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 27, 2020 , 74% of our$48.4 billion in net sales were from theU.S. Government , either as a prime contractor or as a subcontractor (including 64% from theDepartment of Defense (DoD )), 25% 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. COVID-19 The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a pandemic by theWorld Health Organization and a national emergency by theU.S. Government inMarch 2020 and has negatively affected theU.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 theU.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 endedSeptember 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 theDepartment of Homeland Security's identification of the Defense Industrial Base as a critical infrastructure sector inMarch 2020 , ourU.S. production facilities have continued to operate in support of essential products and services required to meet national security commitments to theU.S. Government and theU.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 inFort 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 theU.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 theU.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. TheU.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 likeLockheed Martin and smaller suppliers. We continue to proactively 28
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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
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 underU.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. 29
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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 theU.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 onDecember 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 endedDecember 31, 2019 (2019 Form 10-K). INDUSTRY CONSIDERATIONSU.S. Government Funding OnFebruary 10, 2020 , the Administration submitted the fiscal year (FY) 2021 President's Budget, requesting$1.34 trillion in total discretionary funding (aU.S. Government fiscal year starts onOctober 1 and ends onSeptember 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 theDoD , including$636 billion for the base budget and$69 billion for OCO. TheDoD request is only$800 million above the FY 2020 enacted level for both base national defense spending and OCO. Between March andJuly 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 onMarch 27, 2020 , provided relief aimed at helping American workers and businesses impacted by the COVID-19 pandemic. The bill included$10.4 billion forDoD 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). OnOctober 1, 2020 , the President signed a continuing resolution to continue funding federal agencies at FY 2020 levels untilDecember 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 onMarch 27, 2020 to provide authorization for federal contractors to continue to support government initiatives despite COVID-19 disruption, was also extended throughDecember 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. 30
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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
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