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ANNUAL REPORT 2003
LOCKHEED MARTIN CORPORATION

Table of contents

  • Page 1
    ANNUAL REPORT 2003 LOCKHEED MARTIN CORPORATION

  • Page 2
    ... of the 2003 Annual Report - PAGE 16 Corporate Directory - PAGE 71 General Information - PAGE 73 On the Cover: The Horizontal Integration Lab in Colorado Springs, Colorado, will enhance Lockheed Martin's collaboration with customers and partners to develop advanced architectures for Net-Centric...

  • Page 3
    WE NEVER FORGET THE IMPORTANCE OF WHAT WE'RE DOING OR WHO WE'RE DOING IT FOR TM

  • Page 4
    Vance D. Coffman Chairman and Chief Executive Officer Robert J. Stevens President and Chief Operating Officer

  • Page 5
    ... dividend rate from 44 cents to 88 cents per common share. Acquisitions. Growing business in our core markets is key to competing successfully, and we have made selective acquisitions to continue strengthening our position in defense and civil government IT. â- â- â- Lockheed Martin last...

  • Page 6
    ... this high-bandwidth engineering network is the Global Vision Integration Center in Suffolk, Virginia, which will lead our development, simulation and analysis of network-centric solutions for the Department of Defense and other national security customers. Without the people of Lockheed Martin, the...

  • Page 7
    ... company is well positioned for the future with: â- Leadership in Defense, Homeland Security, Government Information Technology and Services growth markets, as well as space systems and exploration. A broad portfolio of capabilities and programs that provide total systems solutions for customer...

  • Page 8
    PARTNERING TO HELP CUSTOMERS MEET THEIR DEFINING MOMENTS TM U.S. ARMED SERVICES and allied forces apply cutting-edge technologies from Lockheed Martin that enable them to turn data into knowledge, and knowledge into action. These systems link assets in space, in the air, at sea and on land with ...

  • Page 9
    LOCKHEED MARTIN'S CAPABILITIES are aligned strongly with the highest priorities of our customers, which are mainly large U.S. and allied government agencies responsible for their nations' most important challenges. Whether the mission is defense, homeland security or managing complex civil ...

  • Page 10
    ... depends on robust and extraordinarily reliable command and control systems. Lockheed Martin is working on significant missile defense programs including: Space-Based Infrared System-High (SBIRS-H), Battle Management Command and Control, Terminal High Altitude Area Defense (THAAD), Patriot Advanced...

  • Page 11
    ...help the IT solutions, government agencies can better assist the public with benefits, information and services. Lockheed Martin provides the Department of Veterans Affairs with IT infrastructure support so those who have served their country can be better served. U.S. Coast Guard and U.S. Customs...

  • Page 12
    ... of powered flight. Lockheed Martin's Paul Bevilaqua (above) designed the unique and advanced convertible lift fan propulsion system that powers the F-35 Joint Strike Fighter. The first truly global combat aircraft, the F-35 has become an innovative model for U.S. and international partnering.

  • Page 13
    ... Martin delivers the advanced optical character recognition and computing technologies to address that vital requirement. With inventive solutions, Lockheed Martin is helping the Environmental Protection Agency to develop an automated and integrated approach to managing the federal government's rule...

  • Page 14
    ...IS POSSIBLE is a term that well describes America's exploration of space for the sake of scientific discovery, defense, telecommunications and a better understanding of our own planet Earth, including its weather and natural resources. We will launch aboard our Atlas V vehicle (interior shown above...

  • Page 15
    ... set of values: â- â- â- Ethics and Integrity People and Teamwork Excellence and a "Can-Do'' Spirit LO C K H E E D M A RT I N A N N UA L R E P O RT 2 0 0 3 - 13 THE SERIOUSNESS AND URGENCY of the work WE ALSO SUPPORT our NASA customer's mission the people of Lockheed Martin perform for the...

  • Page 16
    LOCKHEED MARTIN: A TRUSTED AND VALUED PARTNER TM A NEW GENERATION OF INVENTORS, inspired by the pioneers who took to the skies a century ago, is experiencing the excitement of learning through Space Day. Lockheed Martin is a proud sponsor of Space Day, dedicated to encouraging those who yearn to ...

