CorporationUNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended
September 30, 2002 ------------------March 31, 2003 Commission file number 1-11437-------LOCKHEED MARTIN CORPORATION
--------------------------- (Exact(Exact name of registrant as specified in its charter)
MARYLAND 52-1893632 - ----------------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 6801 ROCKLEDGE DRIVE, BETHESDA, MD 20817 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code)
MARYLAND
52-1893632
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
6801 ROCKLEDGE DRIVE, BETHESDA, MD
20817
(Address of principal executive officers)
(Zip Code)
(301) 897-6000
---------------------------------------------------- (Registrant's(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO
_______ -----Indicate the number of shares outstanding of each of the
issuer'sissuer’s classes of common stock, as of the latest practicable date.Class Outstanding as of October 31, 2002 - ------------------------------------ ---------------------------------- Common stock, $1 par value 456,079,806
Class
Outstanding as of April 30, 2003
Common stock, $1 par value
450,098,028
LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2002 -------------MARCH 31, 2003
Page No.
--------Part I. Financial Information
Item 1. Financial Statements
4
5
6
Notes to Unaudited Condensed Consolidated Financial Statements
.........................7
17
Item 3. Quantitative and Qualitative Disclosure of Market Risk
........................ 3127
Item 4. Controls and Procedures
....................................................... 3228
Part II. Other Information
Item 1. Legal Proceedings
............................................................. 3431
32
Item 6. Exhibits and Reports on Form 8-K
..............................................33
35
Signatures .................................................................................... 37Management Certifications
..................................................................... 3836
Exhibit 10.1 Lockheed Martin Corporation Deferred Management Incentive Compensation Plan, as amended effective October 1, 2002 Exhibit 10.2 Lockheed Martin Corporation Directors Equity Plan, as amended effective October 24, 2002 Exhibit 10.3 Lockheed Martin Corporation Directors Deferred Compensation Plan, as amended effective October 24, 2002 2LOCKHEED MARTIN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2002 -------------MARCH 31, 2003INDEX (continued)
Exhibit 10.4 Lockheed Martin Corporation Directors Deferred Stock Plan, as amended effective October 24, 2002 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 3Part
Exhibit 3
Bylaws of Lockheed Martin Corporation, as amended
Exhibit 10.1
Lockheed Martin Corporation 2003 Incentive Performance Award Plan
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges
Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
PART I.
Financial InformationFINANCIAL INFORMATIONItem 1. Financial Statements
Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Earnings
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- (In millions, except per share data)Net sales $ 6,542 $ 6,221 $ 18,798 $ 16,656 Cost of sales 5,989 5,783 17,324 15,469 ------- ------- -------- -------- Earnings from operations 553 438 1,474 1,187 Other income (expense), net 23 (380) 102 (311) ------- ------- -------- -------- 576 58 1,576 876 Interest expense 147 172 440 549 ------- ------- -------- -------- Earnings (loss) from continuing operations before income taxes 429 (114) 1,136 327 Income tax expense (benefit) 129 (27) 261 138 ------- ------- -------- -------- Earnings (loss) from continuing operations 300 (87) 875 189 (Loss) earnings from discontinued operations (10) 300 (28) 273 ------- ------- -------- -------- Net earnings $ 290 $ 213 $ 847 $ 462 ======= ======= ======== ======== Earnings (loss) per common share: - --------------------------------- Basic: Continuing operations $ 0.67 $ (0.20) $ 1.97 $ 0.45 Discontinued operations (0.02) 0.70 (0.06) 0.64 ------- ------- -------- -------- $ 0.65 $ 0.50 $ 1.91 $ 1.09 ======= ======= ======== ======== Diluted: Continuing operations $ 0.66 $ (0.20) $ 1.94 $ 0.44 Discontinued operations (0.02) 0.70 (0.06) 0.63 ------- ------- -------- -------- $ 0.64 $ 0.50 $ 1.88 $ 1.07 ======= ======= ======== ======== Cash dividends declared per common share $ 0.11 $ 0.11 $ 0.33 $ 0.33 ======= ======= ======== ========
Three Months Ended March 31,
2003
2002
(In millions, except per share data)
Net sales
$
7,059
$
5,966
Cost of sales
6,587
5,528
Earnings from operations
472
438
Other income and expenses, net
33
36
505
474
Interest expense
140
148
Earnings from continuing operations before income taxes
365
326
Income tax expense
115
102
Earnings from continuing operations
250
224
Discontinued operations
—
(6
)
Net earnings
$
250
$
218
Earnings (loss) per common share
Basic:
Continuing operations
$
0.56
$
0.51
Discontinued operations
—
(0.01
)
$
0.56
$
0.50
Diluted:
Continuing operations
$
0.55
$
0.50
Discontinued operations
—
(0.01
)
$
0.55
$
0.49
Cash dividends declared per common share
$
0.12
$
0.11
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4Lockheed Martin Corporation
Unaudited Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2002 2001 ------- ------- (In millions)Operating Activities: Earnings from continuing operations $ 875 $ 189 Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities: (Loss) earnings from discontinued operations (28) 273 Depreciation and amortization 403 600 Changes in operating assets and liabilities: Receivables 319 289 Inventories 756 446 Accounts payable (312) (216) Customer advances and amounts in excess of costs incurred 138 681 Other 577 (68) ------- ------- Net cash provided by operating activities 2,728 2,194 ------- ------- Investing Activities: Expenditures for property, plant and equipment (396) (312) Acquisitions / investments in affiliated companies (88) (235) Sale of Lockheed Martin IMS Corporation -- 825 Proceeds from other divestitures 84 50 Other 55 96 ------- ------- Net cash (used for) provided by investing activities (345) 424 ------- ------- Financing Activities: Net decrease in short-term borrowings -- (12) Net repayments related to long-term debt (87) (2,289) Issuances of common stock 431 123 Common stock dividends (149) (144) ------- ------- Net cash provided by (used for) financing activities 195 (2,322) ------- ------- Net increase in cash and cash equivalents 2,578 296 Cash and cash equivalents at beginning of period 912 1,505 ------- ------- Cash and cash equivalents at end of period $ 3,490 $ 1,801 ======= =======
Three Months Ended March 31,
2003
2002
(In millions)
Operating Activities:
Net earnings
$
250
$
218
Adjustments to reconcile earnings to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment
108
103
Amortization of contract intangibles
31
31
Changes in operating assets and liabilities:
Receivables
(143
)
108
Inventories
181
(9
)
Accounts payable
(16
)
(248
)
Customer advances and amounts in excess
of costs incurred
(16
)
(13
)
Other
149
238
Net cash provided by operating activities
544
428
Investing Activities:
Expenditures for property, plant and equipment
(78
)
(105
)
Acquisitions / investments in affiliated companies
(159
)
(78
)
Proceeds from divestitures of affiliated companies
—
100
Other
5
15
Net cash used for investing activities
(232
)
(68
)
Financing Activities:
Repayments related to long-term debt
(637
)
(58
)
Repurchases of common stock
(279
)
—
Issuances of common stock
10
201
Common stock dividends
(54
)
(48
)
Net cash (used for) provided by financing activities
(960
)
95
Net (decrease) increase in cash and cash equivalents
(648
)
455
Cash and cash equivalents at beginning of period
2,738
912
Cash and cash equivalents at end of period
$
2,090
$
1,367
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5Lockheed Martin Corporation
Unaudited Condensed Consolidated Balance Sheet
(Unaudited) September 30, December 31, 2002 2001 ------------ ----------- (In millions)Assets Current assets: Cash and cash equivalents $ 3,490 $ 912 Receivables 3,730 4,049 Inventories 2,254 3,140 Deferred income taxes 1,524 1,566 Assets of businesses held for sale 508 638 Other current assets 441 473 ------------ ---------- Total current assets 11,947 10,778 ------------ ---------- Property, plant and equipment 3,153 2,991 Investments in equity securities 1,751 1,884 Intangible assets related to contracts and programs acquired 846 939 Goodwill 7,371 7,371 Prepaid pension cost 2,230 2,081 Other assets 1,621 1,610 ------------ ---------- $ 28,919 $ 27,654 ============ ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,107 $ 1,419 Customer advances and amounts in excess of costs incurred 5,140 5,002 Salaries, benefits and payroll taxes 1,146 1,100 Income taxes 228 63 Current maturities of long-term debt 763 89 Liabilities of businesses held for sale 328 387 Other current liabilities 1,545 1,629 ------------ ---------- Total current liabilities 10,257 9,689 ------------ ---------- Long-term debt 6,693 7,422 Post-retirement benefit liabilities 1,572 1,565 Deferred income taxes 950 992 Other liabilities 1,747 1,543 Stockholders' equity: Common stock, $1 par value per share 455 441 Additional paid-in capital 2,799 2,142 Retained earnings 4,659 3,961 Unearned ESOP shares (58) (84) Accumulated other comprehensive loss (155) (17) ------------ ---------- Total stockholders' equity 7,700 6,443 ------------ ---------- $ 28,919 $ 27,654 ============ ==========
March 31, 2003
December 31, 2002
(In millions)
Assets
Current assets:
Cash and cash equivalents
$
2,090
$
2,738
Receivables
3,798
3,655
Inventories
2,067
2,250
Deferred income taxes
1,281
1,277
Other current assets
658
706
Total current assets
9,894
10,626
Property, plant and equipment, net
3,254
3,258
Investments in equity securities
1,029
1,009
Intangible assets related to contracts and programs acquired
791
814
Goodwill
7,380
7,380
Other assets
2,667
2,671
$
25,015
$
25,758
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$
1,086
$
1,102
Customer advances and amounts in excess of costs incurred
4,526
4,542
Salaries, benefits and payroll taxes
1,117
1,272
Income taxes
179
107
Current maturities of long-term debt
607
1,365
Other current liabilities
1,398
1,433
Total current liabilities
8,913
9,821
Long-term debt
6,201
6,217
Post-retirement benefit liabilities
1,532
1,480
Pension liabilities
741
651
Other liabilities
1,789
1,724
Stockholders’ equity:
Common stock, $1 par value per share
450
455
Additional paid-in capital
2,573
2,796
Retained earnings
4,458
4,262
Unearned ESOP shares
(42
)
(50
)
Accumulated other comprehensive loss
(1,600
)
(1,598
)
Total stockholders’ equity
5,839
5,865
$
25,015
$
25,758
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
6Lockheed Martin Corporation
Notes
toTo Unaudited Condensed Consolidated Financial StatementsSeptember 30, 2002March 31, 2003
NOTE 1
-– BASIS OF PRESENTATIONThe accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Lockheed Martin Corporation (Lockheed Martin or the Corporation) has continued to follow the accounting policies
(including its critical accounting policies)set forth in the consolidated financial statements included in its20012002 Annual Report on Form 10-K filed with the Securities and ExchangeCommission, except for the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002, as discussed in "Note 3 - Adoption of New Accounting Standard."Commission. In the opinion of management, the interim financial information provided herein reflects all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations for the interim periods. The results of operations for theninethree months endedSeptember 30, 2002March 31, 2003 are not necessarily indicative of results to be expected for the full year. Certain amounts presented for prior periods have been reclassified to conform with the20022003 presentation.NOTE 2
- EXIT FROM THE GLOBAL TELECOMMUNICATIONS SERVICES BUSINESS In December 2001,– STOCK-BASED COMPENSATIONThe Corporation measures compensation cost for stock-based compensation plans using the intrinsic value method of accounting as prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Corporation
announced the exit from its global telecommunications services business. As a resulthas adopted those provisions ofthis action, the Global Telecommunications segment is no longer reported as a separate business segment. The former Global Telecommunications segment businesses retained by the Corporation include the Systems & Technology lineStatement ofbusinessFinancial Accounting Standards (FAS) No. 123, “Accounting for Stock-Based Compensation” andthe COMSAT General telecommunications business unit,FAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” whichwere realigned within the Space Systems segment, and Enterprise Solutions-U.S., which was realigned within the Technology Services segment. Telecommunications equity investments, including Intelsat, Ltd. (Intelsat), Inmarsat Ventures plc, New Skies Satellites, N.V. (New Skies), ACeS International, Ltd., Americom Asia-Pacific, LLC and other ventures, are now reported as partrequire disclosure of theCorporatepro forma effects on net earnings andOther segment. The Corporation adopted SFAS No. 144, "Accountingearnings per share as if compensation cost had been recognized based upon the fair value-based method at the date of grant forthe Impairment or Disposal of Long-Lived Assets," effective January 1, 2001. Accordingly, the results of operations of the businesses held for sale as part of the exit from the telecommunications services business are reported as discontinued operations, net of income taxes, in the Corporation's consolidated statements of operations for all periods presented, and excluded from business segment information. Similarly, their assets and liabilities are separately identified in the consolidated balance sheet as being held for sale. The businesses held for sale at September 30, 2002 are recorded at estimated fair value less cost to sell. Any changes in the estimated fair value will be recorded in future periods as appropriate. The following telecommunications businesses are classified as held for sale at September 30, 2002: . Satellite Services businesses - COMSAT World Systems (World Systems) and Lockheed Martin Intersputnik (LMI). The Corporation reached agreements to sell World Systems and LMI in the first and third quarters of 2002, respectively. These transactions are subject to regulatory approvals and other closing conditions. 7options awarded. Lockheed Martin Corporation
Notes
toTo Unaudited Condensed Consolidated Financial Statements (continued). COMSAT International - provides telecommunications network services in Latin America, primarily Argentina and Brazil.For purposes of pro forma disclosures, the options’ estimated fair values are amortized to expense over the options’ vesting periods. The
Corporation completed the sale of an 81 percent ownership interest in COMSAT International in October 2002. The transaction is not expected to have a material impact on the Corporation's consolidated results of operations or financial position. In the first quarter of 2002, the Corporation completed the sale of COMSAT Mobile Communications. The transaction did not have a material impact on the Corporation's consolidated results of operations or financial position. In addition, the Corporation completed the sale of Lockheed Martin IMS Corporation (IMS) in August 2001, resulting in a net gain of $309 million. This gain, as well as the results of IMS' operations for the quarter and nine months ended September 30, 2001, have been classified as discontinued operations in accordance with SFAS No. 144.Corporation’s pro forma information follows:
Three Months Ended
March 31,
2003
2002
(In millions, except per share data)
Net earnings:
As reported
$
250
$
218
Fair value-based compensation cost, net of taxes
(14
)
(16
)
Pro forma net earnings
$
236
$
202
Basic earnings per share:
As reported
$
0.56
$
0.50
Pro forma
0.53
0.46
Diluted earnings per share:
As reported
$
0.55
$
0.49
Pro forma
0.52
0.45
NOTE 3
- ADOPTION OF NEW ACCOUNTING STANDARD The Corporation adopted SFAS No. 142, "Goodwill and Other Intangible Assets," as of January 1, 2002. Among other things, the Statement prohibits the amortization of goodwill and sets forth a new methodology for periodically assessing and, if warranted, recording impairment of goodwill. The $7.4 billion of goodwill included on the Corporation's consolidated balance sheet is recorded in the Systems Integration, Space Systems and Technology Services segments. There is no goodwill in the Aeronautics segment. In connection with the guidance in SFAS No. 142, the Corporation evaluated the operating units within the Systems Integration and Space Systems segments and determined the reporting units within the segments based on similarities of the economic characteristics of their lines of business. The Technology Services segment was determined to be a separate reporting unit. The Corporation completed the initial step of the goodwill impairment test required by the new rules and concluded that no adjustment to the balance of goodwill at the date of adoption was required. In addition, the Corporation reassessed the estimated remaining useful lives of other intangible assets as part of its adoption of the Statement. As a result of that review, the estimated remaining useful life of the intangible asset related to the F-16 figher aircraft program has been extended from six to ten years, effective January 1, 2002. The critical factors in making this determination included the existing backlog for F-16 deliveries which extends production beyond the original anticipated life, and the Corporation's outlook for potential new orders for the F-16 during the next ten years. This change is expected to decrease annual amortization expense associated with that intangible asset by approximately $30 million on a pretax basis, or approximately $8 million per quarter. The following table provides a reconciliation of reported earnings from continuing operations and related per share amounts for the quarter and nine months ended September 30, 2001 to adjusted amounts which exclude the effects of goodwill amortization and reflect the change in amortization related to the F-16 program for those periods. 8Lockheed Martin Corporation Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- (In millions, except per share data)Earnings (loss) from continuing operations: As reported $ 300 $ (87) $ 875 $ 189 Impact of: Goodwill amortization -- 62 -- 168 Contract value amortization -- 5 -- 15 ------ ------- ------ ------- Adjusted $ 300 $ (20) $ 875 $ 372 ====== ======= ====== ======= Diluted earnings (loss) per share from continuing operations: As reported $ 0.66 $ (0.20) $ 1.94 $ 0.44 Impact of: Goodwill amortization -- 0.14 -- 0.38 Contract value amortization -- 0.02 -- 0.05 ------ ------- ------ ------- Adjusted $ 0.66 $ (0.04) $ 1.94 $ 0.87 ====== ======= ====== =======Intangible assets related to contracts and programs acquired are displayed in the unaudited condensed consolidated balance sheet net of accumulated amortization of $1,333 million and $1,239 million at September 30, 2002 and December 31, 2001, respectively. Amortization expense related to these intangible assets was $31 million and $94 million for the quarter and nine months ended September 30, 2002, respectively, and $38 million and $115 million for the quarter and nine months ended September 30, 2001, respectively. NOTE 4 -– EARNINGS PER SHAREBasic and diluted earnings per share were computed based on net earnings. The weighted average number of common shares outstanding during the period was used in the calculation of basic earnings per share, and this number of shares was increased by the dilutive effect of stock options based on the treasury stock method in the calculation of diluted earnings per share.
