Lockheed Martin 1999 Annual Report Download - page 23

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
December 31, 1999
recorded in 1998. The remaining decrease relates to the
decline in volume on various other systems integration activ-
ities. The increase in operating profit in 1998 compared to
1997 was comprised of $45 million in improved margins
on naval electronics programs, a $15 million increase from
deliveries of control systems, approximately $20 million
related to volume increase in postal systems activities
and $16 million from the previously mentioned favorable
arbitration resolution. These increases were partially offset
by a $32 million decrease in air defense systems, an
$11 million decrease in operating profit on fire control
systems and, to a lesser extent, other volume decreases
that impacted net sales.
Space Systems
Net sales of the Space Systems segment decreased by
17 percent in 1999 compared to 1998, and decreased
by 11 percent in 1998 compared to 1997. Almost half of
the segment’s 1999 net sales decrease resulted from vol-
ume decreases on military satellite programs and classified
activities. Net sales were also reduced by a $185 million
decrease in commercial and civil satellite activities as a
result of the maturity of certain programs and lower market
demand. Net sales were further reduced by a $50 million
decrease from 1998 in launch vehicle activities. In addi-
tion, during the second quarter of 1999, the segment
recorded a $90 million negative adjustment related to the
Titan IV program which included the effects of changes in
estimates for award and incentive fees resulting from the
launch failure on April 30, 1999, as well as a more con-
servative assessment of future program performance. The
remaining decrease is related to a decline in volume on
various other space systems activities. The segment’s 1998
net sales activity was adversely impacted by a decrease in
commercial launch vehicle activity resulting from delays in
the availability of commercial satellites due primarily to
supplier issues. This reduction accounted for approximately
20 percent of the 1998 decrease and was mainly attributa-
ble to the Atlas and Proton commercial launch vehicles. The
1998 net sales further decreased by $165 million due to
a reduction in volume on the Trident fleet ballistic missile
program and $85 million due to a reduction in commercial
and civil satellite activities. Approximately 40 percent of the
remaining decrease was due to additional reductions in
1998 net sales relating to a net decrease in military satel-
lite programs and classified activities, with the remainder
due to various other space systems activities.
Operating profit for the segment decreased by 53
percent in 1999 compared to 1998, and decreased by
17 percent in 1998 compared to 1997. A contributing fac-
tor to the decrease in the segment’s operating profit in
1999 compared to 1998 was the impact of a third quarter
1998 favorable adjustment of approximately $120 million,
net of state income taxes, which resulted from a significant
improvement in the Atlas program related to the retirement
of technical and program risk based upon an evaluation of
historical performance. In addition, 1999 operating profit
was adversely affected by the impact of the $90 million
Titan IV program adjustment discussed above. Operating
profit in 1999 was also adversely impacted by increased
period costs (principally start-up costs) related to launch
vehicle investments which accounted for approximately 15
percent of the decrease, by a reduction in Trident fleet bal-
listic missile activities that reduced operating profit by
approximately $30 million, and by a launch vehicle con-
tract cancellation which resulted in a charge of $30 million.
The remainder of the decrease is attributable to the decline
in sales related to military satellite and classified activities
discussed above as well as a reduction in commercial satel-
lite activities. The 1998 decrease resulted from the same
issues that impacted net sales, as discussed above, with the
Trident fleet ballistic missile program and classified activities
accounting for approximately 75 percent of the total
decrease. In addition, $75 million of the decrease was
attributable to reductions in commercial launch vehicle activi-
ties, and $30 million related to a decline in commercial and
civil satellite activities. These decreases were partially offset
by the previously discussed $120 million favorable Atlas
program adjustment and $15 million contributed by
enhanced performance on the military satellite programs.
The remaining decrease was due to reduced operating
profit related to various other activities of the segment.