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, 2002
Business Overview: Lockheed Martin designs, develops, and manufactures advanced technology systems for domestic and international defense and commercial markets, with the U.S. Government as its principal customer. The company operates four principal segments: Systems Integration, Space Systems, Aeronautics, and Technology Services.

Key Financial Metrics

Note: Debt figures calculated as Current maturities of long-term debt ($762M) plus Long-term debt ($6,687M) for June 30, 2002; and Current maturities ($89M) plus Long-term debt ($7,422M) for Dec 31, 2001.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 11% in Q2 2002 and 17% YTD compared to 2001. Growth was driven by the Aeronautics segment (up 46% in Q2) and Systems Integration, offsetting a slight decline in Space Systems commercial programs.
• Profitability: Operating profit rose 24% in Q2 and 22% YTD. This improvement is partially attributable to the adoption of SFAS No. 142, which eliminated goodwill amortization ($61M impact in Q2 2001, $122M YTD 2001).
• Tax Impact: The effective income tax rate dropped significantly to 8% in Q2 and 19% YTD 2002 (vs. 39% and 37% in 2001). This was primarily due to a $90 million one-time benefit from a settled R&D tax credit claim and the cessation of non-deductible goodwill amortization.
• Discontinued Operations: The company exited its Global Telecommunications Services business. Losses from discontinued operations were $12M in Q2 2002 and $18M YTD.

Guidance, Outlook, and Risks

Management Commentary: Management notes that results for the six months ended June 30, 2002, are not necessarily indicative of full-year results due to the long-term nature of defense contracts. Excluding the R&D tax credit and accounting changes, adjusted operating profit increased 7% in Q2 and 6% YTD.

Liquidity and Capital: Cash and cash equivalents increased to $2.4 billion. Total debt decreased by approximately $62 million YTD. The company maintains $2.5 billion in revolving credit facilities with no borrowings outstanding.

Risks and Contingencies:

• Environmental: Significant exposure exists regarding groundwater contamination at Redlands and Burbank, California. Estimated expenditures are $85 million for Redlands and $50 million for Burbank/Glendale, though some costs may be recoverable from the U.S. Government.
• Legal: Ongoing litigation with the U.S. Department of Energy regarding the Pit 9 waste remediation contract (terminated for default in 1998). The company is appealing a dismissal of its claim for cost recovery.
• Investments: Significant investments in satellite/telecom entities (Intelsat, Inmarsat) face risks related to the ORBIT Act deadlines for IPOs and market conditions in the telecom sector.
• Commercial Launch: Continued industry-wide oversupply and pricing pressure in the commercial launch market negatively impacted Space Systems margins.

Investor Verification Checklist

• Adjusted Earnings: Verify the impact of the $90 million R&D tax credit settlement on Q2 2002 earnings to assess core operational performance.
• Accounting Changes: Review the reconciliation of 2001 results to exclude goodwill amortization (SFAS 142) for accurate year-over-year comparisons.
• Discontinued Operations: Monitor the status of the sale of COMSAT World Systems and COMSAT-International, noting potential termination rights held by Intelsat due to WorldCom bankruptcy.
• Environmental Liabilities: Assess the potential for increased cleanup costs at the Redlands site if California formally adopts the stricter perchlorate standard (4 ppb).
• Debt Structure: Confirm the maturity profile of long-term debt and the status of the $150 million guarantee for Space Imaging LLC borrowings.