Lockheed Martin (LMT) 10-K risk factor changes: FY2018 vs FY2017

We derived [removed: 69%] [added: 70%] of our total net sales from the U.S. Government in [removed: 2017,] [added: 2018,] including [removed: 58%] [added: 60%] from the Department of Defense (DoD).

Congress usually appropriates funds on a [removed: fiscal-year] [added: fiscal year (FY)] basis even though contract performance may extend over many years.

The F-35 is our largest program and represented [removed: 25%] [added: 27%] of our total net sales in [removed: 2017] [added: 2018] and is expected to represent a higher percentage of our sales in future years.

A decision to cut spending or reduce planned orders would have an adverse impact on our [added: business and] results of operations.

Current program challenges include, but are not limited to, [removed: increasing manufacturing capabilities to meet higher customer demand for new aircraft and sustainment activities,] supplier and partner [removed: performance,] [added: performance (including the potential that a decision by the U.S. Government not to allow deliveries of aircraft to Turkey could disrupt the substantial supplier activity in our Turkish supply chain),] software development, [removed: level of cost associated with life cycle operations and sustainment and warranties, successfully negotiating and] receiving funding for production contracts on a timely basis, executing future flight tests and findings resulting from testing and operating the [removed: aircraft.][added: aircraft, level of cost associated with life-cycle operations and sustainment and warranties and continuing to reduce the unit cost of producing aircraft and achieve cost targets.]

Based upon our diverse range of defense, homeland security and information technology products and services, [added: generally] we believe that this makes it less likely that cuts in any specific contract or program will have a long-term effect on our business.

Our business and [removed: our] reputation could be adversely affected if we fail to comply with these laws.

[added: Upon termination for convenience of a fixed-price type contract, typically we] are entitled to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-process and an allowance for profit on the contract or adjustment for loss if completion of performance would have resulted in a loss.

Upon termination for convenience of a cost-reimbursable contract, we normally are entitled to reimbursement of allowable costs plus a portion of the [removed: fee.][added: fee where allowable costs include our cost to terminate agreements with our suppliers and subcontractors.]

As funds are typically appropriated on a fiscal year basis and as the costs of a termination for convenience may exceed the costs of continuing a program in a given fiscal year, occasionally programs do not have sufficient funds appropriated to cover the termination costs [removed: were] [added: if] the government [added: were] to terminate them for convenience.

Contract types [added: primarily] include [removed: cost-reimbursable,] fixed-price [removed: incentive-fee, fixed-price] and [removed: time-and-materials] [added: cost-reimbursable] contracts.

The U.S. Government [removed: is currently pursuing and implementing] [added: could implement] policies that could negatively impact our profitability.

[removed: It] [added: Therefore, it] is critical we maintain strong customer relationships and seek to understand the priorities of their requirements in this price competitive environment.

In international sales, we face substantial competition from both U.S. manufacturers and international manufacturers whose governments [removed: sometimes] [added: sometime] provide research and development assistance, marketing subsidies and other assistance for their products.

Additionally, our competitors are also focusing on increasing their international [removed: sales to partially mitigate the effect of reduced U.S. Government budgets.][added: sales.]

[removed: In addition, multi-award] [added: Multi-award] contracts require that we make sustained efforts to obtain task orders under the contract.

[removed: Unsuccessful bidders are more frequently protesting in] the hope of being awarded a subcontract for a portion of the work in return for withdrawing the protest.

In addition, changes in the economic environment, including defense [removed: budgets] [added: budgets, trade sanctions] and constraints on available financing, may adversely affect the financial stability of our contracting parties and their ability to meet their performance requirements or to provide needed supplies on a timely basis as might their inability to perform profitably in the current highly competitive and budget constrained environment.

A failure, for whatever reason, by one or more of our contracting parties to provide the agreed-upon supplies or perform the agreed-upon services on a timely basis, according to specifications, or at [removed: all] [added: all,] may affect our ability to perform our obligations and require that we transition the work to other companies.

In [removed: 2017, 30%] [added: 2018, 28%] of our total net sales were from international customers.

[removed: This percentage has been increasing and we] [added: We] have a strategy to continue to grow international sales, inclusive of sales of F-35 aircraft to our international partners and other countries.

Our exposure to such risks [removed: increased as a result of our acquisition of Sikorsky and our increased ownership interest in AWE and] may further increase if our international sales grow as we anticipate.

Our international business is conducted through foreign military sales (FMS) [removed: contracted through the U.S. Government] [added: to international customers] or by direct commercial sales (DCS) [removed: with international] [added: to such] customers.

In [removed: 2017,] [added: 2018,] approximately 63% of our sales to international customers were FMS and about 37% were DCS.

These transaction types differ as FMS transactions [removed: represent sales by] [added: entail agreements between] the U.S. Government [removed: to international governments] and our [added: international customers through which the U.S. Government purchases products or services from us on behalf of the foreign customer with our] contract with the U.S. Government [removed: is] [added: being] subject to [removed: FAR.][added: the FAR and the DFARS.]

All sales to international customers are subject to U.S. and foreign laws and regulations, including, without limitation, import-export control, technology transfer restrictions, [added: investments,] taxation, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act and other anti-corruption laws and regulations, and the anti-boycott provisions of the U.S. Export Administration Act.

DCS transactions involve [added: direct] commercial relationships with parties with whom we have less familiarity and where there may be significant cultural differences.

Additionally, international procurement rules and regulations, contract laws and regulations, and contractual terms differ from those in the U.S. and are less familiar to [removed: us.][added: us and may treat as criminal matters issues, which in the U.S. would be civil.]

Export and [removed: import, tax] [added: import] and currency risk also may be increased for DCS with international customers.

Our international business is highly sensitive to changes in [removed: regulations,] [added: regulations (including tariffs, sanctions, embargoes, export and import controls and other trade restrictions),] political environments or security risks that may affect our ability to conduct business outside of the U.S., including those regarding investment, procurement, taxation and repatriation of earnings.

Our efforts to minimize the likelihood and impact of adverse [removed: cyber security] [added: cybersecurity] incidents and to protect data and intellectual property may not be successful and our business could be negatively affected by cyber or other security threats or other disruptions.

Additionally, we conduct regular periodic training of our employees as to the protection of sensitive [removed: information which includes training intended to prevent the success of “phishing” attacks.]

If we are unable to protect sensitive information, [added: including complying with evolving data privacy regulations,] our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures, and depending on the severity of the incident, our customers’ data, our employees’ data, our intellectual property, and other third party data (such as teammates, venture partners, subcontractors, suppliers and vendors) could be compromised.

We have approximately 16,000 direct suppliers and even more indirect suppliers with a wide variety of systems and [removed: cyber security] [added: cybersecurity] capabilities and we may not be successful in preventing adversaries from exploiting possible weak links in our supply chain.

We also must rely on this supply chain for detecting and reporting cyber [removed: incidents and so we may not be successful in reporting] [added: incidents, which could affect our ability to report] or [removed: responding] [added: respond] to [removed: cyber security] [added: cybersecurity] incidents in a timely manner.

Our enterprise risk management program includes threat detection and [removed: cyber security] [added: cybersecurity] mitigation plans, and our disclosure controls and procedures address [removed: cyber security] [added: cybersecurity] and include elements intended to ensure that there is an analysis of potential disclosure obligations arising from security breaches.

We also maintain compliance programs to address the potential applicability of restrictions [removed: against] [added: on] trading while in possession of material, nonpublic information generally and in connection with a [removed: cyber security] [added: cybersecurity] breach.

In pursuing our business strategy, we routinely conduct discussions, evaluate companies, and enter into agreements regarding possible acquisitions, divestitures, ventures and [removed: equity] [added: other] investments.

We often compete with [removed: others] [added: other companies] for the same opportunities.

[added: To be successful, we must conduct due diligence to identify valuation issues and potential] loss contingencies; negotiate transaction terms; complete and close complex transactions; integrate acquired companies and employees; and realize anticipated operating synergies efficiently and effectively.

As discussed within “Industry Considerations-U.S. Government Funding” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, on January 25, 2019 Congress passed and the President signed legislation that fully funds the U.S. Government through February 15, 2019, ending a partial government shutdown which did not include our largest customer, the DoD, but did include other customers such as NASA.

The underlying budget impasse remains, and it is possible that there will be a further partial shutdown or shutdowns.

As noted above, while the corporation’s largest customer, the DoD, is funded through the end of the government FY 2019 and thus would not be affected by another shutdown, limiting the direct impact of any future shutdown or shutdowns on Lockheed Martin, other customers, such as NASA, are not.

In the event of future shutdowns, we may continue to work on unfunded contracts to seek to maintain their projected cost and schedule profiles which, although we would anticipate being paid when the shutdown ends, would put us at risk of nonpayment.

Further there may be indirect impacts such as the potential diversion of funds from the DoD and the fact that the Departments of State and Commerce cease to timely process export licenses.

While in the recent shutdown there were procedures in place to process on an emergency basis licenses involving direct support to the military, humanitarian aid, or other similar emergencies, there was a growing backlog of non-emergency applications.

We anticipate that this will occur again in any future shutdown.

While the impact on Lockheed Martin of the recent shutdown was not material, were a future shutdown to occur and continue for an extended period, this might not be the case.

In addition, the President has not yet submitted a budget proposal for FY 2020 to Congress.

If an annual appropriations bill is not enacted for FY 2020 or beyond, the U.S. Government may operate under a continuing resolution, restricting new contract or program starts and additional government shutdowns, which might involve all government agencies, could arise.

In addition, continued budget uncertainty and the risk of future sequestration cuts remain unless the Budget Control Act is repealed or significantly modified.

Our backlog includes a variety of contract types and represents the sales we expect to recognize for our products and services in the future.

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.

These contracts are mainly fixed-price.

The DoD is currently seeking the views of experts and interested parties within the U.S. Government and the private sector regarding revising policies and procedures for contract financing, performance incentives, and associated regulations for DoD contracts and we have no assurance regarding what changes will be proposed, if any, and their impact on our working capital and cash flow.

Earlier changes proposed by the DoD and later withdrawn would have had a negative impact on the timing of our cash flows.

Additionally, the U.S. Government is taking increasingly aggressive positions under the FAR and Defense Federal Acquisition Regulation Supplement (DFARS) both as to what intellectual property they believe government use rights apply and to acquire broad license rights.

If the U.S. Government is successful in these efforts, this could affect our ability to compete and to obtain access to and use certain supplier intellectual property.

Additionally, recent competitive bids have not contained cost realism evaluation criteria leading to our competitors taking aggressive pricing positions.