  • Page 17
    ... programs. As a company we are dedicated to educational achievement and the promise of our young people. VOLUNTEERISM, THROUGH PROGRAMS to aid our neighbors in distress, clean up the environment or help combat disease, is vital to building a stronger America. In 2003, Lockheed Martin employees...

  • Page 18
    ... Financial Condition and Results of Operations - PAGE 17 Management's Responsibility for Financial Reporting - PAGE 40 Report of Ernst & Young LLP, Independent Auditors - PAGE 41 Consolidated Statement of Operations - PAGE 42 Consolidated Balance Sheet - PAGE 43 Consolidated Statement of Cash Flows...

  • Page 19
    ... year. Lockheed Martin's Business Lockheed Martin Corporation is mainly involved in the research, design, development, manufacture, integration, operation and support of advanced technology systems, products and services. We have customers in domestic and international defense, civil government, and...

  • Page 20
    ... Critical accounting policies Post-retirement benefit plans Environmental matters Acquisition and divestiture activities Changes in our business segment presentation, and discussions of each segment's operations Unallocated Corporate (expense) income, net Liquidity and cash flows Capital structure...

  • Page 21
    ... business process outsourcing has been enabled by recent rule changes for public/private competitions. In addition, recent trends have indicated an increase in demand by federal and civil government agencies for upgrading and investing in new information technology systems and solutions. As a result...

  • Page 22
    Lockheed Martin Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2003 Lockheed-Khrunichev-Energia International, Inc. (LKEI), a joint venture we have with two Russian government-owned space firms, has exclusive rights to market launches...

  • Page 23
    ...the U.S. Postal Service, the Patent and Trademark Office, the Federal Aviation Administration, NASA, the U.S. Coast Guard and the Transportation Security Administration. Although our lines of business in civil government and commercial markets are not dependent on defense budgets, they share many of...

  • Page 24
    Lockheed Martin Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2003 over a longer period of time or to perform a substantial level of development effort in comparison to the total value of the contract, revenues are recorded when we ...

  • Page 25
    ... U.S. Government are reviewed for compliance with regulatory standards by our personnel, and are subject to audit by the Defense Contract Audit Agency. Post-Retirement Benefit Plans Most employees are covered by defined benefit pension plans, and we provide health care and life insurance benefits to...

  • Page 26
    Lockheed Martin Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2003 The FAS/CAS pension adjustment represents the difference between pension expense or income calculated in accordance with FAS 87 and pension costs calculated and ...

  • Page 27
    ... of the merger, we would expect to issue between 16 and 22 million shares of our common stock, depending on the exchange rate. We plan to finance the cash portion of the transaction principally using existing cash and short-term investment holdings. On February 13, 2004, Lockheed Martin and Titan...

  • Page 28
    ... merger agreement is publicly available as an attachment to the proxy statement/prospectus mailed to Titan stockholders and as an exhibit to Lockheed Martin's 2003 Form 10-K. On an ongoing basis, we plan to continue to explore the sale of various non-core businesses, passive equity investments and...

  • Page 29
    .... The effective tax rates for all periods were reduced by tax benefits related to export sales, changes to prior year liabilities arising from tax refund initiatives and adjustments to true-up actual tax return liabilities. The 2002 tax rate was also reduced by a favorable IRS audit settlement...

  • Page 30
    .../CAS pension adjustment (see discussion below), earnings and losses from equity investments (mainly telecommunications), interest income, costs for stock-based compensation programs, the effects of items not considered part of management's evaluation of segment operating performance, and Corporate...

  • Page 31
    Lockheed Martin Corporation The FAS/CAS pension adjustment represents the difference between pension expense or income calculated for financial reporting purposes in accordance with FAS 87, and pension costs calculated and funded in accordance with U.S. Government CAS, which are reflected in the ...

  • Page 32
    ... deployment of Transportation Security Administration (TSA) programs. Net sales for Electronic Systems increased 8% in 2002 as compared to 2001. Sales increased as a result of higher volume in all three of the segment's lines of business. Increased sales at M&FC of $285 million were mainly due to...

