Lockheed Martin 2003 Annual Report Download - page 21

Altitude Airship program. In the areas of space intelligence and
information superiority, we have leadership positions on programs
such as Transformational Communications, Advanced Extremely
High Frequency (AEHF), and Space-Based Infrared System-High
(SBIRS-H), and in classified programs and battle management
command and control capabilities. In airlift, we have the
C-130J program and are under contract to upgrade the C-5 strategic
airlift aircraft. Many of these programs are large and require fund-
ing over several budget cycles. There are risks associated with these
and other large, highly visible programs subject to appropriation by
Congress that, because of their size, could be expected to become
potential targets for reduction or extension of funding to pay for
other programs.
The Office of Management and Budget recently announced its
intention to conduct a comprehensive review of the F/A-22 Raptor
program. This independent assessment will evaluate the perform-
ance, requirements and cost aspects of the program. We believe sus-
tained improved performance in production and testing of the
F/A-22 will re-validate the transformational qualities of this
weapons system, and the suitability of the F/A-22 for continued
production by the U.S. Air Force.
We continue to expand our capabilities in critical intelligence,
knowledge management and E-Government solutions. Consistent
with the President’s agenda, the expected growth in business
process outsourcing has been enabled by recent rule changes for
public/private competitions. In addition, recent trends have indicat-
ed an increase in demand by federal and civil government agencies
for upgrading and investing in new information technology systems
and solutions. As a result, we continue to focus our resources in sup-
port of infrastructure modernization that allows for interoperability
and communication across agencies.
In addition, the increase in emphasis on homeland security
may increase demand for our capabilities in areas such as air traffic
management, ports and waterways security, biohazard detection
systems for postal equipment, information systems security and
other technical systems solutions.
In prior years, companies in our industry had reacted to histor-
ically shrinking defense budgets for procurement and research and
development by combining to maintain critical mass. More recent-
ly, we have focused our efforts on select core acquisitions, cost sav-
ings and improving efficiency, as well as generating cash to repay
debt incurred during the period of consolidation. Through our con-
solidation activities, we have been able to pass along savings to our
customers, mainly the DoD.
Non-U.S. defense budgets have generally been declining over
the past decade. As a result, consolidation has also been occurring
in the European aerospace industry, resulting in fewer but larger and
more capable competitors, potentially resulting in an environment
where there could be less demand abroad for products from U.S.
companies. This type of environment could reduce opportunities for
European partnerships and sales potential for U.S. exports.
Space Business
The commercial launch vehicle marketplace remains very compet-
itive due mainly to low demand for new satellites as a result of
excess capacity in the telecommunications industry. The reduction
in demand has resulted in pricing pressures in both the launch vehi-
cle and satellite markets. We received new orders for both commer-
cial satellites and launch vehicles in 2003; however, the majority of
those orders relate to replacement satellites versus an expansion of
telecommunications capacity.
The above factors have impacted orders for all of our commer-
cial launch vehicles, including the Evolved Expendable Launch
Vehicle (EELV or Atlas V), our next generation launch vehicle pro-
gram in which we have made significant investments over the past
few years. The Atlas V is available for both commercial and gov-
ernment use. This program has required investment of funds for
research and development, start-up and other nonrecurring costs,
and launch facilities. Some of these expenditures have been funded
under an agreement with the U.S. Government. Commercial orders
to-date for the Atlas V launch vehicle have been lower than origi-
nally expected and at lower prices. However, we have received a
total of 18 EELV launch assignments from the U.S. Government
(including those described in the following paragraph), 3 of which
are under contract. We had our third Atlas V launch in 2003.
In July 2003, the U.S. Air Force announced that our competi-
tor in the EELV competition had violated the Procurement Integrity
Act. As a result of that determination, the Air Force reassigned 7
launch vehicles from the initial competition (referred to as “Buy 1”)
to us and removed our exclusion from west coast launches. At the
same time, the Air Force assigned us 3 new west coast launches. To
prepare for providing the west coast launches, we are upgrading
west coast launch facilities, which will require further investment in
the EELV program. However, we expect to recover that investment
through pricing of the west coast launches. The 7 reassigned launch-
es are expected to occur over the 2005 through 2009 time period.
Contractual terms and conditions related to the west coast launches
have not yet been finalized with the Air Force.
Lockheed Martin Corporation
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