Lockheed Martin 2005 Annual Report Download - page 20

   

The฀ financial฀ section฀ of฀ our฀ Annual฀ Report฀ describes฀ our฀
ongoing฀ operations,฀ including฀ discussions฀ about฀ particular฀
lines฀of฀business฀or฀programs,฀our฀ability฀to฀finance฀our฀operat-
ing฀activities,฀and฀trends฀and฀uncertainties฀in฀our฀industry฀and฀
how฀ they฀might฀affect฀our฀ future฀ operations.฀ We฀ also฀discuss฀
those฀ items฀ affecting฀ our฀ results฀ that฀ were฀ not฀ considered฀ in฀
senior฀management’s฀assessment฀of฀the฀operating฀performance฀
of฀our฀business฀segments.฀We฀separately฀disclose฀these฀items฀to฀
assist฀in฀your฀evaluation฀of฀our฀overall฀operating฀performance฀
and฀financial฀condition฀of฀the฀consolidated฀company.฀We฀would฀
like฀to฀draw฀your฀attention฀to฀the฀following฀items฀disclosed฀in฀
this฀financial฀section฀and฀where฀you฀will฀find฀them:
Topic Location(s)
Critical฀accounting฀policies:฀
฀ ฀Contract฀accounting/฀
฀ revenue฀recognition
฀
Page฀22฀and฀page฀50
฀ Postretirement฀benefit฀plans Page฀24฀and฀page฀61
฀ Environmental฀matters Page฀26,฀page฀50฀and฀page฀68
Discussion฀of฀business฀segments Page฀28฀and฀page฀69
Liquidity฀and฀cash฀flows Page฀34฀and฀page฀46
Capital฀structure฀and฀resources Page฀35,฀page฀45,฀page฀47฀and฀
page฀59
Legal฀proceedings,฀commitments฀฀
฀ and฀contingencies
฀
Page฀37฀and฀page฀66
Stock-based฀compensation Page฀38,฀page฀51฀and฀page฀60