9Lockheed Martin Corporation
Notes
toTo Unaudited Condensed Consolidated Financial Statements (continued)The following table sets forth the computations of basic and diluted earnings per share:
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- (In millions, except per share data)Net earnings: Earnings (loss) from continuing operations $ 300 $ (87) $ 875 $ 189 Discontinued operations: Results of operations from discontinued businesses (10) (9) (28) (36) Gain on sale of IMS -- 309 -- 309 ------ ------ ------ ------ Net earnings for basic and diluted computations $ 290 $ 213 $ 847 $ 462 ====== ====== ====== ====== Average common shares outstanding: Average number of common shares outstanding for basic computations 448.5 428.0 443.5 425.7 Dilutive stock options 7.2 --/(a)/ 7.4 4.6 ------ ------ ------ ------ Average number of common shares outstanding for diluted computations 455.7 428.0 450.9 430.3 ====== ====== ====== ====== Earnings (loss) per share: Basic: Continuing operations $ 0.67 $(0.20) $ 1.97 $ 0.45 Discontinued operations: Results of operations from discontinued businesses (0.02) (0.02) (0.06) (0.08) Gain on sale of IMS -- 0.72 -- 0.72 ------ ------ ------ ------ $ 0.65 $ 0.50 $ 1.91 $ 1.09 ====== ====== ====== ====== Diluted: Continuing operations $ 0.66 $(0.20) $ 1.94 $ 0.44 Discontinued operations: Results of operations from discontinued businesses (0.02) (0.02) (0.06) (0.08) Gain on sale of IMS -- 0.72 -- 0.71 ------ ------ ------ ------ $ 0.64 $ 0.50 $ 1.88 $ 1.07 ====== ====== ====== ======/(a)/ The average number of common shares used in the calculation of the diluted loss per share from continuing operations has not been adjusted for the effects of 5.2 million dilutive stock options, as such adjustment would have been antidilutive. 10
Three Months Ended March 31,
2003
2002
(In millions, except per share data)
Net earnings:
Earnings from continuing operations
$
250
$
224
Discontinued operations – results of operations
—
(6
)
Net earnings for basic and diluted computations
$
250
$
218
Average common shares outstanding:
Average number of common shares outstanding for basic computations
448.8
437.4
Dilutive stock options – based on the treasury stock method
3.7
7.3
Average number of common shares outstanding for diluted computations
452.5
444.7
Earnings (loss) per common share:
Basic:
Continuing operations
$
0.56
$
0.51
Discontinued operations
—
(0.01
)
$
0.56
$
0.50
Diluted:
Continuing operations
$
0.55
$
0.50
Discontinued operations
—
(0.01
)
$
0.55
$
0.49
NOTE 4 – INVENTORIES
March 31, 2003
December 31, 2002
(In millions)
Work in process, primarily related to long-term contracts and programs in progress
$
5,487
$
5,627
Work in process, commercial launch vehicles
589
594
Less customer advances and progress payments
(4,221
)
(4,272
)
1,855
1,949
Other inventories
212
301
$
2,067
$
2,250
Lockheed Martin Corporation
Notes
toTo Unaudited Condensed Consolidated Financial Statements (continued)NOTE 5 - INVENTORIES
September 30, December 31, 2002 2001 ---- ---- (In millions)Work in process, commercial launch vehicles $ 807 $ 1,205 Work in process, primarily related to other long-term contracts and programs in progress 4,870 4,279 Less customer advances and progress payments (3,928) (2,931) -------- -------- 1,749 2,553 Other inventories 505 587 -------- -------- $ 2,254 $ 3,140 ======== ========In the third quarter of 2002, approximately $130 million of work in process inventory related to commercial launch vehicles was reclassified to property, plant and equipment. These assets, which are related to the Corporation's Atlas V program, include the Atlas Space Operations Center, the vehicle integration facility and certain related ground equipment for the program. The reclassification was made in connection with the completion of the facilities and the initial operational status of the Atlas V program. The assets are being depreciated over a period of 10 years.Commercial launch vehicle inventories
includeincluded amounts advanced to Khrunichev State Research and Production Space Centera(Khrunichev), the Russian manufacturerof $589 million and $672 million at September 30, 2002 and December 31, 2001, respectively, for the manufactureof Proton launch vehicles and provider of related launchservices.services, of $347 million and $391 million at March 31, 2003 and December 31, 2002, respectively. In addition, commercial launch vehicle inventoriesincludeincluded amounts advanced to RD AMROSS, a joint venture between Pratt & Whitney and NPO Energomash, of$44$53 million and$58$61 million atSeptember 30, 2002March 31, 2003 and December 31,2001,2002, respectively, for the development and purchase, subject to certain conditions, of RD-180 booster engines used for Atlas launch vehicles.NOTE
6 -5 – CONTINGENCIESThe Corporation or its subsidiaries are parties to or have property subject to litigation and other proceedings, including matters arising under provisions relating to the protection of the environment. In the opinion of management and in-house counsel, the probability is remote that the outcome of these matters will have a material adverse effect on the
Corporation'sCorporation’s consolidated results of operations, financial position orfinancial position.cash flows. These matters include the following items:Environmental matters
-—The Corporation is responding to three administrative orders issued by the California Regional Water Quality Control Board (the Regional Board) in connection with theCorporation'sCorporation’s former Lockheed Propulsion Company facilities in Redlands, California. Under the orders, the Corporation is investigating the impact and potential remediation of regional groundwater contamination by perchlorates and chlorinated solvents. The Regional Board has approved theCorporation'sCorporation’s plan to maintain public water supplies with respect to chlorinated solvents during this investigation, and the Corporation continues to negotiate with local water purveyors to implement this plan, as well as to address water supply concerns relative to perchlorate contamination. The Corporation is also coordinating with the U.S. Air Force, which is working with the aerospace and defense industry to conduct preliminary studies of the11Lockheed Martin Corporation Notes to Unaudited Condensed Consolidated Financial Statements (continued)potential health effects of perchlorate exposure in connection with several sites across the country, including the Redlands site. The results of these studies are intended to assist state and federal regulators in setting appropriate action levels for perchlorates in groundwater. In January 2002, the State of California reduced its provisional standard for perchlorate concentration in water from 18 parts per billion (ppb) tofour4 ppb, a move that neither industry nor the Air Force believes is supported by the current studies.Although this provisional standard does not create any legally enforceable requirements for the Corporation at this time, the Corporation has developed a preliminary remediation plan that would meet the provisional standard if it were to become final. Because this plan entails a long lead-time for implementation, the Corporation has
elected to beginbegun implementing this plan andrecognizehas recognized the increased costs that are associated with the plan. The consolidated balance sheet atSeptember 30, 2002March 31, 2003 includes a liability of approximately $185 million representing theCorporation'sCorporation’s estimate of the remaining expenditures necessary to implement the remediation and other work at the site over the next 30 years.This amount represents an approximate $100 million increase in the liability since December 31, 2001.As at other sites, the Corporation is pursuing claims against otherLockheed Martin Corporation
Notes To Unaudited Condensed Consolidated Financial Statements (continued)
potentially responsible parties (PRPs), including the
U. S.U.S. Government, for contribution to sitecleanupclean-up costs.Since 1990, the Corporation has been responding to various consent decrees and orders relating to soil and regional groundwater contamination in the San Fernando Valley associated with the Corporation's former operations in Burbank, California. Among other things, these consent decrees and orders obligate the Corporation to construct and fund the operations of soil and groundwater treatment facilities in Burbank and Glendale, California through 2018 and 2012, respectively; however, responsibility for the long-term operation of these facilities was assumed by the respective localities in 2001. The Corporation has been successful in limiting its financial responsibility for these activities to date to its pro rata share as a result of litigation and settlements with other potentially responsible parties. In addition, under an agreement reached with the U.S. Government in 2000, the Corporation will continue to be reimbursed in an amount equal to approximately 50 percent of future expenditures for certain remediation activities by the U.S. Government in its capacity as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The Corporation has recorded a liability of approximately $60 million representing its estimate of the total expenditures required over the remaining terms of the consent decrees and orders described above, net of the effects of the agreement.The Corporation has been conducting remediation activities to address soil and groundwater contamination by chlorinated solvents at its former operations in Great Neck, New York which it acquired as part of its acquisition of Loral Corporation in 1996. This work is being done pursuant to a series of orders and agreements with the New York State Department of Environmental Conservation beginning with a 1991 administrative order entered by Unisys Tactical Defense Systems, a predecessor company at the site.
