LOCKHEED MARTIN : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

Business Overview
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) is intended to help the reader understand our
results of operations and financial condition. The MD&A is provided as a
supplement to, and should be read in conjunction with, our consolidated
financial statements and notes thereto included in Item 8 - Financial Statements
and Supplementary Data.
The MD&A generally discusses 2020 and 2019 items and year-to-year comparisons
between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons
between 2019 and 2018 that are not included in this Form 10-K can be found in
"Management's Discussion and Analysis of Financial Condition and Results or
Operations" in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2019 filed with the SEC on February 7, 2020.
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. In 2020, 74% of our $65.4 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.
We operate in four business segments: Aeronautics, Missiles and Fire Control
(MFC), Rotary and Mission Systems (RMS) and Space. We organize our business
segments based on the nature of the products and services offered.
We operate in an environment characterized by both complexity in global security
and continuing economic pressures in the U.S. and globally. A significant
component of our strategy in this environment is to focus on program execution,
improving the quality and predictability of the delivery of our products and
services, and placing security capability quickly into the hands of our U.S. and
international customers at affordable prices. Recognizing that our customers are
resource constrained, we are endeavoring to develop and extend our portfolio
domestically in a disciplined manner with a focus on adjacent markets close to
our core capabilities, as well as growing our international sales. We continue
to focus on affordability initiatives. We also expect to continue to innovate
and invest in technologies to fulfill new mission requirements for our
customers, including through acquisitions, and invest in our people so that we
have the technical skills necessary to succeed.
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. 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 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 2020. However, 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 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 Item 1A - Risk Factors.
                                       32

--------------------------------------------------------------------------------
  Table of Contents
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 delayed 2020 F-35 deliveries by
18 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 of 2020, 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 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 assuming the continuation of
the current DoD progress payment policy 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, in particular in instances where
there is not a qualified second source of supply. We have identified a number of
suppliers that have experienced delivery impacts due to COVID-19 and have been
working to manage those impacts. However, if alternatives or other mitigations
are not effective, 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 March 31, 2021. 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 deferred certain payroll taxes in 2020 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.
                                       33

--------------------------------------------------------------------------------
  Table of Contents
2021 Financial Trends

We expect our 2021 net sales to increase by approximately 4% from 2020 levels.
The projected growth is driven by increases across all four business areas.
Specifically, the increased growth is driven by F-35, F-16 and classified
programs at Aeronautics, increased volume within integrated air and missile
defense at MFC, increased volume on Sikorsky helicopter program and training and
logistics solutions programs at RMS, and hypersonics volume (including an
acquisition of Integration Innovation Inc.'s (i3) hypersonics portfolio in
November 2020) at Space. Total business segment operating margin in 2021 is
expected to be approximately 11.0% and cash from operations is expected to be
greater than or equal to $8.3 billion, net of $1.0 billion of planned pension
contributions. The preliminary outlook for 2021 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. announced on December 20, 2020. The outlook
for 2021 assumes continued support and funding of our programs, known impacts of
COVID-19, and a statutory tax rate of 21%. 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, operating
margin and cash flows.
We expect a total net FAS/CAS pension benefit of approximately $2.3 billion in
2021 based on a 2.50% discount rate (a 75 basis point decrease from the end of
2019), an approximate 16.5% 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. 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.
Portfolio Shaping Activities
We continuously strive to strengthen our portfolio of products and services to
meet the current and future needs of our customers. We accomplish this in part
by our independent research and development activities and through acquisition,
divestiture and internal realignment activities.
We selectively pursue the acquisition of businesses and investments at
attractive valuations that will expand or complement our current portfolio and
allow access to new customers or technologies. We also may explore the
divestiture of businesses that no longer meet our needs or strategy or that
could perform better outside of our organization. In pursuing our business
strategy, we routinely conduct discussions, evaluate targets and enter into
agreements regarding possible acquisitions, divestitures, joint ventures and
equity investments.
Acquisitions
On December 20, 2020 we entered into an agreement to acquire Aerojet Rocketdyne
Holdings, Inc. (Aerojet Rocketdyne) for $56 per share in cash, which is expected
to be reduced to $51 per share after Aerojet Rocketdyne pays a pre-closing
special dividend to its stockholders on March 24, 2021. This represents 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 projected net cash balance. We expect to
finance the acquisition through a combination of cash on hand and new debt
issuances. The acquisition provides the corporation the opportunity to integrate
Aerojet Rocketdyne's propulsion systems more effectively into its products,
generate cost and revenue synergies, and improve efficiencies in Aerojet
Rocketdyne's production operations. The transaction will also allow customers
incorporating Aerojet Rocketdyne products to offer more timely, innovative and
affordable solutions, and reduce the prices paid by the U S. Government for
systems it buys. The transaction is expected to close in the second half of 2021
and is subject to the satisfaction of customary closing conditions, including
regulatory approvals and approval by Aerojet Rocketdyne's stockholders. For
risks related to the transaction, see Item 1A - Risk Factors. For more
information regarding the acquisition terms, see Item 1.01 in our Current Report
on Form 8-K filed with the SEC on December 21, 2020 for a description and copy
of the merger agreement.
Additionally, in the fourth quarter of 2020, we paid approximately $282 million
for the acquisitions of Integration Innovation Inc.'s (i3) hypersonics portfolio
and Allcomp Inc. The purchase price for each was allocated to the estimated fair
value of net tangible and intangible assets acquired, with any excess purchase
price recorded as goodwill. As a result, we recorded goodwill of $173 million at
our Space business segment and $16 million at our Aeronautics business segment.
The final determination of the fair values of certain assets and liabilities
will be completed within the measurement period of up to one year from the
respective acquisition date. The operating results of the businesses acquired
have been included within our operating results since their respective
acquisition dates.
                                       34

--------------------------------------------------------------------------------
  Table of Contents
Industry Considerations
U.S. Government Funding
On December 27, 2020, the President signed the fiscal year (FY) 2021
Consolidated Appropriations Act, providing annual funding for the DoD, other
government agencies, and COVID-19 relief. The appropriations provide $741
billion in discretionary funding for national defense (includes DoD funding and
defense-related spending in energy and water development, homeland security, and
military construction appropriations), of which $671 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).
The Appropriations Act also provides stimulus funds to individuals, businesses,
and hospitals in response to the economic distress caused by the coronavirus
(COVID-19) pandemic. Additionally, it extends Section 3610 of the CARES Act
until March 31, 2021, which gives 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.
International Business
A key component of our strategic plan is to grow our international sales. To
accomplish this growth, we continue to focus on strengthening our relationships
internationally through partnerships and joint technology efforts. We conduct
business with international customers through each of our business segments
through either FMS or direct sales to international customers. See Item 1A -
Risk Factors for a discussion of risks related to international sales.
International customers accounted for 31% of Aeronautics' 2020 net sales. There
continues to be strong international interest in the F-35 program, which
includes commitments from the U.S. Government and seven international partner
countries and six international customers, as well as expressions of interest
from other countries. The U.S. Government and the partner countries continue to
work together on the design, testing, production, and sustainment of the F-35
program. Other areas of international expansion at our Aeronautics business
segment include the F-16 and C-130J programs. Aeronautics received contracts in
2020 with Bulgaria and Taiwan for new F-16 aircraft, extending work beyond 2025.
The C-130J Super Hercules aircraft continued to draw interest from various
international customers, including a contract in 2020 from New Zealand.
In 2020, international customers accounted for 25% of MFC's net sales. Our MFC
business segment continues to generate significant international interest, most
notably in the air and missile defense product line, which produces the Patriot
Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD)
systems. The PAC-3 family of missiles are the only combat proven Hit-to-Kill
interceptors that defend against incoming threats, including tactical ballistic
missiles, cruise missiles and aircraft. Fourteen nations have chosen PAC-3 Cost
Reduction Initiative (CRI) and PAC-3 Missile Segment Enhancement (MSE) to
provide missile defense capabilities. THAAD is an integrated system designed to
protect against high altitude ballistic missile threats. Additionally, we
continue to see international demand for our tactical missile and fire control
products, where we received orders for precision fires systems from Poland and
Romania; and Apache and Low Altitude Navigation and Targeting Infrared for Night
(LANTIRN®) systems for Qatar.
In 2020, international customers accounted for 25% of RMS' net sales. Our RMS
business segment continues to experience international interest in the Aegis
Ballistic Missile Defense System (Aegis) for which we perform activities in the
development, production, modernization, ship integration, test and lifetime
support for ships of international customers such as Japan, Spain, Republic of
Korea, and Australia. We have ongoing combat systems programs associated with
different classes of surface combatant ships for customers in Canada, Chile, and
New Zealand. Our Multi-Mission Surface Combatant (MMSC) program provides surface
combatant ships for international customers, such as the Kingdom of Saudi
Arabia, designed to operate in shallow waters and the open ocean. In our
training and logistics solutions portfolio, we have active programs and pursuits
in the United Kingdom, the Kingdom of Saudi Arabia, Canada, Singapore,
Australia, Germany and France. We have active development, production, and
sustainment support of the S-70i Black Hawk® and MH-60 Seahawk® aircraft to
foreign military customers, including Chile, Australia, Denmark, Taiwan, the
Kingdom of Saudi Arabia, Colombia, and Greece. Commercial aircraft are sold to
international customers to support search and rescue missions as well as VIP and
offshore oil and gas transportation.
International customers accounted for 13% of Space's 2020 net sales. The
majority of our Space business segment international sales are from our majority
share of AWE Management Limited (AWE), which operates the United Kingdom's
nuclear deterrent program. The work at AWE covers the entire life cycle, from
initial concept, assessment and design, through
                                       35

--------------------------------------------------------------------------------
  Table of Contents
component manufacture and assembly, in-service support and decommissioning, and
disposal. On November 2, 2020, the UK Ministry of Defense (MOD) announced its
intention to re-nationalize the program on June 30, 2021. We are working with
the MOD to transition operations.
Status of the F-35 Program
The F-35 program primarily consists of production contracts, sustainment
activities, and new development efforts. Production of the aircraft is expected
to continue for many years given the U.S. Government's current inventory
objective of 2,456 aircraft for the U.S. Air Force, U.S. Marine Corps, and U.S.
Navy; commitments from our seven international partner countries and six
international customers; as well as expressions of interest from other
countries.
During 2020, the F-35 program completed several milestones both domestically and
internationally. The U.S. Government continued testing the aircraft, including
ship trials, mission and weapons systems evaluations, and the F-35 fleet
recently surpassed 355,000 flight hours. During the second half of 2020, the
U.S. Government awarded the production of 18 F-35 Block Buy aircraft in addition
to the 448 aircraft previously awarded. Since program inception, we have
delivered 611 production F-35 aircraft, demonstrating the F-35 program's
continued progress and longevity. The first 611 F-35 aircraft delivered to U.S.
and international customers include 438 F-35A variants, 128 F-35B variants, and
45 F-35C variants.
During 2020, we delivered 120 production aircraft to our U.S. and international
partner countries, and we have 356 production aircraft in backlog, including
orders from our international partner countries.
In response to COVID-19 F-35 supplier delays and in conjunction with the F-35
Joint Program Office, we have tapered our production rate, and we anticipate
resuming a pre-COVID-19 production rate in 2021. The delays resulted in 18 fewer
deliveries than originally planned in 2020. See the discussion in Business
Overview - COVID-19 and Item 1A, Risk Factors.
As a result of Turkey accepting delivery of the Russian S-400 air and missile
defense system, the U.S. Government removed Turkey from the F-35 program in 2019
and in December 2020 imposed sanctions on Turkey's defense procurement agency
(SSB) and certain of the agency's officers under the Countering America's
Adversaries Through Sanctions Act (CAATSA). The primary sanction imposed was a
restriction on all new U.S. export licenses and authorizations for any goods or
technology transferred to the SSB, but does not apply to current, valid export
licenses and authorizations. Lockheed Martin expects the U.S. Government to
continue to engage Turkey on these issues, but we have no indication that the
sanctions will be removed, that additional sanctions will not be imposed or that
Turkey will not issue reciprocal sanctions. While we do not expect the current
sanctions to have a material effect on our current programs, additional
sanctions, reciprocal sanctions or other actions, could be material to our
operations, operating results, financial position or cash flows.
In addition to having committed to purchase up to 100 F-35 aircraft, six of
which had completed production at the time of removal, Turkish suppliers
continue to produce component parts for the F-35 program, some of which are
single-sourced. To minimize the risks of disruption of our supply chain and
ensure continuity of F-35 production, we have been working closely with the DoD
and supporting activities to identify and engage alternate suppliers for the
component parts produced by Turkish suppliers. We have made significant progress
transitioning to non-Turkish suppliers, but due to the procedure to qualify new
parts and suppliers, this collaborative process between DoD and Lockheed Martin
is ongoing. During 2020, the DoD publicly confirmed that Turkish suppliers would
be permitted to provide certain components for the F-35 through 2022. While the
transition timeline is an important first step, it is equally important that our
replacement capacity is re-established so that production is not impacted.
Efforts to date have significantly reduced our risk, but final resolution on a
limited number of remaining components could affect F-35 deliveries, and any
accelerated work stoppage would impact cost. We will continue to follow official
U.S. Government guidance as it relates to completed Turkish aircraft and the
export and import of component parts from the Turkish supply chain.
The effects on the F-35 program of the U.S. Government sanctions on the SSB and
Turkey's removal from the F-35 program do not appear to be significant at this
time. However, unforeseen actions could impact the timing of orders, disrupt the
production of aircraft, delay delivery of aircraft, disrupt delivery of
sustainment components produced in Turkey and impact funding on the F-35 program
to include the result of any reprogramming of funds that may be necessary to
mitigate the impact of alternate sources for component parts made in Turkey.
While, in the case of the F-35 program, we expect that these costs ultimately
would be recovered from the U.S. Government, the availability or timing of any
recovery could adversely affect our cash flows and results of operations. For
additional discussion, including the risk of sanctions on other programs
involving sales to Turkey or work with Turkish industry, see Item 1A - Risk
Factors.
Given the size and complexity of the F-35 program, we anticipate that there will
be continual reviews related to aircraft performance, program schedule, cost,
and requirements as part of the DoD, Congressional, and international partner
countries' oversight and budgeting processes. Current program challenges
include, but are not limited to, supplier and partner
                                       36