Customer฀requirements฀for฀defense฀and฀related฀advanced฀tech-
nology฀ systems฀ for฀ 2006฀ and฀ beyond฀ will฀ continue฀ to฀ be฀
affected฀by฀the฀global฀war฀on฀terrorism฀through฀the฀continued฀
need฀ for฀ military฀ missions฀ and฀ reconstruction฀ efforts฀ in฀ Iraq฀
and฀ Afghanistan฀ and฀ the฀ related฀ fiscal฀ consequences฀ of฀ war.฀
The฀ war฀ on฀ terrorism฀ has฀ focused฀ greater฀ attention฀ on฀ the฀
security฀ of฀ our฀ homeland฀ and฀ better฀ communication฀ and฀
interoperability฀ between฀ law฀ enforcement,฀ civil฀ government฀
agencies,฀ intelligence฀ agencies฀ and฀ our฀ military฀ services.฀ At฀
the฀same฀time,฀our฀nation’s฀overall฀defense฀posture฀continues฀
to฀ move฀ toward฀ a฀ more฀ joint-capabilities-based฀ structure,฀
which฀ creates฀ the฀ ability฀ for฀ a฀ more฀ flexible฀ response฀ with฀
greater฀ force฀ mobility,฀ stronger฀ space฀ capabilities,฀ enhanced฀
missile฀defense฀and฀improved฀information฀systems฀capabilities฀
and฀security.
The฀U.S.฀Department฀of฀Defense฀(DoD)฀recently฀completed฀
the฀ Congressionally฀ mandated฀ 2006฀ Quadrennial฀ Defense฀
Review฀(QDR).฀The฀QDR฀continues฀and฀accelerates฀the฀DoD’s฀
prior฀commitment฀to฀a฀transformation฀of฀the฀military฀to฀focus฀
more฀on฀the฀needs฀of฀its฀combatant฀commanders฀and฀to฀develop฀
portfolios฀ of฀ joint฀ capabilities฀ rather฀ than฀ stove-piped฀ pro-
grams.฀This฀ movement฀towards฀horizontally-integrated฀struc-
tures฀ is฀ expected฀ to฀ become฀ an฀ organizing฀ principle฀ for฀ the฀
DoD฀ in฀ making฀ investment฀ decisions฀ for฀ future฀ systems.฀ We฀
formed฀the฀Integrated฀Systems฀&฀Solutions฀business฀segment฀
in฀2003฀to฀help฀us฀better฀focus฀our฀integrated฀solutions฀capa-
bilities฀ across฀ the฀ Corporation฀ and฀ enhance฀ our฀ ability฀ to฀
serve฀as฀a฀lead฀partner฀with฀the฀DoD.฀In฀2005,฀we฀opened฀our฀
Center฀ for฀ Innovation,฀ a฀ state-of-the-art฀ facility฀ for฀ modeling฀
and฀simulating฀our฀net-centric฀solutions฀for฀our฀customers.฀
The฀President’s฀budget฀proposal฀for฀fiscal฀year฀2007฀and฀
beyond฀ presents฀ a฀ framework฀ to฀ reduce฀ the฀ federal฀ budget฀
deficit฀ while฀ prosecuting฀ the฀ global฀ war฀ on฀ terrorism.฀ The฀
DoD฀budget฀is฀growing,฀but฀at฀lower฀levels฀than฀in฀the฀past฀few฀
years,฀in฀order฀to฀continue฀the฀modernization฀and฀recapitaliza-
tion฀ that฀ began฀ earlier฀ this฀ decade.฀ The฀ budget฀ for฀ the฀
Department฀of฀Homeland฀Security฀is฀increasing,฀while฀spend-
ing฀across฀other฀non-defense฀federal฀agencies฀is฀anticipated฀to฀
decline฀through฀2011.฀These฀changes฀in฀the฀President’s฀budget฀
plan฀ reflect฀a฀commitment฀ to฀ a฀50%฀ reduction฀in฀ the฀ federal฀
budget฀ deficit฀ by฀ 2009,฀ and฀ the฀ sentiment฀ expressed฀ by฀ the฀
Federal฀ Reserve฀ that฀ sustained฀ federal฀ deficits฀ could฀ hamper฀
economic฀growth.
The฀President’s฀budget฀proposal฀includes฀$439฀billion฀for฀
the฀DoD,฀including฀$84฀billion฀for฀procurement฀of฀systems฀and฀
$73฀ billion฀ for฀ research฀ and฀ development.฀ Transformation฀ of฀
the฀ DoD฀ enterprise฀ and฀ accompanying฀ budget฀ pressures฀ also฀
may฀create฀additional฀opportunities฀for฀supply฀chain฀logistics,฀
business฀process฀management฀and฀outsourcing฀of฀service฀func-
tions฀by฀the฀military฀services,฀expanding฀the฀scope฀of฀private฀
sector฀contracting฀opportunities฀at฀the฀DoD.
The฀ Fiscal฀ Year฀ 2007-2011฀ Future฀ Years฀ Defense฀ Plan฀
(FYDP)฀projects฀sustained฀growth฀in฀the฀DoD’s฀top฀line฀bud-
get,฀rising฀from฀$439฀billion฀in฀2007฀to฀$502฀billion฀in฀2011.฀
These฀estimates฀do฀not฀include฀any฀allowance฀to฀fund฀ongoing฀
military฀ operations฀ in฀ Iraq,฀ Afghanistan฀ and฀ the฀ global฀ war฀฀
on฀ terrorism,฀ which฀ are฀ expected฀ to฀ be฀ addressed฀ through฀
annual฀ supplemental฀ appropriations฀ as฀ required.฀ The฀ DoD’s฀
continued฀ emphasis฀on฀ systems฀modernization฀is฀reflected฀in฀
the฀proposed฀growth฀ in฀the฀FYDP฀for฀Procurement,฀which฀is฀
Lockheed฀Martin฀Corporation
MANAGEMENT’S฀DISCUSSION฀AND฀ANALYSIS฀OF฀
FINANCIAL฀CONDITION฀AND฀RESULTS฀OF฀OPERATIONS
December฀31,฀2005