Until now, all of theThe remediation work associated with this sitehas beenincludes work performed on the site itself,but in the third quarteras well as implementation of2002, the Corporation entered into negotiations with the state of New York to implementan off-site interim remedial measure intended to address an off-site plume of groundwater contamination that was found to be moving more rapidly than originally anticipated.This has led to an increase of approximately $40 million in theTotal projected future costs for thesite. Total projected future costssite arenowestimated to be approximately$60$70 million through 2025. This amount is included as a liability in the consolidated balance sheet atSeptember 30, 2002.March 31, 2003. As at other sites, the Corporation is pursuing claims against otherpotentially responsible parties,PRPs, including theUnited States,U.S. Government, for contribution to sitecleanupclean-up costs.12Lockheed MartinSince 1990, the Corporation
Noteshas been responding toUnaudited Condensed Consolidated Financial Statements (continued)various consent decrees and orders relating to soil and regional groundwater contamination in the San Fernando Valley associated with the Corporation’s former operations in Burbank and Glendale, California. Among other things, these consent decrees and orders obligate the Corporation to construct and fund the operations of soil and groundwater treatment facilities in Burbank and Glendale, California through 2018 and 2012, respectively; however, responsibility for the long-term operation of these facilities has been assumed by the respective localities. The Corporation has been successful in limiting its financial responsibility for these activities to date to its pro rata share as a result of litigation and settlements with other PRPs. In addition, under an agreement reached with the U.S. Government in 2000, the Corporation will continue to be reimbursed in an amount equal to approximately 50% of future expenditures for certain remediation activities by the U.S. Government in its capacity as a PRP under the Comprehensive Environmental Response, Compensation and Liability Act. The Corporation has recorded a liability of approximately $60 million representing its estimate of the total expenditures required over the remaining terms of the consent decrees and orders described above, net of the effects of the agreement.The Corporation is involved in proceedings and potential proceedings relating to environmental matters at other facilities, including disposal of hazardous wastes and soil and water contamination. The extent of the
Corporation'sCorporation’s financial exposure cannot in all cases be reasonably determined at this time. In addition to the amounts with respect to the Redlands,Burbank, Glendale andGreat Neck, Burbank and Glendale sites described above, a liability of approximately$155$130 million for the other properties (including current operating facilities and certain facilities operated in prior years) in which an estimate of financial exposure can be determined has been recorded.Lockheed Martin Corporation
Notes To Unaudited Condensed Consolidated Financial Statements (continued)
Under agreements reached with the U.S. Government in 1990 and 2000, certain groundwater treatment and soil remediation expenditures referenced above are being allocated to the
Corporation'sCorporation’s operations as general and administrative costs and, under existing government regulations, these and other environmental expenditures related to U.S. Government business, after deducting any recoveries from insurance or otherpotentially responsible parties,PRPs, are allowable in establishing the prices of theCorporation'sCorporation’s products and services. As a result, a substantial portion of the expenditures are being reflected in theCorporation'sCorporation’s sales and cost of sales pursuant to U.S. Government agreement or regulation.At September 30, 2002 and December 31, 2001, the aggregate amount of liabilities recorded relative to environmental matters was $460 million and $300 million, respectively.The Corporation has recorded an asset for the portion of environmental costs that are probable of future recovery in pricing of the
Corporation'sCorporation’s products and services for U.S. Government business. The portion that is expected to be allocated to commercial business has been reflected in cost of sales. The recorded amounts do not reflect the possible future recoveries of portions of the environmental costs through insurance policy coverage or from otherpotentially responsible parties,PRPs, which the Corporation is pursuing as required by agreement and U.S. Government regulation. Any such recoveries, when received, would reduce the allocated amounts to be included in theCorporation'sCorporation’s U.S. Government sales and cost of sales.Waste remediation contract
-—In 1994, the Corporation was awarded a $180 million fixed-price contract by the U.S. Department of Energy (DoE) for remediation of waste found in Pit 9, located on the Idaho National Engineering and Environmental Laboratory reservation. The Corporation incurred significant unanticipated costs and scheduling issues due to complex technical and contractual matters, which it sought to remedy through submission of a request for equitable adjustment. To date, the Corporation has been unsuccessful in reaching any agreements with the DoE on cost recovery or other contract restructuring matters. In 1998, the management contractor for the project, a wholly-owned subsidiary of the Corporation, at theDoE'sDoE’s direction, terminated the Pit 9 contract for default. As a result, the Corporation filed a lawsuit against the DoE in the Court of Federal Claimschallenging andseeking to overturn the default termination and recover its costs, which are included in inventories. Also in 1998, the management contractor, also at theDoE'sDoE’s direction, filed suit against the Corporation in the United States District Court for the District of Idaho seeking, among other things, recovery of approximately $54 million previously paid to the Corporation under the Pit 9 contract. The Corporation counterclaimed seeking to overturn the default termination and recover its costs. The Corporation is defending this action which is set for trial inwhich discovery has been pending sinceAugust1999.2003.In 2001,
the DoE filed a motion for summary judgment seeking to dismiss the Corporation's complaint on jurisdictional grounds, whichthe Court of Federal Claims granted the DoE’s motion to dismiss the Corporation’s complaint, finding that there was no privity of contract between the Corporation and the United States sufficient to provide the Court with jurisdiction over the dispute. On September 30, 2002, the U.S. Court of Appeals for the Federal Circuit affirmed the decision of the Court of Federal Claims. The Corporationdoesdid notplanappeal the decision furtherappealand willpursue its remedies in its counterclaims in the district court 13Lockheed Martin Corporation Notes to Unaudited Condensed Consolidated Financial Statements (continued) action. The Corporation continuescontinue to seek resolution of the Pit 9 dispute through non-litigationmeans.means while preparing for trial in the Idaho proceeding.Lockheed Martin Corporation
Notes To Unaudited Condensed Consolidated Financial Statements (continued)
NOTE
7 -6 – INFORMATION ON BUSINESS SEGMENTSThe Corporation operates in
the followingfour principal business segments: Systems Integration, Aeronautics, Space SystemsAeronauticsand Technology Services.All other activities fall withinIn theCorporate and Other segment. As discussed more fully in "Note 3 - Adoptionfollowing tables ofNew Accounting Standard,"financial data, theCorporation adopted SFAS No. 142 as of January 1, 2002. As a resulttotal of theadoption, goodwilloperating results of the principal business segments isno longer being amortized andreconciled to theestimated remaining useful life of a contract intangiblecorresponding consolidated amount. With respect to the caption “Operating profit,” the reconciling item “Unallocated Corporate (expense) income, net” includes the FAS/CAS adjustment related to pensions (see discussion below), earnings and losses from equity investments (mainly telecommunications), interest income, costs for stock-based award programs, items not considered part of management’s evaluation of segment operating performance, and Corporate costs not allocated to theF-16 program was extended. In connectionoperating segments as well as other miscellaneous Corporate activities. For financial statement captions other than “Operating profit,” all activities other than those pertaining to the principal business segments are included on a line item entitled “Other.”The FAS/CAS adjustment represents the difference between pension costs calculated and funded in accordance with
its adoption of SFAS No. 142, amortization expense related to goodwill and the impact of the change in the estimated remaining useful life of the F-16 intangible asset is nowCost Accounting Standards (CAS), which are reflected in theCorporatebusiness segment results, andOther segmentpension expense or income calculated forall periods prior to January 1, 2002 to provide managementfinancial reporting purposes under generally accepted accounting principles in accordance withconsistent financial informationFAS 87, “Employers’ Accounting for Pensions.” CAS is a major factor for determining pension funding requirements for the Corporation, and governs the extent of allocability and recoverability of pension costs onwhich to base its evaluationgovernment contracts. The CAS expense is recovered through the pricing of our products and services on U.S. Government contracts, and therefore is recognized in net sales of theperformanceapplicable segment. The results of operations of theCorporation's business segments. Financial data for the nine months ended September 30, 2001 have been reclassified to reflect the elimination of the Corporation's Global Telecommunications segmentCorporation’s segments only include pension expense asdiscussed more fullydetermined and funded in"Note 2 - Exit From the Global Telecommunications Services Business" and to reflect the adoption of SFAS No. 142. 14accordance with CAS rules. Lockheed Martin Corporation
Notes
toTo Unaudited Condensed Consolidated Financial Statements (continued)
Three Months Ended March 31,
2003
2002
(In millions)
Selected Financial Data by Business Segment
Net sales
Systems Integration
$
2,203
$
2,088
Aeronautics
2,088
1,334
Space Systems
2,078
1,870
Technology Services
687
670
Total business segments
7,056
5,962
Other
3
4
$
7,059
$
5,966
Operating profit
Systems Integration
$
209
$
207
Aeronautics
145
92
Space Systems
150
112
Technology Services
48
37
Total business segments
552
448
Unallocated Corporate (expense) income, net(a)
(47
)
26
$
505
$
474
Intersegment revenue(b)
Systems Integration
$
107
$
59
Aeronautics
9
7
Space Systems
31
15
Technology Services
215
188
Total business segments
362
269
Other
18
32
$
380
$
301
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- (In millions)Selected Financial Data by Business Segment Net(a) Unallocated Corporate (expense) income, net includes the following:
Three Months Ended
March 31,
2003
2002
(In millions)
FAS/CAS adjustment
$
(72
)
$
50
Other
25
(24
)
$
(47
)
$
26
(b) Intercompany transactions between segments are eliminated in consolidation and therefore excluded from the net sales - --------- Systems Integration $ 2,253 $ 2,237 $ 6,586 $ 6,282 Space Systems 1,843 1,793 5,496 5,023 Aeronautics 1,668 1,449 4,549 3,362 Technology Services 776 734 2,157 1,972 CorporateandOther 2 8 10 17 -------- ------- ---------- --------- $ 6,542 $ 6,221 $ 18,798 $ 16,656 ======== ======= ========== ========= Operatingoperating profit(loss)/(a)/ - ----------------------- Systems Integration $ 248 $ 246 $ 702 $ 698 Space Systems 126 128 370 442 Aeronautics 126 125 360 308 Technology Services 48 39 131 109 Corporate and Other 28 (480) 13 (681) -------- ------- ---------- --------- $ 576 $ 58 $ 1,576 $ 876 ======== ======= ========== ========= Intersegment sales/(b)/ - --------------------- Systems Integration $ 82 $ 61 $ 213 $ 171 Space Systems 22 17 62 57 Aeronautics 8 12 21 40 Technology Services 154 194 526 541 Corporate and Other 18 40 57 111 -------- ------- ---------- --------- $ 284 $ 324 $ 879 $ 920 ======== ======= ========== =========September 30, December 31, 2002 2001 ---- ---- (In millions)Customer advances andamountsin excess of - ------------------------------------------ costs incurred -------------- Systems Integration $ 869 $ 797 Space Systems 1,482 1,784 Aeronautics 2,785 2,406 Technology Services 4 15 -------- -------- $ 5,140 $ 5,002 ======== ========presented above.(a) With respect to the adoption of SFAS No. 142, amounts previously included in segment operating results for the quarter and nine months ended September 30, 2001, respectively, were as follows: Systems Integration - $43 million and $128 million; Space Systems - $9 million and $28 million; Aeronautics - $8 million and $23 million; Technology Services - $3 million and $9 million; and Corporate and Other - $5 million and $17 million. (b) Intercompany transactions between segments are eliminated in consolidation and therefore excluded from the net sales and operating profit (loss) amounts presented above. 15Lockheed Martin Corporation
Notes
toTo Unaudited Condensed Consolidated Financial Statements (continued)
March 31, 2003
December 31, 2002
(In millions)
Selected Financial Data by Business Segment
Customer advances and amounts in excess of costs incurred
Systems Integration
$
982
$
836
Aeronautics
2,128
2,408
Space Systems
1,395
1,275
Technology Services
21
19
Total business segments
4,526
4,538
Other
—
4
$
4,526
$
4,542
NOTE
8 -7 – OTHERInAs of the
second quarterend of 2002, the global telecommunications services businesses identified for divestiture in 2001 had been sold, except for Lockheed Martin Intersputnik (LMI). The Corporationsettledreached an agreement to sell LMI in the third quarter of 2002; however, in April 2003, the agreement was terminated. The Corporation is continuing to treat LMI as aresearchdiscontinued operation, as it is still holding anddevelopment (R&D) tax credit claim and received a refundactively marketing the business for sale. The operating results of$117 millionLMI had no impact on the statement of earnings for theyears 1982 through 1988. The settlementfirst quarter of 2003. LMI wasrecorded as a reductioncarried at estimated fair value less cost to sell at March 31, 2003, and its assets and liabilities, which represented less than 1% of theCorporation'sCorporation’s consolidated assets and liabilities, respectively, were included in the balance sheet in other current assets and other current liabilities. Changes in the estimated fair value of LMI will be recorded in the future if appropriate.In 2003, the Corporation issued irrevocable redemption notices to the trustees for two issuances of callable debentures totaling $450 million. This amount was included in current maturities of long-term debt on the Corporation’s balance sheet at December 31, 2002. One notice was for $300 million of 7.875% debentures due on March 15, 2023, which were repaid on March 15, 2003. The second
quarternotice was for $150 million of 7.75% debentures due on April 15, 2023, which were repaid on April 15, 2003. The $150 million of 7.75% debentures was included in current maturities of long-term debt on the balance sheet at March 31, 2003. The Corporation recorded a loss, net of state income taxexpense,benefits, of $19 million in other income andincreasedexpenses related to the early repayment of the $450 million of debt. The loss reduced net earningsfrom continuing operationsfor thenine monthsquarter endedSeptember 30,March 31, 2003 by $13 million ($0.03 per diluted share).In December 2002, the Corporation recorded a charge, net of state income tax benefits, of $163 million related to its investment in Space Imaging, LLC and its guarantee of up to $150 million of Space Imaging’s borrowings under a credit facility. At December 31, 2002, the Corporation’s balance sheet included $150 million in current maturities of long-term debt representing the estimated obligation under the guarantee.
Lockheed Martin Corporation
Notes To Unaudited Condensed Consolidated Financial Statements (continued)
On March 31, 2003, Lockheed Martin paid $130 million to acquire Space Imaging’s outstanding borrowings under Space Imaging’s credit facility, and the guarantee was eliminated. The Corporation therefore reversed, net of state income taxes, approximately $19 million of the charge recorded in December 2002, representing the unutilized portion of the credit facility covered by
$90the Corporation’s guarantee. This gain increased first quarter 2003 net earnings by $13 million ($0.200.03 per diluted share). The $130 million is included in investing activities on the statement of cash flows for the period ended March 31, 2003.The components of comprehensive income for the three months ended March 31, 2003 and 2002 consisted of the following:
Three Months Ended
March 31,
2003
2002
(In millions)
Net earnings
$
250
$
218
Other comprehensive income (loss):
Net unrealized gain (loss) from available-for-sale investments
14
(31
)
Other
(16
)
(21
)
(2
)
(52
)
Comprehensive income
$
248
$
166
The Corporation’s total interest payments were $36 million and $39 million for the three months ended March 31, 2003 and 2002, respectively.