Unsuccessful bidders may protest in

Recent acquisitions in our industry, particularly vertical integration by tier-1 prime contractors, could also result in increased competition.

In contrast, DCS transactions represent sales by us directly to international customers and are not subject to the FAR or the DFARS.

We continue to evaluate the potential effect of the United Kingdom’s (UK) planned departure from the European Union (EU) (commonly referred to as Brexit) on our business operations and financial results, including the impacts if the UK fails to reach an agreement with the EU on Brexit by the March 29, 2019 deadline.

We anticipate that the most probable near-term effects are likely to reflect the pressure Brexit is placing on the UK government, which may influence the government’s ability to make decisions on large complex programs of the type we perform.

Brexit may also have adverse tax effects on movement of products or sustainment activities between the UK and EU.

Additionally, Brexit may impact the value of the pound sterling.

If the pound sterling were to remain depressed against the U.S. dollar, this could negatively impact the ability of the UK government to afford our products.

Currently, we do not anticipate that Brexit will have a material impact on our operations or our financial results.

While we have operations in the UK, these operations have little activity between the UK and the EU (e.g., sales, supply chain, or reliance on personnel).

Additionally, our practice is to substantially hedge all of our currency exposure.

Therefore, we do not have material currency exposure to the pound sterling or the euro.

Additionally, Congress may act to prevent or impose conditions upon the sale or delivery of our products, such as F-35 aircraft to Turkey, and discussions in Congress may result in sanctions on the Kingdom of Saudi Arabia.

Sales of military products are also affected by defense budgets and U.S. foreign policy, including trade restrictions, and there could be significant delays or other issues in reaching definitive agreements for announced programs and international customer priorities could change.

Additionally, the U.S. Government may also enter into unilateral contract actions.

A unilateral contract action obligates us to perform under terms and conditions imposed by the U.S. Government.

Unilateral contract actions could negatively affect profit and cash flows, and establish a precedent for future contracts.

Upon termination for convenience of a fixed-price type contract, we normally

Allowable costs would include our cost to terminate agreements with our suppliers and subcontractors.

Our backlog includes a variety of contract types that are intended to address changing risk and reward profiles as a program matures.

Under cost-reimbursable contracts, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance-based.

Under a fixed-price incentive-fee contract, the allowable costs incurred are eligible for reimbursement but are subject to a cost-share arrangement, which affects profitability.

These contracts are mainly fixed-price, although some operations and maintenance contracts are time-and-materials type.

Under fixed-price contracts, we receive a fixed price regardless of the actual costs we incur.

We have to absorb any costs in excess of the fixed price.

Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses.

Our customers are subject to pressures that may result in a change in contract types referenced above earlier in a program’s maturity than is traditional.

An example of this is the use of fixed-price incentive-fee contracts for recent LRIP contracts on the F-35 program while the development contract is being performed concurrently.

For example, changes resulting from the F-35 development contract may need to be implemented on the production contracts (including the LRIP contracts), a concept referred to as concurrency, which may require us to pay for a portion of the concurrency costs.

For example, the U.S. Government is now requiring that bid and proposal costs be included in general and administrative costs, rather than charged directly to contracts in certain circumstances.

Another example is a recent challenge to overhead costs.

The U.S. Government’s pursuit of policies intended to cause us to absorb cost may become more aggressive if the U.S. Government concludes that our profitability justifies cost shifting without regard to the provisions of the FAR.

Other policies could negatively impact our working capital and cash flow.

For example contrary to FAR, the government has expressed a preference for requiring progress payments rather than performance based payments on new fixed-price contracts, which if implemented, delays our ability to recover a significant amount of costs incurred on a contract and thus affects the timing of our cash flows.

By contrast, DCS transactions represent sales directly to another international government or commercial customer.

Sales of military products are also affected by defense budgets and U.S. foreign policy.

However, we may not be successful in detecting, reporting or responding to cyber incidents in a timely manner.

To be successful, we must conduct due diligence to identify valuation issues and potential

We recorded a net one-time tax charge, substantially all of which was non-cash, resulting from the estimated impact of the Tax Cuts and Jobs Act, which reduced our 2017 net earnings and resulted in a deficit in our total equity as of December 31, 2017.

As a Maryland corporation, so long as we are able to pay our indebtedness as it becomes due in the usual course of business, we anticipate that we would be able to pay dividends and make stock repurchases in an amount limited to our net earnings in either the current or the preceding fiscal year or from the net earnings for the preceding eight quarters, notwithstanding the deficit in our total equity.

We also have no assurance as to the timing of any increase in our stockholders’ equity.

Accordingly, we also may incur liabilities that are unique to our products and services, including combat and air mobility aircraft, missile and space systems, command and control systems, cybersecurity, homeland security and training programs.

negatively affect our reputation among our customers and the public and make it more difficult for us to compete effectively.

Following the five year transition period, CAS Harmonization was fully phased in during 2017, this better aligns the CAS pension cost and ERISA funding requirements.

The enactment of the Highway and Transportation Funding Act of 2014 and Bipartisan Budget Act of 2015 increased the interest rate assumption used to determine our CAS pension costs and ERISA funding requirements.

This has the effect of lowering both the recovery of pension contributions, as it decreases our CAS pension costs, and our ERISA funding requirements during the affected periods.

Any delays or work stoppages

We acquired Sikorsky in November 2015 and recorded the assets acquired and liabilities assumed at fair value.

In [removed: 2017, 69%] [added: 2018, 70%] of our [removed: $51.0] [added: $53.8] billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including [removed: 58%] [added: 60%] from the Department of Defense (DoD)), [removed: 30%] [added: 28%] were from international customers (including foreign military sales (FMS) contracted through the U.S. Government) and [removed: 1%] [added: 2%] were from U.S. commercial and other customers.

We operate in four business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and [removed: Space, previously known as Space Systems.][added: Space.]

We operate in an environment characterized by both [removed: increasing] complexity in global security and continuing economic pressures in the U.S. and globally.

We also expect to continue to [added: innovate and] invest in technologies to fulfill new mission requirements for our customers and invest in our people so that we have the technical skills necessary to succeed without limiting our ability to return a substantial portion of our free cash flow to our investors in the form of dividends and share repurchases.

[removed: 2018] [added: 2019] Financial Trends

| Missiles and Fire Control | | [removed: 7,212 | | | | 82] [added: 8,462] | | | | [removed: —] [added: 7,282] | | | | [removed: 7,294] [added: 6,789] | | |

| Rotary and Mission Systems | | [removed: 14,215 | | | | (552] [added: 14,250] | | [removed: )] | | [removed: —] [added: 13,663] | | | | [removed: 13,663] [added: 13,595] | | |

| Operating profit [removed: | | | |] [added: (a)] | | [added: 7,334] | | | | [added: 6,744] | | | | [added: 5,888] | | |

| Aeronautics | | $ | [removed: 2,164 | | | $ | 12] [added: 2,272] | | | $ | [removed: —] [added: 2,176] | | | $ | [removed: 2,176] [added: 1,845] | |

| Missiles and Fire Control | | [removed: 1,053 | | | | (4] [added: 1,248] | | [removed: )] | | [removed: —] [added: 1,034] | | | | [removed: 1,049] [added: 1,004] | | |

| Rotary and Mission Systems | | [removed: 905 | | | | (3] [added: 1,302] | | [removed: )] | | [removed: —] [added: 902] | | | | [removed: 902] [added: 845] | | |

| Space [removed: | | 993 | |] [added: (a)] | | [removed: (13] [added: 1,055] | | [removed: )] | | [removed: —] [added: 980] | | | | [removed: 980] [added: 1,288] | | |

| Total business segment operating profit | | [removed: 5,115 | | | | (8] [added: 5,877] | | [removed: )] | | [removed: —] [added: 5,092] | | | | [removed: 5,107] [added: 4,982] | | |

| Total unallocated, net [removed: (a)] | | [removed: 806 | | | | —] [added: 1,457] | | | | [removed: 846] [added: 1,652] | | | | [removed: 1,652] [added: 906] | | |

| Total consolidated operating profit [removed: (a)] | | $ | [removed: 5,921 | | | $ | (8] [added: 7,334] | [removed: )] | | $ | [removed: 846] [added: 6,744] | | | $ | [removed: 6,759] [added: 5,888] | |

We expect [removed: 2018] [added: our 2019] net sales [removed: will] [added: to] increase in the [removed: low-single] [added: mid-single] digit range from [removed: 2017] [added: 2018] levels.

The projected growth is driven by increased production and sustainment [removed: volume] on the F-35 program at Aeronautics [removed: as well as] [added: and key contract awards and] increased volume in [added: the] tactical [added: and strike] missiles [removed: programs at MFC, partially offset by decreased volume] [added: business] at [removed: RMS and Space.][added: MFC.]

[removed: Our] [added: The preliminary] outlook for [removed: 2018] [added: 2019] assumes the U.S. Government continues to support and fund our key [removed: programs, consistent with the government fiscal year (GFY) 2018 budget.][added: programs.]

Changes in circumstances may require us to revise our assumptions, which could materially change our current estimate of [removed: 2018] [added: 2019] net [removed: sales and] [added: sales,] operating [removed: profit margin.][added: margin and cash flows.]

We expect the net [removed: 2018] [added: 2019] FAS/CAS pension benefit to be approximately [removed: $1.0] [added: $1.5] billion [removed: assuming] [added: based on] a [removed: 3.625%] [added: 4.25%] discount rate (a [removed: 50] [added: 62.5] basis point [removed: decrease] [added: increase] from the end of [removed: 2016), an approximately 13.00%] [added: 2017), a negative 5.00%] return on plan assets in [removed: 2017 (a 550 basis point increase from the expected rate of return at the end of 2016), and] [added: 2018,] a [removed: 7.50%] [added: 7.00%] expected long-term rate of return on plan assets in future [removed: years,] [added: years (a 50 basis point decrease from the end of 2017),] and the revised longevity assumptions released [removed: on October 20, 2017] [added: during the fourth quarter of 2018] by the Society of Actuaries.

We [removed: will make] [added: made] contributions of $5.0 billion to our qualified defined benefit pension plans in 2018, including required and discretionary contributions.

We [removed: plan to fund] [added: funded] these contributions [added: in 2018] using a mix of cash on hand and commercial paper.

We [added: currently] expect Aeronautics’ [removed: 2018] [added: 2019] net sales to increase in the [removed: mid-single] [added: high-single] digit percentage range as compared to [removed: 2017] [added: 2018] driven by [added: the] increased [removed: production and sustainment] volume on the F-35 program.

