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 both U.S. and international
customers with products and services that have defense, civil and commercial
applications, with our principal customers being agencies of the U.S.
Government. During the nine months ended September 26, 2021, 72% of our $49.3
billion in net sales were from the U.S. Government, either as a prime contractor
or as a subcontractor (including 63% from the Department of Defense (DoD)), 27%
were from international customers (including foreign military sales (FMS)
contracted through the U.S. Government) and 1% were from U.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, on June 30, 2021 the UK Ministry of Defence terminated
the contract to operate the UK'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 ended September 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 ended September 26, 2021. During
the quarter and nine months ended September 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
On December 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 on March 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 on March 9, 2021, which was a
closing condition. As part of the regulatory review process of the transaction,
on September 24, 2021, we and Aerojet Rocketdyne each certified substantial
compliance with the Federal Trade Commission's (FTC) requests for additional
information, known as a "second request", and the parties continue to engage
with the FTC. 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 from December 21, 2021 to March 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
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accelerated progress payments from the U.S. Government and cash on hand to
accelerate $1.5 billion of payments to our suppliers as of September 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 by President Biden on September 9,
2021, including Executive Order 14042, the Safer Federal Workforce Task Force
guidance issued September 24, 2021, and the DoD's Force Health Protection
Guidance. As of September 13, 2021, all personnel working at DoD facilities,
including Lockheed Martin employees, must comply with DoD's process to attest to
vaccination status. Pursuant to the DoD mandate, this is required for physical
access to DoD buildings and leased spaces in non-DoD buildings where official
agency business is performed. Additionally, pursuant to Executive Order 14042,
all U.S. based employees of Lockheed 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 the December 8, 2021 deadline for
vaccination will apply to all U.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 ended
December 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 to Lockheed 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 the
Lockheed 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 the U.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.
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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 by Congress before it takes effect on
January 1, 2022. Although we continue to have ongoing discussions with members
of Congress, 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 the U.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 expected U.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 on December 31, 2021. The final assumptions,
including the actual investment return for 2021 may differ materially from those
discussed above.
INDUSTRY CONSIDERATIONS
U.S. Government Funding
On May 28, 2021, the Administration submitted to Congress the President's fiscal
year (FY) 2022 budget request, which proposes $753 billion for total national
defense spending including $715 billion for the DoD, a 1.6% increase above the
FY 2021 enacted amounts for both total national defense and the DoD (a U.S.
Government fiscal year starts on October 1 and ends on September 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, the U.S. Government has not yet enacted an annual budget for FY 2022.
To avert a government shutdown, on September 30, 2021, a continuing resolution
funding measure was enacted to finance all U.S. Government activities through
December 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
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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, the U.S. Government continues to
face a variety of fiscal and monetary policy issues, including rising debt
levels. The legal limit on U.S. debt, commonly known as the debt ceiling, was
reinstated on August 1, 2021 at the amount of U.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, the U.S.
Department of the Treasury began to employ extraordinary measures to continue
financing the U.S. Government. On October 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 early December 2021. It
is uncertain exactly when the debt ceiling will again become critical, and
whether the Department 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, the U.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 or Lockheed Martin cannot be
predicted at this time.
See also the discussion of U.S. Government funding risks within "Item 1A, Risk
Factors" included in our 2020 Form 10-K.

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