BUSINESS OVERVIEW We are a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We also provide a broad range of management, engineering, technical, scientific, logistics, system integration and cybersecurity services. We serve bothU.S. and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of theU.S. Government . During the nine months endedSeptember 26, 2021 , 72% of our$49.3 billion in net sales were from theU.S. Government , either as a prime contractor or as a subcontractor (including 63% from theDepartment of Defense (DoD )), 27% were from international customers (including foreign military sales (FMS) contracted through theU.S. Government ) and 1% were fromU.S. commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security and information technology, including cybersecurity. The following discussion is a supplement to and should be read in conjunction with the accompanying consolidated financial statements and notes thereto and with our 2020 Form 10-K. Renationalization of the Atomic Weapons Establishment Program As previously announced, onJune 30, 2021 theUK Ministry of Defence terminated the contract to operate theUK's nuclear deterrent program and assumed control of the entity that manages the program (referred to as the renationalization of the Atomic Weapons Establishment (AWE program). Accordingly, the AWE program, including the entity that manages the program, is no longer included in our financial results beginning in the third quarter of 2021. Because of the renationalization, no sales or operating profit for the AWE program are included in the company's financial results for the quarter endedSeptember 26, 2021 . However, during the first six months of 2021, AWE generated sales of$865 million and operating profit of$15 million , which are included in the company's financial results for the nine months endedSeptember 26, 2021 . During the quarter and nine months endedSeptember 26, 2020 , AWE generated sales of$350 million and$1.0 billion and operating profit of$10 million and$30 million which are included in the company's financial results for 2020. Pending Acquisition Of Aerojet Rocketdyne OnDecember 20, 2020 , we entered into an agreement to acquire Aerojet Rocketdyne Holdings, Inc. ("Aerojet Rocketdyne") for$51.00 per share, which is net of a$5.00 per share special cash dividend Aerojet Rocketdyne paid to its stockholders onMarch 24, 2021 . At the time of announcement, this represented a post-dividend equity value of approximately$4.6 billion , on a fully diluted as-converted basis, and a transaction value of approximately$4.4 billion after the assumption of Aerojet Rocketdyne's then-projected net cash. We expect to finance the acquisition primarily through new debt issuances. The transaction was approved by Aerojet Rocketdyne's stockholders onMarch 9, 2021 , which was a closing condition. As part of the regulatory review process of the transaction, onSeptember 24, 2021 , we and Aerojet Rocketdyne each certified substantial compliance with theFederal Trade Commission's (FTC) requests for additional information, known as a "second request", and the parties continue to engage with theFTC . Subject to satisfactory completion of the regulatory review process and satisfaction of the other closing conditions specified in the acquisition agreement, we anticipate closing the transaction in the first quarter of 2022. As previously disclosed, under the acquisition agreement, the "outside" date that gives rise to certain termination rights will automatically be extended fromDecember 21, 2021 toMarch 21, 2022 in circumstances where all conditions have been satisfied but for the receipt of regulatory approvals. Our financial results will not include Aerojet Rocketdyne's results until the acquisition is closed. COVID-19 The COVID-19 pandemic continues to present business challenges in 2021. During the first nine months of 2021, we continued to experience impacts in each of our business areas related to COVID-19, primarily in continued increased coronavirus-related costs, delays in supplier deliveries, travel restrictions, site access and quarantine restrictions, and the remote work and adjusted work schedules. In the second quarter of 2021, we had initiated a plan to reintroduce employees that had been working remotely to the workplace, however, we paused the reintroduction as COVID-19 cases rose in the third quarter of 2021. Although we have not yet returned to pre-pandemic operations, we are experiencing stabilization of our employee attendance. We continued to take measures to protect the health and safety of our employees, including measures to facilitate the provision of vaccines to our employees in line with state and local guidelines. We also continued to work with our customers and suppliers to minimize disruptions, including using 30
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accelerated progress payments from theU.S. Government and cash on hand to accelerate$1.5 billion of payments to our suppliers as ofSeptember 26, 2021 that are due by their terms in future periods. We will continue to monitor risk driven by the pandemic and, based on our current assessment, we expect to continue to accelerate payments to our suppliers based on risk assessed need through the end of 2022. Consistent to our current acceleration approach, we will prioritize small and COVID-19 impacted businesses. We are closely tracking developments regarding the Administration's Path Out Of The Pandemic: COVID-19 Action Plan, announced byPresident Biden onSeptember 9, 2021 , including Executive Order 14042, theSafer Federal Workforce Task Force guidance issuedSeptember 24, 2021 , and theDoD's Force Health Protection Guidance. As ofSeptember 13, 2021 , all personnel working atDoD facilities, includingLockheed Martin employees, must comply withDoD's process to attest to vaccination status. Pursuant to theDoD mandate, this is required for