Operating profit is [added: also] expected to increase in the [removed: low-single] [added: high-single] digit percentage range, resulting in [removed: slightly lower] [added: comparable] operating profit [removed: margins.][added: margins in 2019 as compared to 2018.]

We [added: currently] expect MFC’s net sales to increase in the [removed: mid-single] [added: low-double] digit percentage range in [removed: 2018] [added: 2019] as compared to [removed: 2017] [added: 2018] driven [removed: primarily] by key contract awards [added: in 2018] and [added: higher] volume in [added: the] tactical [removed: missile programs.][added: and strike missiles business.]

[removed: Accordingly,] [added: As a result,] operating profit margin [added: in 2019] is expected to [removed: slightly] decrease from [removed: 2017] [added: 2018] levels.

[removed: As a result operating] [added: Operating] profit margin [added: for 2019] is expected to [removed: increase] [added: be] slightly [removed: from 2017] [added: lower than 2018] levels.

[removed: During the fourth quarter of] [added: In] 2017, we recognized an additional gain of $73 million, which reflects certain post-closing adjustments, including certain tax adjustments and the final determination of net working capital.

Consequently, [added: we began consolidating AWE and] our operating results include 100% of AWE’s sales and 51% of its operating profit.

For additional information, see “Note 3 – [removed: Acquisitions] [added: Acquisition] and Divestitures” included in our Notes to Consolidated Financial Statements.

[removed: The] [added: However, the] U.S. Government has not yet passed [removed: an] [added: full-year] appropriations [removed: bill] for [removed: fiscal year 2018 (the U.S. Government’s fiscal year begins on October 1 and ends on September 30).][added: all agencies.]

[added: Once submitted,] Congress must approve or revise the President’s [removed: GFY 2018] [added: FY 2020] budget [removed: proposals] [added: proposal] through enactment of appropriations bills and other policy legislation, which would then require final [removed: Presidential approval.][added: approval from the President.]

Currently, U.S. defense spending [removed: through fiscal year] [added: in FY 2020 and FY] 2021 remains subject to statutory spending limits established by the Budget Control [removed: Act.][added: Act of 2011 (Budget Control Act).]

The [added: Budget Control Act] spending limits were modified for fiscal years 2013 through [removed: 2017] [added: 2019] by the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of [removed: 2013 and] [added: 2013,] the Bipartisan Budget Act of [removed: 2015.][added: 2015, and most recently the BBA of 2018.]

However, these acts [removed: did] [added: do] not [removed: provide relief to] [added: alter] the spending limits beyond [removed: fiscal year 2017.][added: FY 2019.]

As currently enacted, the Budget Control Act limits defense spending to [removed: $549] [added: $576] billion [removed: (approximately $522] [added: (including approximately $550] billion for DoD) for [removed: fiscal year 2018] [added: FY 2020] with [added: a] modest [removed: increases of about 2.5% per year through] [added: increase to $590 billion (including approximately $563 billion for DoD) in] 2021.

The President’s [removed: budget proposal as well as] defense budget estimates for [removed: fiscal year 2018] [added: FY 2020] and beyond exceed the spending limits established by the Budget Control Act.

International customers accounted for 36% of Aeronautics’ [removed: 2017] [added: 2018] net sales.

There continues to be strong international interest in the F-35 program, which includes commitments from the U.S. Government and eight international partner countries and [removed: three] [added: four] international customers, as well as expressions of interest from other countries.

This award [removed: is for] [added: includes] international F-35 partners and FMS customers.

Total business segment operating profit margin in 2019 is expected to be approximately 10.8%; and cash from operations is expected to be greater than or equal to $7.4 billion.

As a result of our $5.0 billion in contributions to our qualified defined benefit pension plans in 2018, we do not expect to make contributions to our qualified defined benefit pension plans in 2019.

Consolidation of AWE Management Limited

For the first time in nearly a decade, the DoD began the government fiscal year (FY) with a full-year appropriation.

Congress passed, and the President signed into law an appropriation act that provides $685 billion in funding for the DoD for FY 2019, which is comprised of $617 billion in base funding and $68 billion for the Overseas Contingency Operations (OCO) account to support the Global War on Terrorism (GWOT).

The appropriation adheres to the Bipartisan Budget Act of 2018 (BBA of 2018), which provided an additional $80 billion for national defense over two years in FY 2018 and FY 2019.

A majority of U.S. Government agencies operated under continuing resolution funding measures through December 21, 2018.

Congress was unable to reach an agreement on full-year appropriations prior to its expiration.

Consequently, a majority of U.S. Government agencies were shutdown through January 25, 2019 when an agreement was reached to provide funding under a continuing resolution funding measure through February 15, 2019.

These agencies may be subject to future shutdowns if new appropriations are not passed prior to the expiration of the current continuing resolution.

The President has not yet submitted the budget proposal for FY 2020 to Congress due to administrative delays associated with the partial government shutdown that began on December 22, 2018 and ended on January 25, 2019.

See also the discussion of U.S. Government funding risks within Item 1A - Risk Factors.

During 2018, the government of Belgium announced its decision to purchase 34 F-35 aircraft.

Additionally in 2018, we finalized the Low Rate Initial Production (LRIP) 11 contract with the DoD at $11.5 billion of funding for the production of 141 F-35 aircraft.

During 2018, we received a $1.1 billion contract from the U.S. Government to produce 16 new production F-16 Block 70 aircraft for the Royal Bahraini Air Force.

The Undefinitized Contract Action (UCA) award represents the first F-16 Block 70 sale and the first F-16 production program to be performed in Greenville, South Carolina.

Additionally, in December 2018, Slovakia signed a Letter of Offer and Acceptance (LOA) to procure 14 new production F-16 Block 70/72 aircraft and we were awarded a contract to upgrade 84 F-16 aircraft for the Greek Ministry of Defence.

Additionally during 2018, the U.S. and Swedish officials formalized an agreement to provide PAC-3 missiles to Sweden.

During 2018, the F-35 program completed several milestones both domestically and internationally.

In April 2018, we completed the System Development and Demonstration (SDD) flight testing portion of the development contract and began the next phase of development in support of phased capability improvements and modernization of the F-35 air system.

This next phase of development work is being performed separately from the basic SDD contract as part of the Joint Program Office’s Continuous Capability Development and Delivery (C2D2) strategy.

On June 11, we delivered the 300th production F-35 aircraft, demonstrating the F-35 program’s continued progress and longevity.

The first 300 F-35 aircraft delivered to U.S. and international customers include 197 F-35A variants, 75 F-35B variants, and 28 F-35C variants.

In December 2018, the DoD officially approved the F-35 program to begin the formal Initial Operational Test & Evaluation (IOT&E) phase.

Testing is expected to be completed during 2019.

The data will be analyzed by the U.S. Government as part of their evaluation to transition the F-35 program from LRIP into full-rate production at the end of 2019.

Several milestones were also achieved with our U.S. Government and international customers.

First, United Kingdom’s F-35B carried out the first trials with UK-built weapons.

This represents a key part of the work-up toward Initial Operating Capability efforts.

Second, F-35Cs’ participated in Integrated Flight Operations aboard the USS Abraham Lincoln.

Third, a U.S. Marine Corps F-35B conducted the first combat strike in the U.S. Central Command area of responsibility in support of Operation Freedom’s Sentinel in Afghanistan on September 27.

Fourth, the Royal Navy landed the F-35B on the HMS Queen Elizabeth.

On September 28, we finalized the LRIP 11 contract with the DoD at $11.5 billion for the production and delivery of 141 F-35 aircraft at the lowest per aircraft price in program history.

In November 2018, the U.S. Government awarded an aggregate $22.7 billion UCA Block Buy for the production of 252 F-35 aircraft in order to provide greater production efficiency, stability and cost savings.

| Net sales | | $ | 53,762 | | | $ | 49,960 | | | $ | 47,290 | |

| Cost of sales | | (46,488 | | ) | | (43,589 | | ) | | (41,889 | | ) |

| Gross profit | | 7,274 | | | | 6,371 | | | | 5,401 | | |

| Income tax expense (b) | | (792 | | ) | | (3,356 | | ) | | (1,093 | | ) |

| Net earnings | | $ | 5,046 | | | $ | 1,963 | | | $ | 5,173 | |

| Continuing operations | | $ | 17.59 | | | $ | 6.50 | | | $ | 12.08 | |

Effective January 1, 2018, we adopted two new accounting standards.

Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers, as amended (Topic 606) (commonly referred to as ASC 606) changes the way we recognize revenue from contracts with customers.

ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715) changes the income statement presentation of certain components of net periodic benefit cost related to defined benefit pension and other postretirement benefit plans.

See “Note 1 – Significant Accounting Policies” (under the caption “Recent Accounting Pronouncements”) included in our Notes to Consolidated Financial Statements for further discussion on the adoption of these standards.

The following table presents selected 2017 recast, unaudited financial data updated for the adoption of ASC 606 and ASU 2017-07 (in millions).

We are providing this information to assist in understanding our 2018 trend information in the following paragraphs, which includes the impacts of adopting these standards.

| | | | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | Year Ended December 31, 2017 | | | | | | | | | | | | | | |

| | | Historical | | | | Adjustments for ASC 606 | | | | Adjustments for ASU 2017-07 | | | | Adjusted | | |

| Net sales | | | | | | (unaudited) | | | | (unaudited) | | | | (unaudited) | | |

| Aeronautics | | $ | 20,148 | | | $ | (738 | ) | | $ | — | | | $ | 19,410 | |

| Space | | 9,473 | | | | 136 | | | | — | | | | 9,609 | | |

| Total net sales | | $ | 51,048 | | | $ | (1,072 | ) | | $ | — | | | $ | 49,976 | |

| | |

| --- | --- |

| (a) | Total unallocated, net and consolidated operating profit includes an increase of $846 million in 2017, with a corresponding increase in other non-operating expense, net for the expected impact of adopting ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715) on January 1, 2018. See “Note 1 – Significant Accounting Policies” (under the caption “Recent Accounting Pronouncements”) included in our Notes to Consolidated Financial Statements for further discussion. |

Segment operating profit is expected to increase in the mid-single digit range from 2017 levels primarily driven by improved performance at RMS.

Accordingly, we expect that 2018 segment operating profit margin will slightly increase over our 2017 margin of 10.2%.

For additional information related to trends in net sales and operating profit at our business segments, see the “Business Segment Results of Operations” discussion below.

As a result of these contributions, we do not expect any material qualified defined benefit cash funding will be required until 2021.

While we do not anticipate a need to do so, our capital structure and resources would allow us to issue new debt if circumstances change (see “Capital Structure, Resources and Other” discussion below).