  • Page 33
    Lockheed Martin Corporation driven by higher volumes at M&FC and PT&TS as noted in the preceding discussion of sales. The increase in backlog during 2003 over 2002 resulted from increased orders on development programs which more than offset declines in orders on mature production programs. Space ...

  • Page 34
    Lockheed Martin Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2003 settlement costs. The 2001 results included charges for market and pricing pressures, which reduced that year's operating profit by $145 million. The increase in ...

  • Page 35
    ... (expense) income Less: CAS expense and funding FAS/CAS pension adjustment - (expense) income LIQUIDITY AND CASH FLOWS Our management has set forth strategic cash deployment objectives to help ensure that we keep a focus toward growing our core business and increasing shareholder value, and that we...

  • Page 36
    Lockheed Martin Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2003 Investing Activities Capital expenditures - Capital expenditures for property, plant and equipment amounted to $687 million in 2003, $662 million in 2002 and $619 ...

  • Page 37
    Lockheed Martin Corporation Our stockholders' equity amounted to $6.8 billion at December 31, 2003, an increase of about $900 million from December 31, 2002. Net earnings, stock plan activities and a reduction of our minimum pension liability, more than offset our payment of dividends and share ...

  • Page 38
    Lockheed Martin Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 2003 including covenants limiting our ability and the ability of certain of our subsidiaries to encumber our assets. Purchase obligations include agreements and ...

  • Page 39
    ...on prevailing financial, market and economic conditions, we will continue to explore the sale of non-core businesses, passive equity investments and surplus real estate. EQUITY INVESTMENTS In 2002, we recorded impairment charges, net of state income tax benefits, totaling $776 million related to our...

  • Page 40
    ...diluted share). Realization and valuation of our investments in equity securities may be affected by an investee's ability to obtain adequate funding, including through public and private sales of its debt and equity securities, and execute its business plans, as well as by general market conditions...

  • Page 41
    ... each business segment and key Corporate functions, and under the supervision of the CEO and CFO. Based on the evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal controls...

  • Page 42
    ... of conduct and practices in dealings with customers, including the U.S. Government. The Code provides for a help line that employees can use to confidentially or anonymously communicate to the Corporation's ethics office complaints or concerns about accounting, internal control or auditing matters...

  • Page 43
    ... AUDITORS Board of Directors and Stockholders Lockheed Martin Corporation We have audited the accompanying consolidated balance sheet of Lockheed Martin Corporation as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows...

  • Page 44
    Lockheed Martin Corporation CONSOLIDATED STATEMENT OF OPERATIONS Year ended December 31, (In millions, except per share data) NET SALES 2003 $ 31,824 ...Cost of sales Earnings from operations Other income and expenses, net Interest expense Earnings from continuing operations before taxes Income tax...

  • Page 45
    ... 2002 Current assets: Cash and cash equivalents Short-term investments Receivables Inventories Deferred income taxes Other current assets Total current assets Property, plant and equipment, net Investments in equity securities Goodwill Purchased intangibles, net Prepaid pension asset Other assets...

  • Page 46
    ... $ 912 Expenditures for property, plant and equipment Acquisition of businesses / investments in affiliated companies Purchase of short-term investments, net Proceeds from divestiture of affiliated companies Other Net cash (used for) provided by investing activities FINANCING ACTIVITIES Issuances...

  • Page 47
    Lockheed Martin Corporation CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In millions, except per share data) Common Stock Additional Paid-In Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive (Loss) Income Total Stockholders' Equity Comprehensive (Loss) Income...

  • Page 48
    ... carrying value on the Corporation's consolidated balance sheet approximates fair value. Short-term investments - The Corporation's short-term investments consist of marketable securities that are categorized as available-for-sale securities as defined by Statement of Financial Accounting Standards...

  • Page 49
    Lockheed Martin Corporation and administrative expenses. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers have title to, or a security interest in, inventories related to such contracts as a result of advances, performance-based payments and progress ...