physical access toDoD buildings and leased spaces in non-DoD buildings where official agency business is performed. Additionally, pursuant to Executive Order 14042, allU.S. based employees ofLockheed Martin and most of its suppliers, industry partners and contractors working directly or indirectly on covered government contracts, or working at a facility where those contracts are performed, administered, or otherwise supported, must be fully vaccinated, or have an approved medical or religious accommodation. This includes employees who telework. Contractors that are not working directly or indirectly on covered government contracts but who work at a facility where covered contracts are performed, administered, or otherwise supported are strongly encouraged to be fully vaccinated. We have determined theDecember 8, 2021 deadline for vaccination will apply to allU.S. sites. We are in the process of executing this executive order across our workforce. It is uncertain to what extent compliance with the vaccine mandate may result in workforce attrition for us or our suppliers. If attrition is significant, our operations and ability to execute on our contracts could be adversely affected. The ultimate impact of COVID-19 on our operations and financial performance in future periods, including our ability to execute our programs in the expected timeframe, remains uncertain and will depend on future COVID-19 related developments, including the duration of the pandemic, any potential subsequent waves of COVID-19 infection or potential new variants, the effectiveness of COVID-19 vaccines and the impacts of implementation of the vaccine mandates, and related government actions to prevent and manage disease spread, all of which are uncertain and cannot be predicted. The long-term impacts of COVID-19 on government budgets and other funding priorities, including international priorities, that impact demand for our products and services are also difficult to predict but could negatively affect our future results and business operations. For additional risks to the corporation related to the COVID-19 pandemic, see Item 1A, Risk Factors of our Annual Report on Form 10-K for the year endedDecember 31, 2020 (2020 Form 10-K). 2021 Financial Outlook We now expect our 2021 net sales to increase from 2020 to approximately$67 billion . The projected growth is driven by F-16 and classified programs at Aeronautics, increased volume within integrated air and missile defense programs at MFC, increased volume on Sikorsky helicopter programs and training and logistics solutions programs at RMS, and hypersonics development volume at Space. We continue to expect total business segment operating profit margin in 2021 to be approximately 11.0%. Cash from operations in 2021 is now expected to be greater than or equal to$8.3 billion , with no pension contributions. It is our practice not to incorporate adjustments into our financial outlook for proposed acquisitions, divestitures, ventures, pension risk transfer transactions, changes in law, or new accounting standards until such items have been consummated, enacted or adopted. The outlook for 2021 assumes continued support and funding of our programs, known impacts of COVID-19, no additional impact toLockheed Martin operations or the supply chain due to continued COVID-19 disruption or implementation of the vaccine executive order, continued accelerated payments to suppliers at current levels, and a statutory tax rate of 21%. Our 2021 outlook also reflects the supply chain impacts experienced in the third quarter of 2021 and the impact of net gains from investments held by theLockheed Martin Ventures Fund recognized in the first nine months of 2021, but does not include any future gains or losses related to market volatility and changes in valuations of our investment holdings. Additionally, it assumes that there will not be significant reductions in customer budgets, changes in funding priorities and that theU.S. Government will not operate under a continuing resolution for an extended period in which new contract and program starts are restricted. Changes in circumstances may require us to revise our assumptions, which could materially change our current estimate of 2021 net sales, segment operating margin and cash from operations. 31
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2022 Financial Trends We expect 2022 net sales to decline from expected 2021 levels to approximately$66 billion and 2022 total business segment operating margin to be approximately 11.0%. Cash from operations in 2022 is expected to be greater than or equal to$8.4 billion , which excludes a potential decrease in 2022 cash from operations of up to$2 billion if the provisions in the Tax Cuts and Jobs Act of 2017 that eliminate the option to immediately deduct research and development expenditures in the period incurred and requires companies to amortize such expenditures over five years is not modified or repealed byCongress before it takes effect onJanuary 1, 2022 . Although we continue to have ongoing discussions with members ofCongress , both on our own and with other industries through coalitions, we have no assurance that these provisions will be modified or repealed. See "Income Tax Expense" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding potential impacts of changes in tax laws and regulations, including the treatment of research and development costs. The preliminary outlook for 2022 also assumes continued support and funding of our programs, a statutory tax rate of 21%, known impacts of COVID-19, and the continued acceleration of supplier payments at current levels. No additional impacts to the company's operations, supply chain, or financial results as a result of continued COVID-19 disruption or implementation of the vaccine executive order have been incorporated into our preliminary outlook for 2022 as the company cannot