As a result of adopting ASU No. 2017-07, we expect to present a reclassification of non-service FAS net periodic benefit costs for all postretirement benefit plans (including the qualified defined benefit pension plans) of approximately $870 million for the fiscal year 2018 from consolidated operating profit to other non-operating income, net on our consolidated statements of earnings.

This reclassification has no impact on our total business segment operating profit or consolidated net earnings.

Business Segment 2018 Financial Trends

Aeronautics

Missiles and Fire Control

Operating profit is expected to increase in the low-single digit percentage range in 2018 as compared to 2017 due primarily to new development volume associated with recent key contract awards.

Rotary and Mission Systems

We expect RMS’ net sales to decrease in the low-single digit percentage range as compared to 2017 driven primarily by lower volume in our Sikorsky business partially offset by higher volume in our training and logistics services and integrated warfare systems and sensors (IWSS) lines of business.

Operating profit is expected to increase in the low double digit percentage range driven by performance improvements in the IWSS and C4ISR and Undersea Systems and Sensors (C4USS) lines of business.

Operating profit margins are also expected to improve from 2017 levels.

Space

We expect Space's 2018 net sales to decrease in the mid-single digit percentage range compared to 2017, driven by lower volume resulting from program lifecycles on government satellite programs and lower cost on follow-on contracts.

Operating profit in 2018 is expected to be comparable to 2017.

The Transaction was completed in a multi-step process pursuant to which we initially contributed the IS&GS business to Abacus Innovations Corporation (Abacus), a wholly owned subsidiary of Lockheed Martin created to facilitate the Transaction, and the common stock of Abacus was distributed to participating Lockheed Martin stockholders through an exchange offer.

Under the terms of the exchange offer, Lockheed Martin stockholders had the option to exchange shares of Lockheed Martin common stock for shares of Abacus common stock.

At the conclusion of the exchange offer, all shares of Abacus common stock were exchanged for 9,369,694 shares of Lockheed Martin common stock held by Lockheed Martin stockholders that elected to participate in the exchange.

The shares of Lockheed Martin common stock that were exchanged and accepted were retired, reducing the number of shares of our common stock outstanding by approximately 3%.

Following the exchange offer, Abacus merged with a subsidiary of Leidos, with Abacus continuing as the surviving corporation and a wholly-owned subsidiary of Leidos.

Our financial instruments that are subject to interest rate risk principally include fixed-rate long-term [removed: debt.][added: debt and commercial paper.]

The estimated fair value of our outstanding debt was [removed: $16.8] [added: $15.4] billion at December 31, [removed: 2017] [added: 2018] and the outstanding principal amount was [removed: $15.5] [added: $15.3] billion, excluding unamortized discounts and issuance costs of $1.2 billion.

A 10% change in the level of interest rates would not have a material impact on the fair value of our outstanding debt at December 31, [removed: 2017.][added: 2018.]

The aggregate notional amount of our outstanding interest rate swaps at [removed: both] December 31, [removed: 2017] [added: 2018] and [removed: 2016] [added: 2017] was [added: $1.3 billion and] $1.2 billion.

The aggregate notional amount of our outstanding foreign currency hedges at December 31, [removed: 2017] [added: 2018] and [removed: 2016] [added: 2017] was [removed: $4.1] [added: $3.5] billion and [removed: $4.0] [added: $4.1] billion.

At December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] the net fair value of our derivative instruments was not material (see “Note 16 – Fair Value Measurements” included in our Notes to Consolidated Financial Statements).

As of December 31, [removed: 2017,] [added: 2018,] investments in the trust totaled [removed: $1.4] [added: $1.3] billion and are reflected at fair value on our consolidated balance sheet in other noncurrent assets.

Both the change in the fair value of the trust and the change in the value of the liabilities are recognized on our consolidated statements of earnings in other unallocated, net and were not material for the year ended December 31, [removed: 2017.][added: 2018.]

As a result, we do not have material foreign currency exposure, including exposure to the pound sterling or euro should there be material foreign currency fluctuations due to the United Kingdom departing from the European Union (commonly referred to as Brexit).

In [removed: 2017, 69%] [added: 2018, 70%] of our [removed: $51.0] [added: $53.8] billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including [removed: 58%] [added: 60%] from the Department of Defense (DoD)), [removed: 30%] [added: 28%] were from international customers (including foreign military sales (FMS) contracted through the U.S. Government) and [removed: 1%] [added: 2%] were from U.S. commercial and other customers.

We operate in an environment characterized by both [removed: increasing] complexity in global security and continuing economic pressures in the U.S. and globally.

We also expect to continue to [added: innovate and] invest in technologies to fulfill new mission requirements for our customers and invest in our people so that we have the technical skills necessary to succeed.

We operate in four business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and [removed: Space, previously known as Space Systems.][added: Space.]

In [removed: 2017,] [added: 2018,] our Aeronautics business segment generated net sales of [removed: $20.1] [added: $21.2] billion, which represented [removed: 39%] [added: 40%] of our total consolidated net sales.

Aeronautics’ customers include the military [removed: services] [added: services, principally the U.S. Air Force] and [added: U.S. Navy, and] various other government agencies of the U.S. and other countries.

In [removed: 2017,] [added: 2018,] U.S. Government customers accounted for 63%, international customers accounted for 36% and U.S. commercial and other customers accounted for 1% of Aeronautics’ net sales.

Net sales from Aeronautics’ combat aircraft products and services represented [removed: 30%] [added: 32%, 31% and 28%] of our total consolidated net sales in [added: 2018,] 2017 and [removed: 28% in both 2016 and 2015.][added: 2016.]

| • | F-16 Fighting Falcon - low-cost, combat-proven, international multi-role fighter; [added: and] |

| • | F-22 Raptor - air dominance and multi-mission fifth generation stealth [removed: fighter; and] [added: fighter.] |

The F-35 program is our largest program, generating [removed: 25%] [added: 27%] of our total consolidated net sales, as well as [removed: 64%] [added: 68%] of Aeronautics’ net sales in [removed: 2017.][added: 2018.]

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 [added: U.S.] Air Force, [added: U.S.] Marine Corps and [added: U.S.] Navy; commitments from our eight international partners and [removed: three international customers; as well as expressions of interest from other countries.]

[removed: 2017,] [added: We have 396 production aircraft in backlog as of December 31, 2018,] including orders from our international partners.

We delivered [removed: 26] [added: 25] C-130J aircraft in [removed: 2017,] [added: 2018,] including [removed: seven] [added: two] to international customers.

We have [removed: 64] [added: 78] aircraft in our backlog as of December 31, [removed: 2017] [added: 2018] with advanced funding from customers for additional C-130J aircraft not currently in backlog.

Our C-130J backlog extends into [removed: 2020.][added: 2022.]

[removed: While production and deliveries of F-16 aircraft were completed in 2017 from our Fort Worth, Texas facilities,] [added: Additionally,] Aeronautics continues to provide service-life extension, modernization and other upgrade programs for our customers’ F‑16 aircraft, with existing contracts continuing for several years.

We [removed: delivered eight F-16 aircraft in 2017 and] continue to seek [added: additional] international opportunities to deliver additional aircraft.

In [removed: November 2017,] [added: June 2018, we received a contract from] the U.S. [removed: and Bahrain signed a government-to-government agreement, or a Letter of Offer and Acceptance (LOA), regarding] [added: Government for] the sale of new production Block 70 [added: F-16] aircraft for the Royal Bahraini Air [removed: Force.][added: Force and in December 2018, Slovakia signed a Letter of Offer and Acceptance (LOA) to procure 14 new production F-16 Block 70/72 aircraft.]

We are transitioning F-16 production to Greenville, South [removed: Carolina,] [added: Carolina] to support the [removed: Bahrain] production [removed: program] [added: programs] and other emerging F-16 production requirements.

[removed: While production and deliveries of F-22 aircraft were completed in 2012,] Aeronautics continues to provide modernization and sustainment activities for the U.S. Air Force’s F-22 aircraft fleet.

We continue to explore technology advancement and insertion [removed: in] [added: into] our existing aircraft.

In [removed: 2017,] [added: 2018,] our MFC business segment generated net sales of [removed: $7.2] [added: $8.5] billion, which represented [removed: 14%] [added: 16%] of our total consolidated net sales.

In [removed: 2017,] [added: 2018,] U.S. Government customers accounted for [removed: 64%,] [added: 72%,] international customers accounted for [removed: 34%] [added: 26%] and U.S. commercial and other customers accounted for 2% of MFC’s net sales.

| • | The Multiple Launch Rocket System (MLRS), Hellfire, Joint Air-to-Surface Standoff Missile (JASSM) and Javelin tactical missile programs. MLRS is a highly mobile, automatic system that fires surface-to-surface rockets and missiles from the M270 and High Mobility Artillery Rocket System platforms produced for the U.S. Army and international customers. Hellfire is an air-to-ground missile used on rotary and fixed-wing aircraft, which is produced for the U.S. Army, Navy, Marine Corps and international customers. JASSM is an air-to-ground missile launched from fixed-wing aircraft, which is produced for the [added: U.S. Air Force and international customers. Javelin is a shoulder-fired anti-armor rocket system, which is produced for the U.S. Army, Marine Corps and international customers.] |

| • | The Special Operations Forces [removed: Contractor] [added: Global] Logistics Support Services (SOF [removed: CLSS)] [added: GLSS)] program provides logistics support services to the special operations forces of the U.S. military. [removed: In August 2017, we were awarded a contract for the Special Operations Forces Global Logistics Support Services (SOF GLSS) program, which is a competitive follow-on contract to SOF CLSS.] |

In [removed: 2017,] [added: 2018,] our RMS business segment generated net sales of [removed: $14.2] [added: $14.3] billion, which represented [removed: 28%] [added: 26%] of our total consolidated net sales.

RMS’ customers include the military services, principally the U.S. [removed: Army] [added: Navy] and [removed: Navy,] [added: Army,] and various government agencies of the U.S. and other countries, as well as commercial and other customers.

In [removed: 2017,] [added: 2018,] U.S. Government customers accounted for [removed: 69%,] [added: 71%,] international customers accounted for [removed: 28%] [added: 26%] and U.S. commercial and other customers accounted for 3% of RMS’ net sales.

| • | The Black [removed: Hawk] [added: Hawk®] and [removed: Seahawk] [added: Seahawk®] helicopters manufactured for U.S. and foreign governments. |

| • | The Aegis Combat System (Aegis) serves as [removed: a fleet ballistic] [added: an air and] missile defense system for the U.S. Navy and international customers and is also a sea and land-based element of the U.S. missile defense system. |

| • | The CH-53K [removed: development] [added: King Stallion] helicopter delivering the next generation heavy lift helicopter for the U.S. Marine Corps. |

| • | The Command, Control, Battle Management and Communications (C2BMC) contract, a program to [removed: increase the integration of] [added: provide an air operations center for] the Ballistic Missile Defense System for the U.S. Government. |

In [removed: 2017,] [added: 2018,] our Space business segment generated net sales of [removed: $9.5] [added: $9.8] billion, which represented [removed: 19%] [added: 18%] of our total consolidated net sales.

