Lockheed Martin 2013 Annual Report Download - page 32

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Business Overview
We are a global security and aerospace company principally engaged in the research, design, development, manufacture,
integration and sustainment of advanced technology systems, products and services. We also provide a broad range of
management, engineering, technical, scientific, 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 2013, 82% of our $45.4 billion in net sales were from the U.S. Government, either
as a prime contractor or as a subcontractor (including 61% from the Department of Defense (DoD)), 17% were from
international customers (including foreign military sales (FMS) contracted through the U.S. Government), and 1% were from
U.S. commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security, and
information technology, including cyber security.
We operate in five business segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and
Fire Control (MFC), Mission Systems and Training (MST), and Space Systems. We organize our business segments based on
the nature of the products and services offered.
We are operating in an environment characterized by both increasing complexity in global security and continuing
economic pressures in the U.S. and globally. A significant component of our strategy in this environment is to focus on
program execution, improving the quality and predictability of the delivery of our products and services, and placing security
capability quickly into the hands of both our domestic and international customers at affordable prices. Recognizing that our
customers are resource constrained, we are endeavoring to develop and extend our portfolio domestically in a disciplined
manner with a focus on adjacent markets close to our core capabilities, as well as growing our international sales. We
continue to focus on affordability initiatives as demonstrated by our plan to close and consolidate several of our facilities as
we announced in November 2013. We also expect to continue to 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 at least 50% of free cash flow1to our investors in the form of dividends and share repurchases.
We expect 2014 net sales will decline slightly from 2013 due to projected lower net sales at Space Systems and IS&GS,
partially offset by an anticipated increase in net sales at Aeronautics. We expect our 2014 segment operating profit will also
decrease from 2013 at a slightly higher percentage rate than the decline in net sales due an anticipated decrease in segment
operating profit at each of our business segments, with the exception of Aeronautics. Accordingly, segment operating profit
margin is also expected to be lower than 2013 levels. For additional information related to trends in net sales and operating
profit at our business segments, see the “Business Segment Results of Operations” section below.
Industry Considerations
U.S. Government Funding Constraints
The U.S. Government, our principal customer, continues to face significant fiscal and economic challenges such as
financial deficits, budget uncertainty, increasing debt levels, and an economy with restrained growth. In order to address
these challenges, the U.S. Government continues to focus on discretionary spending, entitlement programs, taxes, and other
initiatives to stimulate the economy, create jobs, and reduce the deficit. In doing so, the Administration and Congress must
balance decisions regarding defense, homeland security, and other federal spending priorities in a constrained fiscal
environment largely imposed by the Budget Control Act of 2011 (Budget Control Act). The Budget Control Act established
limits on discretionary spending, which provided for reductions to planned defense spending of $487 billion over a 10 year
period that began with government fiscal year (GFY) 2012 (a U.S. Government fiscal year starts on October 1 and ends on
September 30).
The Budget Control Act also provided for additional automatic spending reductions, known as sequestration, which went
into effect on March 1, 2013, that would reduce planned defense spending by another $500 billion over a nine-year period
that began in GFY 2013. These additional spending reductions are arbitrary as they would be applied across-the-board to
numerous programs and contracts without regard to national priorities. While the defense budget will sustain the largest
single reduction, other civil agencies and programs are also impacted by significant spending reductions. In light of the
Budget Control Act and deficit reduction pressures, it is likely that discretionary spending by the U.S. Government will
remain constrained for a number of years.
1We define free cash flow as cash from operations as determined under U.S. generally accepted accounting principles (GAAP), less capital
expenditures as presented on our Statements of Cash Flows.
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