--------------------------------------------------------------------------------
  Table of Contents
performance, software development, level of cost associated with life cycle
operations and sustainment and warranties, receiving funding for contracts on a
timely basis, executing future flight tests, and findings resulting from testing
and operating the aircraft.
Backlog
At December 31, 2020, our backlog was $147.1 billion compared with
$144.0 billion at December 31, 2019. Backlog at December 31, 2020 was reduced by
$1.0 billion to reflect the impact of the U.K. Ministry of Defense's intent to
re-nationalize the AWE program on June 30, 2021. Backlog is converted into sales
in future periods as work is performed or deliveries are made. We expect to
recognize approximately 39% of our backlog over the next 12 months and
approximately 61% over the next 24 months as revenue, with the remainder
recognized thereafter.
Our backlog includes both funded (firm orders for our products and services for
which funding has been both authorized and appropriated by the customer) and
unfunded (firm orders for which funding has not been appropriated) amounts. We
do not include unexercised options or potential orders under
indefinite-delivery, indefinite-quantity agreements in our backlog. If any of
our contracts with firm orders were to be terminated, our backlog would be
reduced by the expected value of the unfilled orders of such contracts. Funded
backlog was $102.3 billion at December 31, 2020, as compared to $94.5 billion at
December 31, 2019. For backlog related to each of our business segments, see
"Business Segment Results of Operations" in Management's Discussion and Analysis
of Financial Condition and Results of Operations.
                                       37

--------------------------------------------------------------------------------
  Table of Contents
Consolidated Results of Operations
Our operating cycle is primarily long term and involves many types of contracts
for the design, development and manufacture of products and related activities
with varying delivery schedules. Consequently, the results of operations of a
particular year, or year-to-year comparisons of sales and profits, may not be
indicative of future operating results. The following discussions of comparative
results among years should be reviewed in this context. All per share amounts
cited in these discussions are presented on a "per diluted share" basis, unless
otherwise noted. Our consolidated results of operations were as follows (in
millions, except per share data):
                                                                         2020              2019              2018
Net sales                                                         $ 65,398          $ 59,812          $ 53,762
Cost of sales                                                      (56,744)          (51,445)          (46,488)
Gross profit                                                         8,654             8,367             7,274
Other (expense) income, net                                            (10)              178                60
Operating profit (a)(b)(c)(d)                                        8,644             8,545             7,334
Interest expense                                                      (591)             (653)             (668)
Other non-operating income (expense), net                              182              (651)             (828)
Earnings from continuing operations before income taxes              8,235             7,241             5,838
Income tax expense (e)                                              (1,347)           (1,011)             (792)
Net earnings from continuing operations                              6,888             6,230             5,046
Net loss from discontinued operations (f)                              (55)                -                 -
Net earnings                                                      $  6,833          $  6,230          $  5,046
Diluted earnings (loss) per common share
Continuing operations                                             $  24.50          $  21.95          $  17.59
Discontinued operations                                              (0.20)                -                 -
Total diluted earnings per common share                           $  24.30

$ 21.95 $ 17.59

(a)For the years ended December 31, 2020 and 2018, operating profit include a
non-cash asset impairment charge of $128 million and $110 million related to
AMMROC. See "Note 1 - Significant Accounting Policies" included in our Notes to
Consolidated Financial Statements for more information.
(b)For the year ended December 31 , 2020, operating profit includes $27 million
of severance charges primarily related to corporate functions. For the year
ended December 31, 2018, operating profit includes $96 million of severance and
restructuring charges.
(c)For the year ended December 31, 2019, operating profit includes a previously
deferred non-cash gain of approximately $51 million related to properties sold
in 2015.
(d)For the year ended December 31, 2019, operating profit includes a gain of $34
million for the sale of our Distributed Energy Solutions business.
(e)Net earnings for the year ended December 31, 2019 include benefits of $127
million ($0.45 per share) for additional tax deductions for the prior year,
primarily attributable to foreign derived intangible income treatment based on
proposed tax regulations released on March 4, 2019 and our change in tax
accounting method. Net earnings for the year ended December 31, 2018 include
benefits of $146 million ($0.51 per share) for additional tax deductions for the
prior year, primarily attributable to true-ups to the net one-time charges
related to the Tax Cuts and Jobs Act enacted on December 22, 2017 and our change
in tax accounting method. See "Income Tax Expense" section below and "Note 10 -
Income Taxes" included in our Notes to Consolidated Financial Statements for
additional information.
(f)Discontinued operations for the year ended December 31, 2020 includes a
$55 million ($0.20 per share) non-cash charge resulting from the resolution of
certain tax matters related to the former Information Systems & Global Solutions
business divested in 2016.
Certain amounts reported in other income, net, primarily our share of earnings
or losses from equity method investees, are included in the operating profit of
our business segments. Accordingly, such amounts are included in our discussion
of our business segment results of operations.
                                       38

--------------------------------------------------------------------------------
  Table of Contents
Net Sales
We generate sales from the delivery of products and services to our customers.
Our consolidated net sales were as follows (in millions):
                                 2020              2019              2018
Products                   $ 54,928          $ 50,053          $ 45,005
% of total net sales           84.0   %          83.7   %          83.7   %
Services                     10,470             9,759             8,757
% of total net sales           16.0   %          16.3   %          16.3   %
Total net sales            $ 65,398          $ 59,812          $ 53,762


Substantially all of our contracts are accounted for using the
percentage-of-completion cost-to-cost method. Under the percentage-of-completion
cost-to-cost method, we record net sales on contracts over time based upon our
progress towards completion on a particular contract, as well as our estimate of
the profit to be earned at completion. The following discussion of material
changes in our consolidated net sales should be read in tandem with the
subsequent discussion of changes in our consolidated cost of sales and our
business segment results of operations because changes in our sales are
typically accompanied by a corresponding change in our cost of sales due to the
nature of the percentage-of-completion cost-to-cost method.
Product Sales
Product sales increased $4.9 billion, or 10%, in 2020 as compared to 2019,
primarily due to higher product sales of $2.0 billion at Aeronautics,
$1.4 billion at MFC, $945 million at Space and $540 million at RMS. The increase
in product sales at Aeronautics was primarily due to higher production volume
for the F-35 program and classified development contracts. The increase in
product sales at MFC was primarily due to increased volume for integrated air
and missile defense programs (primarily PAC-3 and THAAD) and tactical and strike
missile programs (primarily Guided Multiple Launch Rocket Systems (GMLRS) and
High Mobility Artillery Rocket System (HIMARS)). The increase in product sales
at Space was primarily due to higher volume for government satellite programs
(primarily Next Gen OPIR) and strategic and missile defense programs (primarily
hypersonic development programs). The increase in product sales at RMS was
primarily due to higher volume for Sikorsky helicopter programs (primarily
Seahawk, VH-92A, and Combat Rescue Helicopter (CRH) production contracts), C6ISR
programs (primarily on undersea combat systems programs), and integrated warfare
systems and sensors (IWSS) programs (primarily Aegis), partially offset by lower
volume on various TLS programs.
Service Sales
Service sales increased $711 million, or 7%, in 2020 as compared to 2019. The
increase in service sales was primarily due to higher sales of approximately
$565 million at Aeronautics and $325 million at RMS, partially offset by lower
sales of $255 million at MFC. The increase in service sales at Aeronautics was
primarily due to higher sustainment volume for the F-35 and F-16 programs. The
increase in service sales at RMS was primarily due to higher volume for Sikorsky
helicopter programs (primarily a Seahawk sustainment program) and IWSS programs
(primarily radar surveillance systems programs). The decrease in service sales
at MFC was primarily due to lower volume on energy programs due to the
divestiture of the Distributed Energy Solutions business, sensors and global
sustainment programs (primarily Apache sensors program), and integrated air and
missile defense development programs (primarily PAC-3).

                                       39

--------------------------------------------------------------------------------
  Table of Contents
Cost of Sales
Cost of sales, for both products and services, consist of materials, labor,
subcontracting costs, an allocation of indirect costs (overhead and general and
administrative), as well as the costs to fulfill our industrial cooperation
agreements, sometimes referred to as offset agreements, required under certain
contracts with international customers. For each of our contracts, we monitor
the nature and amount of costs at the contract level, which form the basis for
estimating our total costs to complete the contract. Our consolidated cost of
sales were as follows (in millions):
                                     2020               2019               2018
Cost of sales - products      $ (48,996)         $ (44,589)         $ (40,293)
% of product sales                 89.2   %           89.1   %           89.5   %
Cost of sales - services         (9,371)            (8,731)            (7,738)
% of service sales                 89.5   %           89.5   %           88.4   %
Severance charges                   (27)                 -                (96)
Other unallocated, net            1,650              1,875              1,639
Total cost of sales           $ (56,744)         $ (51,445)         $ (46,488)


The following discussion of material changes in our consolidated cost of sales
for products and services should be read in tandem with the preceding discussion
of changes in our consolidated net sales and our business segment results of
operations. We have not identified any developing trends in cost of sales for
products and services that would have a material impact on our future
operations.
Product Costs
Product costs increased approximately $4.4 billion, or 10%, in 2020 as compared
to 2019. The increase in product costs was primarily due to higher product costs
of approximately $1.8 billion at Aeronautics, $1.2 billion at MFC, $1.0 billion
at Space and $430 million at RMS. The increase in product costs at Aeronautics
was primarily due to higher production volume for the F-35 program and
classified contracts. The increase in product costs at MFC was primarily due to
increased volume for integrated air and missile defense programs (primarily
PAC-3 and THAAD) and tactical and strike missile programs (primarily GMLRS and
HIMARS). The increase in product costs at Space was primarily due to increased
volume for government satellite programs (primarily Next Gen OPIR) and strategic
and missile defense programs (primarily hypersonic development programs). The
increase in product costs at RMS was primarily due to higher volume for Sikorsky
helicopter programs (primarily Seahawk, VH-92A, and CRH production contracts),
C6ISR programs (primarily on undersea combat systems programs), and IWSS
programs (primarily Aegis), partially offset by lower volume on various TLS
programs.
Service Costs
Service costs increased approximately $640 million, or 7%, in 2020 compared to
2019. The increase in service costs was primarily due to higher service costs of
approximately $485 million at Aeronautics and $245 million at RMS, partially
offset by lower service costs of approximately $180 million at MFC. The increase
in service costs at Aeronautics was primarily due to higher sustainment volume
for the F-35 and F-16 programs. The increase in service costs at RMS was
primarily due to higher volume for Sikorsky helicopter programs (primarily a
Seahawk sustainment program) and IWSS programs (primarily radar surveillance
systems programs), partially offset by charges for an army sustainment program
in 2019 not repeated in 2020. The decrease in service costs at MFC was primarily
due to lower volume on energy programs due to the divestiture of the Distributed
Energy Solutions business, sensors and global sustainment programs (primarily
Apache sensors program), and integrated air and missile defense development
programs (primarily PAC-3).
Severance Charges
During 2020, we recorded severance charges totaling $27 million ($21 million, or
$0.08 per share, after-tax) related to the planned elimination of certain
positions primarily at our corporate functions. Upon separation, terminated
employees receive lump-sum severance payments primarily based on years of
service, the majority of which are expected to be paid over the next several
quarters.
Other Unallocated, Net
Other unallocated, net primarily includes the FAS/CAS operating adjustment as
described in the "Business Segment Results of Operations" section below,
stock-based compensation expense and other corporate costs. These items are not
allocated to the business segments and, therefore, are not allocated to cost of
sales for products or services. Other unallocated, net reduced cost of sales by
$1.7 billion in 2020, compared to $1.9 billion in 2019.
                                       40

--------------------------------------------------------------------------------
  Table of Contents
The decrease in net reduction in expense from 2019 to 2020 was primarily
attributable to a decrease in our FAS/CAS operating adjustment and fluctuations
in other costs associated with various corporate items, none of which were
individually significant. See "Business Segment Results of Operations" and
"Critical Accounting Policies - Postretirement Benefit Plans" discussion below
for more information on our pension cost.
Other (Expense) Income, Net
Other (expense) income, net primarily includes our share of earnings or losses
from equity method investees and gains or losses for acquisitions and
divestitures. Other expense, net in 2020 was $10 million, compared to other
income, net of $178 million in 2019. Other expense, net in 2020 included a
non-cash asset impairment charge of $128 million ($96 million, or $0.34 per
share, after-tax) for our international equity method investee, AMMROC. Other
income, net in 2019 included the recognition of a previously deferred non-cash
gain of approximately $51 million ($38 million, or $0.13 per share, after-tax)
related to properties sold in 2015 as a result of completing our remaining
obligations and a $34 million gain (approximately $0 after-tax) for the sale of
our Distributed Energy Solutions business.
In July 2020, we entered into an agreement to sell our ownership interest in
AMMROC to our joint venture partner for $307 million, subject to certain closing
conditions. Accordingly, we adjusted the carrying value of our investment to the
selling price of $307 million, which resulted in the recognition of a noncash
impairment charge of $128 million ($96 million, or $0.34 per share, after-tax)
in our results of operations. The sale was completed on November 25, 2020. The
purchase price is required to be paid in cash installments in 2021 and is
guaranteed by an irrevocable letter of credit issued by a third-party financial
institution.
Interest Expense
Interest expense in 2020 was $591 million, compared to $653 million in 2019. The
decrease in interest expense in 2020 resulted primarily from our scheduled
repayment of $900 million of debt during 2019. See "Capital Structure, Resources
and Other" included within "Liquidity and Cash Flows" discussion below and
"Note 11 - Debt" included in our Notes to Consolidated Financial Statements for
a discussion of our debt.
Other Non-Operating Income (Expense), Net
Other non-operating income (expense), net primarily includes the non-service
cost components of FAS pension and other postretirement benefit plan income
(expense) (i.e., interest cost, expected return on plan assets, net actuarial
gains or losses, and amortization of prior service cost or credits). Other
non-operating income, net in 2020 was $182 million, compared to other
non-operating expense, net of $651 million in 2019. The increase in 2020 was
primarily due to a reduction in non-service FAS pension expense for our
qualified defined benefit pension plans. The increase was primarily due to FAS
pension income in 2020, compared to FAS pension expense in 2019, as a result of
completing the planned freeze of our salaried pension plans effective January 1,
2020 that was previously announced on July 1, 2014.
Income Tax Expense
Our effective income tax rate from continuing operations was 16.4% for 2020 and
14.0% for 2019. The rate for 2019 was lower than the rate for 2020 primarily due
to $98 million additional tax deductions for 2018 attributable to foreign
derived intangible income treatment, which lowered the rate 1.4%, and $51
million additional research and development credits, which reduced our effective
tax rate by 0.8%.

