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 27, 2020, 74% of our
$48.4 billion in net sales were from the U.S. Government, either as a prime
contractor or as a subcontractor (including 64% from the Department of Defense
(DoD)), 25% 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.
COVID-19
The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a
pandemic by the World Health Organization and a national emergency by the U.S.
Government in March 2020 and has negatively affected the U.S. and global
economies, disrupted global supply chains, resulted in significant travel and
transport restrictions, including mandated closures and orders to
"shelter-in-place" and quarantine restrictions, and created significant
disruption of the financial markets. We have taken measures to protect the
health and safety of our employees, work with our customers and suppliers to
minimize disruptions and support our community in addressing the challenges
posed by this ongoing global pandemic. The pandemic has presented unprecedented
business challenges, and we have experienced impacts in each of our business
areas related to COVID-19, primarily in increased coronavirus-related costs,
delays in supplier deliveries, impacts of travel restrictions, site access and
quarantine requirements, and the impacts of remote work and adjusted work
schedules.
Despite these challenges, Lockheed Martin and the U.S. Government's pro-active
efforts, especially with regard to the supply chain, helped to partially
mitigate the disruptions caused by COVID-19 on our operations in the third
quarter and nine months ended September 27, 2020. In addition, favorable
contract award timing, strong operational performance and lower travel and
overhead expenditures due to COVID-19 restrictions partially offset the impacts
of COVID-19 on our financial results in the first nine months of 2020. However,
the ultimate impact of COVID-19 on our operations and financial performance in
2020 and in future periods, including our ability to execute our programs in the
expected timeframe, remains uncertain and will depend on future pandemic related
developments, including the duration of the pandemic and any potential
subsequent waves of COVID-19 infection, 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 and our business are also difficult to predict but
could negatively affect our future results of operations. For additional risks
to the corporation related to the COVID-19 pandemic, see "Part II, Item 1A. Risk
Factors."
In accordance with the Department of Homeland Security's identification of the
Defense Industrial Base as a critical infrastructure sector in March 2020, our
U.S. production facilities have continued to operate in support of essential
products and services required to meet national security commitments to the U.S.
Government and the U.S. military. Although we are designated as a critical
infrastructure workforce, operations have been adjusted in response to the
pandemic, including, most significantly, a reduction in the F-35 production rate
primarily due to supplier delays. The reduction is expected to delay 2020 F-35
deliveries by 18-24 aircraft. Due to the supplier delays, we implemented a
temporary schedule adjustment for the F-35 production workforce in Fort Worth,
Texas. While the F-35 production workforce resumed their pre-COVID-19 work
schedule in the third quarter, staffing levels at our facilities, our customer
facilities, and our supplier facilities have and could continue to fluctuate as
a result of COVID-19, which could negatively impact our business. In addition,
countries other than the U.S. have different responses to the pandemic that can
affect our international operations and the operations of our suppliers and
customers. Base closures, travel restrictions, and quarantine requirements both
within and outside the U.S. have affected our normal operations and resulted in
some schedule delays and future or prolonged occurrences of these could
adversely affect our ability to achieve future contract milestones and our
results of operations.
The U.S. Government has taken actions in response to COVID-19 to increase the
progress payment rates in new and existing contracts and accelerate contract
awards to provide cash flow and liquidity for companies in the Defense
Industrial Base, including large prime contractors like Lockheed Martin and
smaller suppliers. We continue to proactively
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monitor our supply chain and have implemented multiple actions to help mitigate the effects of COVID-19, including accelerating payments to suppliers within our global supply base as a result of the actions taken by the DoD in changing the progress payment policy. We plan to continue to accelerate payments to the supply chain for the remainder of the year in order to mitigate COVID-19 risks, prioritizing impacted suppliers and small businesses. As described in Item 1A, Risk Factors of our Annual Report on Form 10-K, we rely on other companies and the U.S. Government to provide materials, major components and products, and to perform a portion of the services that are provided to our customers under the terms of most of our contracts. Many of these suppliers also supply parts for commercial aviation businesses which have been more significantly impacted by the pandemic due to the impacts on these markets. Global supply chain disruption caused by the response to COVID-19 has impacted some of our programs and could impact our ability to perform on our contracts. We have identified a number of suppliers that have had potential delivery impacts due to COVID-19 and are working to manage those impacts. However, if we are not able to implement alternatives or other mitigations, deliveries and other milestones on affected programs could be adversely impacted. Our work in production facilities and labs has continued throughout the pandemic, consistent with guidance from federal, state and local officials to minimize the spread of COVID-19. We have taken actions to equip employees with personal protective equipment, establish minimum staffing and social distancing policies, sanitize workspaces more frequently, adopt alternate work schedules and institute other measures aimed to sustain production and related services while minimizing the transmission of COVID-19. In addition, we have implemented a flexible teleworking policy for employees who can meet our customer commitments remotely, and a significant portion of our workforce is currently teleworking. It remains uncertain when and on what scale teleworking employees will return to work in person. We have not previously experienced such a significant portion of our workforce working remotely for a prolonged period, so its effects on our long-term operations are unknown. Coronavirus-related costs for us and our suppliers are significant and we are seeking reimbursement of coronavirus-related costs under our U.S. Government contracts through a combination of equitable adjustments to the contract price and reimbursement of the costs under Section 3610 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which allows federal agencies to reimburse contractors at the minimum applicable contract billing rate for costs arising from certain paid leave, including sick leave, a contractor provides to keep its employees or subcontractors in a ready state, as well as to protect the life and safety of government and contractor personnel from March 27, 2020 through December 11, 2020. Reimbursement of any costs under Section 3610 of the CARES Act increases sales, but is not expected to be at a profit or fee and so would have the effect of reducing our margins in future periods. These cost increases, including costs for employees whose jobs cannot be performed remotely and for certain costs incurred prior to March 27, 2020, may not be fully recoverable under our contracts, particularly fixed-price contracts, or adequately covered by insurance. We also have no assurance that Congress will appropriate funds to cover the reimbursement of defense contractors authorized by the CARES Act, which could reduce funds available for other U.S. Government defense priorities. We also are deferring certain payroll taxes as provided for in the CARES Act, which has the effect of increasing our cash from operations in 2020, but reducing cash from operations in 2021 and 2022. We continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19 and to take actions in an effort to mitigate adverse consequences.