  • Page 50
    .... Applicable estimated profits are included in earnings in the proportion that incurred costs bear to total estimated costs. Sales of products and services provided essentially under commercial terms and conditions are recorded upon delivery and passage of title. Amounts representing contract change...

  • Page 51
    ...accounting for the federal subsidy introduced by the Act which, when issued, could require a change to previously reported information. The Corporation elected to defer recognition of the impact of the Act; accordingly, the accumulated post-retirement benefit obligation (APBO) for its retiree health...

  • Page 52
    Lockheed Martin Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 post-retirement benefit cost, included in the Corporation's financial statements and the accompanying notes do not currently reflect the effects of the Act. It is expected that any such change would result in ...

  • Page 53
    ... exit its global telecommunications services business as a result of continuing overcapacity in the telecommunications industry and deteriorating business and economic conditions in Latin America. The Corporation recorded charges, net of state income tax benefits, totaling approximately $1.4 billion...

  • Page 54
    ...18 $ 0.10 - - $ 2.34 (0.07) (0.14) - (2.38) $1.11 $ (2.42) Inventories included amounts advanced to Khrunichev State Research and Production Space Center (Khrunichev), the Russian manufacturer of Proton launch vehicles and provider of related launch services, of $327 million and $391 million at...

  • Page 55
    ... the development and purchase, subject to certain conditions, of RD-180 booster engines used for Atlas launch vehicles. In 2003, the Corporation recorded a charge, net of state income tax benefits, of $41 million in cost of sales related to its decision to exit the commercial mail sorting business...

  • Page 56
    ...6,072 $ 6,192 (a) Amounts exclude a $25 million adjustment to the fair value of long-term debt relating to the Corporation's interest rate swap agreements which will not be settled in cash. In August 2003, the Corporation completed a tender offer to purchase for cash any and all of its outstanding...

  • Page 57
    ... repaid by the Corporation on May 1, 2008. A leveraged employee stock ownership plan (ESOP) incorporated into the Corporation's salaried savings plan borrowed $500 million through a private placement of notes in 1989. These notes are being repaid in quarterly installments over terms ending in 2004...

  • Page 58
    ... tax assets related to: Accumulated post-retirement $ benefit obligations Contract accounting methods Accrued compensation and benefits Basis differences of impaired investments Pensions(a) Other Deferred tax liabilities related to: Purchased intangibles Property, plant and equipment Pensions...

  • Page 59
    ...Lockheed Martin 2003 Incentive Performance Award Plan (the Award Plan). Under the Award Plan, employees of the Corporation may be granted stock-based incentive awards, including options to purchase common stock, stock appreciation rights, restricted stock or stock units. The maximum number of shares...

  • Page 60
    ... price of common stock underlying an award, subject to certain conditions, by interest-bearing notes payable to the Corporation. Prior to April 2003, the Corporation granted stock-based and cash-based incentive awards pursuant to the Lockheed Martin Corporation 1995 Omnibus Performance Award Plan...

  • Page 61
    ... Risk-free interest rate Dividend yield Volatility factors related to expected price of Lockheed Martin stock Expected option life The weighted average fair value of each option granted during 2003, 2002 and 2001 was $17.78, $18.23 and $13.32, respectively. NOTE 13 - POST-RETIREMENT BENEFIT PLANS...

  • Page 62
    ... accounts. This ESOP trust held approximately 3.3 million issued and outstanding shares of common stock at December 31, 2003. Defined benefit pension plans, and retiree medical and life insurance plans - Most employees are covered by defined benefit pension plans, and certain health care and life...

  • Page 63
    ... service cost Recognized net actuarial losses (gains) Amortization of transition asset Total net pension expense (income) RETIREE MEDICAL AND LIFE INSURANCE PLANS $ 640 $ 565 $ 523 1,453 1,401 1,357 (1,748) (2,162) (2,177) 79 72 64 62 (33) (117) (2) (3) (4) $ 484 $ (160) $ (354) Discount rates...

