Lockheed Martin 2003 Annual Report Download - page 22

Lockheed-Khrunichev-Energia International, Inc. (LKEI), a
joint venture we have with two Russian government-owned space
firms, 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. Commercial Atlas and Proton launch
services are marketed around the world through International
Launch Services (ILS), a joint venture between Lockheed Martin
and LKEI. We consolidate the results of operations of LKEI and
ILS into our financial statements based on controlling financial
interest. We received 7 new awards for launches on Proton vehicles
in 2003. Contracts for launch services usually require substantial
advances from the customer prior to launch. At the end of 2003,
$250 million of advances received from customers 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 sizeable percentage of the advances we receive from cus-
tomers for Proton launch services are sent to Khrunichev State
Research and Production Space Center (Khrunichev), the manu-
facturer 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. Advances for launch-
es not under contract are subject to an agreement entered into in
2002 which provides for reduced 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. As a result of this
agreement, as well as our assessment in 2002 of the likelihood of
customer terminations for convenience for launches under con-
tract, we reduced the carrying value of our advances to Khrunichev
and recognized a charge, net of state income tax benefits, of $173
million. The charge reduced 2002 net earnings by $112 million
($0.25 per diluted share). At year-end 2003, payments to
Khrunichev included in inventories, net of the amount of the
reserve recorded in 2002, totaled $327 million. Our ability to real-
ize the remaining amounts may be affected by Khrunichev’s abili-
ty to provide the launch services and the political environment in
Russia. Through the end of 2003, launch services through LKEI
and ILS have been provided according to contract terms.
The Corporation has entered into an agreement with RD
AMROSS, a joint venture of the Pratt & Whitney division of United
Technologies Corporation and the Russian firm NPO Energomash,
for the purchase, subject to certain conditions, of RD-180 booster
engines for use in the Corporation’s Atlas launch vehicles. Terms of
the agreement call for payments to be made to RD AMROSS upon
the achievement of certain milestones in the manufacturing process.
Payments of $57 million made under this agreement for engines not
yet delivered were included in the Corporation’s inventories at
December 31, 2003.
As discussed above, the commercial satellite market has con-
tinued to experience pricing pressures due to excess capacity and
lower demand. Satellite demand also has been impacted by the busi-
ness 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.
However, in the past year, we received 5 new commercial satellite
orders, generally for replacement satellites versus capacity expan-
sion. We expect to continue to control costs in our commercial satel-
lite manufacturing business while keeping our focus on providing a
reliable product. We also received new orders for government satel-
lites in 2003 related to classified activities.
Other Business Considerations
As a government contractor, we are subject to U.S. Government
oversight. The government may ask about and investigate our
business practices and audit our compliance with applicable rules
and regulations. Depending on the results of those audits and
investigations, the government could make claims against us.
Under government procurement regulations and practices, an
indictment of a government contractor could result in that con-
tractor being fined and/or suspended from being able to bid on, or
be awarded, new government contracts for a period of time. A con-
viction could result in debarment for a specific period of time.
Similar government oversight exists in most other countries where
we conduct business. Although we cannot predict the outcome of
these types of investigations and inquiries with certainty, based on
current facts, we do not believe that any of the claims, audits or
investigations pending against us are likely to have a material
adverse effect on our business or our results of operations, cash
flows or financial position.
Changes in government procurement policies and practices
over the past several years, such as increases in the progress pay-
ment rate and the use of performance-based payments, have had a
positive effect on our financial position and cash flows. But we are
still exposed to risks associated with U.S. Government contracting,
Lockheed Martin Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2003
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