Space’s customers include various [removed: U.S. Government] [added: government] agencies [added: of the U.S.] and [added: other countries along with] commercial customers.

In [removed: 2017,] [added: 2018,] U.S. Government customers accounted for [removed: 85%, international customers accounted for 14% and U.S. commercial] [added: 84%] and [removed: other] [added: international] customers accounted for [removed: 1%] [added: 16%] of Space’s net sales.

Net sales from Space’s satellite products and services represented 11%, [removed: 13%] [added: 12%] and [removed: 15%] [added: 13%] of our total consolidated net sales in [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015.][added: 2016.]

Space is engaged in the [removed: research and development,] [added: research,] design, [added: development,] engineering and production of satellites, [removed: strategic and defensive missile systems and] space transportation [added: systems, and strategic, advanced strike, and defensive] systems.

| • | The Space Based Infrared System [removed: (SBIRS),] [added: (SBIRS) and Next Generation Overhead Persistent Infrared (Next Gen OPIR) system programs,] which [removed: provides] [added: provide] the U.S. Air Force with enhanced worldwide missile [removed: launch detection and tracking] [added: warning] capabilities. |

Technological advances in such areas [removed: as:] [added: as] additive manufacturing, cloud computing, advanced materials, autonomy, robotics, and big data and new business models such as commercial access to space are enabling new factors of competition for both traditional and non-traditional competitors.

In April 2018, we completed the System Development and Demonstration (SDD) flight testing portion of the development contract and began the next phase of development in support of phased capability improvements and modernization of the F-35 air system.

This next phase of development work is being performed separately from the basic SDD contract as part of the Joint Program Office’s Continuous Capability Development and Delivery (C2D2) strategy.

In December 2018, the DoD officially approved the F-35 program to begin the formal Initial Operational Test & Evaluation (IOT&E) phase.

Testing is expected to be completed during 2019.

The data will be analyzed by the U.S. Government as part of their evaluation to transition the F-35 program from Low Rate Initial Production (LRIP) into full-rate production at the end of 2019.

three international customers; as well as expressions of interest from other countries.

In 2018, we delivered 91 aircraft, including 37 to international customers, resulting in total deliveries of 357 production aircraft as of December 31, 2018.

MFC also has contracts with the U.S. Government for various classified programs.

Net sales from RMS’ Sikorsky helicopter programs represented 10% in 2018 and 12% in both 2017 and 2016 of our consolidated net sales.

In some areas of our business, customer

requirements are changing to encourage expanded competition.

See the discussion of matters related to our intellectual property within Item 1A - Risk Factors.

We expect to recognize approximately 38% of our backlog over the next 12 months and approximately 66% over the next 24 months as revenue, with the remainder recognized thereafter.

We conduct research and development (R&D) activities using our own funds (referred to as company-funded R&D or independent research and development (IR&D)) and under contractual arrangements with our customers (referred to as customer-funded R&D) to enhance existing products and services and to develop future technologies.

| | |

| --- | --- |

| • | C-5M Super Galaxy - strategic airlifter. |

The System Development and Demonstration (SDD) portion of the development contracts was substantially completed in 2017, with over 99% of flight test objectives met through over 9,200 flights.

Approximately 70 flights remain and are expected to be completed in early 2018.

Additionally, the final logistics and training capability is planned for 2018 and new Third Life structural testing added to the SDD portion in 2013 is scheduled to be completed in 2019.

During 2017, we delivered 66 aircraft to our U.S. and international partners, resulting in total deliveries of 266 production aircraft as of December 31, 2017.

We have 235 production aircraft in backlog as of December 31,

Aeronautics provides sustainment services for the existing U.S. Air Force C-5 Galaxy fleet and modernization activities to convert 52 C-5 Galaxy aircraft to the C-5M Super Galaxy configuration.

These modernization activities include the installation of new engines, landing gear and systems and other improvements that enable a shorter takeoff, a higher climb rate, an increased cargo load and longer flight range.

As of December 31, 2017, we had delivered 48 C‑5M aircraft under these modernization activities, including seven C-5M aircraft delivered in 2017.

As of December 31, 2017, we have four C-5 aircraft in backlog with all deliveries expected in 2018.

Although existing production contracts provide for deliveries of C-5M aircraft through mid-2018, we continue to seek additional modernization opportunities for the C-5 Galaxy fleet beyond 2018.

Sustainment activities for our customers’ C-5 Galaxy aircraft are expected to continue for several years.

U.S. Air Force and international customers.

Javelin is a shoulder-fired anti-armor rocket system, which is produced for the U.S. Army, Marine Corps and international customers.

Financial, Geographic and Other Business Segment Information

For additional information regarding our business segments, including comparative segment net sales, operating profit and related financial information, including geographic, for 2017, 2016, and 2015, see “Business Segment Results of Operations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Note 5 – Information on Business Segments” included in our Notes to Consolidated Financial Statements.

In some areas of our business, customer requirements are changing to encourage expanded competition and increasingly what would have previously been competed as a single large procurement is being broken into multiple smaller procurements.

The U.S. Government is taking increasingly aggressive positions under the FAR both as to what intellectual property they believe such rights apply and to acquire broad license rights to use and have others use such intellectual property.

If the U.S. Government is successful in these efforts, this could affect our ability to compete and to obtain access to and use certain supplier intellectual property.

While we do not anticipate material problems regarding the supply of our raw

Under existing revenue recognition guidance, approximately $31 billion, or 31%, of our backlog at December 31, 2017 would have been converted into sales in 2018.

We conduct research and development (R&D) activities under customer-sponsored contracts and with our own independent R&D funds.

Generally, these costs are allocated among contracts and programs in progress.

Costs we incur under customer-sponsored R&D programs pursuant to contracts are included in net sales and cost of sales.

Under certain arrangements in which a customer shares in product development costs, our portion of the unreimbursed costs is expensed as incurred in cost of sales.

of assets, or the anticipated consequences are examples of forward-looking statements.

For information regarding [removed: these matters,] [added: the matters discussed above,] including current estimates of the amounts that we believe are required for remediation or clean-up to the extent estimable, see “Critical Accounting Policies - Environmental Matters” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Note 14 – Legal Proceedings, Commitments and Contingencies” included in our Notes to Consolidated Financial Statements.

These matters include the proceedings summarized in “Note 14 – Legal Proceedings, Commitments and Contingencies” included in our Notes to Consolidated Financial Statements.

For the fiscal year ended December 31, [removed: 2017][added: 2018]

Indicate by check mark whether the registrant has submitted electronically [removed: and posted on its corporate Web site, if any,] every Interactive Data File required to be submitted [removed: and posted] pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit [removed: and post] such files).

| Large accelerated filer ☒ | Accelerated filer ☐ | [removed: |] Non-accelerated filer ☐ | Smaller reporting company ☐ | Emerging growth company ☐ |

The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant computed by reference to the last sales price of such stock, as of the last business day of the registrant’s most recently completed second fiscal quarter, which was June [removed: 23, 2017,] [added: 22, 2018,] was approximately [removed: $80.3] [added: $84.7] billion.

There were [removed: 285,570,742] [added: 282,562,534] shares of our common stock, $1 par value per share, outstanding as of January [removed: 26, 2018.][added: 25, 2019.]

Portions of Lockheed Martin Corporation’s [removed: 2018] [added: 2019] Definitive Proxy Statement are incorporated by reference into Part III of this Form 10‑K.

For the Year Ended December 31, [removed: 2017][added: 2018]

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| ITEM 7. | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#s4D6090314CCE4929087472DCE58CEA12)] [added: Operations](#sA06B2FBA6B7A5D24B9C6D33EEF66E206)] | [removed: [24](#s4D6090314CCE4929087472DCE58CEA12)] [added: [25](#sA06B2FBA6B7A5D24B9C6D33EEF66E206)] |

| ITEM 7A. | [Quantitative and Qualitative Disclosures About Market [removed: Risk](#s681366831512AFA4153472DCE6FB2C6C)] [added: Risk](#sAABA8A20C0D351E8B5C773ABEF9BF203)] | [removed: [56](#s681366831512AFA4153472DCE6FB2C6C)] [added: [56](#sAABA8A20C0D351E8B5C773ABEF9BF203)] |

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| ITEM 9. | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#sE2A85224DB016948853872DCECF594F7)] [added: Disclosure](#s8B9ACC7654B4512187F9B34B33BC0B78)] | [removed: [103](#sE2A85224DB016948853872DCECF594F7)] [added: [106](#s8B9ACC7654B4512187F9B34B33BC0B78)] |

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| ITEM 12. | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#s331A8E0BBF75FE5070D372DCDF6651C8)] [added: Matters](#s82B0C5B4035954248357DF7AC38DE91A)] | [removed: [105](#s331A8E0BBF75FE5070D372DCDF6651C8)] [added: [109](#s82B0C5B4035954248357DF7AC38DE91A)] |

| ITEM 13. | [Certain Relationships and Related Transactions, and Director [removed: Independence](#s76824681AD17A06D8DAD72DCEE24A489)] [added: Independence](#s6BDFCE6AF7155728A1BD024CB2DCE1FE)] | [removed: [105](#s76824681AD17A06D8DAD72DCEE24A489)] [added: [110](#s6BDFCE6AF7155728A1BD024CB2DCE1FE)] |

| ITEM 14. | [Principal Accountant Fees and [removed: Services](#s3E4E368281883A9804EE72DCEE57FE15)] [added: Services](#sB4A583923D9B55E3B74A28CE9C9C49A6)] | [removed: [105](#s3E4E368281883A9804EE72DCEE57FE15)] [added: [110](#sB4A583923D9B55E3B74A28CE9C9C49A6)] |

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| ITEM 16. | [Form 10-K [removed: Summary](#sFCD19803D9B80312DE4A72DCEECC53F8)] [added: Summary](#s43E8BB75549C514698B46DE8872CC62D)] | [removed: [109](#sFCD19803D9B80312DE4A72DCEECC53F8)] [added: [114](#s43E8BB75549C514698B46DE8872CC62D)] |

10-K 1 lmtq4201810k.htm FORM 10-K

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| [SIGNATURES](#s43A84AF92FDE5834A53F23557047F604) | | [115](#s43A84AF92FDE5834A53F23557047F604) |

10-K 1 lmtq4201710k.htm FORM 10-K

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| --- | --- | --- | --- | --- | --- |

| [SIGNATURES](#s8A9830861944B4AA12B572DCEEFD9FCC) | | [110](#s8A9830861944B4AA12B572DCEEFD9FCC) |

At December 31, [removed: 2017,] [added: 2018,] we owned or leased building space (including offices, manufacturing plants, warehouses, service centers, laboratories and other facilities) at approximately [removed: 375] [added: 380] locations primarily in the U.S. Additionally, we manage or occupy approximately 15 government-owned facilities under lease and other arrangements.