2020 Financial Outlook
We expect our 2020 net sales to increase to approximately $65.3 billion. The
projected growth is driven by the F-35 program at Aeronautics, increased
production rate volume in the tactical and strike missiles and integrated air
and missile defense businesses at MFC, Sikorsky volume at RMS, and Next
Generation Overhead Persistent Infrared (Next Gen OPIR) and hypersonics volume
at Space. Total business segment operating profit margin in 2020 is expected to
be approximately 10.9%; and cash from operations is expected to be greater than
or equal to $8.0 billion. Changes in circumstances may require us to revise our
assumptions, which could materially change our current estimate of 2020 net
sales, operating margin and cash flows.
Given our current position and expectations for the remainder of 2020, we are
updating our 2020 guidance as described above to reflect the recent performance
across all four business areas. However, the ultimate impact of COVID-19 in
future periods remains uncertain. Our 2020 outlook and 2021 financial trends
discussed below assume, among other things, that our production facilities
continue to operate and we do not experience significant work stoppages or
closures, we are able to mitigate any supply chain disruptions and these do not
worsen, and we are able to recover our costs under U.S. Government contracts and
government funding priorities do not change. While these are our current
assumptions for our 2020 outlook, they could change as described above. Risk
related to these items are described above and under Item 1A, Risk Factors.
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2021 Financial Trends
We expect our 2021 net sales to increase to greater than or equal to $67
billion. Total business segment operating margin in 2021 is expected to be in
the 10.9% to 11.1% range and cash from operations is expected to be greater than
or equal to $8.1 billion, net of $1.0 billion of planned pension contributions.
The preliminary outlook for 2021 assumes continued support and funding of our
programs, including recovery of COVID-19 cost impacts, and a statutory tax rate
of 21%. Additionally, the preliminary outlook for 2021 assumes that there will
not be significant reductions in customer budgets, changes in funding priorities
and that the U.S. Government will not continue to 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, operating
margin and cash flows.
We currently expect a total net FAS/CAS pension benefit of approximately $2.1
billion in 2021. This estimate assumes a 2.50% discount rate (a 75 basis point
decrease from the end of 2019), a 7.00% return on plan assets in 2020, and a
7.00% 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 $15 million to the estimated
net 2021 FAS/CAS pension benefit. A change of plus or minus 100 basis points to
the return on plan assets in 2020 only, with all other assumptions held
constant, would result in an incremental increase or decrease of approximately
$15 million to the estimated net 2021 FAS/CAS pension benefit. We expect to make
contributions of approximately $1.0 billion to our qualified defined benefit
pension plans in 2021 and anticipate recovering approximately $2.1 billion of
CAS pension cost. We will complete the annual remeasurement of our
postretirement benefit plans and update our estimated 2021 FAS/CAS pension
adjustment on December 31, 2020. The final assumptions and actual investment
return for 2020 may differ materially from those discussed above.
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 Annual Report on Form 10-K for the year ended December 31, 2019 (2019
Form 10-K).
INDUSTRY CONSIDERATIONS
U.S. Government Funding
On February 10, 2020, the Administration submitted the fiscal year (FY) 2021
President's Budget, requesting $1.34 trillion in total discretionary funding (a
U.S. Government fiscal year starts on October 1 and ends on September 30). The
FY 2021 budget requests $672 billion for base discretionary national defense
spending, the maximum permitted under the Bipartisan Budget Act of 2019
(BBA-19). The total national defense request is $741 billion, which includes $69
billion requested for Overseas Contingency Operations (OCO). OCO funding does
not count toward discretionary spending caps.
The FY 2021 budget requests $705 billion for the DoD, including $636 billion for
the base budget and $69 billion for OCO. The DoD request is only $800 million
above the FY 2020 enacted level for both base national defense spending and
OCO.
Between March and July 2020, Congress enacted eight pieces of legislation
related to the COVID-19 pandemic and the economic impacts, authorizing roughly
$3.7 trillion of fiscal support. The CARES Act, signed by the President on March
27, 2020, provided relief aimed at helping American workers and businesses
impacted by the COVID-19 pandemic. The bill included $10.4 billion for DoD to
fund COVID-19 response related expenses in defense health programs, operations,
and the Defense Procurement Act fund. The funding is identified as emergency and
is exempt from the discretionary spending limits of the Budget Control Act of
2011 (BCA).
On October 1, 2020, the President signed a continuing resolution to continue
funding federal agencies at FY 2020 levels until December 11, 2020. Unless
specifically exempted, under a continuing resolution there can be no new program
starts or increases in procurement quantities. Under the continuing resolution,
Section 3610 of the CARES Act, which was passed on March 27, 2020 to provide
authorization for federal contractors to continue to support government
initiatives despite COVID-19 disruption, was also extended through December 11,
2020. U.S. Government agencies may be subject to a government shutdown if new
appropriations are not passed prior to the expiration of the current continuing
resolution.
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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 results of operations. See also the discussion of U.S. Government funding risks within "Item 1A. Risk Factors" included in our 2019 Form 10-K.

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