predict how the pandemic will evolve or what impact it will continue to have. The ultimate impacts of COVID-19 on our financial results remains uncertain and there can be no assurance that our underlying assumptions are correct. Additionally, the company's preliminary outlook for 2022 assumes that there will not be significant reductions in customer budgets, changes in funding priorities and that theU.S. Government will not operate under a continuing resolution for an extended period in which new contract and program starts are restricted. It also does not incorporate the pending acquisition of Aerojet Rocketdyne Holdings, Inc. Changes in circumstances may require us to revise our assumptions, which could materially change our current estimate of 2022 net sales, business segment operating margin, and cash flows. We currently expect a total net FAS/CAS pension benefit of approximately$2.2 billion in 2022, which includes total expectedU.S. Government cost accounting standards (CAS) pension cost of approximately$1.8 billion and total expected financial accounting standards (FAS) pension income of approximately$400 million . The estimated FAS pension income amount assumes a 2.75% discount rate (the same rate used for the remeasurement of the defined benefit pension plans impacted by the pension risk transfer transaction in the third quarter of 2021), a 10.0% return on plan assets in 2021, and a 6.5% expected long-term rate of return on plan assets in future years, among other assumptions. A change of plus or minus 25 basis points to the assumed discount rate, with all other assumptions held constant, would result in an incremental increase or decrease of approximately$10 million to the estimated net 2022 FAS/CAS pension benefit. A change of plus or minus 100 basis points to the return on plan assets in 2021 only, with all other assumptions held constant, would result in an incremental increase or decrease of approximately$15 million to the estimated net 2022 FAS/CAS pension benefit. We do not expect to make required contributions to our qualified defined benefit pension plans in 2022. We will complete the annual remeasurement of our postretirement benefit plans and update our estimated 2022 net FAS/CAS pension adjustment onDecember 31, 2021 . The final assumptions, including the actual investment return for 2021 may differ materially from those discussed above. INDUSTRY CONSIDERATIONSU.S. Government Funding OnMay 28, 2021 , the Administration submitted toCongress the President's fiscal year (FY) 2022 budget request, which proposes$753 billion for total national defense spending including$715 billion for theDoD , a 1.6% increase above the FY 2021 enacted amounts for both total national defense and theDoD (aU.S. Government fiscal year starts onOctober 1 and ends onSeptember 30 ). This is the first budget over the past decade that is not restricted by the discretionary spending caps under the Budget Control Act of 2011. The budget also proposes to end the use of Overseas Contingency Operations (OCO) as a separate fund to finance overseas operations. However, theU.S. Government has not yet enacted an annual budget for FY 2022. To avert a government shutdown, onSeptember 30, 2021 , a continuing resolution funding measure was enacted to finance allU.S. Government activities throughDecember 3, 2021 . Under the continuing resolution, partial-year funding at amounts consistent with appropriated levels for FY 2021 are available, subject to certain restrictions, but new spending initiatives are not authorized. Importantly, our key programs continue to be supported and funded despite the continuing resolution financing mechanism. However, during periods covered by continuing resolutions or in the event of a government shutdown, we may experience delays in procurement of products and services due to lack of funding, and those delays may affect our 32
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results of operations. In the coming months,Congress will need to approve or revise the President's FY 2022 budget proposal through enactment of appropriations bills and other policy legislation, which would then require final approval from the President in order for the FY 2022 budget to become law and complete the budget process. In addition to finalizing the FY 2022 budget, theU.S. Government continues to face a variety of fiscal and monetary policy issues, including rising debt levels. The legal limit onU.S. debt, commonly known as the debt ceiling, was reinstated onAugust 1, 2021 at the amount ofU.S. Government debt outstanding on that date, after a two-year suspension in accordance with the Bipartisan Budget Act of 2019 (BBA-19). To avoid exceeding the new debt limit, theU.S. Department of the Treasury began to employ extraordinary measures to continue financing theU.S. Government . OnOctober 15, 2021 , the President signed legislation raising the debt limit by$480 billion to$28.9 trillion , which is estimated to provide federal borrowing authority until earlyDecember 2021 . It is uncertain exactly when the debt ceiling will again become critical, and whether theDepartment of Treasury will again be able to use "extraordinary measures" to delay the point at which the limit would be exceeded beyond year-end to early 2022. If the debt ceiling is not raised, theU.S. Government may not be able to pay for expenditures or fulfill its funding obligations and there could be significant disruption to discretionary programs and wider financial and economic repercussions. Although we believe that key defense, intelligence and homeland security programs would receive priority in these circumstances, the effect on individual programs orLockheed Martin cannot be predicted at this time. See also the discussion ofU.S. Government funding risks within "Item 1A, Risk Factors" included in our 2020 Form 10-K. 33
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