The rates for both 2020 and 2019 benefited from additional tax deductions based
on proposed tax regulations released on March 4, 2019, which clarified that
foreign military sales qualify for foreign derived intangible income treatment.
On July 9, 2020, the U.S. Treasury Department issued final tax regulations
related to foreign derived intangible income. The final tax regulations confirm
foreign military sales qualify for foreign derived intangible income treatment.
The rates for 2020 and 2019 also benefited from the research and development tax
credit, dividends paid to the corporation's defined contribution plans with an
employee stock ownership plan feature, and tax deductions for employee equity
awards.
On March 27, 2020, President Trump signed into law the CARES Act, which, along
with earlier issued IRS guidance, provides for deferral of certain taxes. The
CARES Act, among other things, also contains numerous other provisions which
impact Lockheed Martin. The CARES Act and the projected annual financial impact
of COVID-19 did not have a material impact on our effective tax rate for the
year ended December 31, 2020.
                                       41

--------------------------------------------------------------------------------
  Table of Contents
Changes in U.S. (federal or state) or foreign tax laws and regulations, or their
interpretation and application, including those with retroactive effect,
including the amortization for research or experimental expenditures, could
significantly impact our provision for income taxes, the amount of taxes
payable, our deferred tax asset and liability balances, and stockholders'
equity. Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the
option to deduct research and development expenditures currently and requires
taxpayers to amortize them over five years. While it is possible that Congress
may modify or repeal this provision before it takes effect and 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. Furthermore, we are continuing to work with our
advisors to refine our legal interpretation of this provision prior to
implementation in 2022. If these provisions are not repealed and based on
current interpretations of the law, initially this would materially decrease our
cash from operations based on current assumptions beginning in 2022 by
approximately $2.0 billion; and increase our net deferred tax assets by a
similar amount. The largest impact would be on 2022 cash from operations, which
would depend on the amount of research and development expenses paid or incurred
in 2022 and other factors. The impact, however, would continue over the five
year amortization period but would decrease over the period and be immaterial in
year six. The amount of net deferred tax assets will change periodically based
on several factors, including the measurement of our postretirement benefit plan
obligations, actual cash contributions to our postretirement benefit plans, and
future changes in tax laws. In addition, we are regularly under audit or
examination by tax authorities, including foreign tax authorities (including in,
amongst others, Australia, Canada, India, Italy, Japan, Poland, and the United
Kingdom). The final determination of tax audits and any related litigation could
similarly result in unanticipated increases in our tax expense and affect
profitability and cash flows.
Net Earnings from Continuing Operations
We reported net earnings from continuing operations of $6.9 billion ($24.50 per
share) in 2020 and $6.2 billion ($21.95 per share) in 2019. Both net earnings
and earnings per share were affected by the factors mentioned above. Earnings
per share also benefited from a net decrease of approximately 1.2 million common
shares outstanding from December 31, 2020 to December 31, 2019 as a result of
share repurchases, partially offset by share issuances under our stock-based
awards and certain defined contribution plans.
Net Loss from Discontinued Operations
In 2020, we recognized a $55 million ($0.20 per share) non-cash charge resulting
from the resolution of certain tax matters related to the former Information
Systems & Global Solutions business divested in 2016.

Business Segment Results of Operations
We operate in four business segments: Aeronautics, MFC, RMS and Space. We
organize our business segments based on the nature of products and services
offered.
Net sales and operating profit of our business segments exclude intersegment
sales, cost of sales, and profit as these activities are eliminated in
consolidation. Business segment operating profit includes our share of earnings
or losses from equity method investees as the operating activities of the equity
method investees are closely aligned with the operations of our business
segments. United Launch Alliance (ULA), results of which are included in our
Space business segment, is one of our largest equity method investees.
Business segment operating profit also excludes the FAS/CAS operating adjustment
described below, a portion of corporate costs not considered allowable or
allocable to contracts with the U.S. Government under the applicable U.S.
government cost accounting standards (CAS) or federal acquisition regulations
(FAR), and other items not considered part of management's evaluation of segment
operating performance such as a portion of management and administration costs,
legal fees and settlements, environmental costs, stock-based compensation
expense, retiree benefits, significant severance actions, significant asset
impairments, gains or losses from significant divestitures, and other
miscellaneous corporate activities.
Excluded items are included in the reconciling item "Unallocated items" between
operating profit from our business segments and our consolidated operating
profit. See "Note 1 - Significant Accounting Policies" included in our Notes to
Consolidated Financial Statements for a discussion related to certain factors
that may impact the comparability of net sales and operating profit of our
business segments.
Our business segments' results of operations include pension expense only as
calculated under CAS pension cost. We recover CAS pension and other
postretirement benefit plan cost through the pricing of our products and
services on U.S. Government contracts and, therefore, recognize CAS cost in each
of our business segment's net sales and cost of sales. Our consolidated
financial statements must present FAS pension and other postretirement benefit
plan expense calculated in
                                       42

--------------------------------------------------------------------------------
  Table of Contents
accordance with FAS requirements under U.S. GAAP. The operating portion of the
net FAS/CAS pension adjustment represents the difference between the service
cost component of FAS pension expense and total CAS pension cost. The
non-service FAS pension cost component is included in other non-operating
expense, net in our consolidated statements of earnings. As a result, to the
extent that CAS pension cost exceeds the service cost component of FAS pension
expense we have a favorable FAS/CAS operating adjustment.
Summary operating results for each of our business segments were as follows (in
millions):
                                                      2020          2019          2018
Net sales
Aeronautics                                     $ 26,266      $ 23,693      $ 21,242
Missiles and Fire Control                         11,257        10,131         8,462
Rotary and Mission Systems                        15,995        15,128        14,250
Space                                             11,880        10,860         9,808
Total net sales                                 $ 65,398      $ 59,812      $ 53,762
Operating profit
Aeronautics                                     $  2,843      $  2,521      $  2,272
Missiles and Fire Control                          1,545         1,441         1,248
Rotary and Mission Systems                         1,615         1,421         1,302
Space                                              1,149         1,191         1,055
Total business segment operating profit            7,152         6,574      

5,877

Unallocated items

   FAS/CAS operating adjustment (a)                1,876         2,049      

1,803

Stock-based compensation                            (221)         (189)     

(173)

   Severance and restructuring charges (b)           (27)            -           (96)
Other, net (c)                                      (136)          111           (77)
Total unallocated, net                             1,492         1,971         1,457
Total consolidated operating profit             $  8,644      $  8,545

$ 7,334

(a)The FAS/CAS operating adjustment represents the difference between the
service cost component of FAS pension income (expense) and total pension costs
recoverable on U.S. Government contracts as determined in accordance with CAS.
For a detail of the FAS/CAS operating adjustment and the total net FAS/CAS
pension adjustment, see the table below.
(b)See "Consolidated Results of Operations - Severance Charges" discussion above
for information on charges related to certain severance actions across our
organization.
(c)Other, net in 2020 includes a non-cash impairment charge of $128 million
recognized on our investment in the international equity method investee,
AMMROC. Other, net in 2019 includes a previously deferred non-cash gain of
$51 million related to properties sold in 2015 as a result of completing our
remaining obligations and a gain of $34 million for the sale of our Distributed
Energy Solutions business. Other, net in 2018 includes a non-cash asset
impairment charge of $110 million related to our equity method investee, AMMROC
(see "Note 1 - Significant Accounting Policies" included in our Notes to
Consolidated Financial Statements for more information).
Total net FAS/CAS pension adjustments, including the service and non-service
cost components of FAS pension income (expense), were as follows (in millions):
                                                             2020          

2019 2018

Total FAS income (expense) and CAS costs

       FAS pension income (expense)                     $   118      $ 

(1,093) $ (1,431)

       Less: CAS pension cost                             1,977         2,565         2,433
       Net FAS/CAS pension adjustment                   $ 2,095      $  1,472      $  1,002

       Service and non-service cost reconciliation
       FAS pension service cost                            (101)         (516)         (630)
       Less: CAS pension cost                             1,977         2,565         2,433
       FAS/CAS operating adjustment                       1,876         2,049         1,803
       Non-operating FAS pension income (expense)           219          (577)         (801)
       Net FAS/CAS pension adjustment                   $ 2,095      $  1,472      $  1,002


                                       43

--------------------------------------------------------------------------------
  Table of Contents
We recover CAS pension and other postretirement benefit plan cost through the
pricing of our products and services on U.S. Government contracts and,
therefore, recognize CAS cost in each of our business segment's net sales and
cost of sales. Our consolidated financial statements must present FAS pension
and other postretirement benefit plan expense calculated in accordance with FAS
requirements under U.S. GAAP. The operating portion of the net FAS/CAS pension
adjustment represents the difference between the service cost component of FAS
pension income (expense) and total CAS pension cost. The non-service FAS pension
income (expense) component is included in other non-operating income (expense),
net in our consolidated statements of earnings. As a result, to the extent that
CAS pension cost exceeds the service cost component of FAS pension income
(expense), we have a favorable FAS/CAS operating adjustment.
The following segment discussions also include information relating to backlog
for each segment. Backlog was approximately $147.1 billion and $144.0 billion at
December 31, 2020 and 2019. These amounts included both funded backlog (firm
orders for which funding has been both authorized and appropriated by the
customer) and unfunded backlog (firm orders for which funding has not yet been
appropriated). Backlog does not include unexercised options or task orders to be
issued under indefinite-delivery, indefinite-quantity contracts. Funded backlog
was approximately $102.3 billion at December 31, 2020, as compared to
$94.5 billion at December 31, 2019. If any of our contracts with firm orders
were to be terminated, our backlog would be reduced by the expected value of the
unfilled orders of such contracts.
Management evaluates performance on our contracts by focusing on net sales and
operating profit and not by type or amount of operating expense. Consequently,
our discussion of business segment performance focuses on net sales and
operating profit, consistent with our approach for managing the business. This
approach is consistent throughout the life cycle of our contracts, as management
assesses the bidding of each contract by focusing on net sales and operating
profit and monitors performance on our contracts in a similar manner through
their completion.
We regularly provide customers with reports of our costs as the contract
progresses. The cost information in the reports is accumulated in a manner
specified by the requirements of each contract. For example, cost data provided
to a customer for a product would typically align to the subcomponents of that
product (such as a wing-box on an aircraft) and for services would align to the
type of work being performed (such as aircraft sustainment). Our contracts
generally allow for the recovery of costs in the pricing of our products and
services. Most of our contracts are bid and negotiated with our customers under
circumstances in which we are required to disclose our estimated total costs to
provide the product or service. This approach for negotiating contracts with our
U.S. Government customers generally allows for recovery of our actual costs plus
a reasonable profit margin. We also may enter into long-term supply contracts
for certain materials or components to coincide with the production schedule of
certain products and to ensure their availability at known unit prices.
Many of our contracts span several years and include highly complex technical
requirements. At the outset of a contract, we identify and monitor risks to the
achievement of the technical, schedule and cost aspects of the contract and
assess the effects of those risks on our estimates of total costs to complete
the contract. The estimates consider the technical requirements (e.g., a
newly-developed product versus a mature product), the schedule and associated
tasks (e.g., the number and type of milestone events) and costs (e.g., material,
labor, subcontractor, overhead and the estimated costs to fulfill our industrial
cooperation agreements, sometimes referred to as offset agreements, required
under certain contracts with international customers). The initial profit
booking rate of each contract considers risks surrounding the ability to achieve
the technical requirements, schedule and costs in the initial estimated total
costs to complete the contract. Profit booking rates may increase during the
performance of the contract if we successfully retire risks surrounding the
technical, schedule and cost aspects of the contract, which decreases the
estimated total costs to complete the contract. Conversely, our profit booking
rates may decrease if the estimated total costs to complete the contract
increase. All of the estimates are subject to change during the performance of
the contract and may affect the profit booking rate.
We have a number of programs that are designated as classified by the U.S.
Government which cannot be specifically described. The operating results of
these classified programs are included in our consolidated and business segment
results and are subjected to the same oversight and internal controls as our
other programs.
Our net sales are primarily derived from long-term contracts for products and
services provided to the U.S. Government as well as FMS contracted through the
U.S. Government. We recognize revenue as performance obligations are satisfied
and the customer obtains control of the products and services. For performance
obligations to deliver products with continuous transfer of control to the
customer, revenue is recognized based on the extent of progress towards
completion of the performance obligation, generally using the
percentage-of-completion cost-to-cost measure of progress for our contracts
because it best depicts the transfer of control to the customer as we incur
costs on our contracts. For performance obligations in which control does not
continuously transfer to the customer, we recognize revenue at the point in time
in which each performance obligation is fully satisfied.
                                       44