The Corporation made net federal and foreign income tax payments of $31 million, and received net federal and foreign income tax refunds
including the R&D tax credit refund discussed above,of$121$26 million, for theninethree months endedSeptember 30,March 31, 2003 and 2002, respectively.As disclosed in its 2002 Annual Report on Form 10-K, on a combined basis, the Corporation’s investments in Intelsat, Space Imaging, United Space Alliance and Americom Asia-Pacific accounted for the majority of its total equity method investments at December 31, 2002 and
made federal and foreign income tax payments, net of refunds received, of $345 millionequity earnings (losses) recorded for thesame period in 2001. The Corporation's total interest payments were $332 million and $450 millionyear then ended. Summarized statement of operations information for these investees for thenine monthsperiod endedSeptember 30, 2002 and 2001, respectively. The components of comprehensive income for the three month and nine month periods ended September 30, 2002 and 2001 consisted of the following:
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- (In millions)Net earnings $ 290 $ 213 $ 847 $ 462 Other comprehensive (loss) income: Net foreign currency translation adjustments (3) (17) (35) (26) Net unrealized (loss) gain from available-for-sale investments, primarily Loral Space and New Skies (27) 11 (104) (35) Reclassification adjustment due to realization of lossMarch 31, 2003 onLoral Space investment -- 151 -- 151 Net unrealized (loss) gain from hedging activities (16) 1 1 6 ------ ------- ------ ------- (46) 146 (138) 96 ------ ------- ------ ------- Comprehensive income $ 244 $ 359 $ 709 $ 558 ====== ======= ====== =======In October 2002, the Corporation announced thatanew share repurchase authority had been authorized which provides for the repurchase of up to 23 million shares of its common stock from time-to-time if market and business conditions warrant. Under the authority, management has discretion to determine whether to purchase shares, the number and price of shares to be repurchased, and the timing of any repurchases. The authority replaced a prior repurchase plan which had been authorized in 1995. New accounting pronouncements adopted - In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, the Statement generally prohibits the classification of gains or losses from the early extinguishment of debtcombined basis is asextraordinary items, and therefore rescinds the previous requirement to do so. Gains and losses from prior early debt extinguishments are required to be reclassified. The Statement is not required to be implemented until 2003, though earlier application is encouraged. In the third 16Lockheed Martin Corporation Notes to Unaudited Condensed Consolidated Financial Statements (continued) quarter of 2002, the Corporation elected to adopt the Statement and, accordingly, reclassified the $36 million extraordinary item recognized in the third quarter of 2001 related to the redemption of approximately $117 million of 7% debentures ($175 million at face value) due in 2011. As a result of the reclassification, the loss on the redemption,follows: netof state income tax benefits, of $55 million was included in other income and expenses for the quarter and nine month periods ended September 30, 2001, and the related income tax benefit of $19 million was included in income tax expense for those periods. 17sales—$687 million; net earnings—$72 million. Item 2.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of OperationsLockheed Martin Corporation
March 31, 2003
Lockheed Martin Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 2002 Lockheed Martin Corporation (Lockheed Martin or the Corporation)isengagedinvolved in the conception, research, design, development, manufacture, integration and operation of advanced technology systems, products and services.The Corporation servesAs a lead systems integrator, our products and services range from aircraft, spacecraft and launch vehicles to missiles, electronics and information systems. We have customers in both domestic and international defense and commercialmarkets, with itsmarkets. Our principal customersbeingare agencies of the U.S. Government. Our main areas of focus are in the defense, space, homeland security, and government/civil information technology markets. The following discussion should be readin conjunctionalong withthe Corporation's 2001our 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission, and with the unaudited condensed consolidated financial statements included in this Form 10-Q.EXIT FROM THE GLOBAL TELECOMMUNICATIONS SERVICES BUSINESS In December 2001, the Corporation announced the exit from its global telecommunications services business. As a result of this action, the Global Telecommunications segment is no longer reported as a separate business segment. As discussed in "Note 2 - Exit From the Global Telecommunications Services Business," certain of the former Global Telecommunications segment's businesses have been realigned with other business segments, certain other businesses have been classified as held for sale or have been sold, and investments held by the former segment are now reported as part of the Corporate and Other segment. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of operations of the businesses classified as held for sale, including Lockheed Martin IMS Corporation (IMS) which was sold in August 2001, are reported as discontinued operations in the Corporation's consolidated financial statements. As discussed in Note 2, the Corporation has entered into agreements for the proposed sale of COMSAT World Systems (World Systems) and Lockheed Martin Intersputnik (LMI). The Corporation expects to complete the World Systems transaction by the end of 2002 and the LMI transaction in mid-2003, subject to receipt of regulatory approvals and satisfaction of other closing conditions. As previously reported, the Corporation received a letter from Intelsat, Ltd. (Intelsat) in July 2002 stating that Intelsat has the right, but has not yet elected, to terminate the agreement to acquire World Systems based on the allegation that a bankruptcy filing by WorldCom, a World Systems' customer, among other things, has had or reasonably is expected to have a material adverse effect on the World Systems' business. The Corporation disagrees with Intelsat's statement that the bankruptcy filing gives Intelsat the right to terminate the agreement and has responded accordingly. Consummation of the World Systems and LMI transactions is not expected to have a material impact on the Corporation's consolidated results of operations or financial position. The Corporation has either sold or has agreements in place to sell all of the businesses classified as held for sale and included in discontinued operations. The businesses held for sale at September 30, 2002 are recorded at estimated fair value less cost to sell. Any changes in the estimated fair value will be recorded in future periods as appropriate. 18Lockheed Martin Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)RESULTS OF OPERATIONS
Consolidated Results of Operations
The Corporation'sSince our operating cycle is long-term and involves many types of development and production contracts with varying production delivery
schedules. Accordingly,schedules, the results of operations of a particular quarter, or quarter-to-quarter comparisons of recorded sales andoperatingprofits, may not be indicative of our future operating results. The following discussions of comparativeanalysisresults among periods should be viewed in this context.Continuing Operations
The Corporation's consolidated netNet sales for the
thirdfirst quarter of20022003 were$6.5$7.1 billion, anincrease of five percent over third quarter 2001 sales of $6.2 billion. Sales for the nine months ended September 30, 2002 were $18.8 billion, a 13 percent18% increase over the$16.7 billionfirst quarter 2002 salesrecorded in the comparable 2001 period.of $6.0 billion. Sales increased in all business segmentsexcept Corporate and Otherduringboththe quarterand nine-monthsendedSeptember 30, 2002March 31, 2003 from the comparable2001 periods. The Corporation's operating2002 period.Operating profit (earnings before interest and taxes) for the
thirdfirst quarter of20022003 was$576$505 million, an increase of$518 million7% from the$58$474 million recorded in the comparable2001 period before adjusting for2002 period. Operating profit increased in all four business segments during theadoption of SFAS No. 142. The Corporation's operating profit for the nine monthsquarter endedSeptember 30, 2002 was $1.6 billion, an increase of 80 percentMarch 31, 2003 from the$876 million recorded in thecomparable2001 period before adjusting for the adoption of SFAS No. 142 and the effects of nonrecurring and unusual items recorded in the prior-year2002 period.Effective January 1, 2002, the Corporation adopted SFAS No. 142, as discussed more fully in "Note 3 - Adoption of New Accounting Standard." The Corporation completed the initial step of the goodwill impairment test required by the new rules and concluded that no adjustment to the balance of goodwill at the date of adoption was required. In addition, the Corporation reassessed the estimated remaining useful lives of other intangible assets as part of its adoption of the Statement. As a result of that review, the estimated remaining useful life of the intangible asset related to the F-16 fighter aircraft program has been extended from six to ten years, effective January 1, 2002. The critical factors in making this determination included the existing backlog for F-16 deliveries which extends production beyond the original anticipated life, and the Corporation's outlook for potential new orders for the F-16 during the next ten years. With respect to new orders, it is expected that the F-16 will continue to be the dominant fighter aircraft available for many countries in the international market until the F-35 Joint Strike Figher is available. As a result of the adoption, amortization expense associated with goodwill and certain other intangibles was lower for the quarter and nine month periods ended September 30, 2002 by approximately $68 million and $205 million, respectively, as compared to the same periods in the prior year. 19Lockheed Martin Corporation
Management'sManagement’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
There were no nonrecurring and unusualFor the quarter ended March 31, 2003, the items in the
business segments fortable below, among other things, were included in “unallocated Corporate (expense) income, net” (see thequarter or nine months ended September 30, 2002. Continuing operations forrelated section under thequarter and nine months ended September 30, 2001 included the impactDiscussion ofseveral nonrecurring and unusual items, as follows:Business Segments below).
Operating
profit (loss)
Net
earnings
(loss)
Earnings (loss) per diluted share
(In millions, except per share data)
Quarter ended March 31, 2003
Loss on early repayment of debt(1)
$
(19
)
$
(13
)
$
(0.03
)
Gain on partial reversal of Space Imaging, LLC guarantee(2)
19
13
0.03
$
0
$
0
$
0.00
Quarter ended March 31, 2002
None
$
—
$
—
$
—
Net Earnings Operating earnings (loss) per profit (loss) (loss) diluted share ------------- ---------- -------------- (In millions, except per share data)Quarter ended September 30, 2002 None $ -- $ -- $ -- Quarter ended September 30, 2001 Write-down(1) In the first quarter of investment in Loral Space /(1)/ $(361) $(235) $ (0.54) Loss2003, we recognized a loss of $19 million associated with our decision to call and prepay $300 million of 7.875% debentures originally due 2023 and $150 million of 7.75% debentures also originally due 2023.
(2) In the first quarter of 2003, we recognized a gain on early repaymentthe partial reversal ofdebt /(2)/ (55) (36) (0.08) Divestitures and other portfolio shaping activities (5) (3) (0.01) ------ ------ --------- $(421) $(274) $ (0.63) ====== ====== ========= Nine months September 30,the $150 million fourth quarter 2002None $ -- $ -- $ -- Nine months ended September 30, 2001 Write-down of investment in Loral Space /(1)/ $(361) $(235) $ (0.55) Sale of surplus real estate /(3)/ 111 72 0.17 Impairmentcharge related toAmericom Asia-Pacific /(4)/ (100) (65) (0.15) Loss on early repaymentthe guarantee ofdebt /(2)/ (55) (36) (0.08) Divestituresour share of Space Imaging, LLC’s credit facility. On March 31, 2003, we paid $130 million when Space Imaging’s borrowings under the credit facility came due. The difference of $20 million ($19 million after state tax), which represented the unutilized portion of the guarantee, was reversed andother portfolio shaping activities (5) (3) (0.01) ------ ------ --------- $(410) $(267) $ (0.62) ====== ====== =========the guarantee eliminated./(1)/ In the third quarter of 2001, the Corporation recorded a charge related to its investment in Loral Space & Communications Ltd. (Loral Space). The charge was recorded due to an other than temporary decline in the value of the investment. /(2)/ Also in the third quarter of 2001, the Corporation redeemed approximately $117 million of 7% debentures ($175 million at face value) due in 2011 which were originally sold at approximately 54 percent of their principal amount. The debentures were redeemed at face value, resulting in a loss on the early repayment of the debt. /(3)/ InInterest expense for the first quarter of
2001, the Corporation recognized a gain related to the Space Systems segment's sale of certain property in Sunnyvale, California for approximately $1852003 was $140 million,in cash. /(4)/ Also during the first quarter of 2001, the Corporation recorded a charge related to impairment of its investment in Americom Asia-Pacific, LLC, a joint venture in which it holds a 50 percent interest. The charge was recorded due to an other than temporary decline in the value of the Corporation's investment. Adjusting operating profit for the three and nine month periods ended September 30, 2001 for the impact of adopting SFAS No. 142 as discussed above and excluding nonrecurring and unusual items, the operating profit for these periods would have been $547$8 millionand $1.5 billion, respectively, compared to $576 million and $1.6 billion recorded in the comparable 2002 periods. As adjusted, this reflects increases in operating profit of five percent and seven percent for the quarter and nine month periods ended September 30, 2002 over the respective 2001 20Lockheed Martin Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) periods. The operating profit increase between the quarterly periods was primarily driven by increases in the Technology Services and Corporate and Other segments, as operating profit in the other segments remained essentially flat. For the nine months ended September 30, 2002, as compared to the respective 2001 period, operating profit increased in all segments except Corporate and Other. Interest expense of $147 million and $440 million for the three and nine months ended September 30, 2002, respectively, waslowerby $25 million and $109 millionthan the comparableperiodsperiod in20012002 primarily as a result of the reduction inthe Corporation'sour long-term debt.TheOur effective income tax rates for the
quarterquarters ended March 31, 2003 andyear-to-date periods ended September 30,2002 were30 percent31.5% and23 percent,31.3%, respectively. Theyear-to-date rate included a benefit related to the settlement of a research and development (R&D) tax credit claim which decreased 2002 income tax expense by $90 million. Excluding the benefit of this R&D tax credit, theeffectiveincome tax rate for the nine months ended September 30, 2002 would have been 31 percent. The effective income taxrates forthe quarter and year-to-dateboth periodsended September 30, 2001were24 percent and 42 percent, respectively. These rates include income tax benefits associated with the losses from nonrecurring and unusual items incurred in the quarter and nine months ended September 30, 2001. The effective tax rate for the nine-month period in 2002 (after adjusting for the R&D tax credit) was lower than the rate in the comparable 2001 period primarily due to the fact that non-deductible goodwill was amortized in 2001 for financial accounting purposes, but not in 2002 in accordance with SFAS No. 142. In addition, because of the proportionally lower base of earnings in 2001 versus 2002, the non-deductible goodwill had a greater impact on the effective tax rate in the 2001 period. The effective rate for 2002 waslower than the statutory rate of 35% primarily due to tax benefits related to export sales and the realization of tax savings initiatives.Earnings from continuing operations for the
thirdfirst quarter of20022003 were$300$250 million ($0.660.55 per diluted share) compared toa loss from continuing operations of $87$224 million ($0.200.50 per diluted share) reported in thethirdfirst quarter of2001. The loss from continuing operations2002.Discontinued Operations
During 2003, the telecommunications services business held for sale (LMI) had no impact on our earnings. In the
thirdfirst quarter of2001 included the after-tax impact of three nonrecurring and unusual items which decreased third quarter 2001 earnings from continuing operations by $274 million ($0.63 per diluted share). Excluding such items and adjusting for the adoption of SFAS No. 142 as discussed above, earnings from continuing operations for the third quarter of 2001 would have been $254 million ($0.59 per diluted share). Earnings from continuing operations for the nine months ended September 30, 2002 were $875 million ($1.94 per diluted share), which included the one-time impact of the R&D tax credit that increased 2002 earnings from continuing operations by $90 million ($0.20 per diluted share). Excluding the R&D tax credit, earnings from continuing operations in the nine months ended September 30, 2002 were $785 million ($1.74 per diluted share). Earnings from continuing operations for the nine months ended September 30, 2001 were $189 million ($0.44 per diluted share) and included the after-tax impact of several nonrecurring and unusual items, which decreased 2001 earnings from continuing operations by $267 million ($0.62 per diluted share). Excluding such items and adjusting for the adoption of SFAS No. 142, earnings from continuing operations for the nine months ended September 30, 2001 would have been $639 million ($1.49 per diluted share). 21Lockheed Martin Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Discontinued Operations The Corporation reported a loss from discontinued operations of $10 million ($0.02 per diluted share) in the third quarter of 2002 as compared to earnings from discontinued operations of $300 million ($0.70 per diluted share) in the comparable 2001 period. For the nine months ended September 30,2002, the loss from discontinued operations was$28$6 million ($0.060.01 per diluted share).Lockheed Martin Corporation
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Net Earnings
For the first quarter of 2003 and 2002, our net earnings were $250 million ($0.55 per diluted share) and $218 million ($0.49 per diluted share),
as compared to earnings from discontinued operations of $273 million ($0.63 per diluted share) in the comparable 2001 period. Both periods of 2001 were favorably impacted by an after-tax gain of $309 million from the sale of Lockheed Martin IMS Corporation. Net Earnings The Corporation reported net earnings of $290 million ($0.64 per diluted share) and $213 million ($0.50 diluted per share) for the quarters ended September 30, 2002 and 2001,respectively.For the nine-month periods, net earnings were $847 million ($1.88 per diluted share) for 2002 and $462 million ($1.07 per diluted share) for 2001. Excluding the effects of the R&D tax credit discussed previously, net earnings for the nine months ended September 30, 2002 would have been $757 million ($1.68 per diluted share). Excluding the effects of the nonrecurring and unusual items recorded in 2001, adjusting for the adoption of SFAS No. 142, and excluding the after-tax gain on the sale of IMS, net earnings for the three and nine months ended September 30, 2001 would have been $259 million ($0.60 per diluted share) and $644 million ($1.50 per diluted share), respectively.Discussion of Business Segments