At December 31, [removed: 2017,] [added: 2018,] we had significant operations in the following locations:

The following is a summary of our square feet of floor space [added: owned, leased, or utilized] by business segment at December 31, [removed: 2017] [added: 2018] (in millions):

| Aeronautics | | 5.0 | | | | [removed: 2.1] [added: 2.2] | | | | 14.4 | | | | [removed: 21.5] [added: 21.6] | | |

| Missiles and Fire Control | | [removed: 6.3] [added: 6.4] | | | | 2.8 | | | | 1.8 | | | | [removed: 10.9] [added: 11.0] | | |

| Corporate activities | | [removed: 2.7] [added: 2.6] | | | | 0.9 | | | | — | | | | [removed: 3.6] [added: 3.5] | | |

| Rotary and Mission Systems | | 11.1 | | | | 6.5 | | | | 0.5 | | | | 18.1 | | |

| Space | | 8.7 | | | | 2.0 | | | | 5.4 | | | | 16.1 | | |

| Total | | 33.8 | | | | 14.4 | | | | 22.1 | | | | 70.3 | | |

| Rotary and Mission Systems | | 11.2 | | | | 6.6 | | | | 0.4 | | | | 18.2 | | |

| Space | | 8.6 | | | | 1.9 | | | | 6.7 | | | | 17.2 | | |

| Total | | 33.8 | | | | 14.3 | | | | 23.3 | | | | 71.4 | | |

Our executive officers as of February [removed: 6, 2018] [added: 8, 2019] are listed below, with their ages on that date, positions and offices currently held, and principal occupation and business experience during at least the last five years.

All officers serve at the discretion of the Board of [removed: Directors.][added: Directors.*]

Ambrose (age [removed: 59),] [added: 60),] Executive Vice President - Space

Bennett (age [removed: 61),] [added: 62),] Executive Vice President - Rotary and Mission Systems

[removed: Carvalho] [added: Evans] (age [removed: 59),] [added: 53),] Executive Vice President - Aeronautics

[removed: Mr. Carvalho] [added: Ms. Evans] has served as Executive Vice President of Aeronautics since [removed: March 2013.][added: October 2018.]

Colan (age [removed: 57),] [added: 58),] Vice President, Controller, and Chief Accounting Officer

Hewson (age [removed: 64),] [added: 65),] Chairman, President and Chief Executive Officer

Ms. Hewson has served as Chairman, President and Chief Executive Officer of Lockheed Martin since January [removed: 2014 and as Chief Executive Officer and President from January 2013 to December 2013.][added: 2014.]

Lavan (age [removed: 58),] [added: 59),] Senior Vice President, General Counsel and Corporate Secretary

Mollard (age [removed: 60),] [added: 61),] Vice President and Treasurer

Frank St. John (age [removed: 51),] [added: 52),] Executive Vice President - Missiles and Fire Control

He previously served as Executive Vice President and Deputy, [removed: Programs,] [added: Programs at our] Missiles and Fire Control [added: (MFC) segment] from June 2017 to January 2018.

Prior to that, he served as Vice President, Orlando Operations and Tactical Missiles/Combat Maneuver Systems [added: business in our MFC segment] from 2011 to May 2017.

Tanner (age [removed: 58),] [added: 59),] Executive Vice President and Chief Financial Officer

At January [removed: 26, 2018,] [added: 25, 2019,] we had [removed: 27,731] [added: 26,812] holders of record of our common stock, par value $1 per share.

Information concerning [removed: the high and low reported sales prices of] [added: dividends paid on] Lockheed Martin common stock [removed: and dividends paid] during the past two years is as follows:

Common Stock - Dividends Paid Per Share [removed: and Market Prices]

| | | Dividends Paid Per Share | | | | | | | [removed: | Stock Prices (High-Low) | | | | | | | | | | | | | | |]

| Quarter | | [removed: 2017 | | | | 2016] [added: 2018] | | | | 2017 | | | [removed: | | | | | 2016 | | | | | | |]

The following graph compares the total return on a cumulative basis of $100 invested in Lockheed Martin common stock on December 31, [removed: 2012] [added: 2013] to the Standard and Poor’s (S&P) 500 Index and the S&P Aerospace & Defense Index.

[removed: ][added: ]

The S&P Aerospace & Defense Index comprises Arconic Inc., General Dynamics Corporation, Harris Corporation, [added: Huntington Ingalls Industries,] L3 Technologies, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Company, [removed: Rockwell Collins, Inc.,] Textron Inc., The Boeing Company, Transdigm Group Inc., and United Technologies Corporation.

There were no sales of unregistered equity securities during the quarter ended December 31, [removed: 2017.][added: 2018.]

The following table provides information about our repurchases of our common stock registered pursuant to Section 12 of the Exchange Act during the quarter ended December 31, [removed: 2017.][added: 2018.]

| (a) | We close our books and records on the last Sunday of each month to align our financial closing with our business processes, except for the month of December, as our fiscal year ends on December 31. As a result, our fiscal months often differ from the calendar months. For example, [removed: September 25, 2017] [added: October 29, 2018] was the first day of our [removed: October 2017] [added: November 2018] fiscal month. |

| (b) | In October 2010, our Board of Directors approved a share repurchase program pursuant to which we are authorized to repurchase our common stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current market prices. From time to time, our Board of Directors authorizes increases to our share repurchase program. [removed: On September 28, 2017, our Board of Directors authorized a $2.0 billion increase to the program.] The total remaining authorization for future common share repurchases under our share repurchase program was [removed: $3.5] [added: $3.0] billion as of December 31, [removed: 2017.] [added: 2018.] Under the program, management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. This includes purchases pursuant to Rule 10b5-1 [removed: plans.] [added: plans, including accelerated share repurchases.] The program does not have an expiration date. |

| (c) | During the quarter ended December 31, [removed: 2017,] [added: 2018,] the total number of shares purchased included [removed: 10,863] [added: 9,435] shares that were transferred to us by employees in satisfaction of tax withholding obligations associated with the vesting of restricted stock units. These purchases were made pursuant to a separate authorization by our Board of Directors and are not included within the program. |

Michele A.

She previously served as Deputy Executive Vice President of Aeronautics from June 2018 to September 2018.

Prior to that, she served as Vice President and General Manager, Integrated Warfare Systems and Sensors business in our Rotary and Missions Systems (RMS) segment from November 2016 to June 2018; and Vice President and General Manager, Undersea Systems business in our RMS segment from December 2013 to November 2016.

| * | As previously announced, Bruce L. Tanner is retiring from Lockheed Martin Corporation in 2019. Effective February 11, 2019, Kenneth R. Possenriede will become Executive Vice President and Chief Financial Officer. Mr. Possenriede (age 59) has served as Vice President of Finance and Program Management at Aeronautics since April 2016. Prior to that, he served as Vice President and Treasurer from July 2011 through April 2016. |

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| --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | |

| First | | $ | 2.00 | | | $ | 1.82 | |

| Second | | 2.00 | | | | 1.82 | | |

| Third | | 2.00 | | | | 1.82 | | |

| Fourth | | 2.20 | | | | 2.00 | | |

| Year | | $ | 8.20 | | | $ | 7.46 | |

| October 1, 2018 – October 28, 2018 | | 688,729 | | | $ | 323.55 | | | 688,579 | | | $ | 3,454 | |

| October 29, 2018 – November 25, 2018 | | 1,125,685 | | | $ | 294.14 | | | 1,125,665 | | | $ | 3,123 | |

| November 26, 2018 – December 31, 2018 | | 401,685 | | | $ | 286.52 | | | 392,420 | | | $ | 3,010 | |

| Total | | 2,216,099 | | (c) | $ | 301.90 | | | 2,206,664 | | | | | |

| | |

| --- | --- |

He previously served as Vice President and Deputy, Space from July 2012 to March 2013.

Orlando P.

He previously served as Executive Vice President and General Manager, F-35 Program from March 2012 to March 2013.

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| First | | $ | 1.82 | | | $ | 1.65 | | | $ | 274.57 | | \- | $ | 248.00 | | | $ | 223.19 | | \- | $ | 200.47 | |

| Second | | 1.82 | | | | 1.65 | | | | 284.98 | | | \- | 264.04 | | | | 245.37 | | | \- | 218.34 | | |

| Third | | 1.82 | | | | 1.65 | | | | 311.36 | | | \- | 274.69 | | | | 266.93 | | | \- | 235.28 | | |

| Fourth | | 2.00 | | | | 1.82 | | | | 323.94 | | | \- | 303.31 | | | | 269.90 | | | \- | 228.50 | | |

| Year | | $ | 7.46 | | | $ | 6.77 | | | $ | 323.94 | | \- | $ | 248.00 | | | $ | 269.90 | | \- | $ | 200.47 | |

| September 25, 2017 – October 29, 2017 | | 666,380 | | | $ | 314.86 | | | 666,275 | | | $ | 3,794 | |

| October 30, 2017 – November 26, 2017 | | 524,021 | | | $ | 311.03 | | | 524,010 | | | $ | 3,631 | |

| November 27, 2017 – December 31, 2017 | | 418,796 | | | $ | 314.71 | | | 408,049 | | | $ | 3,503 | |

| Total | | 1,609,197 | | (c) | $ | 313.57 | | | 1,598,334 | | | | | |

| (In millions, except per share data) | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | |

| Operating results [added: (a)] | | | | | | | | | | | | | | | | | | | | |

| Net sales | | $ | [removed: 51,048] [added: 53,762] | | | $ | [removed: 47,248] [added: 49,960] | | | $ | [removed: 40,536] [added: 47,290] | | | $ | [removed: 39,946] [added: 40,536] | | | $ | [removed: 39,243] [added: 39,946] | |

