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 quarter endedMarch 28, 2021 , 72% of our$16.3 billion in net sales were from theU.S. Government , either as a prime contractor or as a subcontractor (including 62% 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. COVID-19 The COVID-19 pandemic continues to present significant business challenges in 2021. During the first quarter 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, impacts of travel restrictions, site access and quarantine restrictions, and the impacts of remote work and adjusted work schedules. During the first quarter, 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 accelerated progress payments from theU.S. Government plus cash on hand to accelerate$1.4 billion of payments to our suppliers during the first quarter of 2021 that are due by their terms in future periods. Although the COVID-19 pandemic did not have a significant impact on our financial results in the first quarter of 2021, 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 pandemic related developments, including the duration of the pandemic, any potential subsequent waves of COVID-19 infection, the effectiveness, distribution and acceptance of COVID-19 vaccines, 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 expect our 2021 net sales to increase in the mid-single digit range from 2020 levels. The projected growth in net sales from 2020 is driven by F-35, F-16 and classified programs at Aeronautics, increased volume within integrated air and missile defense programs at MFC, increased volume on Sikorsky helicopter program and training and logistics solutions programs at RMS, and hypersonics volume (including the acquisition ofIntegration Innovation Inc.'s (i3) hypersonics portfolio) at Space. Total business segment operating profit margin in 2021 is expected to be approximately 11.0%; and we have increased cash from operations to greater than or equal to$8.9 billion , with no discretionary pension contribution. Our 2021 outlook reflects theUK Ministry of Defense's intent to re-nationalize the Atomic Weapons Establishment program (AWE program) onJune 30, 2021 . It does not incorporate the pending acquisition of Aerojet Rocketdyne Holdings, Inc. The outlook for 2021 assumes continued support and funding of our programs, known impacts of COVID-19, and a statutory tax rate of 21%. Our 2021 outlook also reflects the impact of the first quarter 2021 unrealized gains from investments held by theLockheed Martin Ventures Fund , 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. 25
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OnMarch 11, 2021 ,President Biden signed into law the American Rescue Plan Act of 2021 (ARPA), which eased funding rules for single-employer defined benefit pension plans by extending the amortization of funding shortfalls and enhancing interest rate stabilization, among many other stimulus measures. Plan sponsors can spread (amortize) contributions required to pay for plan underfunding. ARPA lowers the minimum required contributions by "restarting" and extending the amortization period from seven to fifteen years. ARPA also adjusts and extends the pension funding interest rate relief from prior legislation that was to begin phasing out. The legislation effectively stabilizes (or raises) interest rates used to calculate required funding contributions and provides temporary funding relief due to the historically low interest rate environment. We also use the stabilized interest rates to determine our CAS pension costs. Plan sponsors can adopt the legislation as of 2020, 2021, or 2022. We will adopt the funding amortization change as of 2020 and the interest rate stabilization as of 2022. The lower pension contributions will be partially offset by lower tax deductions. We are currently analyzing the impacts to the business areas but expect the legislation will result in lower sales, increased segment operating profit, reduced FAS / CAS adjustment and net income, and improved cash flow in future years than if the legislation had not been enacted. 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. 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. INDUSTRY CONSIDERATIONSU.S. Government Funding TheU.S. Government is operating with a full year appropriation which provided$741 billion in discretionary funding for national defense (includesDepartment of Defense (DoD ) funding and defense-related spending in energy and water development, homeland security, and military construction appropriations), of which$672 billion is in base funding and$69 billion is Overseas Contingency Operations (OCO)/emergency funding (OCO and emergency supplemental funding do not count toward discretionary spending caps). Of the$741 billion , theDoD was allocated$704 billion , composed of$635 billion in base funding and$69 billion in OCO and emergency funding. The appropriations adhere to the Bipartisan Budget Act of 2019 (BBA 2019), which increased the spending limits for both defense and non-defense discretionary funds for the final two years (FY 2020 and FY 2021) of the Budget Control Act of 2011 (BCA). OnMarch 11, 2021 , the President signed the American Rescue Plan Act of 2021 into law. The legislation provides additional relief to address the continued impact of COVID-19 on the economy, public health, state and local governments, individuals, and businesses. The legislation also contains funding relief provisions affecting single-employer pension plans (see further discussion in "Financial Condition" below). Additionally, it extends Section 3610 of the CARES Act throughSeptember 2021 , which gives theDoD and federal agencies discretion to reimburse contractors for any paid leave, including sick leave, a contractor provides during the pandemic to keep its employees in a ready state. OnApril 9, 2021 , the President released his initial discretionary funding request for FY 2022. The document outlines the Biden administration's discretionary funding priorities, including the discretionary topline requests for theDOD and other agencies. The request includes$715 billion in discretionary funding for theDoD . The proposed funding level for theDoD is approximately$11 billion above the enacted amount for FY 2021. The President's full budget release is expected later this spring and will include his full agenda of investments, spending, and revenues. See also the discussion ofU.S. Government funding risks within "Item 1A, Risk Factors" included in our 2020 Form 10-K. 26
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