Lockheed Martin 2002 Annual Report Download - page 39

FORTY-SIX
Lockheed Martin Corporation
MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2002
not been able to obtain commitments for, additional invest-
ment or funding. In addition to our equity investment, we also
guarantee up to $150 million of Space Imaging’s borrowings
under a credit facility that matures on March 31, 2003, and
have about $33 million in receivables from the joint venture at
the end of 2002. In light of our decision and the decision of
the other major member in the joint venture not to provide fur-
ther funding at this time, our assessment that Space Imaging
will likely not be able to repay its obligation under the credit
facility when due, and the uncertainties as to whether Space
Imaging will be successful in obtaining the additional invest-
ment necessary to fund replacement satellites, we wrote off
our investment in the joint venture and recorded the obligation
to fund amounts due from us under the guarantee. As a result,
we recorded a charge, net of state income taxes, of $163 million
which reduced net earnings by $106 million ($0.23 per diluted
share), and increased current maturities of long-term debt by
$150 million, representing our obligation under the guarantee,
which is expected to be paid in the first quarter of 2003.
In March 2000, we converted our 45.9 million shares of
Loral Space & Communications Ltd. Series A Preferred Stock
into an equal number of shares of Loral Space common stock.
Due to the market price of Loral Space stock and the potential
impact of underlying market and industry conditions on Loral
Space’s ability to execute its current business plans, we
recorded an unusual charge, net of state income tax benefits,
of $361 million in the third quarter of 2001 related to our
investment in Loral Space. The charge reduced net earnings by
$235 million, or $0.54 per diluted share (see Note 8 to the
financial statements). The value of our investment continues to
be impacted by adverse market and industry conditions,
including low demand for commercial satellites as a result of
excess capacity in the telecommunications industry.
We satisfied our contractual obligation relating to our guar-
antee of certain indebtedness of Globalstar, L.P. (Globalstar)
with a net payment of $150 million on June 30, 2000 to repay
a portion of Globalstar’s borrowings under a revolving credit
agreement. This payment resulted in our recording an unusual
charge, net of state income tax benefits, of approximately
$141 million in 2000 which reduced net earnings for the year
by $91 million, or $0.23 per diluted share (see Note 9 to the
financial statements for more information). We have no
remaining guarantees related to Globalstar. On February 15,
2002, Globalstar and certain of its affiliates filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code.
QUANTITATIVE AND QUALITATIVE DISCLOSURE
OF MARKET RISK
Our main exposure to market risk relates to interest rates and,
to a lesser extent, foreign currency exchange rates. Our finan-
cial instruments which are subject to interest rate risk mainly
include commercial paper and fixed-rate long-term debt. At
December 31, 2002, we did not have any commercial paper
outstanding. We use interest rate swaps to manage our expo-
sure to fixed and variable interest rates. At the end of the year
2002, we had agreements in place to swap fixed interest rates
on about $920 million of our long-term debt for variable inter-
est 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. At December 31, 2002,
the fair values of interest rate swap agreements outstanding
totaled about $25 million. 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 index on which the swaps are based increases
or decreases by 1%, our interest expense would increase or
decrease by $9 million annually on a pretax basis. Changes in
swap rates would affect the market value of the agreements,
but those changes in value would be offset by changes in value
of the underlying debt. A 1% rise in swap rates from those at
December 31, 2002 would result in a decrease in market value
of about $11 million. A 1% decline would increase the market
value by a like amount.
We use forward foreign exchange and option contracts to
manage our 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 recog-
nized in income when the hedged transaction occurs. To the
extent the hedges are ineffective, gains and losses on the con-
tracts are recognized currently. At December 31, 2002, the fair
value of forward exchange and option contracts outstanding,
as well as the amounts of gains and losses recorded during the
year, were not material. We do not hold or issue derivative
financial instruments for trading purposes.