| Net earnings from continuing operations [removed: (a)(b)(c)(d)] [added: (b)(c)(d)(e)] | | [removed: 1,929] [added: 5,046] | | | | [removed: 3,753] [added: 1,890] | | | | [removed: 3,126] [added: 3,661] | | | | [removed: 3,253] [added: 3,126] | | | | [removed: 2,701] [added: 3,253] | | |

| Net earnings from discontinued operations [removed: (e)] [added: (f)] | | [removed: 73] [added: —] | | | | [removed: 1,549] [added: 73] | | | | [removed: 479] [added: 1,512] | | | | [removed: 361] [added: 479] | | | | [removed: 280] [added: 361] | | |

| Net earnings [removed: (b)(c)(d)] [added: (c)(d)(e)] | | [removed: 2,002] [added: 5,046] | | | | [removed: 5,302] [added: 1,963] | | | | [removed: 3,605] [added: 5,173] | | | | [removed: 3,614] [added: 3,605] | | | | [removed: 2,981] [added: 3,614] | | |

| Basic | | [removed: 0.26] [added: —] | | | | [removed: 5.17] [added: 0.26] | | | | [removed: 1.55] [added: 5.05] | | | | [removed: 1.14] [added: 1.55] | | | | [removed: 0.87] [added: 1.14] | | |

| Diluted | | [removed: 0.25] [added: —] | | | | [removed: 5.11] [added: 0.25] | | | | [removed: 1.53] [added: 4.99] | | | | [removed: 1.12] [added: 1.53] | | | | [removed: 0.86] [added: 1.12] | | |

| Cash dividends declared per common share | | $ | [removed: 7.46] [added: 8.20] | | | $ | [removed: 6.77] [added: 7.46] | | | $ | [removed: 6.15] [added: 6.77] | | | $ | [removed: 5.49] [added: 6.15] | | | $ | [removed: 4.78] [added: 5.49] | |

| Balance sheet [removed: (f)] [added: (a)(g)] | | | | | | | | | | | | | | | | | | | | |

| Cash, cash equivalents and short-term investments [removed: (b)] [added: (c)] | | $ | [removed: 2,861] [added: 772] | | | $ | [removed: 1,837] [added: 2,861] | | | $ | [removed: 1,090] [added: 1,837] | | | $ | [removed: 1,446] [added: 1,090] | | | $ | [removed: 2,617] [added: 1,446] | |

| Total current assets [removed: (g)] [added: (h)] | | [removed: 17,461] [added: 16,103] | | | | [removed: 15,108] [added: 17,505] | | | | [removed: 14,573] [added: 14,780] | | | | [removed: 10,684] [added: 14,573] | | | | [removed: 12,081] [added: 10,684] | | |

| Goodwill [removed: (h)] [added: (i)] | | [removed: 10,807] [added: 10,769] | | | | [removed: 10,764] [added: 10,807] | | | | [removed: 10,695] [added: 10,764] | | | | [removed: 7,964] [added: 10,695] | | | | [removed: 7,698] [added: 7,964] | | |

| Total assets [removed: (b)(g)(h)] [added: (c)(h)(i)] | | [removed: 46,521] [added: 44,876] | | | | [removed: 47,806] [added: 46,620] | | | | [removed: 49,304] [added: 47,560] | | | | [removed: 37,190] [added: 49,304] | | | | [removed: 36,352] [added: 37,190] | | |

| Total current liabilities [removed: (g)] [added: (h)] | | [removed: 12,637] [added: 14,398] | | | | [removed: 12,542] [added: 12,913] | | | | [removed: 13,918] [added: 12,456] | | | | [removed: 10,954] [added: 13,918] | | | | [removed: 10,983] [added: 10,954] | | |

| Total debt, net [removed: (i)] [added: (j)] | | [removed: 14,263] [added: 14,104] | | | | [removed: 14,282] [added: 14,263] | | | | [removed: 15,261] [added: 14,282] | | | | [removed: 6,142] [added: 15,261] | | | | [removed: 6,127] [added: 6,142] | | |

| Total liabilities [removed: (b)(g)(i)] [added: (c)(h)(j)] | | [removed: 47,130] [added: 43,427] | | | | [removed: 46,200] [added: 47,396] | | | | [removed: 46,207] [added: 46,083] | | | | [removed: 33,790] [added: 46,207] | | | | [removed: 31,434] [added: 33,790] | | |

| Total [removed: (deficit)] equity [removed: (b)(d)] [added: (deficit) (c)(e)] | | [removed: (609] [added: 1,449] | | [removed: )] | | [removed: 1,606] [added: (776] | | [added: )] | | [removed: 3,097] [added: 1,477] | | | | [removed: 3,400] [added: 3,097] | | | | [removed: 4,918] [added: 3,400] | | |

| Common shares in stockholders’ equity at year-end | | [removed: 284] [added: 281] | | | | [removed: 289] [added: 284] | | | | [removed: 303] [added: 289] | | | | [removed: 314] [added: 303] | | | | [removed: 319] [added: 314] | | |

| Net cash provided by operating activities [removed: (b)(j)] [added: (c)(k)] | | $ | [removed: 6,476] [added: 3,138] | | | $ | [removed: 5,189] [added: 6,476] | | | $ | [removed: 5,101] [added: 5,189] | | | $ | [removed: 3,866] [added: 5,101] | | | $ | [removed: 4,546] [added: 3,866] | |

| Net cash used for investing activities [removed: (k)] [added: (l)] | | [removed: (1,147] [added: (1,075] | | ) | | [removed: (985] [added: (1,147] | | ) | | [removed: (9,734] [added: (985] | | ) | | [removed: (1,723] [added: (9,734] | | ) | | [removed: (1,121] [added: (1,723] | | ) |

| Net cash (used for) provided by financing activities [removed: (l)] [added: (m)] | | [removed: (4,305] [added: (4,152] | | ) | | [removed: (3,457] [added: (4,305] | | ) | | [removed: 4,277] [added: (3,457] | | [added: )] | | [removed: (3,314] [added: 4,277] | | [removed: )] | | [removed: (2,706] [added: (3,314] | | ) |

| [removed: (a)] [added: (b)] | Our operating profit and net earnings from continuing operations and earnings per share from continuing operations were affected by severance [added: and restructuring] charges of [removed: $80 million ($52] [added: $96] million [added: ($76 million,] or [removed: $0.17] [added: $0.26] per share, after tax) in [removed: 2016;] [added: 2018,] severance charges of [removed: $82] [added: $80] million [removed: ($53] [added: ($52] million or $0.17 per share, after tax) in [removed: 2015;] [added: 2016;] severance charges of [removed: $156] [added: $82] million [removed: ($101] [added: ($53] million or [removed: $0.31] [added: $0.17] per share, after tax) in [removed: 2013.] [added: 2015.] See “Note 15 – [added: Severance and] Restructuring Charges” included in our Notes to Consolidated Financial Statements for a discussion of [added: 2018 and] 2016 [added: severance] and [removed: 2015] restructuring charges. |

| [removed: (b)] [added: (c)] | The impact of our postretirement benefit plans can cause our operating profit, net earnings, cash flows and certain amounts recorded on our consolidated balance sheets to fluctuate. Accordingly, our [added: net] earnings were affected by a [added: net] FAS/CAS pension adjustment of [added: $1.0 billion in 2018,] $876 million in 2017, $902 million in 2016, $400 million in 2015, [removed: $317 million in 2014,] and [removed: $(500)] [added: $317] million in [removed: 2013.] [added: 2014.] We made [added: pension contributions of $5.0 billion in 2018,] $46 million in 2017, $23 million in 2016, [removed: and] $5 million in 2015 [removed: of pension contributions] (for our Sikorsky plan) and $2.0 billion in [removed: 2014, and $2.25 billion in 2013] [added: 2014] (for our legacy plans), and these contributions caused fluctuations in our operating cash flows and cash balance between each of those years. [removed: Fluctuations in our total assets, total liabilities and equity between years 2013 to 2014 primarily were due to the annual measurement of the funded status of our postretirement benefit plans.] See “Critical Accounting Policies - Postretirement Benefit Plans” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information. |

| [removed: (c)] [added: (d)] | In [removed: the fourth quarter of] 2017, we recorded a previously deferred non-cash gain of $198 million related to properties sold in 2015 as a result of completing our remaining obligations, which increased net earnings from continuing operations by $122 million ($0.42 per share). |

| [removed: (d)] [added: (e)] | In [removed: the fourth quarter of] 2017, we recorded a net one-time tax charge of [removed: $1.9] [added: $2.0] billion [removed: ($6.69] [added: ($6.77] per share), substantially all of which was non-cash, primarily related to the estimated impact of the Tax Cuts and Jobs Act (see “Note 9 – Income Taxes” included in our Notes to Consolidated Financial Statements). This charge along with our annual re-measurement adjustment related to our postretirement benefit plans of $1.4 billion resulted in a deficit in our total equity as of December 31, 2017. |

| [removed: (e)] [added: (f)] | Our net earnings from discontinued operations includes a $1.2 billion net gain in 2016 related to the divestiture of our IS&GS business. |

| [removed: (f)] [added: (g)] | Certain prior period amounts have been reclassified to conform to current year presentation. |

| [removed: (g)] [added: (h)] | Included in total current assets are assets of discontinued operations of $1.0 billion in [removed: 2015,] [added: 2015 and] $900 million in [removed: 2014, and $1.0 billion in 2013.] [added: 2014.] Included in total current liabilities are liabilities of discontinued operations of $900 million in [removed: each of the years 2015, 2014] [added: both 2015] and [removed: 2013.] [added: 2014.] Included in total assets are assets of discontinued operations of $4.1 billion in [removed: 2015, $4.2 billion in 2014,] [added: 2015] and [removed: $3.9] [added: $4.2] billion in [removed: 2013.] [added: 2014.] Included in total liabilities are liabilities of discontinued operations of $1.2 billion in [removed: each of the years 2015, 2014,] [added: both 2015] and [removed: 2013.] [added: 2014.] |

| [removed: (h)] [added: (i)] | The increase in our goodwill and total assets from 2014 to 2015 was primarily attributable to the Sikorsky acquisition, which resulted in an increase in goodwill and total assets as of December 31, 2015 of $2.8 billion and $11.7 billion, respectively. |

| [removed: (i)] [added: (j)] | The increase in our total debt and total liabilities from 2014 to 2015 was primarily a result of the debt incurred to fund the Sikorsky acquisition, as well as the issuance of debt in February of 2015 for general corporate [removed: purposes (see “Note 3 – Acquisitions and Divestitures” and “Note 10 – Debt” included in our Notes to Consolidated Financial Statements).] [added: purposes.] |

