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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q 
 
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number: 1-11437 
 
LOCKHEED MARTIN CORPORATION
(Exact name of registrant as specified in its charter) 
Maryland
 
52-1893632
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
6801 Rockledge Drive,
Bethesda,
Maryland
 
20817
(Address of principal executive offices)
 
(Zip Code)
(301) 897-6000
(Registrant’s telephone number, including area code) 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $1 par value
LMT
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
Large accelerated filer Accelerated filer Non–accelerated filer Smaller reporting company Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
There were 280,435,314 shares of our common stock, $1 par value per share, outstanding as of April 17, 2020.
 



Lockheed Martin Corporation
Form 10-Q
For the Quarterly Period Ended March 29, 2020
Table of Contents 
 
 
 
Page
 
 
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
 
 
ITEM 3.
 
 
 
 
 
ITEM 4.
 
 
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
ITEM 1A.
 
 
 
 
 
ITEM 2.
 
 
 
 
 
ITEM 6.
 
 
 




PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Lockheed Martin Corporation
Consolidated Statements of Earnings
(unaudited; in millions, except per share data)
 
 
Quarters Ended
 
 
 
March 29,
2020
 
March 31,
2019
 
Net sales
 
 
 
 
 
 
 
Products
 
$
13,166

 
 
$
11,970

 
 
Services
 
2,485

 
 
2,366

 
 
Total net sales
 
15,651

 
 
14,336

 
 
Cost of sales
 
 
 
 

 
 
Products
 
(11,742
)
 
 
(10,625
)
 
 
Services
 
(2,213
)
 
 
(2,047
)
 
 
Other unallocated, net
 
395

 
 
524

 
 
Total cost of sales
 
(13,560
)
 
 
(12,148
)
 
 
Gross profit
 
2,091

 
 
2,188

 
 
Other income, net
 
31

 
 
95

 
 
Operating profit
 
2,122

 
 
2,283

 
 
Interest expense
 
(148
)
 
 
(171
)
 
 
Other non-operating income (expense), net
 
56

 
 
(167
)
 
 
Earnings before income taxes
 
2,030

 
 
1,945

 
 
Income tax expense
 
(313
)
 
 
(241
)
 
 
Net earnings
 
$
1,717

 
 
$
1,704

 
 
 
 
 
 
 

 
 
Earnings per common share
 
 
 
 

 
 
Basic
 
$
6.10

 
 
$
6.03

 
 
Diluted
 
$
6.08

 
 
$
5.99

 
 
 
 
 
 
 
 
 
 
Cash dividends paid per common share
 
$
2.40

 
 
$
2.20

 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.


3



Lockheed Martin Corporation
Consolidated Statements of Comprehensive Income
(unaudited; in millions)
 
 
Quarters Ended
 
 
 
March 29,
2020
 
March 31,
2019
 
Net earnings
 
$
1,717

 
 
$
1,704

 
 
Other comprehensive income, net of tax
 
 
 
 

 
 
Recognition of previously deferred postretirement benefit plan amounts
 
110

 
 
227

 
 
Other, net
 
(97
)
 
 

 
 
Other comprehensive income, net of tax
 
13

 
 
227

 
 
Comprehensive income
 
$
1,730

 
 
$
1,931

 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.


4



Lockheed Martin Corporation
Consolidated Balance Sheets
(in millions, except par value)
 
 
March 29,
2020
 
December 31,
2019
 
 
(unaudited)
 
 
 
Assets
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,988

 
 
$
1,514

 
Receivables, net
 
2,892

 
 
2,337

 
Contract assets
 
10,189

 
 
9,094

 
Inventories
 
3,539

 
 
3,619

 
Other current assets
 
614

 
 
531

 
Total current assets
 
19,222

 
 
17,095

 
Property, plant and equipment, net
 
6,605

 
 
6,591

 
Goodwill
 
10,565

 
 
10,604

 
Intangible assets, net
 
3,142

 
 
3,213

 
Deferred income taxes
 
3,164

 
 
3,319

 
Other noncurrent assets
 
6,550

 
 
6,706

 
Total assets
 
$
49,248

 
 
$
47,528

 
Liabilities and equity
 
 
 
 

 
Current liabilities
 
 
 
 

 
Accounts payable
 
$
3,166

 
 
$
1,281

 
Contract liabilities
 
7,205

 
 
7,054

 
Salaries, benefits and payroll taxes
 
2,022

 
 
2,466

 
Current maturities of long-term debt
 
1,250

 
 
1,250

 
Other current liabilities
 
2,009

 
 
1,921

 
Total current liabilities
 
15,652

 
 
13,972

 
Long-term debt, net
 
11,439

 
 
11,404

 
Accrued pension liabilities
 
13,078

 
 
13,234

 
Other noncurrent liabilities
 
5,592

 
 
5,747

 
Total liabilities
 
45,761

 
 
44,357

 
Stockholders’ equity
 
 
 
 

 
Common stock, $1 par value per share
 
279

 
 
280

 
Additional paid-in capital
 

 
 

 
Retained earnings
 
18,708

 
 
18,401

 
Accumulated other comprehensive loss
 
(15,541
)
 
 
(15,554
)
 
Total stockholders’ equity
 
3,446

 
 
3,127

 
Noncontrolling interests in subsidiary
 
41

 
 
44

 
Total equity
 
3,487

 
 
3,171

 
Total liabilities and equity
 
$
49,248

 
 
$
47,528

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.