  • Page 64
    ... Cost Accounting Standards (CAS) and Internal Revenue Code rules in determining funding requirements for its pension plans. In December 2003, the Corporation made a discretionary prepayment of $450 million to the defined benefit plan pension trust, the majority of which will reduce its cash funding...

  • Page 65
    ...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's consolidated results of operations, financial position or cash flows...

  • Page 66
    ... related to U.S. Government business, after deducting any recoveries from insurance or other PRPs, are allowable in establishing the prices of the Corporation's products and services. As a result, a substantial portion of the expenditures are being reflected in the Corporation's sales and cost...

  • Page 67
    .../CAS pension adjustment (see discussion below), earnings and losses from equity investments (mainly telecommunications), interest income, costs for stock-based compensation programs, the effects of items not considered part of management's evaluation of segment operating performance, Corporate costs...

  • Page 68
    ... of an Enterprise and Related Information," the following tables of financial data have been adjusted to reflect the changes in the business segments as noted above. This did Aeronautics Electronic Systems Space Systems Integrated Systems & Solutions Information & Technology Services Total business...

  • Page 69
    Lockheed Martin Corporation Selected Financial Data by Business Segment (continued) (In millions) AMORTIZATION OF PURCHASED INTANGIBLES 2003 2002 2001 (In millions) CUSTOMER ADVANCES AND AMOUNTS IN EXCESS OF 2003 2002 2001 Aeronautics Electronic Systems Space Systems Integrated Systems & ...

  • Page 70
    ...$ 1,899 1,804 36 44 104 $ 3,887 2002 Quarters (In millions, except per share data) First Second(e) Third Fourth(f) COMMERCIAL(b) Aeronautics Electronic Systems Space Systems Integrated Systems & Solutions Information & Technology Services Total business segments Other $ 9 $ 17 161 183 1,093 984...

  • Page 71
    Lockheed Martin Corporation CONSOLIDATED FINANCIAL DATA - FIVE YEAR SUMMARY (In millions, except per share data) OPERATING RESULTS 2003(a) $ 31,824 29,848 1,976 43 2,019 487 1,532 479 1,053 - - 1,053 2002(b) $ 26,578 24,629 1,949 (791) 1,158 581 577 44 533 (...

  • Page 72
    Lockheed Martin Corporation CONSOLIDATED FINANCIAL DATA - FIVE YEAR SUMMARY NOTES TO FIVE YEAR SUMMARY (a) Includes the effects of items not considered in senior management's assessment of the operating performance of the Corporation's business segments (see the section "Results of Operations" in ...

  • Page 73
    ...South America Ford Motor Company Robert J. Stevens President and Chief Operating Officer Lockheed Martin Corporation James R. Ukropina Chief Executive Officer Directions, LLC (A Management and Consulting Firm) Douglas C. Yearley Chairman Emeritus Phelps Dodge Corporation COMMITTEES Audit and Ethics...

  • Page 74
    ...Executive Vice President Integrated Systems & Solutions Robert J. Stevens President and Chief Operating Officer Edward S. Taft Senior Vice President Robert H. Trice Senior Vice President Lillian M. Trippett Vice President, Corporate Secretary and Associate General Counsel Anthony G. Van Schaick Vice...

  • Page 75
    ... purchase and dividend reinvestment plan, provides new investors and current stockholders with a convenient, cost-effective way to purchase Lockheed Martin common stock, increase holdings and manage the investment. For more information about Lockheed Martin Direct Invest, contact our transfer agent...

  • Page 76
    ... Corporation's investments in equity securities, or related equity earnings for a given period, may be affected by the investee's ability to obtain adequate funding (including through private and public sales of its debt and equity securities) and execute its business plan, general market conditions...

  • Page 77
    ...I E S OUR VISION To be the world's best advanced technology systems integrator. OUR PURPOSE To achieve Mission Success by attaining total customer satisfaction and meeting all our commitments. OUR VALUES Ethics Excellence "Can-Do" Integrity People Teamwork ACHIEVING RESULTS THROUGH Leadership and...

  • Page 78
    Lockheed Martin Corporation 6801 Rockledge Drive • Bethesda, MD 20817 www.lockheedmartin.com