Lockheed Martin 2010 Annual Report Download - page 29

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management Overview
Lockheed Martin is a global security company that principally is engaged in the research, design, development, manufacture,
integration, and sustainment of advanced technology systems and products. We provide a broad range of management, engineering,
technical, scientific, logistic, and information services. We serve both domestic and international customers with products and services
that have defense, civil, and commercial applications, with our principal customers being agencies of the U.S. Government. In 2010,
84% of our $45.8 billion in net sales were made to the U.S. Government. Approximately 60% of our net sales were made to the
Department of Defense (DoD), with approximately 24% attributable to non-DoD agencies. Sales to foreign governments (including
foreign military sales funded, in whole or in part, by the U.S. Government) amounted to 15% of net sales in 2010. The remainder of
our net sales was attributable to commercial and other customers. Our main areas of focus are in defense, space, intelligence,
homeland security, and government information technology.
We operate in four principal business segments: Aeronautics, Electronic Systems, Information Systems & Global Solutions
(IS&GS), and Space Systems. We organize our business segments based on the nature of the products and services offered.
We are operating in an environment that is characterized by both increasing complexity in the global security environment, as
well as continuing economic pressures in the United States and globally. A significant component of our strategy in this environment
is to focus on core program execution, improving the quality and predictability of the delivery of our products and services, and
placing more security capability into the hands of our customers at affordable prices. We also are focused on cost reduction, through
programs like our recent Voluntary Executive Separation Program (VESP) and facility reduction initiatives, to further enhance the
affordability of our products and services.
While we expect our sales to increase in the low single digits for 2011, growth rates are slowing for our company and across the
industry as compared to prior years as our customers are preparing to meet new security challenges without the benefit of increased
resources in any given fiscal year. We expect our segment operating profit for 2011 to be consistent with 2010 as margins face
pressure in this environment. Despite the challenges we face, we expect to generate strong operating cash flows, which allows us to
continue to invest in technologies to fulfill new mission requirements for our customers, invest in our people so that we have the
professional and leadership skills necessary to be successful in this environment, and return at least 50% of free cash flow1 to investors
in the form of share repurchases and dividends.
Industry Considerations
U.S. Government Business
Budget Priorities
The U.S. Government continues to focus on developing and implementing spending, tax, and other initiatives to stimulate the
economy, create jobs, and reduce the deficit. The Administration is attempting to balance decisions regarding defense, homeland
security, and other federal spending priorities with the cost of these initiatives and increased deficit spending, particularly in the longer
term. Although some specific priorities and initiatives may change from year to year, the investments and acquisitions we have made
have been focused on aligning our businesses to address what we believe are the most critical national priorities and mission areas.
The possibility remains, however, that one or more of our programs could be reduced, extended, or terminated as a result of the
Administration’s continuing assessment of priorities.
The Administration’s spending priorities were released on February 14, 2011 with the submission of the President’s Budget
Request for fiscal year 2012. Every year, Congress must approve or revise the proposals contained in the President’s annual budget
request through enactment of appropriations bills and other policy legislation, which then require final Presidential approval. The
outcome of the federal budget process has a direct effect on our business.
1 We define free cash flow as cash from operations as determined under U.S. generally accepted accounting principles (GAAP),
less the amount identified as expenditures for property, plant and equipment as presented on our Statements of Cash Flows.
Department of Defense Business
The DoD base budget has seen consistent growth over the past ten years, enabling it to grow from $300 billion at the start of the
last decade to $553 billion in the President’s baseline budget request for fiscal year 2012. The fiscal year 2012 request represents
nominal growth of 5.1% over the fiscal year 2011 baseline budget of $526 billion. This 2011 baseline budget assumes that the
continuing resolution currently in place (see discussion below) is extended through the end of fiscal year 2011. Preliminary insights
into national security funding priorities for fiscal year 2012 and beyond were revealed on January 6, 2011 by Secretary of Defense
Robert Gates. Specifically, his defense spending proposal reflected a slight increase in nominal growth over the next few years.