Lockheed Martin 2005 Annual Report Download - page 23

   
The฀U.S.฀Government฀has฀been฀awarding฀launch฀missions฀
incrementally฀as฀it฀continues฀to฀develop฀its฀acquisition฀strategy฀for฀
future฀national฀missions.฀The฀U.S.฀Government฀plans฀to฀maintain฀
assured฀access฀to฀space฀to฀the฀maximum฀extent฀possible฀and฀has฀
recognized฀ the฀ need฀ to฀ fund฀ additional฀ EELV฀ infrastructure฀
costs฀ created฀ by฀ the฀ weaker-than-originally-anticipated฀ com-
mercial฀ demand฀ for฀ launch฀ services.฀ We฀ had฀ three฀ Atlas฀
launches฀ in฀ 2005,฀ including฀ our฀ fifth฀ Atlas฀ V฀ commercial฀
launch.฀As฀of฀year฀end฀2005,฀the฀Atlas฀family฀of฀launch฀vehi-
cles฀ had฀ a฀ record฀ of฀ 77฀ consecutive฀ successful฀ launches.฀
Commercial฀orders฀and฀prices฀for฀the฀Atlas฀V฀launch฀vehicle฀
to฀date฀have฀been฀lower฀than฀we฀originally฀expected฀during฀the฀
development฀phase฀of฀the฀vehicle.฀
In฀ 2005,฀ we฀ entered฀ into฀ an฀ agreement฀ with฀ Boeing฀ to฀
create฀ a฀ joint฀ venture฀ that฀ would฀ combine฀ the฀ production,฀
engineering,฀ test฀ and฀ launch฀ operations฀ associated฀ with฀ U.S.฀
Government฀launches฀of฀our฀Atlas฀launch฀vehicles฀and฀Boeing’s฀
Delta฀launch฀vehicles.฀The฀joint฀venture,฀named฀United฀Launch฀
Alliance,฀ LLC฀ (ULA),฀ is฀ structured฀ as฀ a฀ 50-50฀ joint฀ venture฀
and฀would฀be฀accounted฀for฀as฀an฀equity฀investment.฀Under฀the฀
terms฀of฀the฀joint฀venture,฀Atlas฀and฀Delta฀expendable฀launch฀
vehicles฀would฀continue฀to฀be฀available฀as฀alternatives฀on฀indi-
vidual฀ launch฀ missions.฀ The฀ agreement฀ also฀ stipulates฀ that,฀
upon฀closing฀of฀the฀transaction,฀Lockheed฀Martin฀and฀Boeing฀
will฀dismiss฀all฀claims฀against฀each฀other฀in฀the฀pending฀civil฀
litigation฀related฀to฀a฀previous฀competition฀for฀launches฀under฀
the฀Air฀Force฀EELV฀program฀(see฀Note฀15฀for฀a฀discussion฀of฀
that฀litigation).
The฀ closing฀ of฀ the฀ ULA฀ transaction฀ is฀ subject฀ to฀ condi-
tions฀to฀closing,฀including฀government฀and฀regulatory฀approv-
als฀ and฀ agreements฀ in฀ the฀ United฀ States฀ and฀ internationally.฀
On฀ August฀ 9,฀ 2005,฀ the฀ European฀ Commission฀ determined฀
that฀ ULA฀ was฀compatible฀with฀ European฀ Union฀merger฀con-
trol฀ regulation.฀ On฀ October฀ 24,฀ 2005,฀ the฀ Federal฀ Trade฀
Commission฀ (FTC)฀ requested฀ additional฀ information฀ from฀
Lockheed฀ Martin฀ and฀ Boeing฀ related฀ to฀ ULA฀ in฀ response฀฀
to฀ the฀ pre-merger฀ notice฀ under฀ the฀ Hart-Scott-Rodino฀
Antitrust฀Improvements฀Act฀of฀1976฀(HSR)฀submitted฀by฀the฀
parties.฀The฀FTC’s฀“second฀request”฀extends฀the฀period฀that฀
the฀FTC฀is฀permitted฀to฀review฀the฀transaction฀under฀the฀HSR฀
Act.฀We฀currently฀plan฀to฀close฀the฀ULA฀transaction฀as฀soon฀
as฀ practicable฀ following฀ satisfaction฀ of฀ all฀ the฀ closing฀ condi-
tions.฀We฀do฀not฀expect฀that฀its฀formation฀will฀have฀a฀signifi-
cant฀impact฀on฀our฀results฀of฀operations฀or฀financial฀position฀
for฀2006.฀If฀the฀conditions฀to฀closing฀are฀not฀satisfied฀and฀the฀
ULA฀ transaction฀ is฀ not฀ consummated฀ by฀ March฀ 31,฀ 2006,฀
either฀ Boeing฀ or฀ Lockheed฀ Martin฀ may฀ terminate฀ the฀ joint฀
venture฀agreement.
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฀com-
mercial,฀ non-Russian-origin฀ space฀ payloads฀ on฀ the฀ Proton฀
family฀of฀rockets฀from฀a฀launch฀site฀in฀Kazakhstan.฀One฀of฀the฀
joint฀ venture฀ partners,฀ Khrunichev฀ State฀ Research฀ and฀
Production฀Space฀Center฀(Khrunichev),฀is฀the฀manufacturer฀of฀
the฀ Proton฀ launch฀ vehicle฀ and฀ provider฀ of฀ the฀ related฀ launch฀
services฀in฀ Russia.฀Commercial฀Atlas฀ and฀Proton฀launch฀ser-
vices฀ 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฀our฀con-
trolling฀ financial฀ interest.฀ We฀ received฀ four฀ new฀ awards฀ for฀
launches฀on฀Proton฀vehicles฀in฀2005.฀Contracts฀for฀launch฀ser-
vices฀usually฀require฀ substantial฀ advances฀ from฀the฀ customer฀
prior฀to฀launch.฀At฀the฀end฀of฀2005,฀$315฀million฀of฀advances฀
received฀ from฀ customers฀ for฀ Proton฀ launch฀ services฀ not฀ yet฀
provided฀ was฀ included฀ as฀ a฀ liability฀ in฀ our฀ balance฀ sheet฀ in฀
customer฀advances฀and฀amounts฀in฀excess฀of฀costs฀incurred.
A฀ sizeable฀ percentage฀ of฀ the฀ advances฀ we฀ receive฀ from฀
customers฀for฀Proton฀launch฀services฀are฀sent฀to฀ Khrunichev.฀
If฀a฀contracted฀launch฀service฀is฀not฀provided,฀a฀sizeable฀per-
centage฀ of฀the฀related฀ advance฀ would฀have฀ to฀ be฀refunded฀ to฀
our฀ customer.฀ At฀ year-end฀ 2005,฀ payments฀ to฀ Khrunichev฀
included฀ in฀ inventories฀ for฀ launches฀ under฀ contract฀ totaled฀
$190฀ million.฀ Our฀ ability฀ to฀ recover฀ these฀ advances฀ may฀ be฀
affected฀ by฀ Khrunichev’s฀ ability฀ to฀ provide฀ the฀ launch฀ ser-
vices,฀ as฀ well฀ as฀ economic฀ conditions฀ and฀ the฀ political฀ envi-
ronment฀in฀Russia.฀Through฀the฀end฀of฀2005,฀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฀ $70฀
million฀made฀under฀this฀agreement฀for฀engines฀not฀yet฀deliv-
ered฀ were฀ included฀ in฀ the฀ Corporation’s฀ inventories฀ at฀
December฀31,฀2005.
Lockheed฀Martin฀Corporation