--------------------------------------------------------------------------------
  Table of Contents
Changes in net sales and operating profit generally are expressed in terms of
volume. Changes in volume refer to increases or decreases in sales or operating
profit resulting from varying production activity levels, deliveries or service
levels on individual contracts. Volume changes in segment operating profit are
typically based on the current profit booking rate for a particular contract.
In addition, comparability of our segment sales, operating profit and operating
margin may be impacted favorably or unfavorably by changes in profit booking
rates on our contracts for which we recognize revenue over time using the
percentage-of-completion cost-to-cost method to measure progress towards
completion. Increases in the profit booking rates, typically referred to as risk
retirements, usually relate to revisions in the estimated total costs to fulfill
the performance obligations that reflect improved conditions on a particular
contract. Conversely, conditions on a particular contract may deteriorate,
resulting in an increase in the estimated total costs to fulfill the performance
obligations and a reduction in the profit booking rate. Increases or decreases
in profit booking rates are recognized in the current period and reflect the
inception-to-date effect of such changes. Segment operating profit and margin
may also be impacted favorably or unfavorably by other items, which may or may
not impact sales. Favorable items may include the positive resolution of
contractual matters, cost recoveries on severance and restructuring charges,
insurance recoveries and gains on sales of assets. Unfavorable items may include
the adverse resolution of contractual matters; restructuring charges, except for
significant severance actions, which are excluded from segment operating
results; reserves for disputes; certain asset impairments; and losses on sales
of certain assets.
As previously disclosed, we are responsible for a program to design, develop and
construct a ground-based radar at our RMS business segment. The program has
experienced performance issues for which we have periodically accrued reserves.
In 2020, we revised our estimated costs to complete the program and recorded
charges of approximately $45 million ($34 million, or $0.12 per share,
after-tax) at our RMS business segment, which resulted in cumulative losses of
approximately $250 million on this program as of December 31, 2020. We may
continue to experience issues related to customer requirements and our
performance under this contract and have to record additional charges. However,
based on the losses previously recorded and our current estimate of the sales
and costs to complete the program, at this time we do not anticipate that
additional losses, if any, would be material to our operating results or
financial condition.
As previously disclosed, we have a program, EADGE-T, to design, integrate, and
install an air missile defense command, control, communications, computers -
intelligence (C4I) system for an international customer that has experienced
performance issues and for which we have periodically accrued reserves at our
RMS business segment. As of December 31, 2020, cumulative losses remained at
approximately $260 million. We continue to monitor program requirements and our
performance. At this time, we do not anticipate additional charges that would be
material to our operating results or financial condition.
As previously disclosed, we are responsible for designing, developing and
installing an upgraded turret for the Warrior Capability Sustainment Program. As
of December 31, 2020, cumulative losses remained at approximately $140 million
on this program. We may continue to experience issues related to customer
requirements and our performance under this contract and may have to record
additional reserves. However, based on the losses already recorded and our
current estimate of the sales and costs to complete the program, at this time we
do not anticipate that additional losses, if any, would be material to our
operating results or financial condition.
Our consolidated net adjustments not related to volume, including net profit
booking rate adjustments and other matters, increased segment operating profit
by approximately $1.8 billion in 2020 and $1.9 billion in 2019. The consolidated
net adjustments in 2020 compared to 2019 decreased primarily due to decreases in
profit booking rate adjustments at Space and MFC offset by an increase in
Aeronautics and RMS. The consolidated net adjustments for 2020 are inclusive of
approximately $745 million in unfavorable items, which include reserves for
various programs at RMS, government satellite programs at Space and performance
matters on a sensors and global sustainment international military program at
MFC. The consolidated net adjustments for 2019 are inclusive of approximately
$930 million in unfavorable items, which include reserves for various programs
at RMS, the F-16 program at Aeronautics, performance matters on a sensors and
global sustainment international military program at MFC and government
satellite programs at Space.
                                       45

--------------------------------------------------------------------------------
  Table of Contents
Aeronautics
Our Aeronautics business segment is engaged in the research, design,
development, manufacture, integration, sustainment, support and upgrade of
advanced military aircraft, including combat and air mobility aircraft, unmanned
air vehicles and related technologies. Aeronautics' major programs include the
F-35 Lightning II Joint Strike Fighter, C­130 Hercules, F-16 Fighting Falcon and
F-22 Raptor. Aeronautics' operating results included the following (in
millions):
                               2020              2019              2018
Net sales                $ 26,266          $ 23,693          $ 21,242
Operating profit            2,843             2,521             2,272
Operating margin             10.8   %          10.6   %          10.7   %
Backlog at year-end      $ 56,551          $ 55,636          $ 55,601


Aeronautics' net sales in 2020 increased $2.6 billion, or 11% compared to 2019.
The increase was primarily attributable to higher net sales of approximately
$1.8 billion for the F-35 program due to increased volume on sustainment,
production, and development contracts; about $450 million for higher volume on
classified development contracts; and about $300 million for the F-16 program
due to increased volume on international production and sustainment contracts.
Aeronautics' operating profit in 2020 increased $322 million, or 13%, compared
to 2019. Operating profit increased approximately $240 million for the F-35
program due to higher volume and risk retirements on development and sustainment
contracts and higher volume on production contracts; about $70 million for the
C-130 program due to higher risk retirements on sustainment contracts; and
approximately $20 million for classified development contracts due to higher
risk retirements. Operating profit on the F-16 program was comparable as higher
volume was offset by lower risk retirements. Adjustments not related to volume,
including net profit booking rate adjustments, were $90 million higher in 2020
compared to 2019.
Backlog
Backlog increased in 2020 compared to 2019 primarily due to higher orders on
F-16 production and various classified activities.
Trends
We expect Aeronautics' 2021 net sales to increase in the mid-single digit
percentage range from 2020 levels driven by increased volume on F-35, F-16 and
classified programs. Operating profit is expected to increase in the mid-to-high
single digit percentage range above 2020 levels. Operating profit margin for
2021 is expected to be slightly higher than 2020 levels.
Missiles and Fire Control
Our MFC business segment provides air and missile defense systems; tactical
missiles and air-to-ground precision strike weapon systems; logistics; fire
control systems; mission operations support, readiness, engineering support and
integration services; manned and unmanned ground vehicles; and energy management
solutions. MFC's major programs include PAC­3, THAAD, Multiple Launch Rocket
System (MLRS), Hellfire, Joint Air-to-Surface Standoff Missile (JASSM), Javelin,
Apache, Sniper Advanced Targeting Pod (SNIPER®), LANTIRN and Special Operations
Forces Global Logistics Support Services (SOF GLSS). MFC's operating results
included the following (in millions):
                               2020              2019              2018
Net sales                $ 11,257          $ 10,131          $  8,462
Operating profit            1,545             1,441             1,248
Operating margin             13.7   %          14.2   %          14.7   %
Backlog at year-end      $ 29,183          $ 25,796          $ 21,363


MFC's net sales in 2020 increased $1.1 billion, or 11%, compared to the same
period in 2019. The increase was primarily attributable to higher net sales of
approximately $725 million for integrated air and missile defense programs due
to increased volume (THAAD and PAC-3); and about $605 million for tactical and
strike missile programs due to increased volume (primarily GMLRS, HIMARS, JASSM,
and hypersonics). These increases were partially offset by a decrease of
approximately $80 million for sensors and global sustainment programs due to
lower volume on the Apache sensors program; and about $120 million as a result
of the divestiture of the Distributed Energy Solutions business.
MFC's operating profit in 2020 increased $104 million, or 7%, compared to 2019.
Operating profit increased approximately $90 million for tactical and strike
missile programs due to higher volume (primarily JASSM, hypersonics,
                                       46

--------------------------------------------------------------------------------
  Table of Contents
GMLRS, and HIMARS); and approximately $30 million for integrated air and missile
defense programs due to increased volume (THAAD and PAC-3), which was partially
offset by lower risk retirements (THAAD and PAC-3). These increases were
partially offset by a decrease of approximately $40 million for sensors and
global sustainment programs primarily due to lower risk retirements and a
reduction in the profit booking rate on the Apache sensors program. Adjustments
not related to volume, including net profit booking rate adjustments, were $40
million lower in 2020 compared to 2019.
Backlog
Backlog increased in 2020 compared to 2019 primarily due to higher orders on
PAC-3 and tactical and strike missiles programs.
Trends
We expect MFC's 2021 net sales to increase in the mid-single digit percentage
range from 2020 levels driven by higher volume in the integrated air and missile
defense business, primarily PAC-3. Operating profit is also expected to increase
in the mid-single digit percentage range above 2020 levels. Operating profit
margin for 2021 is expected to be slightly lower than 2020 levels.

Rotary and Mission Systems
RMS designs, manufactures, services and supports various military and commercial
helicopters, surface ships, sea and land-based missile defense systems, radar
systems, sea and air-based mission and combat systems, command and control
mission solutions, cyber solutions, and simulation and training solutions. RMS'
major programs include Aegis Combat System, Littoral Combat Ship (LCS),
Multi-Mission Surface Combatant (MMSC), Black Hawk® and Seahawk® helicopters,
CH-53K King Stallion helicopter, Combat Rescue helicopter, VH-92A helicopter,
and the C2BMC contract. RMS' operating results included the following (in
millions):
                               2020              2019              2018
Net sales                $ 15,995          $ 15,128          $ 14,250
Operating profit            1,615             1,421             1,302
Operating margin             10.1   %           9.4   %           9.1   %
Backlog at year-end      $ 36,249          $ 34,296          $ 31,320


RMS' net sales in 2020 increased $867 million, or 6%, compared to 2019. The
increase was primarily attributable to higher net sales of approximately $570
million for Sikorsky helicopter programs due to higher volume on production
contracts (primarily Seahawk, VH-92A, CRH, and CH-53K), which was partially
offset by lower volume on Black Hawk production programs; about $175 million for
IWSS programs due to higher volume (primarily Aegis); and approximately $165
million for C6ISR programs due to higher volume (primarily undersea combat
systems). These increases were partially offset by a $55 million decrease for
various TLS programs due to lower volume.
RMS' operating profit in 2020 increased $194 million, or 14%, compared to 2019.
Operating profit increased approximately $90 million for TLS programs due to $80
million in charges for an army sustainment program in 2019 not repeated in 2020;
about $70 million for Sikorsky helicopter programs primarily due to higher
volume on production contracts (primarily VH-92A, Seahawk, CRH, and CH-53K); and
about $35 million for IWSS programs primarily due to higher volume and higher
risk retirements on TPQ-53 and Advanced Hawkeye and lower charges on a
ground-based radar program. Operating profit on C6ISR programs was comparable as
higher volume was offset by lower risk retirements. Adjustments not related to
volume, including net profit booking rate adjustments, were $15 million higher
in 2020 compared to 2019.
Backlog
Backlog increased in 2020 compared to 2019 primarily due to higher orders on
Sikorsky programs.
Trends
We expect RMS' 2021 net sales to increase in the low-single digit percentage
range from 2020 levels driven by higher volume on Sikorsky helicopter programs
and TLS programs. Operating profit is also expected to increase in the
low-single digit percentage range above 2020 levels. Operating profit margin for
2021 is expected to be in line with 2020 levels.
                                       47

--------------------------------------------------------------------------------
  Table of Contents
Space
Our Space business segment is engaged in the research and development, design,
engineering and production of satellites, strategic and defensive missile
systems and space transportation systems. Space provides network-enabled
situational awareness and integrates complex space and ground-based global
systems to help our customers gather, analyze, and securely distribute critical
intelligence data. Space is also responsible for various classified systems and
services in support of vital national security systems. Space's major programs
include the Trident II D5 Fleet Ballistic Missile (FBM), AWE program, Orion
Multi-Purpose Crew Vehicle (Orion), Space Based Infrared System (SBIRS) and Next
Generation Overhead Persistent Infrared (Next Gen OPIR) system, Global
Positioning System (GPS) III, Advanced Extremely High Frequency (AEHF), and
hypersonics programs. Operating profit for our Space business segment includes
our share of earnings for our investment in ULA, which provides expendable
launch services to the U.S. Government. Space's operating results included the
following (in millions):
                               2020              2019              2018
Net sales                $ 11,880          $ 10,860          $  9,808
Operating profit            1,149             1,191             1,055
Operating margin              9.7   %          11.0   %          10.8   %
Backlog at year-end      $ 25,148          $ 28,253          $ 22,184


Space's net sales in 2020 increased $1.0 billion, or 9%, compared to 2019. The
increase was primarily attributable to higher net sales of approximately $525
million for government satellite programs due to higher volume (primarily Next
Gen OPIR); and about $430 million for strategic and missile defense programs due
to higher volume (primarily hypersonic development programs, inclusive of
impacts due to the acquisition of i3's hypersonics portfolio in November 2020).
Space's operating profit in 2020 decreased $42 million, or 4%, compared to 2019.
Operating profit decreased approximately $90 million for government satellite
programs due to lower risk retirements on the various programs (primarily AEHF)
that were partially offset by higher risk retirements and volume on the Next Gen
OPIR program. This decrease was partially offset by increases of $40 million for
commercial satellite programs due to charges recorded for performance matters in
2019 not repeated in 2020. Operating profit for strategic and missile defense
programs was comparable as higher risk retirements and volume on hypersonic
development programs were offset by lower risk retirements and volume on fleet
ballistic missile programs. Adjustments not related to volume, including net
profit booking rate adjustments, were $100 million lower in 2020 compared to
2019.
Equity earnings
Total equity earnings recognized by Space (primarily ULA) represented
approximately $135 million and $145 million, or 12% of this business segment's
operating profit during both 2020 and 2019.
Backlog
Backlog decreased in 2020 compared to 2019 primarily due to higher sales on
multi-year contracts awarded in prior years. Additionally, backlog as of
December 31, 2020 reflects a decrease due to the UK Ministry of Defense's intent
to assume 100% ownership of the program on June 30, 2021.
Trends
We expect Space's 2021 net sales to increase in the low-single digit percentage
range from 2020 levels driven by higher volume on hypersonics programs and on
government satellite programs (primarily Next Gen OPIR), partially offset by
lower volume at AWE due to the UK Ministry of Defense's intent to re-nationalize
the program on June 30, 2021. Operating profit is expected to decrease in the
low-single digit percentage range from 2020 levels. Operating profit margin for
2021 is expected to be lower than 2020 levels.

