Lockheed Martin 2002 Annual Report Download - page 24

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of the investment has declined below our carrying value, and
that decline is viewed to be other than temporary.
For publicly traded companies, the fair value of the equity
securities is determined by multiplying the number of shares
we own by the stock price, as well as by computing estimates
of the fair values based on a variety of valuation methods (e.g.,
discounted cash flow analyses, sum-of-the-parts valuations
and trading multiples). For those companies that are not pub-
licly traded, we prepare discounted cash flow analyses to com-
pute an estimate of the fair value of the investment. Since we
generally do not have access to internal projections of those
companies, we prepare projections based on information that
is publicly available. We use judgment in computing the fair
value based on our evaluation of the investee and establishing
an appropriate discount rate and terminal value to apply in the
calculations. In selecting these and other assumptions, we con-
sider the investee’s ability to execute their business plan suc-
cessfully, including their ability to obtain required funding,
general market conditions, and industry considerations spe-
cific to their business. It is likely that we could compute a
materially different fair value for an investment if different
assumptions were used or if circumstances were to change.
Many of our investments are concentrated in the satellite
services and telecommunications industries, including Intelsat,
Ltd. (Intelsat), Inmarsat Ventures plc (Inmarsat) and New Skies
Satellites, N.V. (New Skies). These industries continue to be
affected by the capital markets, excess satellite capacity and
competition from other kinds of telecommunications services,
including fiber optic cable and other wireless communication
technologies. This has been evidenced by recent bankruptcy fil-
ings by some telecommunications companies. Intelsat,
Inmarsat and New Skies are also subject to regulation by the
Federal Communications Commission (FCC). FCC decisions
and policies have had, and may continue to have, a significant
impact on these companies. In 2000, Congress passed the Open-
Market Reorganization for the Betterment of International
Telecommunications Act (the ORBIT Act) that, among other
things, established deadlines for Intelsat and Inmarsat to
complete their initial public offerings. Under the ORBIT
Act, Intelsat and Inmarsat were required to complete their
initial public offerings by December 31, 2002. However,
Inmarsat has received an extension from the FCC until
June 30, 2003. In October 2002, legislation was
enacted which extends the deadline for Intelsat to complete its
initial public offering to December 31, 2003, or June 30, 2004
if approved by the FCC. Unless there are changes in the cur-
rent trends and market conditions in the telecommunications
industry, as well as in the capital markets, Intelsat and
Inmarsat may have difficulty in completing their initial public
offerings by the ORBIT Act deadlines. If those deadlines are
not met or extended by further amendments to the legislation,
the FCC may limit access by U.S. users to the satellite capacity
of the privatized entities for some services. If this were to occur,
the value of our investments could be adversely affected.
In the fourth quarter 2002, as part of the ongoing evaluation
of our ability to recover our investments, we calculated an esti-
mate of the current fair values of our investments in Intelsat
and Inmarsat. For our investment in New Skies, we calculated
the current fair value based on the publicly traded stock price
and, for analysis purposes, also calculated an estimate of the
fair value using discounted cash flow analyses. In each case,
the fair value of our investment was less than our carrying
amount. We then made an assessment as to whether the decline
in the value of these investments was other than temporary. We
reviewed investment analyst reports to the extent they were
available. We also assessed future business prospects for the
companies and reviewed information regarding market and
industry trends for their businesses.
Based on our evaluation, including the factors discussed
above, we determined that the decline in values of these invest-
ments was other than temporary, and recorded impairment
charges related to these investments in the fourth quarter of
2002. The impact of the unusual charges on operating profit
(earnings from continuing operations before interest and taxes),
net earnings and diluted earnings per share was as follows:
Earnings
per
Operating Net Diluted
(In millions) Profit Earnings Share
Write-down of investment in:
Intelsat $(572) $(371) $(0.82)
Inmarsat (101) (66) (0.15)
New Skies (103) (67) (0.15)
Total write-down of
telecommunications
investments $(776) $(504) $(1.12)
Lockheed Martin Corporation