Lockheed Martin 2002 Annual Report Download - page 21

TWENTY-EIGHT
Lockheed Martin Corporation
MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2002
of any violations of export control regulations which are rea-
sonably likely to have a material adverse effect on our business
or our results of operations, cash flows or financial position.
Commercial Space Business
The launch vehicle industry has continued to be affected by
low demand for products and services due mainly to low
demand for satellites as a result of excess capacity in the
telecommunications industry. Concerns over uncertainty in the
economy have made it difficult for many ventures, especially
telecommunications and other high-technology companies, to
obtain funding from capital markets. Reduced demand and
increased competition have also caused pricing pressures in
the launch vehicle market. This comes at a time when we
have been making significant investments in the Evolved
Expendable Launch Vehicle (Atlas V) program, our next gen-
eration launch vehicle. This program has required investment
of funds for research and development, start-up and other non-
recurring costs, and launch facilities. Some of these expendi-
tures have been funded under an agreement with the U.S.
Government. We had our first Atlas V launch in August 2002,
successfully delivering a Eutelsat satellite into orbit. Orders
to-date for the Atlas V launch vehicle have been lower than
expected and at lower prices.
Similar to the launch vehicle market, the commercial
satellite market is experiencing pricing pressures due to excess
capacity and lower demand. Satellite demand also has been
impacted by the business difficulties encountered by some
companies in the commercial satellite services industry which
have resulted in reduced access to capital and a reduction in
the total market size in the near term. We expect to continue to
reduce costs in our commercial satellite manufacturing busi-
ness while keeping our focus on providing a reliable product.
In 1992, we entered into a joint venture with two
Russian government-owned space firms to form Lockheed-
Khrunichev-Energia International, Inc. (LKEI). We 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), with Lockheed Martin and LKEI each holding a
50% ownership. ILS was formed to market commercial Atlas
and Proton launch services around the world. We consolidate
the results of operations of LKEI and ILS into our financial
statements. Contracts for launch services usually require sub-
stantial advances from the customer before the launch. At the
end of 2002, $412 million of advances received from cus-
tomers for Proton launch services not yet provided was
included as a liability on our balance sheet in the caption
“Customer advances and amounts in excess of costs incurred.”
A sizable percentage of the advances we receive from
customers for Proton launch services are sent to Khrunichev
State Research and Production Space Center (Khrunichev), the
manufacturer of the launch vehicle and provider of the related
launch services in Russia. If a contracted launch service is not
provided, a sizeable percentage of the related advance would
have to be refunded to the customer. In addition, we have sent
advances to Khrunichev for launches we purchased which
have not yet been assigned to customers. The advances sent to
Khrunichev are included on our balance sheet in inventories.
In the fourth quarter of 2002, we entered into an agreement
with Khrunichev to eliminate the requirement to provide
launch services for our prior advances that were not associated
with specific customer launch orders in exchange for an
arrangement to reduce future launch payments from us to
Khrunichev, contingent on the receipt of new orders as well as
a minimum number of actual launches each year. Due to the
continuing overcapacity in the launch vehicle market, we do
not expect to recover amounts previously advanced for an
extended period of time. In addition, we assessed the likeli-
hood of customer terminations-for-convenience for launches
currently under contract. A contract termination would require
Khrunichev to refund a portion of the advances we have made
to them and would require us to refund a portion of the
advances received from the customer. As a result of these fac-
tors, we reduced the carrying value of our advances to
Khrunichev and recognized a charge, net of state income tax
benefits, of $173 million in the fourth quarter of 2002. The
charge reduced net earnings by $112 million ($0.25 per share).
At year-end 2002, $391 million of payments to Khrunichev
were included in inventories. Our ability to realize the remain-
ing amounts may be affected by Khrunichev’sability to provide
the launch services and the political environment in Russia.
Through the end of 2002, launch services through LKEI and
ILS have been provided according to contract terms.