Liquidity and Cash Flows
As of December 31, 2020, we had a cash balance of $3.2 billion and no commercial
paper borrowings outstanding under our $2.5 billion revolving credit facility
(the credit facility), which is also available for borrowings in the event of a
lack of short-term commercial paper availability. To date, the effects of
COVID-19 have not had a significant negative impact on our liquidity, cash flows
or capital resources. Actions taken by the U.S. Government to increase the rate
of progress payments had the effect of increasing our cash from operations, but
we used all of this benefit to accelerate payments to our suppliers. The effects
of COVID-19 have, at times, led to disruption and volatility in the global
capital markets, which, depending on future
                                       48

--------------------------------------------------------------------------------
  Table of Contents
developments, could impact our capital resources and liquidity in the future.
The economic impacts of COVID-19 have also caused volatility in the equity
capital markets and investment return on our pension assets. Changes in returns
on plan assets may affect our plan funding, cash flows and stockholders' equity.
Differences between the actual plan asset return and the expected long-term rate
of return on plan assets (7.00% as of December 31, 2020) impact the measurement
of the following year's Financial Accounting Standards (FAS) pension expense and
pension funding requirements.
Cash received from customers, either from the payment of invoices for work
performed or for advances from non-U.S. Government customers in excess of costs
incurred, is our primary source of cash. We generally do not begin work on
contracts until funding is appropriated by the customer. However, we may
determine to fund customer programs ourselves pending government appropriations.
If we incur costs in excess of funds obligated on the contract, we may be at
risk for reimbursement of the excess costs.
Billing timetables and payment terms on our contracts vary based on a number of
factors, including the contract type. We generally bill and collect cash more
frequently under cost-reimbursable contracts, which represented approximately
40% of the sales we recorded in 2020, as we are authorized to bill as the costs
are incurred. A number of our fixed-price contracts may provide for
performance-based payments, which allow us to bill and collect cash as we
perform on the contract. The amount of performance-based payments and the
related milestones are encompassed in the negotiation of each contract. The
timing of such payments may differ from the timing of the costs incurred related
to our contract performance, thereby affecting our cash flows.
The U.S. Government has indicated that it would consider progress payments as
the baseline for negotiating payment terms on fixed-price contracts, rather than
performance-based payments. In contrast to negotiated performance-based payment
terms, progress payment provisions correspond to a percentage of the amount of
costs incurred during the performance of the contract. Our cash flows may be
affected if the U.S. Government decides to withhold payments on our billings.
While the impact of withholding payments delays the receipt of cash, the
cumulative amount of cash collected during the life of the contract will not
vary.
We have a balanced cash deployment strategy to enhance stockholder value and
position ourselves to take advantage of new business opportunities when they
arise. Consistent with that strategy, we have continued to invest in our
business, including capital expenditures, independent research and development,
and selective business acquisitions and investments; returned cash to
stockholders through dividends and share repurchases; and actively managed our
debt levels and maturities, interest rates, and pension obligations.
We have generated strong operating cash flows, which have been the primary
source of funding for our operations, capital expenditures, debt service and
repayments, dividends, share repurchases and postretirement benefit plan
contributions. Our strong operating cash flows enabled our Board of Directors to
approve two key cash deployment initiatives in September 2020. First, we
increased our dividend rate in the fourth quarter by $0.20 to $2.60 per share.
Second, the Board of Directors approved a $1.3 billion increase to our share
repurchase program. Inclusive of this increase, the total remaining
authorization for future common share repurchases under our program was $3.0
billion as of December 31, 2020.
We expect our cash from operations will continue to be sufficient to support our
operations and anticipated capital expenditures for the foreseeable future. We
also have access to credit markets, if needed, for liquidity or general
corporate purposes, and letters of credit to support customer advance payments
and for other trade finance purposes such as guaranteeing our performance on
particular contracts. See our "Capital Structure, Resources and Other" section
below for a discussion on financial resources available to us, including the
issuance of commercial paper.
The majority of our capital expenditures for 2020 and those planned for 2021 are
for equipment, facilities infrastructure and information technology.
Expenditures for equipment and facilities infrastructure are generally incurred
to support new and existing programs across all of our business segments. For
example, we have projects underway in our Aeronautics business segment for
facilities and equipment to support higher production of the F-35 combat
aircraft, and we have projects underway to modernize certain of our facilities.
We also incur capital expenditures for information technology to support
programs and general enterprise information technology infrastructure, inclusive
of costs for the development or purchase of internal-use software.
We made discretionary contributions of $1.0 billion to our qualified defined
benefit pension plans in both 2020 and 2019 using cash on hand. We expect to
make contributions of approximately $1.0 billion to our qualified defined
benefit pension plans in 2021.
The CARES Act, provides a deferral of payroll tax payments from which we
benefited by deferring cash outlays of $460 million during 2020. This will have
the effect of increasing cash outlays for payroll taxes during 2021 and 2022.
The
                                       49

--------------------------------------------------------------------------------
  Table of Contents
CARES Act, among other things, also contains numerous other provisions which may
impact Lockheed Martin. We continue to review ongoing government guidance
related to COVID-19 that may be issued.
The following table provides a summary of our cash flow information followed by
a discussion of the key elements (in millions):
                                                           2020         2019         2018
Cash and cash equivalents at beginning of year        $ 1,514      $   772      $ 2,861
Operating activities
Net earnings                                            6,833        6,230        5,046
Non-cash adjustments                                    1,726        1,549        1,186
Changes in working capital                                101         (672)      (1,401)
Other, net                                               (477)         204       (1,693)
Net cash provided by operating activities               8,183        7,311  

3,138

Net cash used for investing activities                 (2,010)      (1,241) 

(1,075)

Net cash used for financing activities                 (4,527)      (5,328) 

(4,152)

Net change in cash and cash equivalents                 1,646          742  

(2,089)

Cash and cash equivalents at end of year              $ 3,160      $ 1,514

$ 772

Operating Activities
Net cash provided by operating activities increased $872 million in 2020
compared to 2019 primarily due to cash generated from working capital in 2020
compared to a use of cash in 2019, and the deferral of tax payments. The
$773 million improvement in cash flows related to working capital (defined as
receivables, contract assets, and inventories less accounts payable and contract
liabilities) was primarily attributable to timing of cash payments for accounts
payable (primarily Aeronautics) and liquidation of inventories (primarily
classified programs at Aeronautics and Sikorsky helicopter programs at RMS),
partially offset by timing of production and billing cycles affecting contract
assets and contract liabilities (primarily the F-35 program at Aeronautics).
During 2020, we made net cash tax payments of approximately $1.4 billion
compared to $940 million in 2019.
In addition, net cash provided by operating activities in 2020 included the
receipt of approximately $1.2 billion of net accelerated progress payments due
to the U.S. Government's increase in the progress payment rate from 80% to 90%,
and the deferral of $460 million for the employer portion of payroll taxes to
2021 and 2022 pursuant to the CARES Act. We used the accelerated progress
payments from the U.S. Government plus cash on hand to accelerate $2.1 billion
of payments to our suppliers as of December 31, 2020 that are due by their terms
in future periods.
Investing Activities
Net cash used for investing activities increased $769 million in 2020 compared
to 2019, primarily due to an increase in capital expenditures and cash payments
for various acquisitions, partially offset by net cash proceeds from various
divestitures and acquisitions in 2019, and cash received for various other
items, none of which were individually significant. Capital expenditures totaled
$1.8 billion in 2020 and $1.5 billion in 2019. The majority of our capital
expenditures were for equipment and facilities infrastructure that generally are
incurred to support new and existing programs across all of our business
segments. We also incur capital expenditures for information technology to
support programs and general enterprise information technology infrastructure,
inclusive of costs for the development or purchase of internal-use software.
Financing Activities
Net cash used for financing activities decreased $801 million in 2020 compared
to 2019, primarily due to net repayments of $600 million for commercial paper in
2019 which did not recur in 2020, decreased repayments of long-term debt in 2020
and decreased repurchases of common stock, partially offset by higher dividend
payments.
In October 2020, we repaid $500 million of long-term notes with a fixed interest
rate of 2.50% due November 2020. In November 2019, we repaid $900 million of
long-term notes with a fixed interest rate of 4.25% according to their scheduled
maturities.
On May 20, 2020, we received net cash proceeds of $1.1 billion from the issuance
of senior unsecured notes, consisting of $400 million aggregate principal amount
of 1.85% Notes due in 2030 and $750 million aggregate principal amount of 2.80%
                                       50

--------------------------------------------------------------------------------
  Table of Contents
Notes due in 2050. On June 16, 2020, we used the net proceeds from the offering
plus cash on hand to redeem $750 million of the outstanding $1.25 billion in
aggregate principal amount of our 2.50% Notes due in 2020 and $400 million of
the outstanding $900 million in aggregate principal amount of our 3.35% Notes
due in 2021, each at their redemption price.
For additional information about our debt financing activities see the "Capital
Structure, Resources and Other" discussion below and "Note 11 - Debt" included
in our Notes to Consolidated Financial Statements.
We paid dividends totaling $2.8 billion ($9.80 per share) in 2020 and
$2.6 billion ($9.00 per share) in 2019. We paid quarterly dividends of $2.40 per
share during each of the first three quarters of 2020 and $2.60 per share during
the fourth quarter of 2020. We paid quarterly dividends of $2.20 per share
during each of the first three quarters of 2019 and $2.40 per share during the
fourth quarter of 2019.
We paid $1.1 billion to repurchase 3.0 million shares of our common stock during
2020, which includes the $500 million paid to repurchase 1.4 million shares
pursuant to the accelerated share repurchase (ASR) agreement entered into in
2020. We paid $1.2 billion to repurchase 3.5 million shares of our common stock
during 2019. See "Note 13 - Stockholders' Equity" included in our Notes to
Consolidated Financial Statements for additional information about our
repurchases of common stock.

Capital Structure, Resources and Other
At December 31, 2020, we held cash and cash equivalents of $3.2 billion that was
generally available to fund ordinary business operations without significant
legal, regulatory, or other restrictions.
Our outstanding debt, net of unamortized discounts and issuance costs, amounted
to $12.2 billion at December 31, 2020 and mainly is in the form of
publicly-issued notes that bear interest at fixed rates. As of December 31,
2020, we had $500 million of short-term borrowings due within one year, which
are scheduled to mature in September 2021. As of December 31, 2019, we had
$1.3 billion of short-term borrowings due within one year, which were scheduled
to mature in November 2020. As of December 31, 2020, we were in compliance with
all covenants contained in our debt and credit agreements.
We actively seek to finance our business in a manner that preserves financial
flexibility while minimizing borrowing costs to the extent practicable. We
review changes in financial market and economic conditions to manage the types,
amounts and maturities of our indebtedness. We may at times refinance existing
indebtedness, vary our mix of variable-rate and fixed-rate debt or seek
alternative financing sources for our cash and operational needs.
Revolving Credit Facilities
At December 31, 2020, we had a $2.5 billion revolving credit facility (the
credit facility) with various banks that is available for general corporate
purposes. Effective August 24, 2019, we extended the expiration date of the
credit facility from August 24, 2023 to August 24, 2024. The undrawn portion of
the credit facility also serves as a backup facility for the issuance of
commercial paper. The total amount outstanding at any point in time under the
combination of our commercial paper program and the credit facility cannot
exceed the amount of the credit facility. We may request and the banks may
grant, at their discretion, an increase in the borrowing capacity under the
credit facility of up to an additional $500 million. There were no borrowings
outstanding under the credit facility as of December 31, 2020 and 2019.
Borrowings under the credit facility are unsecured and bear interest at rates
based, at our option, on a Eurodollar Rate or a Base Rate, as defined in the
credit facility's agreement. Each bank's obligation to make loans under the
credit facility is subject to, among other things, our compliance with various
representations, warranties and covenants, including covenants limiting our
ability and certain of our subsidiaries' ability to encumber assets and a
covenant not to exceed a maximum leverage ratio, as defined in the 5­year credit
facility agreement.
Long-Term Debt
In May 2020, we issued a total of $1.2 billion of senior unsecured notes,
consisting of $400 million aggregate principal amount of 1.85% Notes due in 2030
(the "2030 Notes") and $750 million aggregate principal amount of 2.80% Notes
due in 2050 (the "2050 Notes" and, together with the 2030 Notes, the "Notes").
Interest on the Notes is payable semi-annually in arrears on June 15 and
December 15 of each year beginning on December 15, 2020. We may, at our option,
redeem the Notes of any series in whole or in part at any time and from time to
time at a redemption price equal to the greater of 100% of the principal amount
of the notes to be redeemed or an applicable "make-whole" amount, plus accrued
and unpaid interest to the date of redemption.
                                       51

--------------------------------------------------------------------------------
  Table of Contents
In June 2020, we used the net proceeds from the offering plus cash on hand to
redeem $750 million of the outstanding $1.25 billion in aggregate principal
amount of our 2.50% Notes due in 2020, and $400 million of the outstanding
$900 million in aggregate principal amount of our 3.35% Notes due in 2021 at
their redemption price. We have an effective shelf registration statement on
Form S-3 on file with the U.S. Securities and Exchange Commission to provide for
the issuance of an indeterminate amount of debt securities.
In October 2020, we repaid $500 million of long-term notes with a fixed interest
rate of 2.50% due November 2020. In November 2019, we repaid $900 million of
long-term notes with a fixed interest rate of 4.25% according to their scheduled
maturities. In November 2018, we repaid $750 million of long-term notes with a
fixed interest rate of 1.85% according to their scheduled maturities.