5



Lockheed Martin Corporation
Consolidated Statements of Cash Flows
(unaudited; in millions)
 
 
Quarters Ended
 
 
March 29,
2020
 
March 31,
2019
Operating activities
 
 
 
 
 
 
Net earnings
 
$
1,717

 
 
$
1,704

 
Adjustments to reconcile net earnings to net cash provided by operating activities
 
 
 
 
 
 
Depreciation and amortization
 
301

 
 
277

 
Stock-based compensation
 
42

 
 
37

 
Gain on property sale
 

 
 
(51
)
 
Changes in assets and liabilities
 
 
 
 

 
Receivables, net
 
(555
)
 
 
(389
)
 
Contract assets
 
(1,095
)
 
 
(1,025
)
 
Inventories
 
80

 
 
(288
)
 
Accounts payable
 
1,894

 
 
744

 
Contract liabilities
 
151

 
 
305

 
Postretirement benefit plans
 
(39
)
 
 
278

 
Income taxes
 
167

 
 
243

 
Other, net
 
(349
)
 
 
(172
)
 
Net cash provided by operating activities
 
2,314

 
 
1,663

 
Investing activities
 
 
 
 

 
Capital expenditures
 
(293
)
 
 
(284
)
 
Other, net
 
(2
)
 
 
27

 
Net cash used for investing activities
 
(295
)
 
 
(257
)
 
Financing activities
 
 
 
 

 
Dividends paid
 
(693
)
 
 
(638
)
 
Repurchases of common stock
 
(756
)
 
 
(281
)
 
Repayments of commercial paper, net
 

 
 
(200
)
 
Other, net
 
(96
)
 
 
(68
)
 
Net cash used for financing activities
 
(1,545
)
 
 
(1,187
)
 
Net change in cash and cash equivalents
 
474

 
 
219

 
Cash and cash equivalents at beginning of period
 
1,514

 
 
772

 
Cash and cash equivalents at end of period
 
$
1,988

 
 
$
991

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.


6



Lockheed Martin Corporation
Consolidated Statements of Equity
(unaudited; in millions)
 
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
Noncontrolling
Interests in
Subsidiary
Total
Equity
Balance at December 31, 2019
$
280

$

 
$
18,401

$
(15,554
)
 
$
3,127

 
$
44

 
$
3,171

Net earnings


 
1,717


 
1,717

 

 
1,717

Other comprehensive income, net of tax


 

13

 
13

 

 
13

Repurchases of common stock
(2
)
(29
)
 
(733
)

 
(764
)
 

 
(764
)
Dividends declared


 
(677
)

 
(677
)
 

 
(677
)
Stock-based awards, ESOP activity and other
1

29

 


 
30

 

 
30

Net decrease in noncontrolling interests in subsidiary


 


 

 
(3
)
 
(3
)
Balance at March 29, 2020
$
279

$

 
$
18,708

$
(15,541
)
 
$
3,446

 
$
41

 
$
3,487

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
281

$

 
$
15,434

$
(14,321
)
 
$
1,394

 
$
55

 
$
1,449

Net earnings


 
1,704


 
1,704

 

 
1,704

Other comprehensive income, net of tax


 

227

 
227

 

 
227

Repurchases of common stock
(1
)
(46
)
 
(237
)

 
(284
)
 

 
(284
)
Dividends declared


 
(623
)

 
(623
)
 

 
(623
)
Stock-based awards, ESOP activity and other
1

46

 


 
47

 

 
47

Net increase in noncontrolling interests in subsidiary


 


 

 
2

 
2

Balance at March 31, 2019
$
281

$

 
$
16,278

$
(14,094
)
 
$
2,465

 
$
57

 
$
2,522

The accompanying notes are an integral part of these unaudited consolidated financial statements.


7


Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited)