The Corporation operatesWe operate in four principal business segments: Systems Integration, Aeronautics, Space Systems
Aeronautics,and Technology Services.All other activities fall within the CorporateThe Aeronautics andOther segment. The following table of financial information and related discussions of the results of operations of the Corporation's business segments correspond to the presentation of segment information in "Note 7 - Information on Business Segments" included in this Form 10-Q, including the financial data in the tables under the headings "Net sales" and "Operating profit (loss)." The following table displays the impact of the nonrecurring and unusual items presented earlier on each segment's operating profit (loss) for each of the periods presented:
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---- ---- ---- ---- (In millions)Nonrecurring and unusual items - profit (loss): Systems Integration $ -- $ -- $ -- $ --Space Systems-- -- -- 111 Aeronautics -- -- -- -- Technology Services -- -- -- -- Corporate and Other -- (421) -- (521) -------- --------- -------- ------- $ -- $ (421) $ -- $ (410) ======== ========= ======== =======22Lockheed Martin Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) In order to make the following discussion of operating results of each business segment more understandable, the effects of these nonrecurring and unusual items have been excluded. The Space Systems and Aeronauticssegments generally include fewer programs thatare substantiallyhave much largerin terms ofsales and operating results thanthoseprograms included in the other segments.Accordingly,Therefore, due to the large number of comparatively smaller programs in the Systems Integration and Technology Services segments, the discussions of the results of operations of these business segments generally focus on lines of business within the segments. The following tables of financial information and related discussions of the results of operations of our business segments are consistent with the presentation of segment information in Note 6 to the financial statements in this Form 10-Q.Systems Integration
Systems Integration’s operating results included the following:
Three Months Ended
March 31,
2003
2002
(In millions, except percentages)
Net sales
$
2,203
$
2,088
Operating profit
$
209
$
207
Margin
9.5
%
9.9
%
Net sales for
theSystems Integrationsegment were $2.3 billion and $6.6 billionincreased by 6% for the quarterand nine monthsendedSeptember 30, 2002, respectively, representing increases of one percent and five percentMarch 31, 2003 fromsales recorded inthe comparable2001 periods. For2002 period. Sales increased in all of thethird quarter, an increase in salessegment’s lines ofapproximately $110business by approximately: $75 millionin the segment'sat Command, Control,Communications,Communication, Computers and Intelligence (C4I)line of business,, primarilyas a result of higher volumedue to information superiority programs; $25 million at Naval Electronics & Surveillance Systems (NE&SS), mainly oncertainundersea programs; and the remainder related to Systems Integration-Owego, primarily due to distribution technology programs and Missiles & Fire Control (M&FC), mainly in air defense programs.Segment operating profit increased by 1% for the quarter ended March 31, 2003 when compared to 2002. Operating profit increases at M&FC, primarily in tactical missile programs, and C4I, mainly in information superiority programs,
wastotaling about $10 million on a combined basis, were partially offset by acombined decrease of approximately $95 million in the segment's other lines of business. For the nine months ended September 30, 2002, sales increased by approximately $250 million in the segment's Missiles & Fire Control line of business, mainly due to higher volume on certain tactical missile programs and the Theater High Altitude Area Defense (THAAD) program, and by approximately $115 million in the segment's C4I line of business as a result of higher volume on certain information superiority programs. These increases were partially offset by an approximate $100 million decrease in platform integration activities in the segment's Systems Integration-Owego line of business. Operating profit for the segment increased by $2 million and $4 million for the quarter and nine months ended September 30, 2002, respectively, from the $246 million and $698 million recorded in comparable 2001 periods. In both periods of 2002, as compared to the respective 2001 periods, increased operating profit at Missiles & Fire Control on certain tactical missile programs and increases at C4I on certain information superiority programs were offset by decreased operating profit on platform integration activities and distribution technologiesdecline at SystemsIntegration-Owego and on certain marine and undersea programs at Naval Electronics and Surveillance Systems.Integration-Owego. Thesegment's 2002segment’s 2003 margin of10.7 percent9.5% was lower than the11.1 percent9.9% realized in20012002 due to aLockheed Martin Corporation
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
decline in volume on mature production programs (at Owego) and
byhigher volume on developmentprograms. Space Systemsprograms (at C4I and NE&SS).Aeronautics
Aeronautics’ operating results included the following:
Three Months Ended
March 31,
2003
2002
(In millions, except percentages)
Net sales
$
2,088
$
1,334
Operating profit
$
145
$
92
Margin
6.9
%
6.9
%
Net sales for
the Space Systems segment were $1.8 billion and $5.5 billionAeronautics increased by 57% for the quarterand nine monthsendedSeptember 30, 2002, respectively, representing increases of three percent and nine percentMarch 31, 2003 from thesales recorded in thecomparable2001 periods. For the third quarter, increases in the segment's commercial space line of business more than offset declines in the segment's government space line of business. The approximate $100 million increase in commercial space is primarily attributable to more commercial satellite deliveries. The approximate $50 million decrease in government space is mainly due to declines in volume on government launch vehicle programs (Titan) and ground systems activities partially offset2002 period. Sales increased byhigher volume on government satellite programs. The increase in net sales for the nine months ended September 30, 2002 resulted from higher volumes in both commercial space and government space. The approximate $290 million 23Lockheed Martin Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) increase in commercial space is primarily attributable to more commercial satellite deliveries and to increased launch vehicle activities, with seven commercial launches during the nine-month period of 2002 compared to five during the comparable 2001 period. In government space, increases totaling approximately $310 million from government satellite and ground system activities more than offset a decline in volume of approximately $115about $375 million ongovernment launch vehicle programs. Space Systems operating profit was $126 million and $370 million forthequarter and nine months ended September 30, 2002, respectively, representing a decline of two percent and an increase of 12 percent over the operating profit recorded in the comparable 2001 periods. Commercial space operating profit decreased by approximately $40 million quarter-over-quarter due primarily to the lower profitability of the three commercial launches this quarter as compared to the two launches in the respective 2001 period. Operating profit also included the adverse effects of adjustments of $25 million in 2002 and $45 million in 2001 recorded to reflect the continued industry-wide oversupply and further deterioration of pricing in the commercial launch vehicle market. In government space, operating profit increases of approximately $45 million due to the higher volume of government satellite programs more than offset an approximate $10 million decline resulting from lower volume on government launch vehicle programs. The increase in operating profit for the nine months ended September 30, 2002 is primarily attributable to reduced losses in commercial space that more than offset lower operating profit in government space programs. Commercial satellite losses declined by approximately $70 million as operating performance improved and satellite deliveries increased. In the first quarter of 2001, the Corporation recorded a $40 million loss provision on certain commercial satellite contracts. Financial performance on commercial launch vehicle activities continues to deteriorate, resulting in a net decrease in operating profit of approximately $20 million between the comparative nine-month periods. This reduction in commercial launch vehicle results of operations included charges of approximately $60 million, net of favorable contract adjustments of $20 million, recorded in 2002 for market and pricing pressures compared to $85 million in 2001. The 2002 year-to-date decrease of approximately $10 million in government space is primarily due to the reduced volume on government launch vehicle programs partially offset by increases in government satellite programs and ground system activities. Aeronautics Net sales for the Aeronautics segment were $1.7 billion and $4.5 billion for the quarter and nine months ended September 30, 2002, respectively, representing increases of 15 percent and 35 percent from the sales recorded in the comparable 2001 periods. For the third quarter, increases in sales of approximately $250 million were attributable to the initial ramp-up ofF-35 Joint Strike FighterSystem Development & Demonstration (SDD)program and by about $100 million on the F/A-22 program due to higher volume. Additional development and support activitiesandon international F-16 programs accounted for approximately$135$150 millionwere attributableof the sales increase. Sales also increased by about $100 million due to higher volume on theF/A-22C-130J programmainly Low Rate Initial Production (LRIP) activities. These increases were partially offset by an approximate $215 million declineinsales due to fewer C-130J deliveries and lower volume on other aeronautics programs. There was one C-130J delivery in thirdthe current quarter2002compared tofive deliveries intherespective 2001 period. The remainderfirst quarter ofthe increase2002.Segment operating profit increased by 58% for the quarter
was primarily due to higher volume of development activities on certain F-16 and C-5 programs. As in the quarter, the majority of the increase in sales for the nine-month period resultedended March 31, 2003 from theinitial ramp-up of F-35 Joint Strike Fighter SDD activities and higher volume on the F/A-22 program which, on a combined basis, contributed approximately $820 million to thecomparable 2002 period. The increaseover the comparable 2001 period. Additionally, sales increased by approximately $190 million due to an increase in C-130J program 24Lockheed Martin Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) deliveries and other activities. There were six C-130J deliveries in 2002 compared to five deliveries for the same period in 2001. The remainder of the increase for the nine-month periodwasprimarily attributable to an increase in volume on F-16 and C-5 development programs. Operating profit for the quarter and year-to-date periods in 2002 was $126 million and $360 million, respectively, representing increases of one percent and 17 percent from the operating profit recorded in the comparable 2001 periods. These increases areprimarily due to the higher volume on the programs describedinabove, mainly combat aircraft programs which accounted for about $50 million of thediscussion of sales, partially offset by an approximate $15 million charge recorded in the third quarter of 2002 related to performance issues on an aircraft modification contract.increase. Thechangeincrease in C-130J deliveries did not impact operating profitfor the comparative periodsdue to the previouslyreporteddisclosed suspension of earnings recognition on the program.Space Systems
Space Systems’ operating results included the following:
Three Months Ended
March 31,
2003
2002
(In millions, except percentages)
Net sales
$
2,078
$
1,870
Operating profit
$
150
$
112
Margin
7.2
%
6.0
%
Net sales for Space Systems increased by 11% in the first quarter of 2003 from the comparable 2002 period. The
comparisonincrease is due to increased sales of about $275 million in theLockheed Martin Corporation
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
government space line of business related to higher volume that more than offset a $75 million decline in the
third quarter 2002 margincommercial space line of7.6 percentbusiness. The increase in government space was mainly due to volume increases of about $150 million in ground systems activities, with thethird quarter 2001 margin of 8.6 percent as well as those for the nine-month periods of 7.9 percentremainder primarily due to government satellite programs. The decrease in2002 versus 9.2 percentcommercial space was driven by a nearly $200 million decline in2001, were impactedsales resulting from fewer commercial launches partially offset by increaseddevelopment activities on F-35, F-16 and C-5 aircraft programs, the ramp-up of F/A-22 LRIP and the previously mentioned performance issue. Margins for the third quarter periods were also impacted by the reduction in C-130J deliveries mentioned in the sales discussion above. Technology Services Netsales ofthe Technology Services segment were $776approximately $125 millionand $2.2 billionfrom one additional commercial satellite delivery.Segment operating profit increased 34% for the quarter
and nine monthsendedSeptember 30, 2002, respectively, representing increases of six percent and nine percentMarch 31, 2003 from thesales recordedcomparable 2002 period. The quarter-to-quarter change was due to an approximate $75 million increase in operating profit in thecomparable 2001 periods. Thegovernment space line of business that more than offset a $30 million decline in the commercial space line of business. Improved performance and higher volumes in government space resulted in a quarter-over-quarter increase in operating profit of $50 million related to government satellite programs and ground systems activities, with the remainder mainly due to the Titan launch vehicle program. The operating loss from commercial launch vehicles was higher by about $50 million primarily due to the effect of profitable launches in the prior year. Partially offsetting the higher losses in commercial launch vehicles was a $25 million current quarter improvement in commercial satellite activities over the first quarter of 2002.Technology Services
Technology Services’ operating results included the following:
Three Months Ended
March 31,
2003
2002
(In millions, except percentages)
Net sales
$
687
$
670
Operating profit
$
48
$
37
Margin
7.0
%
5.5
%
Net sales for Technology Services increased by 3% in the first quarter of 2003 from the comparable 2002 period. The growth in sales was primarily attributable to higher volume in the
segment's government information technologymilitary aircraft and defense lines of businessof approximately $85that resulted in a $50 millionand $35 million, respectively. Theincrease in current quarter sales over the comparable 2002 period. This growthin these lines of businesswas partially offset bydeclines totaling approximately $80a combined decrease of $35 millionondue to lower sales in commercial information technology programs and the NASAprograms. For the nine-month period, as with the quarter, higher volume in the government information technology and defense linesline ofbusiness of approximately $255 million and $60 million, respectively, accounted for the majority of the increase in sales over the comparable nine-month period in 2001. The growth in these lines of business was partially offsetbusiness.Segment operating profit increased by
declines totaling approximately $125 million for the year on commercial information technology and NASA programs. Operating profit for the segment was $48 million and $131 million30% for the quarterand nine monthsendedSeptember 30, 2002, respectively, representing increases of 23 percent and 20 percentMarch 31, 2003 fromoperating profit recorded inthe comparable2001 periods. In both periods the operating2002 period. Operating profit increased mainly due tothe higher volume of government information technology programs andimproved performanceon commercialin informationtechnology programs, partially offset by lower operating profit on the military aircraft, NASA and energy lines of business. Corporate and Other Operating profit for the Corporate and Other segment increased by $19 million for the quarter and decreased by $32 million for the nine months ended September 30, 2002 from the $9 million and $45 million, respectively, recorded in the comparable 2001 periods. These results exclude amortization of $68 million and $205 million from the quarter and nine months ended September 30, 2001 results relating to the adoption of SFAS No. 142 discussed previously. The increase in operating profit for the quarter is primarily the result of a decrease in corporate expenses, mainly in stock-based deferred compensation costs, and by lower noncash losses from certain equity 25technology. Lockheed Martin Corporation
Management'sManagement’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
investments. ForUnallocated Corporate (Expense) Income, Net
The following table shows the
nine-month period, lower interestcomponents of unallocated Corporate (expense) income, net (for a discussion of the FAS/CAS adjustment and other types of items included in unallocated Corporate (expense) income, see Note 6 to the financial statements in this Form 10-Q):
Three Months Ended
March 31,
2003
2002
(In millions)
FAS/CAS adjustment
$
(72
)
$
50
Other
25
(24
)
$
(47
)
$
26
The following table shows the CAS funding that is included as expense in the segments’ operating results, the related FAS (expense) income, and
anthe FAS/CAS adjustment:
Three Months Ended
March 31,
2003
2002
(In millions)
FAS 87 (expense) income
$
(108
)
$
32
CAS funding and expense
(36
)
(18
)
FAS/CAS adjustment – (expense) income
$
(72
)
$
50
The quarter-to-quarter change in the FAS/CAS adjustment is due to our reporting FAS pension expense in 2003 versus FAS pension income in the prior year. We disclosed in our 2002 Form 10-K that we were projecting a substantial amount of pension expense, as well as a substantial increase in
corporate expenses, primarilyCAS funding, for 2003. The amounts of FAS 87 expense and CAS funding recorded instock-based deferred compensation costs, partially offset by lower noncash losses from certain equity investments, accountedthe first quarter of 2003 represent about 20% to 25% of the total amounts we expect to record for thedeclinefull year. We are currently projecting that both the FAS 87 expense and CAS funding for 2004 will increase substantially over 2003 levels, though the actual amounts will not be finalized until the end of 2003 and will depend on current market conditions as well as our judgments inoperating profit.selecting assumptions based on future market trends, changes in interest rates and equity market performance.The quarter-to-quarter change in “Other” unallocated corporate (expense) income, net is primarily due to the impact of the decrease in our stock price, which lowered our stock-based award programs’ deferred liabilities.