Total Equity
Our total equity was $6.0 billion at December 31, 2020, an increase of
$2.9 billion from December 31, 2019. The increase was primarily attributable to
net earnings of $6.8 billion, recognition of previously deferred postretirement
benefit plan amounts of $440 million, and employee stock activity of
$479 million (including the impacts of stock option exercises, issuances of
shares under the employee stock ownership plan and stock-based compensation),
partially offset by the annual December 31 re-measurement adjustment related to
our postretirement benefit plans of $1.1 billion, dividends declared of
$2.8 billion during the year, and the repurchase of 3.0 million common shares
for $1.1 billion.
As we repurchase our common shares, we reduce common stock for the $1 of par
value of the shares repurchased, with the excess purchase price over par value
recorded as a reduction of additional paid-in capital. If additional paid-in
capital is reduced to zero, we record the remainder of the excess purchase price
over par value as a reduction of retained earnings. During 2020, we repurchased
$3.0 million of our common shares, which were recognized as a reduction to
common stock for the par value with the excess purchase price recorded as a
reduction of additional paid-in capital of $256 million and $841 million
recorded as a reduction of retained earnings.
                                       52

--------------------------------------------------------------------------------
  Table of Contents
Contractual Commitments and Off-Balance Sheet Arrangements
At December 31, 2020, we had contractual commitments to repay debt, make
payments under operating leases, settle obligations related to agreements to
purchase goods and services and settle tax and other liabilities. Financing
lease obligations were not material. Payments due under these obligations and
commitments are as follows (in millions):
                                                                Payments Due By Period
                                                       Less Than       Years         Years         After
                                          Total         1 Year        2 and 3       4 and 5       5 Years
Total debt                              $ 13,299      $     500      $    625      $  1,060      $    11,114
Interest payments                          9,382            554         1,067           989            6,772
Other liabilities                          3,021            280           440           367            1,934

Operating lease obligations                1,275            301           356           215              403
Purchase obligations:
Operating activities                      50,728         26,852        19,735         3,930              211
Capital expenditures                         818            562           166            35               55

Total contractual cash obligations $ 78,523 $ 29,049 $ 22,389 $ 6,596 $ 20,489

The table above excludes estimated minimum funding requirements for our
qualified defined benefit pension plans. For additional information about our
future minimum contributions for these plans, see "Note 12 - Postretirement
Benefit Plans" included in our Notes to Consolidated Financial Statements.
Amounts related to other liabilities represent the contractual obligations for
certain long-term liabilities recorded as of December 31, 2020. Such amounts
mainly include expected payments under non-qualified pension plans,
environmental liabilities and deferred compensation plans.

Purchase obligations related to operating activities include agreements and
contracts that give the supplier recourse to us for cancellation or
nonperformance under the contract or contain terms that would subject us to
liquidated damages. Such agreements and contracts may, for example, be related
to direct materials, obligations to subcontractors and outsourcing arrangements.
Total purchase obligations for operating activities in the preceding table
include approximately $46.4 billion related to contractual commitments entered
into as a result of contracts we have with our U.S. Government customers. The
U.S. Government generally would be required to pay us for any costs we incur
relative to these commitments if they were to terminate the related contracts
"for convenience" under the FAR, subject to available funding. This also would
be true in cases where we perform subcontract work for a prime contractor under
a U.S. Government contract. The termination for convenience language also may be
included in contracts with foreign, state and local governments. We also have
contracts with customers that do not include termination for convenience
provisions, including contracts with commercial customers.
Purchase obligations in the preceding table for capital expenditures generally
include facilities infrastructure, equipment and information technology.
We also may enter into industrial cooperation agreements, sometimes referred to
as offset agreements, as a condition to obtaining orders for our products and
services from certain customers in foreign countries. These agreements are
designed to enhance the social and economic environment of the foreign country
by requiring the contractor to promote investment in the country. Offset
agreements may be satisfied through activities that do not require us to use
cash, including transferring technology, providing manufacturing and other
consulting support to in-country projects and the purchase by third parties
(e.g., our vendors) of supplies from in-country vendors. These agreements also
may be satisfied through our use of cash for such activities as purchasing
supplies from in-country vendors, providing financial support for in-country
projects, establishment of joint ventures with local companies and building or
leasing facilities for in-country operations. We typically do not commit to
offset agreements until orders for our products or services are definitive. The
amounts ultimately applied against our offset agreements are based on
negotiations with the customer and typically require cash outlays that represent
only a fraction of the original amount in the offset agreement. Satisfaction of
our offset obligations are included in the estimates of our total costs to
complete the contract and may impact our sales, profitability and cash flows.
Our ability to recover investments on our consolidated balance sheet that we
make to satisfy offset obligations is generally dependent upon the successful
operation of ventures that we do not control and may involve products and
services that are dissimilar to our business activities. At December 31, 2020,
the notional value of remaining obligations under our outstanding offset
agreements totaled approximately $17.5 billion, which primarily relate to our
Aeronautics, MFC and RMS business segments, most of which extend through 2049.
To the extent we have entered into purchase or other obligations at December 31,
2020 that also satisfy offset agreements, those amounts are included in the
preceding table. Offset programs usually extend over several years and may
provide for penalties, estimated at approximately $1.8 billion at December 31,
2020, in the event we fail to perform in accordance with offset requirements.
While historically we have not been required to pay material penalties,
resolution of offset requirements are often the result of negotiations and
subjective judgments.
                                       53

--------------------------------------------------------------------------------
  Table of Contents
We have entered into standby letters of credit and surety bonds issued on our
behalf by financial institutions, and we have directly issued guarantees to
third parties primarily relating to advances received from customers and the
guarantee of future performance on certain contracts. Letters of credit and
surety bonds generally are available for draw down in the event we do not
perform. In some cases, we may guarantee the contractual performance of third
parties such as joint venture partners. At December 31, 2020, we had the
following outstanding letters of credit, surety bonds and third-party guarantees
(in millions):
                                                                          

Commitment Expiration By Period

                                              Total                Less Than            Years              Years             After
                                             Commitment             1 Year             2 and 3            4 and 5            5 Years
Standby letters of credit (a)             $     2,136            $    1,090          $     559          $     441          $        46
Surety bonds                                      357                   357                  -                  -                    -
Third-party Guarantees                            871                   605                  4                220                   42
Total commitments                         $     3,364            $    2,052          $     563          $     661          $        88


(a)Approximately $859 million of standby letters of credit in the "Less Than 1
Year" category, $219 million in the "Years 2 and 3" category and $264 million in
the "Years 4 and 5" category are expected to renew for additional periods until
completion of the contractual obligation.
At December 31, 2020, third-party guarantees totaled $871 million, of which
approximately 71% related to guarantees of contractual performance of joint
ventures to which we currently are or previously were a party. These amounts
represent our estimate of the maximum amounts we would expect to incur upon the
contractual non-performance of the joint venture, joint venture partners or
divested businesses. Generally, we also have cross-indemnities in place that may
enable us to recover amounts that may be paid on behalf of a joint venture
partner.
In determining our exposures, we evaluate the reputation, performance on
contractual obligations, technical capabilities and credit quality of our
current and former joint venture partners and the transferee under novation
agreements all of which include a guarantee as required by the FAR. At
December 31, 2020 and 2019, there were no material amounts recorded in our
financial statements related to third-party guarantees or novation agreements.

Critical Accounting Policies
Contract Accounting / Sales Recognition
The majority of our net sales are generated from long-term contracts with the
U.S. Government and international customers (including FMS contracted through
the U.S. Government) for the research, design, development, manufacture,
integration and sustainment of advanced technology systems, products and
services. We account for a contract when it has approval and commitment from
both parties, the rights of the parties are identified, payment terms are
identified, the contract has commercial substance and collectability of
consideration is probable. For certain contracts that meet the foregoing
requirements, primarily international direct commercial sale contracts, we are
required to obtain certain regulatory approvals. In these cases, we recognize
revenue when it is probable that we will receive regulatory approvals based upon
all known facts and circumstances. We provide our products and services under
fixed-price and cost-reimbursable contracts.
Under fixed-price contracts, we agree to perform the specified work for a
pre-determined price. To the extent our actual costs vary from the estimates
upon which the price was negotiated, we will generate more or less profit or
could incur a loss. Some fixed-price contracts have a performance-based
component under which we may earn incentive payments or incur financial
penalties based on our performance.
Cost-reimbursable contracts provide for the payment of allowable costs incurred
during performance of the contract plus a fee up to a ceiling based on the
amount that has been funded. Typically, we enter into three types of
cost-reimbursable contracts: cost-plus-award-fee, cost-plus-incentive-fee, and
cost-plus-fixed-fee. Cost-plus-award-fee contracts provide for an award fee that
varies within specified limits based on the customer's assessment of our
performance against a predetermined set of criteria, such as targets based on
cost, quality, technical and schedule criteria. Cost-plus-incentive-fee
contracts provide for reimbursement of costs plus a fee, which is adjusted by a
formula based on the relationship of total allowable costs to total target costs
(i.e., incentive based on cost) or reimbursement of costs plus an incentive to
exceed stated performance targets (i.e., incentive based on performance). The
fixed-fee in a cost-plus-fixed-fee contract is negotiated at the inception of
the contract and that fixed-fee does not vary with actual costs.
We assess each contract at its inception to determine whether it should be
combined with other contracts. When making this determination, we consider
factors such as whether two or more contracts were negotiated and executed at or
near the same
                                       54

--------------------------------------------------------------------------------
  Table of Contents
time or were negotiated with an overall profit objective. If combined, we treat
the combined contracts as a single contract for revenue recognition purposes.
We evaluate the products or services promised in each contract at inception to
determine whether the contract should be accounted for as having one or more
performance obligations. The products and services in our contracts are
typically not distinct from one another due to their complex relationships and
the significant contract management functions required to perform under the
contract. Accordingly, our contracts are typically accounted for as one
performance obligation. In limited cases, our contracts have more than one
distinct performance obligation, which occurs when we perform activities that
are not highly complex or interrelated or involve different product lifecycles.
Significant judgment is required in determining performance obligations, and
these decisions could change the amount of revenue and profit recorded in a
given period. We classify net sales as products or services on our consolidated
statements of earnings based on the predominant attributes of the performance
obligations.
We determine the transaction price for each contract based on the consideration
we expect to receive for the products or services being provided under the
contract. For contracts where a portion of the price may vary, we estimate
variable consideration at the most likely amount, which is included in the
transaction price to the extent it is probable that a significant reversal of
cumulative revenue recognized will not occur. We analyze the risk of a
significant revenue reversal and if necessary constrain the amount of variable
consideration recognized in order to mitigate this risk.
At the inception of a contract we estimate the transaction price based on our
current rights and do not contemplate future modifications (including
unexercised options) or follow-on contracts until they become legally
enforceable. Contracts are often subsequently modified to include changes in
specifications, requirements or price, which may create new or change existing
enforceable rights and obligations. Depending on the nature of the modification,
we consider whether to account for the modification as an adjustment to the
existing contract or as a separate contract. Generally, modifications to our
contracts are not distinct from the existing contract due to the significant
integration and interrelated tasks provided in the context of the contract.
Therefore, such modifications are accounted for as if they were part of the
existing contract and recognized as a cumulative adjustment to revenue.
For contracts with multiple performance obligations, we allocate the transaction
price to each performance obligation based on the estimated standalone selling
price of the product or service underlying each performance obligation. The
standalone selling price represents the amount we would sell the product or
service to a customer on a standalone basis (i.e., not bundled with any other
products or services). Our contracts with the U.S. Government, including FMS
contracts, are subject to FAR and the price is typically based on estimated or
actual costs plus a reasonable profit margin. As a result of these regulations,
the standalone selling price of products or services in our contracts with the
U.S. Government and FMS contracts are typically equal to the selling price
stated in the contract.
For non-U.S. Government contracts with multiple performance obligations, we
evaluate whether the stated selling prices for the products or services
represent their standalone selling prices. We primarily sell customized
solutions unique to a customer's specifications. When it is necessary to
allocate the transaction price to multiple performance obligations, we typically
use the expected cost plus a reasonable profit margin to estimate the standalone
selling price of each product or service. We occasionally sell standard products
or services with observable standalone sales transactions. In these situations,
the observable standalone sales transactions are used to determine the
standalone selling price.
We recognize revenue as performance obligations are satisfied and the customer
obtains control of the products and services. In determining when performance
obligations are satisfied, we consider factors such as contract terms, payment
terms and whether there is an alternative future use of the product or service.
Substantially all of our revenue is recognized over time as we perform under the
contract because control of the work in process transfers continuously to the
customer. For most contracts with the U.S. Government and FMS contracts, this
continuous transfer of control of the work in process to the customer is
supported by clauses in the contract that give the customer ownership of work in
process and allow the customer to unilaterally terminate the contract for
convenience and pay us for costs incurred plus a reasonable profit. For most
non-U.S. Government contracts, primarily international direct commercial
contracts, continuous transfer of control to our customer is supported because
we deliver products that do not have an alternative use to us and if our
customer were to terminate the contract for reasons other than our
non-performance we would have the right to recover damages which would include,
among other potential damages, the right to payment for our work performed to
date plus a reasonable profit.
For performance obligations to deliver products with continuous transfer of
control to the customer, revenue is recognized based on the extent of progress
towards completion of the performance obligation, generally using the
percentage-of-completion cost-to-cost measure of progress for our contracts
because it best depicts the transfer of control to the customer as we incur
costs on our contracts. Under the percentage-of-completion cost-to-cost measure
of progress, the extent of progress towards completion is measured based on the
ratio of costs incurred to date to the total estimated costs to complete the
                                       55