| [removed: (j)] [added: (k)] | The fluctuations in our net cash provided by operating activities between years [removed: 2013] [added: 2014] to [removed: 2017] [added: 2018] were due to changes in pension contributions, working capital and tax payments made. See “Liquidity and Cash Flows” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information. |

| [removed: (k)] [added: (l)] | The increase in our cash used for investing activities in 2015 was attributable to acquisitions of businesses, including the $9.0 billion acquisition of Sikorsky in 2015, net of cash [removed: acquired (see “Note 3 – Acquisitions and Divestitures” included in our Notes to Consolidated Financial Statements).] [added: acquired.] |

| [removed: (m)] [added: (n)] | Backlog at December 31, 2015 includes approximately $15.6 billion related to Sikorsky and excludes backlog at December 31, [removed: 2015, 2014,] [added: 2015] and [removed: 2013] [added: 2014] of $4.8 [removed: billion, $6.0 billion,] [added: billion] and [removed: $6.3] [added: $6.0] billion related to our IS&GS business, which we divested in 2016. |

| Operating profit (b)(c)(d) | | 7,334 | | | | 6,744 | | | | 5,888 | | | | 5,233 | | | | 5,445 | | |

| Basic (b)(c)(d)(e) | | 17.74 | | | | 6.56 | | | | 12.23 | | | | 10.07 | | | | 10.27 | | |

| Diluted (b)(c)(d)(e) | | 17.59 | | | | 6.50 | | | | 12.08 | | | | 9.93 | | | | 10.09 | | |

| Basic (c)(d)(e) | | 17.74 | | | | 6.82 | | | | 17.28 | | | | 11.62 | | | | 11.41 | | |

| Diluted (c)(d)(e) | | 17.59 | | | | 6.75 | | | | 17.07 | | | | 11.46 | | | | 11.21 | | |

| Backlog (a)(n) | | $ | 130,468 | | | $ | 105,493 | | | $ | 103,458 | | | $ | 94,756 | | | $ | 74,500 | |

| (a) | Amounts for 2015 and 2014 do not reflect the impact of the adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, in the first quarter of 2018 (see “Note 1 – Significant Accounting Policies” included in our Notes to Consolidated Financial Statements). |

| (m) | The increase in our cash provided by financing activities in 2015 was primarily a result of the debt incurred to fund the Sikorsky acquisition. |

| | |

| --- | --- |

| Operating profit (a)(b)(c) | | 5,921 | | | | 5,549 | | | | 4,712 | | | | 5,012 | | | | 4,066 | | |

| Basic (a)(b)(c)(d) | | 6.70 | | | | 12.54 | | | | 10.07 | | | | 10.27 | | | | 8.42 | | |

| Diluted (a)(b)(c)(d) | | 6.64 | | | | 12.38 | | | | 9.93 | | | | 10.09 | | | | 8.27 | | |

| Basic (b)(c)(d) | | 6.96 | | | | 17.71 | | | | 11.62 | | | | 11.41 | | | | 9.29 | | |

| Diluted (b)(c)(d) | | 6.89 | | | | 17.49 | | | | 11.46 | | | | 11.21 | | | | 9.13 | | |

| Backlog (m) | | $ | 99,936 | | | $ | 96,158 | | | $ | 94,756 | | | $ | 74,500 | | | $ | 76,300 | |

| (l) | The increase in our cash provided by financing activities in 2015 was primarily a result of the debt incurred to fund the Sikorsky acquisition (see “Note 10 – Debt” included in our Notes to Consolidated Financial Statements). The increase in our cash used for financing activities in 2014 was due to decreased proceeds from stock option exercises; higher dividends paid and increased payments for repurchases of common stock. See “Liquidity and Cash Flows” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information. |

[added: Report of] Independent Registered Public Accounting [removed: Firm,][added: Firm]

We have audited the accompanying consolidated balance sheets of Lockheed Martin Corporation (the [removed: “Corporation”)] [added: Corporation)] as of December 31, [removed: 2017 and 2016,] [added: 2018] and [added: 2017,] the related consolidated statements of earnings, comprehensive income, [removed: equity,] [added: equity] and cash [removed: flows,] [added: flows] for each of the three years in the period ended December 31, [removed: 2017.][added: 2018, and the related notes (collectively referred to as the “consolidated financial statements”).]

In our opinion, the [added: consolidated] financial statements present fairly, in all material respects, the consolidated financial position of the Corporation [removed: as of] [added: at] December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, [removed: 2017,] [added: 2018,] in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Corporation’s internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] based on criteria established in Internal [removed: Control - Integrated] [added: Control-Integrated] Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 [removed: framework),] [added: framework)] and our report dated February [removed: 6, 2018] [added: 8, 2019] expressed an unqualified opinion thereon.

Such procedures [removed: include] [added: included] examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

| | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Total net sales | | [removed: 51,048] [added: 47,248] | | | | [removed: 47,248] | [added: 42] | | | [removed: 40,536] | | [added: —] | [added: | | | | 47,290 | | | |]

| Severance charges | | [added: (80 | | ) | | |] — | | | | [removed: (80] | [added: —] | [removed: )] | | [removed: (82] | | [added: (80 | |] ) | [added: |]

| Other unallocated, net | | 655 | | | | [removed: 550] | [added: —] | | | [removed: (47] | | [removed: )] [added: 846] | [added: | | | | 1,501 | | | |]

| Total cost of sales | | (45,500 | | ) | | [removed: (42,186] | [added: 1,065] | [removed: )] | | [removed: (36,044] | | [added: 846 | | | | | (43,589 | |] ) | [added: |]

| Gross profit | | 5,548 | | | | [removed: 5,062] | [added: (23] | | [added: )] | [removed: 4,492] | | [added: 846] | [added: | | | | 6,371 | | | |]

| Other income, net | | [removed: 373] [added: 60] | | | | [removed: 487] [added: 373] | | | | [removed: 220] [added: 487] | | |

| Operating profit | | 5,921 | | | | [removed: 5,549] | [added: (23] | | [added: )] | [removed: 4,712] | | [added: 846] | [added: | | | | 6,744 | | | |]

| Interest expense | | [removed: (651] [added: (668] | | ) | | [removed: (663] [added: (651] | | ) | | [removed: (443] [added: (663] | | ) |

| Other non-operating [removed: (expense) income,] [added: expense,] net | | [removed: (1] [added: —] | | [removed: )] | | [added: |] — | | | | [removed: 30] | [added: (471] | | [added: ) | | | (471 | | ) | |]

| Earnings from continuing operations before income taxes | | [removed: 5,269] [added: 5,838] | | | | [removed: 4,886] [added: 5,246] | | | | [removed: 4,299] [added: 4,754] | | |

| Income tax expense | | (3,340 | | ) | | [removed: (1,133] | [added: (16] | [added: |] ) | | [removed: (1,173] | [added: —] | [added: | | | | (3,356 | |] ) | [added: |]

| Net earnings from continuing operations | | 1,929 | | | | [removed: 3,753] | [added: (39] | | [added: )] | [removed: 3,126] | | [added: —] | [added: | | | | 1,890 | | | |]

| Net earnings from discontinued operations | | [removed: 73] [added: 1,549] | | | | [removed: 1,549] | [added: (37] | | [added: )] | [removed: 479] | | [added: —] | [added: | | | | 1,512 | | | |]

| Net earnings | | $ | 2,002 | | | [added: |] $ | [removed: 5,302] [added: (39] | [added: )] | | [added: |] $ | [removed: 3,605] [added: —] | | [added: | | $ | 1,963 | | |]

| Continuing operations | | $ | 6.70 | | | [added: |] $ | [removed: 12.54] [added: (0.14] | [added: )] | | [added: |] $ | [removed: 10.07] [added: —] | | [added: | | $ | 6.56 | | |]

| Discontinued operations | | 0.26 | | | | [removed: 5.17] | [added: —] | | | [removed: 1.55] | | [added: —] | [added: | | | | 0.26 | | | |]

| Basic earnings per common share | | $ | 6.96 | | | [added: |] $ | [removed: 17.71] [added: (0.14] | [added: )] | | [added: |] $ | [removed: 11.62] [added: —] | | [added: | | $ | 6.82 | | |]

| Continuing operations | | $ | 6.64 | | | [added: |] $ | [removed: 12.38] [added: (0.14] | [added: )] | | [added: |] $ | [removed: 9.93] [added: —] | | [added: | | $ | 6.50 | | |]

| Discontinued operations | | 0.25 | | | | [removed: 5.11] | [added: —] | | | [removed: 1.53] | | [added: —] | [added: | | | | 0.25 | | | |]

| Diluted earnings per common share | | $ | 6.89 | | | [added: |] $ | [removed: 17.49] [added: (0.14] | [added: )] | | [added: |] $ | [removed: 11.46] [added: —] | | [added: | | $ | 6.75 | | |]

| Other comprehensive [removed: (loss) income,] [added: income (loss),] net of tax | | | | | | | | | | | | |

| Net other comprehensive loss recognized during the period, net of tax benefit of [removed: $375] [added: $136] million in [removed: 2017, $668] [added: 2018, $375] million in [removed: 2016] [added: 2017] and [removed: $192] [added: $668] million in [removed: 2015] [added: 2016] | | [removed: (1,380] [added: (501] | | ) | | [removed: (1,232] [added: (1,380] | | ) | | [removed: (351] [added: (1,232] | | ) |

| Amounts reclassified from accumulated other comprehensive loss, net of tax expense of [removed: $437] [added: $327] million in [removed: 2017, $382] [added: 2018, $437] million in [removed: 2016] [added: 2017] and [removed: $464] [added: $382] million in [removed: 2015] [added: 2016] | | [removed: 802] [added: 1,202] | | | | [removed: 699] [added: 802] | | | | [removed: 850] [added: 699] | | |

| Reclassifications from divestiture of IS&GS business | | — | | | | [removed: (134] [added: —] | | [removed: )] | | [removed: —] [added: (134] | | [added: )] |

| Other, net | | [removed: 140] [added: (75] | | [added: )] | | [removed: 9] [added: 141] | | | | [removed: (73] [added: 9] | | [removed: )] |

| Other comprehensive [removed: (loss) income,] [added: (loss),] net of tax | [added: —] | [removed: (438] | | [added: — | | | | — | | | (658 | |] ) | | (658 | | ) | | [removed: 426] [added: —] | | | [added: | (658 | | ) |]

| | | [added: 2018 | | | |] 2017 | | | | 2016 | | |

| Cash and cash equivalents | | $ | 2,861 | | | [added: |] $ | [removed: 1,837] [added: —] | | [added: | | $ | 2,861 | | |]