Lockheed Martin Corporation
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES
During the
nine monthsquarter endedSeptember 30, 2002, $2.7 billionMarch 31, 2003, $544 million of cash was provided by operating activities, compared to$2.2 billion$428 million during the comparable20012002 period. Each period includes the impact of earnings from continuing operations, adjusted for non-cash depreciation and amortization, and changes in operating assets andliabilities, and significant advances received on international F-16 fighter aircraft contracts (net of payments to subcontractors and other disbursements). The 2002 amount also includes the receipt from the settlement of the R&D tax credit claim. The 2001 amount includes pretax proceeds from sales of surplus real estate and a cash distribution received from Intelsat, Ltd. (Intelsat) in the second quarter of 2001. These increases were partially offset by income tax payments made in 2001 related to divestiture activities in 2000.liabilities.Net cash used for investing activities during the
nine monthsquarter endedSeptember 30, 2002March 31, 2003 was$345$232 million as compared to$424$68 millionprovided by investing activitiesused during the comparable 2002 period. Investing activities for 2003 included a $130 million payment related to the Space Imaging guarantee (see related discussion below) and a $23 million payment related to the 2001period. The 2002 amount includes $396 million for additionsacquisition of OAO Corporation consistent with the related contract. Additions to property, plant andequipment. This outflow was partiallyequipment amounted to $78 million in 2003. These outflows more than offsetby netthe proceedsof $51from property dispositions. Investing activities for 2002 included $113 millionconsisting primarily ofin proceeds from the March 2002 sale of COMSAT Mobile Communications andproceeds fromproperty dispositions, offset bypaymentsa $76 million payment related to the 2001 acquisition of OAO Corporation.The 2001 amount included $825 million received from the divestiture of IMS and approximately $96 million received from property dispositions. These inflows were partially offset by $312 million used for additionsAdditions to property, plant and equipmentas well as $185amounted to $105 million inother investing activities including additional equity investments in Astrolink International, LLC and Intelsat of approximately $140 million and $30 million, respectively.2002.Net cash
provided byused for financing activities during thenine monthsquarter endedSeptember 30, 2002March 31, 2003 was$195$960 million as compared to$2.3 billion used$95 million provided by financing during the comparable20012002 period. The 2003 amount included $324 million for scheduled debt repayments, $313 million in debt prepayments and an associated prepayment premium (see related discussion below), $279 million for the repurchase of 6.3 million shares of common stock and $54 million in dividend payments. These outflows more than offset proceeds of $10 million from the issuance of common stock, primarily from the exercise of employee stock options. The 2002 amountincludes $431included $201 million in proceeds from the issuance of common stock, primarily from the exercise of employee stock options, partially offset by$149$58 millionin dividend payments and $87 million in net debt repayments. The 2001 amount includes approximately $2.3 billionin net debt repayments and$144$48 million in dividendpayments, partially offset by $123 million in proceeds from the issuance of common stock, primarily from the exercise of employee stock options.payments.Total debt decreased by
approximately $55$774 million during thenine monthsquarter endedSeptember 30, 2002March 31, 2003 from approximately$7.5$7.6 billion at December 31,2001.2002. This decrease was mainly attributable to thepaymentprepayment of debt,maturities. The Corporation's long-termscheduled payments of debtis primarily inmaturities as well as theformresolution ofpublicly issued, fixed-rate notes and debentures. At September 30, 2002, the Corporation held cash and cash equivalentsour guarantee ofapproximately $3.5 billion.Space Imaging, LLC’s credit facility (see related discussion below). Totalstockholders'stockholders’ equity was$7.7$5.8 billion atSeptember 30, 2002, an increaseMarch 31, 2003, a decrease of$1.3 billion$26 million from the December 31,20012002 balance. Thisincreasedecrease resulted from stock repurchases of $279 million, dividend payments of $54 million and other comprehensive losses of $2 million, partially offset by net earnings of$847$250 million and employee stock option and ESOP activities of$697 million, partially offset by dividend payments of $149 million and other comprehensive losses of $138$59 million.The Corporation'sOur ratio ofdebt to totaldebt-to-total capitalizationdecreasedimproved from the5456 percent reported at December 31,20012002 to4954 percent atSeptember 30, 2002. The Corporation expects that it could record an adjustment at DecemberMarch 31,2002 related2003. At March 31, 2003, we held cash and cash equivalents of approximately $2.1 billion. In the first quarter of 2003, Fitch Ratings upgraded our long-term debt rating tocertain of its pension plans which would reduce stockholders' equity by approximately $1 billion to $2 billion, thereby impacting the ratio of debt to total capitalization discussed above. Such adjustment is not expected to impact complianceBBB+ withthe Corporation's debt covenants. See further discussion under the caption "Employee Benefit Plans." 26a stable outlook. Lockheed Martin Corporation
Management'sManagement’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In 2003, we issued irrevocable redemption notices to the trustees for two issuances of callable debentures totaling $450 million. This amount was included in current maturities of long-term debt on our balance sheet at December 31, 2002. One notice was for $300 million of 7.875% debentures due on March 15, 2023, which we repaid on March 15, 2003. The second notice was for $150 million of 7.75% debentures due on April 15, 2023, which we repaid on April 15, 2003. We included the $150 million of 7.75% debentures in current maturities of long-term debt on our balance sheet at March 31, 2003. We recorded a loss, net of state income tax benefits, of $19 million in other income and expenses related to the early repayment of the $450 million of debt. The loss reduced first quarter 2003 net earnings by $13 million ($0.03 per diluted share).
In December 2002, we recorded a charge, net of state income tax benefits, of $163 million related to our investment in Space Imaging, LLC and our guarantee of up to $150 million of Space Imaging’s borrowings under a credit facility that matured on March 30, 2003. At
September 30,December 31, 2002, we increased current maturities of long-term debt by $150 million representing our estimated obligation under theCorporationguarantee. On March 31, 2003, we paid $130 million to acquire Space Imaging’s outstanding borrowings under Space Imaging’s credit facility, and the guarantee was eliminated. We therefore reversed, net of state income taxes, approximately $19 million of the charge recorded in December 2002, representing the unutilized portion of the credit facility covered by our guarantee. This gain increased first quarter 2003 net earnings by $13 million ($0.03 per diluted share).At March 31, 2003, we had in place a $1.5 billion revolving credit
facilities of $1.0 billion and $1.5 billion;facility; no borrowings were outstanding.In October 2002, the Corporation terminated the $1.0 billion credit facility. The $1.5 billionThis credit facility will expire in November 2006.The CorporationWe actively
seeksseek to financeitsour business in a manner that preserves financial flexibility while minimizing borrowing costs to the extent practicable.The Corporation'sOur management continually reviews changes in financial, market and economic conditions to manage the types, amounts and maturities ofthe Corporation'sour indebtedness.Periodically, the CorporationWe may at times refinance existing indebtedness, varyitsour mix of variable-rate and fixed-rate debt, or seek alternative financing sources foritsour cash and operational needs.Cash and cash equivalents,
(including temporary investments),internally generated cash flow from operations and other available financing resources, including those described above, are expected to be sufficient to meet anticipated operating, capital expenditure and debt service requirements,andas well as discretionary investment needs, during the next twelve months.The Corporation continuesConsistent with our desire toguarantee upgenerate cash to$150 millionreduce debt and invest inborrowingsour core businesses, we expect that, depending on prevailing financial, market and economic conditions, we will continue to explore the sale ofSpace Imaging LLC (Space Imaging), a joint venture in which it holds a 46 percent ownership interest. The amountnon-core businesses, passive equity investments and surplus real estate.Realization of
borrowings outstanding as of September 30, 2002 for which Lockheed Martin was guarantor was approximately $140 million. These borrowings mature on March 31, 2003. The Corporation's investment in Space Imaging is accounted for under the equity method of accounting. At September 30, 2002, the Corporation's investment in and receivables due from Space Imaging amounted to approximately $50 million. Space Imaging is pursuing its business plan, including assessments relative to future investment in replacement satellites and related funding requirements. To execute its current business plan and fund future replacement satellites, Space Imaging will likely need to obtain long-term commitments and funding from the U.S. Government for purchases of commercial satellite imagery, as well as commitments for additional investment or funding, none of which are committed at present. In light of current market conditions, it is uncertain as to whether Space Imaging will be successful in attracting the necessary additional funding. If the long-term commitments and additional investment or funding do not materialize, the Corporation could be required to fund all or part of its obligation under the guarantee and record a charge to earnings to the extent that any amounts invested, advanced or paid under the guarantee are not realizable. The Corporation has minority investments in the equity securities of several companies, including Intelsat, Inmarsat Ventures plc (Inmarsat), Loral Space & Communications, Ltd. and New Skies Satellites, N.V. For a description of the Corporation's investments in equity securities, including other investments not referenced, see "Note 9 - Investments in Equity Securities" to the Corporation's 2001 Annual Report on Form 10-K. The Corporation's ability to realize the value of itsour investments in equity securities may be affected bythe investee'san investee’s ability tosuccessfullyobtain adequate funding and execute its businessplan,plans, general market conditions, industry considerations specific to theinvestee'sinvestee’s business, and/or otherfactors. The Corporation's investments in equity securities are concentrated in the satellite services and telecommunications sectors. The satellite services sector is subject to the effects of the increasing availability of satellite capacity and competition from other forms of telecommunications services, including fiber optic cable and other wireless communication technologies. These factors could adversely affect the market value of the underlying equity securities, which in turn could impact the Corporation's earnings. 27Lockheed Martin Corporation
Management'sManagement’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
In 2000, Congress passed the Open-market Reorganization for the Bettermentfactors. The inability of
International Telecommunications Act (the ORBIT Act) that, among other measures, established deadlines for completion of the initial public offerings by Intelsat and Inmarsat. Under the ORBIT Act, Intelsat and Inmarsat were requiredan investee tocomplete their initial public offerings by December 31, 2002. However, Inmarsat may petition the Federal Communications Commission (FCC) for an extension until June 30, 2003 pursuant to an amendment passed in 2001 and, in October 2002, the President signed into law legislation to extend the deadline for Intelsat to completeobtain future funding or successfully execute itsinitial public offering to December 31, 2003, or June 30, 2004 if approved by the FCC. If those deadlines are not met, the FCC may limit access by U.S. users to the satellite capacity of the privatized entities for certain services. If this were to occur, the value of the Corporation's investment in those entitiesbusiness plan couldbeadverselyaffected. Current trends and market conditionsaffect our earnings in thetelecommunications industry, including recent bankruptcy filingsperiods affected bysome carriers, as well as trends in the securities markets, may make it difficult for Intelsat or Inmarsat to complete their initial public offerings by the prescribed ORBIT Act deadlines. The Corporation's investments in Intelsat and Inmarsat were $1.26 billion and $270 million, respectively, at September 30, 2002. EMPLOYEE BENEFIT PLANS As disclosed in its 2001 Annual Report on Form 10-K, the Corporation's earnings will continue to be affected positively or negatively by the level of income or expense related to its employee benefit plans, including qualified defined benefit plans and retiree medical and life insurance plans. This is particularly true with income or expense associated with qualified defined benefit plans (pension plans), as the related calculations are sensitive to changes in various key economic assumptions and workforce demographics. Based on actuarial assumptions and projected rates of return on plan assets used as of December 31, 2001, the Corporation anticipated that its income related to employee benefit plans would decline substantially in 2002 and result in a net expense in 2003. Based on the current market performance and its preliminary analysis, the Corporation projects that the discount rate and long-term rate of return on plan asset assumptions to be used for year-end 2002 reporting purposes may be lower thanthoseused at the end of 2001. These assumptions are used in calculating the subsequent year's pension plan expense. The assumptions used at the end of 2001 included a discount rate of 7.25% and an expected long-term rate of return on plan assets of 9.5%. In addition, the difference between the actual return on plan assets for a given year and the assumed rate of return may also affect the subsequent year's pension plan expense. The Corporation had assumed a 2002 return on plan assets of approximately 5%; however, the actual year-to-date return on plan assets through September 30, 2002 was negative. The discount rate assumption, the long-term rate of return assumption and the actual return on plan assets that will be used for calculating pension plan expense for 2003 will be finalized at the end of the year consistent with the Corporation's pension plan measurement date. With respect to the Corporation's pension plans, the following analysis reflects the potential incremental impact of changes in the respective plan assumptions and experience: . Lowering the discount rate by 25 basis points would increase 2003 pension expense by approximately $40 million to $50 million. . Lowering the long-term rate of return on assets by 25 basis points would increase 2003 pension expense by approximately $55 million to $65 million. 28Lockheed Martin Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) . Each 100 basis point decline in the 2002 actual return on plan assets, compared to the assumed rate of return, would increase 2003 pension expense by approximately $10 million. The balance sheet is expected to be adjusted at December 31, 2002 due to the recording of a minimum liability adjustment related to certain of the Corporation's pension plans. The adjustment is calculated on a plan-by-plan basis, and is determined by comparing the accumulated benefit obligation to the related fair value of the plan assets in accordance with SFAS No. 87, "Employers' Accounting for Pensions." The adjustment would be recorded as a reduction of stockholders' equity. Assuming there is no change in interest rates or equity market performance for the remainder of the year, the Corporation estimates that the after-tax impact of the adjustment on stockholders' equity would be in the range of $1 billion to $2 billion.events.ADVANCES TO RUSSIAN MANUFACTURERS