--------------------------------------------------------------------------------
  Table of Contents
performance obligation(s). For performance obligations to provide services to
the customer, revenue is recognized over time based on costs incurred or the
right to invoice method (in situations where the value transferred matches our
billing rights) as our customer receives and consumes the benefits.
For performance obligations in which control does not continuously transfer to
the customer, we recognize revenue at the point in time in which each
performance obligation is fully satisfied. This coincides with the point in time
the customer obtains control of the product or service, which typically occurs
upon customer acceptance or receipt of the product or service, given that we
maintain control of the product or service until that point.
Significant estimates and assumptions are made in estimating contract sales and
costs, including the profit booking rate. At the outset of a long-term contract,
we identify and monitor risks to the achievement of the technical, schedule and
cost aspects of the contract, as well as variable consideration, and assess the
effects of those risks on our estimates of sales and total costs to complete the
contract. The estimates consider the technical requirements (e.g., a
newly-developed product versus a mature product), the schedule and associated
tasks (e.g., the number and type of milestone events) and costs (e.g., material,
labor, subcontractor, overhead, general and administrative and the estimated
costs to fulfill our industrial cooperation agreements, sometimes referred to as
offset or localization agreements, required under certain contracts with
international customers). The initial profit booking rate of each contract
considers risks surrounding the ability to achieve the technical requirements,
schedule and costs in the initial estimated total costs to complete the
contract. Profit booking rates may increase during the performance of the
contract if we successfully retire risks surrounding the technical, schedule and
cost aspects of the contract, which decreases the estimated total costs to
complete the contract or may increase the variable consideration we expect to
receive on the contract. Conversely, our profit booking rates may decrease if
the estimated total costs to complete the contract increase or our estimates of
variable consideration we expect to receive decrease. All of the estimates are
subject to change during the performance of the contract and may affect the
profit booking rate. When estimates of total costs to be incurred on a contract
exceed total estimates of the transaction price, a provision for the entire loss
is determined at the contract level and is recorded in the period in which the
loss is determined.
Comparability of our segment sales, operating profit and operating margin may be
impacted favorably or unfavorably by changes in profit booking rates on our
contracts for which we recognize revenue over time using the
percentage-of-completion cost-to-cost method to measure progress towards
completion. Increases in the profit booking rates, typically referred to as risk
retirements, usually relate to revisions in the estimated total costs to fulfill
the performance obligations that reflect improved conditions on a particular
contract. Conversely, conditions on a particular contract may deteriorate,
resulting in an increase in the estimated total costs to fulfill the performance
obligations and a reduction in the profit booking rate. Increases or decreases
in profit booking rates are recognized in the current period and reflect the
inception-to-date effect of such changes. Segment operating profit and margin
may also be impacted favorably or unfavorably by other items, which may or may
not impact sales. Favorable items may include the positive resolution of
contractual matters, cost recoveries on severance and restructuring charges,
insurance recoveries and gains on sales of assets. Unfavorable items may include
the adverse resolution of contractual matters; restructuring charges, except for
significant severance actions, which are excluded from segment operating
results; reserves for disputes; certain asset impairments; and losses on sales
of certain assets.
Other Contract Accounting Considerations
The majority of our sales are driven by pricing based on costs incurred to
produce products or perform services under contracts with the U.S. Government.
Cost-based pricing is determined under the FAR. The FAR provides guidance on the
types of costs that are allowable in establishing prices for goods and services
under U.S. Government contracts. For example, costs such as those related to
charitable contributions, interest expense and certain advertising and public
relations activities are unallowable and, therefore, not recoverable through
sales. In addition, we may enter into advance agreements with the U.S.
Government that address the subjects of allowability and allocability of costs
to contracts for specific matters. For example, most of the environmental costs
we incur for environmental remediation related to sites operated in prior years
are allocated to our current operations as general and administrative costs
under FAR provisions and supporting advance agreements reached with the U.S.
Government.
We closely monitor compliance with and the consistent application of our
critical accounting policies related to contract accounting. Costs incurred and
allocated to contracts are reviewed for compliance with U.S. Government
regulations by our personnel and are subject to audit by the Defense Contract
Audit Agency.
                                       56

--------------------------------------------------------------------------------
  Table of Contents
Postretirement Benefit Plans
Overview
Many of our employees and retirees participate in qualified and nonqualified
defined benefit pension plans, retiree medical and life insurance plans and
other postemployment plans (collectively, postretirement benefit plans - see
"Note 12 - Postretirement Benefit Plans" included in our Notes to Consolidated
Financial Statements). The majority of our accrued benefit obligations relate to
our qualified defined benefit pension plans and retiree medical and life
insurance plans. We recognize on a plan-by-plan basis the net funded status of
these postretirement benefit plans under GAAP as either an asset or a liability
on our consolidated balance sheets. The GAAP funded status represents the
difference between the fair value of each plan's assets and the benefit
obligation of the plan. The GAAP benefit obligation represents the present value
of the estimated future benefits we currently expect to pay to plan participants
based on past service.
We completed the final step of the previously announced planned freeze of our
qualified and nonqualified defined benefit pension plans for salaried employees
effective January 1, 2020. The freeze took effect in two stages. Effective
January 1, 2016, the pay-based component of the formula used to determine
retirement benefits was frozen. Effective January 1, 2020, the service-based
component of the formula was frozen. As a result of these changes, the qualified
defined benefit pension plans for salaried employees are fully frozen effective
January 1, 2020. With the freeze complete, the majority of our salaried
employees participate in an enhanced defined contribution retirement savings
plan.
Similar to recent years, we continue to take actions to mitigate the effect of
our defined benefit pension plans on our financial results by reducing the
volatility of our pension obligations, including entering into additional
transactions involving the purchase of group annuity contracts for portions of
our outstanding defined benefit pension obligations using assets from the
pension trust. During December 2020, Lockheed Martin, through its master
retirement trust, purchased an irrevocable group annuity contract from an
insurance company (referred to as a buy-out contract) for $1.4 billion to
transfer the related, outstanding defined benefit pension obligations. As a
result of this transaction, we were relieved of all responsibility for these
pension obligations and the insurance company is now required to pay and
administer the retirement benefits owed to approximately 13,500 U.S. retirees
and beneficiaries, with no change to the amount, timing or form of monthly
retirement benefit payments. Although the transaction was treated as a
settlement for accounting purposes, we did not recognize a loss on the
settlement in earnings associated with the transaction because total settlements
during 2020 for the affected pension plans were less than the plans' service and
interest cost in 2020.
A second contract was also purchased from an insurance company for $793 million
that will reimburse the plan for all future benefit payments related to
approximately 2,500 U.S. retirees and beneficiaries (referred to as a buy-in
contract). The covered retirees and beneficiaries and buy-in contract were
spun-off to the plan established in December 2018 for the contract purchased at
that time similarly structured as a buy-in; the buy-in contracts are the sole
assets of that plan. Under the arrangement, the plan remains responsible for
paying the benefits for the covered retirees and beneficiaries and the insurance
company will reimburse the plan as those benefits are paid. As a result, there
is no net ongoing cash flow to the plan for the covered retirees and
beneficiaries as the cost of providing the benefits is funded by the buy-in
contract; effectively locking in the cost of the benefits and eliminating future
volatility of the benefit obligation, while also providing the option to convert
to a buy-out. The buy-in contract was purchased using assets from the pension
trust and is accounted for at fair value as an investment of the trust. These
transactions had no impact on our 2020 FAS pension expense or CAS pension cost.
Since December 2018, Lockheed Martin, through its master retirement trust, has
purchased total contracts (both buy-in and buy-out) for approximately $6.7
billion related to our outstanding defined benefit pension obligations
eliminating pension plan volatility for approximately 77,000 retirees and
beneficiaries and annually required Pension Benefit Guarantee Corporation (PBGC)
premiums of approximately $55 million per year.
We expect to continue to look for opportunities to manage our pension
liabilities through additional buy-out (and buy-in) contracts in future years.
Future transactions could result in a non-cash settlement charge to earnings,
which could be material to a reporting period.
Notwithstanding these actions, the impact of our postretirement benefit plans on
our earnings may be volatile in that the amount of expense we record and the
funded status for our postretirement benefit plans may materially change from
year to year because the calculations are sensitive to funding levels as well as
changes in several key economic assumptions, including interest rates, actual
rates of return on plan assets and other actuarial assumptions including
participant longevity and employee turnover, as well as the timing of cash
funding.

                                       57

--------------------------------------------------------------------------------
  Table of Contents
Actuarial Assumptions
The plan assets and benefit obligations are measured at the end of each year or
more frequently, upon the occurrence of certain events such as a significant
plan amendment, settlement or curtailment. The amounts we record are measured
using actuarial valuations, which are dependent upon key assumptions such as
discount rates, the expected long-term rate of return on plan assets,
participant longevity, employee turnover and the health care cost trend rates
for our retiree medical plans. The assumptions we make affect both the
calculation of the benefit obligations as of the measurement date and the
calculation of net periodic benefit cost in subsequent periods. When reassessing
these assumptions, we consider past and current market conditions and make
judgments about future market trends. We also consider factors such as the
timing and amounts of expected contributions to the plans and benefit payments
to plan participants.
We continue to use a single weighted average discount rate approach when
calculating our consolidated benefit obligations related to our defined benefit
pension plans resulting in 2.50% at December 31, 2020, compared to 3.25% at
December 31, 2019. We utilized a single weighted average discount rate of 2.375%
when calculating our benefit obligations related to our retiree medical and life
insurance plans at December 31, 2020, compared to 3.25% at December 31, 2019. We
evaluate several data points in order to arrive at an appropriate single
weighted average discount rate, including results from cash flow models, quoted
rates from long-term bond indices and changes in long-term bond rates over the
past year. As part of our evaluation, we calculate the approximate average
yields on corporate bonds rated AA or better selected to match our projected
postretirement benefit plan cash flows. The decrease in the discount rate from
December 31, 2019 to December 31, 2020 resulted in an increase in the projected
benefit obligations of our qualified defined benefit pension plans of
approximately $4.9 billion at December 31, 2020.
We utilized an expected long-term rate of return on plan assets of 7.00% at both
December 31, 2020 and December 31, 2019. The long-term rate of return assumption
represents the expected long-term rate of return on the funds invested or to be
invested, to provide for the benefits included in the benefit obligations. This
assumption is based on several factors including historical market index
returns, the anticipated long-term allocation of plan assets, the historical
return data for the trust funds, plan expenses and the potential to outperform
market index returns. The difference between the long-term rate of return on
plan assets assumption we select and the actual return on plan assets in any
given year affects both the funded status of our benefit plans and the
calculation of FAS pension expense in subsequent periods. Although the actual
return in any specific year likely will differ from the assumption, the average
expected return over a long-term future horizon should be approximately equal to
the assumption. Any variance each year should not, by itself, suggest that the
assumption should be changed. Patterns of variances are reviewed over time, and
then combined with expectations for the future. As a result, changes in this
assumption are less frequent than changes in the discount rate. The actual
investment return for our qualified defined benefit plans during 2020 of $5.6
billion based on an actual rate of approximately 16.5% improved plan assets more
than the $2.3 billion expected return based on our 7.00% long-term rate of
return assumption.
In October 2020, the Society of Actuaries published revised longevity
assumptions that refined its prior studies. We used the revised assumptions in
our December 31, 2020 re-measurement of benefit obligation resulting in an
approximate $426 million decrease in the projected benefit obligations of our
qualified defined benefit pension plans.
Our stockholders' equity has been reduced cumulatively by $16.2 billion from the
annual year-end measurements of the funded status of postretirement benefit
plans. The cumulative non-cash, after-tax reduction primarily represents net
actuarial losses resulting from declines in discount rates, investment losses
and updated longevity. A market-related value of our plan assets, determined
using actual asset gains or losses over the prior three-year period, is used to
calculate the amount of deferred asset gains or losses to be amortized. These
cumulative actuarial losses will be amortized to expense using the corridor
method, where gains and losses are recognized to the extent they exceed 10% of
the greater of plan assets or benefit obligations, over an average period of
approximately twenty years as of December 31, 2020. This amortization period
extended in 2020 due to the freeze of our salaried pension plans to use the
average remaining life expectancy of the participants instead of average future
service. During 2020, $440 million of these amounts were recognized as a
component of postretirement benefit plans expense.
The discount rate and long-term rate of return on plan assets assumptions we
select at the end of each year are based on our best estimates and judgment. A
change of plus or minus 25 basis points in the 2.50% discount rate assumption at
December 31, 2020, with all other assumptions held constant, would have
decreased or increased the amount of the qualified pension benefit obligation we
recorded at the end of 2020 by approximately $1.6 billion, which would result in
an after-tax increase or decrease in stockholders' equity at the end of the year
of approximately $1.3 billion. If the 2.50% discount rate at December 31, 2020
that was used to compute the expected 2021 FAS pension expense for our qualified
defined benefit pension plans had been 25 basis points higher or lower, with all
other assumptions held constant, the amount of FAS pension expense projected for
2021 would be lower or higher by approximately $15 million. The impact of
changes in the discount rate on FAS pension expense is significantly less than
in years prior to the freeze of our salaried pension plans effective January 1,
2020 due to the resulting service cost reduction and extended loss amortization
period discussed above. If the 7.00% expected long-term rate of
                                       58

