and Commentary: Management expects U.S. Government sales to remain the primary revenue source. The company is well-positioned for defense programs including the F/A-22, F-35, and missile defense systems. However, the commercial space market faces overcapacity and pricing pressures. The company plans to continue reducing debt and exploring the sale of non-core assets.

Key Risks:

• Government Dependence: 80% of revenue relies on U.S. Government contracts, which are subject to funding uncertainties, termination for convenience, and political shifts.
• Contract Accounting: Significant judgment is required in estimating costs and revenues for long-term contracts; changes in estimates can materially affect future results.
• Equity Investments: Continued volatility in the telecommunications and satellite industries poses risks to remaining equity investments.
• Environmental Liabilities: The company faces ongoing remediation costs at various sites (e.g., Redlands, CA; Great Neck, NY), with a recorded liability of $445 million at year-end.
• Legal Proceedings: Ongoing investigations by the SEC and DOJ regarding past disclosures and contract compliance, as well as securities litigation and environmental lawsuits.

Unusual Items: Significant charges in 2002 included the write-down of telecom investments and the recognition of a $150 million debt obligation related to the guarantee of Space Imaging's credit facility.

Investor Verification Checklist

• Unusual Item Adjustments: Verify the "adjusted" operating profit of $2.3 billion (excluding $1.1 billion in unusual charges) to assess core operational performance.
• Telecom Investment Exposure: Review the remaining carrying value of equity investments in Intelsat, Inmarsat, and New Skies for potential future impairments.
• Space Imaging Guarantee: Confirm the status of the $150 million debt obligation recorded for the Space Imaging guarantee and the likelihood of recovery.
• Backlog Funding: Analyze the ratio of funded ($36.1B) to unfunded backlog to assess revenue visibility given Congressional appropriation risks.
• Pension Liability: Review the $1.5 billion reduction in stockholders' equity due to the minimum pension liability adjustment and future funding requirements under CAS.
• Environmental Accruals: Monitor the $445 million environmental liability, particularly the $185 million accrual for the Redlands, CA site, for potential increases due to regulatory changes.