In 1992,
the Corporationwe entered into a joint venture with two Russian government-owned space firms to form Lockheed-Khrunichev-Energia International, Inc. (LKEI).Lockheed Martin owns 51 percentWe own 51% of LKEI. LKEI has exclusive rights to market launches of commercial, non-Russian-origin space payloads on the Proton family of rockets from a launch site in Kazakhstan. In 1995, another joint venture was formed, International Launch Services (ILS), withthe CorporationLockheed Martin and LKEI each holding a50 percent50% ownership. ILS was formed to market commercial Atlas and Proton launch servicesworldwide. The Corporation consolidatesaround the world. We consolidate the results of operations of LKEI and ILS intoitsour financial statements. Contracts forProtonlaunch servicestypically provide forusually require substantial advances from the customerprior tobefore the launch. Advances received from customers for Proton launch services not yet provided totaled $374 million at March 31, 2003 and $412 million at December 31, 2002, and were included as a liability on our balance sheet in the caption customer advances and amounts in excess of costs incurred.A sizable percentage of
thesethe advances we receive from customers for Proton launch services areforwardedsent to Khrunichev State Research and Production Space Center (Khrunichev), the manufacturerin Russia, to provide forof themanufacturelaunch vehicle and provider of the related launchvehicle.services in Russia. Ifthea contracted launchservices couldservice is notbeprovided, a sizeable percentage ofsuch advancesthe related advance wouldbe requiredhave to be refunded toeachthe customer.At September 30, 2002, $429 million relatedIn addition, we have previously sent advances tolaunches not yet provided was included in the caption "customer advances and amounts in excess of costs incurred"Khrunichev that are covered by an arrangement to reduce future launch payments from us to Khrunichev, contingent on theconsolidatedreceipt of new orders as well as a minimum number of actual launches each year. The advances sent to Khrunichev are included on our balancesheet. Also at that date, $589 million ofsheet in inventories. Total payments to Khrunichevwere reflected on the balance sheetincluded in inventories at March 31, 2003 and December 31, 2002, net ofwhich $340reserves recorded in the fourth quarter of 2002, were $347 millionrelatedand $391 million, respectively. Our ability tolaunches currently under contract and $249 million related to launches not under contract. Lockheed Martin and Khrunichev originally anticipatedrealize these amounts may be affected by theinventory related to launches not under contract would be assigned to future launch vehicle orders over a period of not more than three years. However, due to the reduction in demand for commercial launch vehicles andcontinuing overcapacity in the launch vehicle market,the Corporation and Khrunichev are evaluating the impact of a longer period over which to sell the inventory related to launch vehicles not under contract. The Corporation's ability to realize such amounts may also be affected by Khrunichev'sKhrunichev’s ability to provide therelatedlaunch services and the political environment in Russia. ThroughSeptember 30, 2002,the end of March 2003, launch servicesprovidedthrough LKEI and ILS have beenin accordance withprovided according to contract terms.The Corporation hasWe have entered into an agreement with RD AMROSS, a joint venture of the Pratt & Whitney division of United Technologies Corporation and the Russian firm NPO Energomash, for the development and purchase, subject to certain conditions, of RD-180 booster engines for use in
the Corporation'sour Atlas launch vehicles. Terms of the agreement call for payments to be made to RD AMROSS upon the achievement of certain milestones in the development and manufacturing processes. Approximately$44$53 million of payments made under this agreement for engines not yet delivered were included inthe Corporation'sinventories atSeptember 30, 2002. 29March 31, 2003 ($61 million at December 31, 2002). Lockheed Martin Corporation
Management'sManagement’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
OTHER MATTERS
As of the end of 2002, the global telecommunications services businesses identified for divestiture in 2001 had been sold, except for Lockheed Martin Intersputnik (LMI). We reached an agreement to sell LMI in the third quarter of 2002; however, in April 2003, the agreement was terminated. We are continuing to treat LMI as a discontinued operation, as we are still holding and actively marketing the business for sale. The operating results of LMI had no impact on the statement of earnings for the first quarter of 2003. LMI was carried at estimated fair value less cost to sell at March 31, 2003, and its assets and liabilities, which represented less than 1% of our consolidated assets and liabilities, respectively, were included in our balance sheet in other current assets and other current liabilities. Changes in the estimated fair value of LMI will be recorded in the future if appropriate.
We provide products and services to NASA, including the Space Shuttle program, mainly through our Space Systems and Technology Services
segment hasbusiness segments. Work for NASA accounted for approximately 6% of our consolidated net sales in 2002, of which about one-half was related to the Space Shuttle program. We also have abusiness unit50% equity interest in United Space Alliance, LLC which provides ground processing and other operational services to thegovernmentSpace Shuttle program. We are continuing to work with NASA and others in the investigation ofArgentina. At September 30, 2002,theCorporation had investmentstragic accident inand advances toFebruary 2003 involving thebusiness unit totaling approximately $60 million. With regard to this business unit, the Corporation doesSpace Shuttle Columbia. We do not expect that thecurrent economic situation in Argentina, including the devaluationeffects ofthe Argentine peso,this accident will have a material impact onthe Corporation'sour results of operations, financial position or cash flowsor financial position.for 2003. Pending completion of the investigation, it is too early to determine whether the accident will affect our business operations beyond 2003.As
more fullydescribed in"Note 6 - Contingencies,"Note 5 to theCorporation isfinancial statements, we are continuing to pursue recovery of a significant portion of the unanticipated costs we incurredin connection with thefor a $180 million fixed-price contract with the U.S. Department of Energy (DoE) for the remediation of waste found in Pit 9.The Corporation hasWe have been unsuccessful to date in reaching agreement with the DoE on cost recovery or other contract restructuring matters. In 1998, the management contractor for the project, a wholly-owned subsidiary ofthe Corporation,ours, at theDoE'sDoE’s direction, terminated the Pit 9 contract fordefault and filed suit againstdefault. We sued theCorporationDoE in theUnited StatesU.S. Court of Federal Claims seeking to overturn the default termination and to recover our costs. The management contractor, at the DoE’s direction, sued us in the U.S. District Courtfor the District ofin Idaho seeking, among other things, recovery ofapproximatelyabout $54 million previously paid tothe Corporationus under the contract.The Corporation counterclaimedWe filed counterclaims, again seeking to overturn the default termination and recoveritsour costs. In 2001,the DoE filed a motion for summary judgment seeking to dismiss the Corporation's complaint on jurisdictional grounds, whichthe Court of Federal Claimsgranted,dismissed our lawsuit against the DoE, finding thatthere was nowe lacked privity of contractbetweenwith theCorporation and the United States sufficient to provide the Court with jurisdiction over the dispute.DoE. On September 30, 2002, the U.S. Court of Appeals for the Federal Circuit affirmed the dismissal. We did not appeal the decisionof the Court of Federal Claims. The Corporation does not planfurtherappealand willpursue its remedies in its counterclaims in the district court action. The Corporation continuescontinue to seek resolution of the Pit 9 dispute through non-litigationmeans. 30means while pursuing our remedies in the Idaho proceeding, which is set for trial in August 2003. Lockheed Martin Corporation
Item 3. Quantitative and Qualitative Disclosure of Market Risk
Lockheed Martin Corporation Quantitative and Qualitative Disclosure of Market Risk The Corporation's primaryOur main exposure to market risk relates to interest rates and, to a lesser extent, foreign currency exchange rates.
The Corporation'sOur financial instrumentswhichthat are subject to interest rate risk principally includecommercial paper andfixed-rate long-term debt.At September 30, 2002, the Corporation had no commercial paper outstanding. The Corporation'sOur long-term debt obligations are generally not callable until maturity.The Corporation usesWe sometimes use interest rate swaps to manageitsour exposure to fixed and variable interest rates. At the end of thethirdfirst quarter of2002, the Corporation2003, we had agreements in place to swap fixed interest rates on approximately$920$720 million ofitsour long-term debt for variable interest rates based on LIBOR. The interest rate swap agreements are designated as effective hedges of the fair value of the underlying fixed-rate debt instruments. AtSeptember 30, 2002,March 31, 2003, the fair values of interest rate swap agreements outstandingtotaled approximately $27 million.were not material. The amounts of gains and losses from changes in the fair values of the swap agreements were entirely offset by those from changes in the fair value of the associated debt obligations. The interest rate swaps create a market exposure to changes in the LIBOR rate. To the extent that the LIBOR indexuponon which the swaps are based increases or decreases by 1%,the Corporation'sour interest expense would increase or decrease by$9$7 million on a pretax basis. Changes in swap rates would affect the market value of the agreements, butsuchthose changes in value would be offset by changes in value of the underlying debt obligations. A 1% rise in swap rates from those prevailing atSeptember 30, 2002March 31, 2003 would result in a decrease in market value of approximately$13$9 million. A 1% decline would increase the market value by a like amount.The Corporation usesWe use forward foreign exchange contracts to manage
itsour exposure to fluctuations in foreign exchange rates. These contracts are designated as qualifying hedges of the cash flows associated with firm commitments or specific anticipated transactions, and related gains and losses on the contracts, to the extent they are effective hedges, are recognized in income when the hedged transaction occurs. To the extent the hedges are ineffective, gains and losses on the contracts are recognized currently. AtSeptember 30, 2002,March 31, 2003, the fair value of forward exchange contracts outstanding, as well as the amounts of gains and losses recorded during the quarterand nine month periodsthen ended, were not material.The Corporation doesWe do not hold or issue derivative financial instruments for trading purposes.31Lockheed Martin Corporation
Item 4. Controls and Procedures
Lockheed Martin Corporation ControlsWe maintain disclosure controls and
Proceduresprocedures that are designed to ensure that information required to be disclosed in our periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to use its judgment in evaluating the cost to benefit relationship of possible controls and procedures. Also, we have investments in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to those entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.Within 90 days prior to the date of this report,
the Corporationwe performed an evaluation of the effectiveness of the design and operation ofitsour disclosure controls and procedures.Disclosure controls and procedures help to ensure that the financial and non-financial information required to be disclosed in the Corporation's periodic filings with the Securities and Exchange Commission is recorded, processed, summarized and reported timely.The evaluation was performed with the participation of senior management of each business segment and key Corporate functions, and under the supervision of theChief Executive Officer (CEO)CEO andChief Financial Officer (CFO).CFO. Based on the evaluation,the Corporation'sour management, including the CEO and CFO, concluded thatthe Corporation'sour disclosure controls and procedures were effective. There have been no significant changes inthe Corporation'sour internalaccountingcontrols or in other factors that couldadverselysignificantly affect internalaccountingcontrolssubsequent toafter the dateofwe completed the evaluation.32Lockheed Martin Corporation
Forward-Looking StatementsFORWARD-LOOKING STATEMENTS
This Form 10-Q contains statements which, to the extent that they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The words
"believe," "estimate," "anticipate," "project," "intend," "expect," "plan," "outlook," "forecast"“believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “forecast” and similar expressions are intended to identify forward-looking statements. Numerous factors, including potentially the following factors, could affect theCorporation'sCorporation’s forward-looking statements and actual performance:the ability to achieve savings through cost-cutting and other financial management programs; the level of returns on pension and retirement plan assets;the ability to obtain or the timing of obtaining future government awards; the availability of government funding and customer requirements both domestically and internationally; changes in government or customer priorities due to program reviews or revisions to strategic objectives (including changes in priorities in response torespond toOperation Iraqi Freedom and terrorist threats, or to improve homeland security); difficulties in developing and producing operationally advanced technology systems; the level of returns on pension and retirement plan assets; the competitive environment; economic, business and political conditions both domestically and internationally; program performance and the timing of contract payments (including the ability to perform fixed-price contracts within estimated costs and considering subcontractor performance); the timing and customer acceptance of product deliveries and launches; the termination of programs or contracts for convenience by customers;difficulties in developingthe ability to achieve savings through cost-cutting andproducing operationally advanced technology systems; launch failuresother financial management programs; government import andpotential problems that might result, including potential loss of future or existing orders;export policies; the ability to procure insurance to cover operational and contractual risks, including launch and satellite failures, on commercially reasonable terms;the competitive environment (including continued pricing pressures associated with commercial satellites and launch services); economic business and political conditions both domestically and internationally; government import and export policies; program performance and the timing of contract payments (including the ability to perform fixed-price contracts within estimated costs, subcontractor performance, and the timing of product deliveries and customer acceptance);and the outcome of contingencies (including completion of acquisitions and divestitures, litigation and environmental remediation efforts).The Corporation's ability to monetize assets or businesses placed in discontinued operations will depend upon market and economic conditions, negotiation of acceptable terms with prospective purchasers and other factors, and may require receipt of regulatory or governmental approvals.Realization of the value of the
Corporation'sCorporation’s investments in equity securities, or related equity earnings for a given period, may be affected bythe investee'san investee’s ability to obtain adequate funding and execute its business plan, general market conditions, industry considerations specific to theinvestee'sinvestee’s business, and/or other factors.Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this Form 10-Q. The Corporation does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this Form 10-Q, or to reflect the occurrence of unanticipated events. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act and 21E of the Exchange Act.
For a discussion identifying some important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see the
Corporation'sCorporation’s Securities and Exchange Commission filings including, but not limited to, the discussions of"Competition and Risk," "Government“Government Contracts andRegulations,"Regulations” and"Industry Considerations"“Risk Factors and Forward-Looking Statements” on pages1119 through12, pages 13 through 1420 and pages2823 through31,28, respectively, of theCorporation'sCorporation’s Annual Report on Form 10-K for the fiscal year endedLockheed Martin Corporation
December 31,
2001 (Form 10-K); "Management's2002; “Management’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations” on pages1817 through3026 of this Form 10-Q;"Note 2 - Exit From the Global Telecommunications Services Business," "Note 3 - Adoption of New Accounting Standard"and"Note 6 - Contingencies"“Note 5 – Contingencies” and “Note 7 – Other” of the Notes to Unaudited Condensed Consolidated Financial Statements on pages710 through8, pages 8 through 912 and pages1115 through14,16, respectively, of this Form 10-Q; and Part II-– Item 1,"Legal Proceedings"“Legal Proceedings” onpage 34pages 31 through 32 of this Form 10-Q.33PartPART II.
Other InformationOTHER INFORMATIONLockheed Martin Corporation
Other InformationThe Corporation is a party to or has property subject to litigation and other proceedings, including matters arising under provisions relating to the protection of the environment, as described in
"Note 6 - Contingencies"“Note 5 – Contingencies” of the Notes to Unaudited Condensed Consolidated Financial Statements in this Form 10-Q, and in theCorporation's 2001Corporation’s 2002 Annual Report on Form 10-K (Form 10-K), or arising in the ordinary course of business. In the opinion of management, the probability is remote that the outcome of any such litigation or other proceedings will have a material adverse effect on theCorporation'sCorporation’s results of operations or financial position.The Corporation is primarily engaged in providing products and services under contracts with the U.S. Government and, to a lesser degree, under direct foreign sales contracts, some of which are funded by the U.S. Government. These contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. Government investigate whether the
Corporation'sCorporation’s operations are being conducted in accordance with these requirements. U.S. Government investigations of the Corporation, whether relating to these contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon the Corporation, or could lead to suspension or debarment from future U.S. Government contracting. U.S. Government investigations often take years to complete and many result in no adverse action against the Corporation. For the U.S. Government investigations described in theCorporation'sCorporation’s Form 10-K, it is too early for Lockheed Martin to determine whether adverse decisions relating to these investigations could ultimately have a material adverse effect on its results of operations or financial position.We are subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. As a result, we are a party to or have our property subject to various other lawsuits or proceedings involving environmental protection matters. Due in part to their complexity and pervasiveness, such requirements have resulted in our being involved with related legal proceedings, claims and remediation obligations. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or clean-up to the extent estimable, see Note 5 - Contingencies on page 10 through page 12 and “Other Matters” in Management’s Discussion and Analysis of Results of Operations and Financial Condition on page 26 of this Form 10-Q.
In addition, see the “Legal Proceedings” section of the Form 10-K for a description of previously reported matters.
As previously reported,
two shareholder class-action complaints have beena consolidated third amended complaint was filed against the Corporation and certain of its officers and directors in the United States District Court forLockheed Martin Corporation
the Central District of
California. They are captioned "InCalifornia, In re Lockheed Martin Corp. SecuritiesLitigation" and "Kops et al. v. Lockheed Martin et al." InLitigation. On March 26, 2003, theSecurities Litigation proceeding, the district court granted our motion to dismiss the second amended complaint on July 22, 2002. The plaintiffs filed a third amended complaint on September 12, 2002, and we filed a motion to dismiss that complaint on October 28, 2002. In the Kops proceeding, the district court granted part and denied part of our motion to dismiss the second amended complaint on November 1, 2002. Thecourt dismissed withleave to amend,prejudice theallegationcomplaint against the Corporation and all individual defendants in thatwe publicly announced false or misleading expectations about anticipated resultslawsuit. Plaintiffs have filed an appeal with the United States Court of Appeals for the Ninth Circuit.As previously reported, a federal grand jury was investigating whether hazardous waste was properly stored and handled at the Paducah Gaseous Diffusion Plant in Paducah, Kentucky. On March 19, 2003, the Department of Justice advised the Corporation that the investigation has been closed.
As previously reported, in a
varietylawsuit filed against the Corporation in the United States District Court for the Northern District ofareas, includingCalifornia, Space Systems/Loral alleged our series 3000, 4000, 5000, 7000 and A2100 satellites infringed a Space Systems/Loral patent. On March 19, 2003, thesalecourt granted the Corporation’s motion for summary judgment ruling that the Space Systems/Loral patent was invalid.As previously reported, the SEC has been investigating the disclosures regarding the regulatory approval of
F-16 aircraftthe proposed merger between the Corporation and Northrop Grumman, which was announced in 1997 and terminated in 1998. On May 1, 2003, the SEC advised the Corporation that the investigation was closed.Item 4. Submission of Matters to a
foreign government in 1999, expected deliveriesVote ofC-130J aircraft in 1999 and earnings projections. The court dismissed, without leave to amend,Security HoldersAt the
allegations that we made false statements regardingAnnual Meeting of Stockholders on April 24, 2003, theexpected numberstockholders ofsatellite launches in 1999. The court denied our motion regarding the allegations that we falsely claimed the sale of six C-130J aircraft to the Air Force and improperly recognized revenue from that sale. We intend to defend these actions vigorously. In addition, see the "Legal Proceedings" section of the Form 10-K for a description of previously reported matters. 34Lockheed Martin Corporation:
· Elected the following thirteen individuals to the Board of Directors to serve as directors until the Annual Meeting of Stockholders in 2004 and until their successors have been duly elected and qualified:
Votes Cast For
Votes Withheld
Nolan D. Archibald
384,288,940
17,922,248
Norman R. Augustine
332,179,565
70,031,623
Marcus C. Bennett
395,328,550
6,882,638
Vance D. Coffman
394,139,272
8,071,916
Gwendolyn S. King
385,794,837
16,416,351
Douglas H. McCorkindale
395,630,985
6,580,203
Eugene F. Murphy
385,886,625
16,324,563
Joseph W. Ralston
395,232,472
6,978,716
Frank Savage
288,008,255
114,202,933
Anne Stevens
385,742,375
16,468,813
Robert J. Stevens
395,638,914
6,572,274
James R. Ukropina
385,915,658
16,295,530
Douglas C. Yearley
385,987,392
16,223,796
Lockheed Martin Corporation
Other Information (continued)
· Adopted management’s proposal to approve the Lockheed Martin Corporation 2003 Incentive Performance Award Plan. There were 289,107,231 votes for the proposal, 108,930,964 votes against the proposal and 4,172,993 abstentions.
· Rejected a stockholder proposal that recommended that the Corporation furnish stockholders with an annual listing of employees and other persons acting on behalf of the Corporation (e.g., consultants) who have served in any governmental capacity in the previous five years. There were 9,416,124 votes for the proposal, 329,397,530 votes against the proposal, 15,246,379 abstentions and 48,151,155 broker non-votes.
· Rejected a stockholder proposal that recommended that the Board of Directors redeem any poison pill previously issued (if applicable) and not adopt or extend any poison pill unless such adoption or extension has been submitted to a shareholder vote. There were 156,699,943 votes for the proposal, 193,172,304 votes against the proposal, 4,305,360 abstentions and 48,033,581 broker non-votes.
· Rejected a stockholder proposal that recommended that the Board of Directors provide within six months of the annual meeting, a comprehensive report on the Corporation’s foreign sales of weapons-related products and services, including offset agreements. There were 11,290,282 votes for the proposal, 326,826,521 votes against the proposal, 15,843,235 abstentions and 48,251,150 broker non-votes.
· Rejected a stockholder proposal that recommended that the Board of Directors adopt a policy stating that the public accounting firm retained by the Corporation to provide audit services, or any affiliated company, should not also be retained to provide any management consulting services to the Corporation. There were 38,839,439 votes for the proposal, 310,846,342 votes against the proposal, 4,374,255 abstentions and 48,151,152 broker non-votes. Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 1. Exhibit 10.1
(a) Exhibits
Exhibit 3
Bylaws of Lockheed Martin Corporation, as amended
Amended Section 3.02 of the Bylaws to change the name of the Finance Committee to the “Strategic Affairs and Finance Committee” and revise its functions accordingly
Exhibit 10.1
Lockheed Martin Corporation 2003 Incentive Performance Award Plan (incorporated by reference to the Corporation’s 2003 Annual Proxy filed with the Securities and Exchange Commission on Schedule 14A on March 14, 2003)
Lockheed Martin Corporation
Deferred Management Incentive Compensation Plan, as amended effective October 1, 2002. 2. Exhibit 10.2 Lockheed Martin Corporation Directors Equity Plan, as amended effective October 24, 2002. 3. Exhibit 10.3 Lockheed Martin Corporation Directors Deferred Compensation Plan, as amended effective October 24, 2002. 4. Exhibit 10.4 Lockheed Martin Corporation Directors Deferred Stock Plan, as amended effective October 24, 2002. 5. Exhibit 12. Lockheed Martin Corporation Computation of Ratio of Earnings to Fixed Charges for the nine months ended September 30, 2002. 6. Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 7. Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K filed in the third quarter of 2002. 1. Current report on Form 8-K filed on August 20, 2002. Item 5. Other Events
Exhibit 12
Lockheed Martin Corporation Computation of Ratio of Earnings to Fixed Charges for the three months ended March 31, 2003
Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K filed in the first quarter of 2003.
1. Current report on Form 8-K filed on January 16, 2003.
The Corporation filed information
regarding two internal corporate policy statements pertainingconcerning the change in reporting of its business segments.
(c) Reports on Form 8-K filed subsequent to the first quarter of 2003.
1. Current report on Form 8-K filed on April 22, 2003.
The Corporation furnished information contained in its press release dated April 22, 2003 related to
international consultants and procedures undertheForeign Corrupt Practices Act. Item 7. Financial Statements and ExhibitsCorporation’s financial results for quarter ended March 31, 2003.Lockheed Martin Corporation
Policy Statement No. CPS-704 (International Consultants), as amended. Lockheed Martin Corporation Policy Statement No. CPS-730 (Compliance with the Foreign Corrupt Practices Act), as amended. 2. Current report on Form 8-K filed on August 8, 2002. Item 5. Other Events The Corporation filed CEO and CFO sworn statements required by the Securities and Exchange Commission Order No. 4-460. 35Lockheed Martin Corporation Other Information (continued) Item 7. Financial Statements and Exhibits Statement under oath of principal executive officer regarding facts and circumstances relating to Exchange Act filings dated August 8, 2002. Statement under oath of principal financial officer regarding fact and circumstances relating to Exchange Act filings dated August 8, 2002. 36LOCKHEED MARTIN CORPORATIONPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LOCKHEED MARTIN CORPORATION --------------------------- (Registrant) Date: November 8, 2002 by: /s/ Rajeev Bhalla ----------------------------- ----------------- Rajeev Bhalla Vice President and Controller (Chief Accounting Officer) 37LOCKHEED MARTIN CORPORATION
Lockheed Martin Corporation
(Registrant)
Date: May 8, 2003
by:
/s/ Rajeev Bhalla
Rajeev Bhalla
Vice President and Controller
(Chief Accounting Officer)
Lockheed Martin Corporation
I, Vance D. Coffman, Chairman and Chief Executive Officer, certify that:
1.
1. I have reviewed this quarterly report on Form 10-Q of Lockheed Martin Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and Lockheed Martin
Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 386. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 /s/ Vance D. Coffman ------------------ -------------------- Vance D. Coffman Chairman and Chief Executive Officer 39LOCKHEED MARTIN CORPORATIONCorporation
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with respect to significant deficiencies and material weaknesses.
Date:May 7, 2003
/s/ Vance D. Coffman
Vance D. Coffman
Chairman and Chief Executive Officer
Lockheed Martin Corporation
CERTIFICATION
I, Christopher E. Kubasik, Senior Vice President and Chief Financial Officer, certify that:
1.
1. I have reviewed this quarterly report on Form 10-Q of Lockheed Martin Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and Lockheed Martin
Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 406. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 /s/ Christopher E. Kubasik ---------------- -------------------------- Christopher E. Kubasik Senior Vice President and Chief Financial Officer 41
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with respect to significant deficiencies and material weaknesses. |
Date:May 7, 2003 | /s/ Christopher E. Kubasik | |||||
Christopher E. Kubasik Senior Vice President and Chief Financial Officer | ||||||
39