--------------------------------------------------------------------------------
  Table of Contents
return on plan assets assumption at December 31, 2020 that was used to compute
the expected 2021 FAS pension expense for our qualified defined benefit pension
plans had been 25 basis points higher or lower, with all other assumptions held
constant, the amount of FAS pension expense projected for 2021 would be lower or
higher by approximately $80 million. Each year, differences between the actual
plan asset return and the expected long-term rate of return on plan assets
impacts the measurement of the following year's FAS expense. Every 100 basis
points difference in return during 2020 between our actual rate of return of
approximately 16.5% and our expected long-term rate of return of 7.00% impacted
2021 expected FAS pension expense by approximately $15 million.
Funding Considerations
We made contributions of $1.0 billion in both 2020 and 2019 to our qualified
defined benefit pension plans. Funding of our qualified defined benefit pension
plans is determined in a manner consistent with CAS and in accordance with the
Employee Retirement Income Security Act of 1974 (ERISA), as amended by the
Pension Protection Act of 2006 (PPA). Our goal has been to fund the pension
plans to a level of at least 80%, as determined under the PPA. The ERISA funded
status of our qualified defined benefit pension plans was approximately 86% and
83% as of December 31, 2020 and 2019; which is calculated on a different basis
than under GAAP.
Contributions to our defined benefit pension plans are recovered over time
through the pricing of our products and services on U.S. Government contracts,
including FMS, and are recognized in our cost of sales and net sales. CAS govern
the extent to which our pension costs are allocable to and recoverable under
contracts with the U.S. Government, including FMS. Pension cost recoveries under
CAS occur in different periods from when pension contributions are made under
the PPA. The CAS rules fully transitioned in 2017 to better align the recovery
of pension costs with the minimum funding requirements of the PPA (referred to
as CAS Harmonization).
We recovered $2.0 billion in 2020 and $2.6 billion in 2019 as CAS pension costs.
Amounts contributed in excess of the CAS pension costs recovered under U.S.
Government contracts are considered to be prepayment credits under the CAS
rules. Our prepayment credits were approximately $8.3 billion and $8.5 billion
at December 31, 2020 and 2019, respectively. The prepayment credit balance will
increase or decrease based on our actual investment return on plan assets.
Trends
We plan to make discretionary contributions of approximately $1.0 billion to our
qualified defined benefit pension plans in 2021. We anticipate recovering
approximately $2.1 billion of CAS pension cost in 2021 allowing us to recoup a
portion of our CAS prepayment credits.
We project FAS pension income of $265 million in 2021, compared to FAS pension
income of $118 million in 2020, and a net 2021 FAS/CAS pension benefit of $2.3
billion compared to $2.1 billion in 2020.
Environmental Matters
We are a party to various agreements, proceedings and potential proceedings for
environmental remediation issues, including matters at various sites where we
have been designated a potentially responsible party (PRP). At December 31, 2020
and 2019, the total amount of liabilities recorded on our consolidated balance
sheet for environmental matters was $789 million and $810 million. We have
recorded assets totaling $685 million and $703 million at December 31, 2020 and
2019 for the portion of environmental costs that are probable of future recovery
in pricing of our products and services for agencies of the U.S. Government, as
discussed below. The amount that is expected to be allocated to our non-U.S.
Government contracts or that is determined to not be recoverable under U.S.
Government contracts is expensed through cost of sales. We project costs and
recovery of costs over approximately 20 years.
We enter into agreements (e.g., administrative consent orders, consent decrees)
that document the extent and timing of some of our environmental remediation
obligations. We also are involved in environmental remediation activities at
sites where formal agreements either do not exist or do not quantify the extent
and timing of our obligations. Environmental remediation activities usually span
many years, which makes estimating the costs more judgmental due to, for
example, changing remediation technologies. To determine the costs related to
clean up sites, we have to assess the extent of contamination, effects on
natural resources, the appropriate technology to be used to accomplish the
remediation, and evolving environmental standards.
We perform quarterly reviews of environmental remediation sites and record
liabilities and receivables in the period it becomes probable that the
liabilities have been incurred and the amounts can be reasonably estimated (see
the discussion under "Environmental Matters" in "Note 1 - Significant Accounting
Policies" and "Note 15 - Legal Proceedings, Commitments and
                                       59

--------------------------------------------------------------------------------
  Table of Contents
Contingencies" included in our Notes to Consolidated Financial Statements). We
consider the above factors in our quarterly estimates of the timing and amount
of any future costs that may be required for environmental remediation
activities, which result in the calculation of a range of estimates for each
particular environmental remediation site. We do not discount the recorded
liabilities, as the amount and timing of future cash payments are not fixed or
cannot be reliably determined. Given the required level of judgment and
estimation, it is likely that materially different amounts could be recorded if
different assumptions were used or if circumstances were to change (e.g., a
change in environmental standards or a change in our estimate of the extent of
contamination).
Under agreements reached with the U.S. Government, most of the amounts we spend
for environmental remediation are allocated to our operations as general and
administrative costs. Under existing U.S. Government regulations, these and
other environmental expenditures relating to our U.S. Government business, after
deducting any recoveries received from insurance or other PRPs, are allowable in
establishing prices of our products and services. As a result, most of the
expenditures we incur are included in our net sales and cost of sales according
to U.S. Government agreement or regulation, regardless of the contract form
(e.g. cost-reimbursable, fixed-price). We continually evaluate the
recoverability of our assets for the portion of environmental costs that are
probable of future recovery by assessing, among other factors, U.S. Government
regulations, our U.S. Government business base and contract mix, our history of
receiving reimbursement of such costs, and efforts by some U.S. Government
representatives to limit such reimbursement.
In addition to the proceedings and potential proceedings discussed above, the
California State Water Resources Control Board, a branch of the California
Environmental Protection Agency, has indicated it will work to re-establish a
maximum level of the contaminant hexavalent chromium in drinking water after a
prior standard of 10 parts per billion (ppb) was challenged and withdrawn, and
is also reevaluating its existing drinking water standard of 6 ppb for
perchlorate. The U.S. Environmental Protection Agency decided in June 2020 not
to regulate perchlorate in drinking water at the federal level, although this
decision has been challenged, and is considering whether to regulate hexavalent
chromium.
If substantially lower standards are adopted for perchlorate (in California) or
for hexavalent chromium (in California or at the federal level), we expect a
material increase in our estimates for environmental liabilities and the related
assets for the portion of the increased costs that are probable of future
recovery in the pricing of our products and services for the U.S. Government.
The amount that would be allocable to our non-U.S. Government contracts or that
is determined not to be recoverable under U.S. Government contracts would be
expensed, which may have a material effect on our earnings in any particular
interim reporting period.
We also are evaluating the potential impact of existing and contemplated legal
requirements addressing a class of compounds known generally as per- and
polyfluoroalkyl compounds (PFAS). PFAS compounds have been used ubiquitously,
such as in fire-fighting foams, manufacturing processes, and stain- and
stick-resistant products (e.g., Teflon, stain-resistant fabrics). Because we
have used products and processes over the years containing some of those
compounds, they likely exist as contaminants at many of our environmental
remediation sites. Governmental authorities have announced plans, and in some
instances have begun, to regulate certain of these compounds at extremely low
concentrations in drinking water, which could lead to increased cleanup costs at
many of our environmental remediation sites.
As disclosed above, we may record changes in the amount of environmental
remediation liabilities as a result of our quarterly reviews of the status of
our environmental remediation sites, which would result in a change to the
corresponding amount that is probable of future recovery and a charge to
earnings. For example, if we were to determine that the liabilities should be
increased by $100 million, the corresponding amount that is probable of future
recovery would be increased by approximately $87 million, with the remainder
recorded as a charge to earnings. This allocation is determined annually, based
upon our existing and projected business activities with the U.S. Government.
We cannot reasonably determine the extent of our financial exposure at all
environmental remediation sites with which we are involved. There are a number
of former operating facilities we are monitoring or investigating for potential
future environmental remediation. In some cases, although a loss may be
probable, it is not possible at this time to reasonably estimate the amount of
any obligation for remediation activities because of uncertainties (e.g.,
assessing the extent of the contamination). During any particular quarter, such
uncertainties may be resolved, allowing us to estimate and recognize the initial
liability to remediate a particular former operating site. The amount of the
liability could be material. Upon recognition of the liability, a portion will
be recognized as a receivable with the remainder charged to earnings, which may
have a material effect in any particular interim reporting period.
If we are ultimately found to have liability at those sites where we have been
designated a PRP, we expect that the actual costs of environmental remediation
will be shared with other liable PRPs. Generally, PRPs that are ultimately
determined to be responsible parties are strictly liable for site remediation
and usually agree among themselves to share, on an allocated basis, the costs
and expenses for environmental investigation and remediation. Under existing
environmental laws, responsible parties are
                                       60

--------------------------------------------------------------------------------
  Table of Contents
jointly and severally liable and, therefore, we are potentially liable for the
full cost of funding such remediation. In the unlikely event that we were
required to fund the entire cost of such remediation, the statutory framework
provides that we may pursue rights of cost recovery or contribution from the
other PRPs. The amounts we record do not reflect the fact that we may recover
some of the environmental costs we have incurred through insurance or from other
PRPs, which we are required to pursue by agreement and U.S. Government
regulation.
Goodwill and Intangible Assets
The assets and liabilities of acquired businesses are recorded under the
acquisition method of accounting at their estimated fair values at the date of
acquisition. Goodwill represents costs in excess of fair values assigned to the
underlying identifiable net assets of acquired businesses. Intangible assets
from acquired businesses are recognized at fair value on the acquisition date
and consist of customer programs, trademarks, customer relationships, technology
and other intangible assets. Customer programs include values assigned to major
programs of acquired businesses and represent the aggregate value associated
with the customer relationships, contracts, technology and trademarks underlying
the associated program and are amortized on a straight-line basis over a period
of expected cash flows used to measure fair value, which ranges from nine to 20
years.
Our goodwill balance was $10.8 billion at December 31, 2020 and $10.6 billion at
December 31, 2019. We perform an impairment test of our goodwill at least
annually in the fourth quarter or more frequently whenever events or changes in
circumstances indicate the carrying value of goodwill may be impaired. Such
events or changes in circumstances may include a significant deterioration in
overall economic conditions, changes in the business climate of our industry, a
decline in our market capitalization, operating performance indicators,
competition, reorganizations of our business, U.S. Government budget
restrictions or the disposal of all or a portion of a reporting unit. Our
goodwill has been allocated to and is tested for impairment at a level referred
to as the reporting unit, which is our business segment level or a level below
the business segment. The level at which we test goodwill for impairment
requires us to determine whether the operations below the business segment
constitute a self-sustaining business for which discrete financial information
is available and segment management regularly reviews the operating results.
We may use both qualitative and quantitative approaches when testing goodwill
for impairment. For selected reporting units where we use the qualitative
approach, we perform a qualitative evaluation of events and circumstances
impacting the reporting unit to determine the likelihood of goodwill impairment.
Based on that qualitative evaluation, if we determine it is more likely than not
that the fair value of a reporting unit exceeds its carrying amount, no further
evaluation is necessary. Otherwise we perform a quantitative impairment test. We
perform quantitative tests for most reporting units at least once every three
years. However, for certain reporting units we may perform a quantitative
impairment test every year.
To perform the quantitative impairment test, we compare the fair value of a
reporting unit to its carrying value, including goodwill. If the fair value of a
reporting unit exceeds its carrying value, goodwill of the reporting unit is not
impaired. If the carrying value of the reporting unit, including goodwill,
exceeds its fair value, a goodwill impairment loss is recognized in an amount
equal to that excess. We generally estimate the fair value of each reporting
unit using a combination of a discounted cash flow (DCF) analysis and
market-based valuation methodologies such as comparable public company trading
values and values observed in recent business acquisitions. Determining fair
value requires the exercise of significant judgments, including the amount and
timing of expected future cash flows, long-term growth rates, discount rates and
relevant comparable public company earnings multiples and relevant transaction
multiples. The cash flows employed in the DCF analysis are based on our best
estimate of future sales, earnings and cash flows after considering factors such
as general market conditions, U.S. Government budgets, existing firm orders,
expected future orders, contracts with suppliers, labor agreements, changes in
working capital, long term business plans and recent operating performance. The
discount rates utilized in the DCF analysis are based on the respective
reporting unit's weighted average cost of capital, which takes into account the
relative weights of each component of capital structure (equity and debt) and
represents the expected cost of new capital, adjusted as appropriate to consider
the risk inherent in future cash flows of the respective reporting unit. The
carrying value of each reporting unit includes the assets and liabilities
employed in its operations, goodwill and allocations of amounts held at the
business segment and corporate levels.
In the fourth quarter of 2020, we performed our annual goodwill impairment test
for each of our reporting units. The results of that test indicated that for
each of our reporting units no impairment existed. As of the date of our annual
impairment test, the fair value of our Sikorsky reporting unit exceeded its
carrying value, which included goodwill of $2.7 billion, by a margin of
approximately 30%. The fair value of our Sikorsky reporting unit can be
significantly impacted by changes in expected future orders, general market
pressures, including U.S. Government budgetary constraints, discount rates, long
term growth rates, and changes in U.S. (federal or state) or foreign tax laws
and regulations, or their interpretation and application, including those with
retroactive effect, along with other significant judgments. Based on our
assessment of these circumstances, we have determined that goodwill at our
Sikorsky reporting unit is at risk for impairment should there be a
deterioration of projected cash flows of the reporting unit.
                                       61

--------------------------------------------------------------------------------
  Table of Contents
Impairment assessments inherently involve management judgments regarding a
number of assumptions such as those described above. Due to the many variables
inherent in the estimation of a reporting unit's fair value and the relative
size of our recorded goodwill, differences in assumptions could have a material
effect on the estimated fair value of one or more of our reporting units and
could result in a goodwill impairment charge in a future period.
Acquired intangible assets deemed to have indefinite lives are not amortized,
but are subject to annual impairment testing. This testing compares carrying
value to fair value and, when appropriate, the carrying value of these assets is
reduced to fair value. In the fourth quarter of 2020, we performed our annual
impairment test, and the results of that test indicated no impairment existed.
Finite-lived intangibles are amortized to expense over the applicable useful
lives, ranging from three to 20 years, based on the nature of the asset and the
underlying pattern of economic benefit as reflected by future net cash inflows.
We perform an impairment test of finite-lived intangibles whenever events or
changes in circumstances indicate their carrying value may be impaired. If
events or changes in circumstances indicate the carrying value of a finite-lived
intangible may be impaired, the sum of the undiscounted future cash flows
expected to result from the use of the asset group would be compared to the
asset group's carrying value. If the asset group's carrying amount exceed the
sum of the undiscounted future cash flows, we would determine the fair value of
the asset group and record an impairment loss in net earnings.
Recent Accounting Pronouncements
See "Note 1 - Significant Accounting Policies" included in our Notes to
Consolidated Financial Statements (under the caption "Recent Accounting
Pronouncements").
                                       62

--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses