Lockheed Martin 2015 Annual Report Download - page 39

government shutdowns could arise. We anticipate there will continue to be significant debate within the U.S. Government
over defense spending throughout the budget appropriations process for GFY 2017 and beyond. The outcome of these
debates could have long-term consequences for our industry and company as described below. However, we continue to
believe that our portfolio of products and services will continue to be well supported in a strategically focused allocation of
budget resources.
Potential Impacts of Budget Reductions
While recent budget actions provide a more measured and strategic approach to addressing the U.S. Government’s fiscal
challenges, sequestration remains a long-term concern. If not further modified, sequestration could have significant negative
impacts on our industry and company in future periods. There may be disruption of ongoing programs, impacts to our supply
chain, contractual actions (including partial or complete terminations), potential facilities closures, and thousands of
personnel reductions across the industry that will severely impact advanced manufacturing operations and engineering
expertise, and accelerate the loss of skills and knowledge. Sequestration, or other budgetary cuts in lieu of sequestration,
could have a material negative effect on our company.
Despite the continued uncertainty surrounding U.S. Government budgets, we have sought to align our businesses with
what we believe are the most critical national priorities and mission areas. Additionally, we are seeking to lessen our
dependence on contracts with the U.S. Government by focusing on expanding into adjacent markets close to our core
capabilities and growing international sales but we may not be successful in this strategy. The possibility remains, however,
that our programs could be materially reduced, extended, or terminated as a result of the U.S. Government’s continuing
assessment of priorities, changes in government priorities, or budget reductions, including sequestration (particularly in those
circumstances where sequestration is implemented across-the-board without regard to national priorities). Additionally,
decreases in production volume associated with budget cuts, including sequestration, will increase unit costs making our
products less affordable for both our U.S. and international customers. In particular, if sequestration level spending cuts are
reinstated in GFY 2018, we may experience significant rescheduling or termination activity with our supplier base. Such
activity could result in claims from our suppliers, which may include the amount established in any settlement agreements,
the costs of evaluating the supplier settlement proposals, and the costs of negotiating settlement agreements. Budget cuts,
including sequestration, could result in restructuring charges, impairment of assets, including goodwill, or other charges. We
expect costs associated with claims from our suppliers and restructuring charges will be recovered from our customers.
Generally, we expect that the impact of budget reductions on our operating results will lag in certain of our businesses
with longer cycles such as our Aeronautics and Space Systems business segments, and our products businesses within our
MFC and MST business segments, due to our production contract backlog. However, our businesses with smaller, short-term
contracts are the most susceptible to the impacts of budget reductions, such as our IS&GS business segment. We have also
experienced increased market pressures in these services businesses including lower in-theater support as troop levels are
drawn down and increased re-competition on existing contracts coupled with the fragmentation of large contracts into
multiple smaller contracts that are awarded primarily on the basis of price. Additionally, our services businesses across most
of our business segments have experienced lower volume due to improved product field performance that require less service
support.
International Business
A key component of our strategic plan is to grow our international sales. To accomplish this growth, we continue to
focus on expanding our in-country presence and strengthening our relationships internationally through partnerships and
local production joint technology offices. Since 2013, we have acquired Amor Group, a United Kingdom-based company,
and we have opened new in-country offices including in Israel, United Kingdom, the United Arab Emirates (UAE), Saudi
Arabia and Qatar that will enable development of ventures to create products and enhance our offerings in technology,
aerospace and security sectors. We conduct business with international customers primarily through our Aeronautics, MFC
and MST business segments.
In our Aeronautics business segment, there remains strong international interest in the F-35 program. The F-35 program
includes commitments from eight international partner countries and three international customers; as well as expressions of
interest from other countries. The U.S. Government and the eight partner countries continue to work together on the design,
testing, production and sustainment of the F-35. The international role on the program continues to grow as we have
successfully delivered aircraft to five international partners, including the first two Norwegian aircraft. In 2015, the first
Italian Final Assembly and Check-Out Facility produced F-35 aircraft was delivered. The award of the Low Rate Initial
Production (LRIP) 9 undefinitized contract action in 2015 included 21 international orders for four international partners and
customers.
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