Lockheed Martin 2015 Annual Report Download - page 36

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, logistics and information services. We serve both U.S. and international
customers with products and services that have defense, civil and commercial applications, with our principal customers
being agencies of the U.S. Government. In 2015, 78% of our $46.1 billion in net sales were from the U.S. Government, either
as a prime contractor or as a subcontractor (including 58% from the Department of Defense (DoD)), 21% were from
international customers (including foreign military sales (FMS) contracted through the U.S. Government) and 1% were from
U.S. commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security and
information technology, including cybersecurity.
We operate in 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 products and services offered.
We operate 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 our U.S. and international customers at affordable prices. Recognizing that our customers
are resource constrained, we are endeavoring to develop and extend our portfolio domestically in a disciplined manner with a
focus on adjacent markets close to our core capabilities, as well as growing our international sales. We continue to focus on
affordability initiatives. We also expect to continue to 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 substantially all of our free cash flow1to our investors in the form of dividends and share repurchases over the next
two years.
We expect 2016 net sales will increase in the high single digit range from 2015 levels. The projected growth is driven by
the addition of Sikorsky and increased volume expected on the F-35 program, offset by volume declines at our IS&GS and
Space Systems business segments. We expect our 2016 segment operating profit will decline in the high single digit range
from 2015 levels due to an expected decrease in segment operating profit at our IS&GS, MFC and Space Systems business
segments. Operating margin is expected to decline due to costs associated with the Sikorsky acquisition, including the impact
of purchase accounting adjustments, integration costs and inherited restructuring costs associated with actions committed to
by Sikorsky prior to acquisition. Accordingly, we expect 2016 segment operating profit margin will be below 2015 levels, in
the 10% range. Our 2016 outlook includes amounts for the government IT infrastructure services and technical services
businesses we expect to divest. The 2016 outlook will not be adjusted to exclude these businesses until a divestiture is
completed. Our outlook for 2016 assumes the U.S. Government continues to support and fund our key programs, consistent
with the government fiscal year (GFY) 2016 budget. Changes in circumstances may require us to revise our assumptions,
which could materially change our current estimate of 2016 net sales and operating profit margin. 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.
Portfolio Shaping Activities
We continuously strive to strengthen our portfolio of products and services to meet the current and future needs of our
customers. We accomplish this in part by our independent research and development activities and through acquisition,
divestiture and internal realignment activities.
We selectively pursue the acquisition of businesses and investments at attractive valuations that will expand or
complement our current portfolio and allow access to new customers or technologies. We also may explore the divestiture of
businesses that no longer meet our needs or strategy or that could perform better outside of our organization. In pursuing our
business strategy, we routinely conduct discussions, evaluate targets and enter into agreements regarding possible
acquisitions, divestitures, ventures and equity investments.
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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