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 quarter ended March 28, 2021, 72% of our $16.3 billion in
net sales were from the U.S. Government, either as a prime contractor or as a
subcontractor (including 62% 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.
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 the
U.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 ended December 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 of Integration 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 the UK Ministry of Defense's intent to re-nationalize
the Atomic Weapons Establishment program (AWE program) on June 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 the Lockheed 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 the U.S.
Government will not operate under a continuing resolution for an extended period
in which new contract and program starts are restricted.
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On March 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 CONSIDERATIONS
U.S. Government Funding
The U.S. Government is operating with a full year appropriation which provided
$741 billion in discretionary funding for national defense (includes Department
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, the DoD 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).
On March 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 through September 2021, which gives the DoD 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.
On April 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 the DOD and other agencies. The request includes $715 billion in
discretionary funding for the DoD. The proposed funding level for the DoD 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 of U.S. Government funding risks within "Item 1A, Risk
Factors" included in our 2020 Form 10-K.

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