NOTE 1 – BASIS OF PRESENTATION
We prepared these consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of U.S. Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of management, these consolidated financial statements reflect all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations, financial condition, and cash flows for the interim periods presented. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates. Significant estimates inherent in the preparation of our consolidated financial statements include, but are not limited to, accounting for sales and cost recognition, postretirement benefit plans, assets for the portion of environmental costs that are probable of future recovery and liabilities, evaluation of goodwill, investments and other assets for impairment, income taxes including deferred tax assets, fair value measurements and contingencies. The consolidated financial statements include the accounts of subsidiaries we control and variable interest entities if we are the primary beneficiary. We eliminate intercompany balances and transactions in consolidation.
We close our books and records on the last Sunday of the calendar quarter, which was on March 29 for the first quarter of 2020 and March 31 for the first quarter of 2019, to align our financial closing with our business processes. The consolidated financial statements and tables of financial information included herein are labeled based on that convention. This practice only affects interim periods as our fiscal year ends on December 31.
We adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective January 1, 2020 using the modified retrospective approach. The new standard changes how we account for credit losses for financial assets and certain other instruments, including trade receivables and contract assets, that are not measured at fair value through net income. Under legacy standards, we recognized an impairment of receivables when it was probable that a loss had been incurred. Under the new standard, we are required to recognize estimated credit losses expected to occur over the estimated life or remaining contractual life of an asset (which includes losses that may be incurred in future periods) using a broader range of information including reasonable and supportable forecasts about future economic conditions. The adoption of the standard did not have a significant impact on our operating results, financial position or cash flows.
We adopted ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements For Defined Benefit Plans, effective January 1, 2020. The new standard modifies the annual disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance requires disclosure changes to be presented on a retrospective basis. As this standard relates only to financial disclosures, its adoption did not have an impact to our operating results, financial position or cash flows.
The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the full year or future periods. Unless otherwise noted, we present all per share amounts cited in these consolidated financial statements on a “per diluted share” basis. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K).

8



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

NOTE 2 – EARNINGS PER COMMON SHARE
The weighted average number of shares outstanding used to compute earnings per common share were as follows (in millions):
 
 
Quarters Ended
 
 
 
March 29,
2020
 
March 31,
2019
 
Weighted average common shares outstanding for basic computations
 
281.3

 
 
282.5

 
 
Weighted average dilutive effect of equity awards
 
1.3

 
 
1.8

 
 
Weighted average common shares outstanding for diluted computations
 
282.6

 
 
284.3

 
 

We compute basic and diluted earnings per common share by dividing net earnings by the respective weighted average number of common shares outstanding for the periods presented. Our calculation of diluted earnings per common share also includes the dilutive effects for the assumed vesting of outstanding restricted stock units (RSUs) and performance stock units (PSUs) and exercise of outstanding stock options based on the treasury stock method. There were no significant anti-dilutive equity awards during the quarters ended March 29, 2020 or March 31, 2019.
NOTE 3 – INFORMATION ON BUSINESS SEGMENTS
We operate in four business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space. We organize our business segments based on the nature of products and services offered.
Net sales and operating profit of our business segments exclude intersegment sales, cost of sales, and profit as these activities are eliminated in consolidation. Business segment operating profit includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments.
Business segment operating profit also excludes the FAS/CAS operating adjustment described below, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. Government under the applicable U.S. government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance such as a portion of management and administration costs, legal fees and settlements, environmental costs, stock-based compensation expense, retiree benefits, significant severance actions, significant asset impairments, gains or losses from significant divestitures, and other miscellaneous corporate activities.
Excluded items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See “Note 10 – Other for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.

9



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

Summary operating results for each of our business segments were as follows (in millions):
 
 
Quarters Ended
 
 
 
March 29,
2020
 
March 31,
2019
 
Net sales
 
 
 
 
 
 
 
Aeronautics
 
$
6,369

 
 
$
5,584

 
 
Missiles and Fire Control
 
2,619

 
 
2,350

 
 
Rotary and Mission Systems
 
3,746

 
 
3,762

 
 
Space
 
2,917

 
 
2,640

 
 
Total net sales
 
$
15,651

 
 
$
14,336

 
 
Operating profit
 
 
 
 
 
 
 
Aeronautics
 
$
672

 
 
$
585

 
 
Missiles and Fire Control
 
396

 
 
417

 
 
Rotary and Mission Systems
 
376

 
 
379

 
 
Space
 
281

 
 
334

 
 
Total business segment operating profit
 
1,725

 
 
1,715

 
 
Unallocated items
 
 
 
 
 
 
 
FAS/CAS operating adjustment (a)
 
469

 
 
512

 
 
Stock-based compensation
 
(42
)
 
 
(37
)
 
 
Other, net
 
(30
)
 
 
93

 
 
Total unallocated items
 
397

 
 
568

 
 
Total consolidated operating profit
 
$
2,122

 
 
$
2,283

 
 
Intersegment sales
 
 
 
 
 
 
 
Aeronautics
 
$
59

 
 
$
42

 
 
Missiles and Fire Control
 
136

 
 
121

 
 
Rotary and Mission Systems
 
499

 
 
499

 
 
Space
 
108

 
 
68

 
 
Total intersegment sales
 
$
802

 
 
$
730

 
 
(a) 
The FAS/CAS operating adjustment represents the difference between the service cost component of financial accounting standards (FAS) pension income (expense) and total pension costs recoverable on U.S. Government contracts as determined in accordance with CAS.  

10



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

Our total net FAS/CAS pension adjustment for the quarters ended March 29, 2020 and March 31, 2019, including the service and non-service cost components of FAS pension income (expense) for our qualified defined benefit pension plans, were as follows (in millions):
 
 
Quarters Ended
 
 
 
March 29,
2020
 
March 31,
2019
 
Total FAS income (expense) and CAS costs
 
 
 
 
 
 
 
FAS pension income (expense)
 
$
30

 
 
$
(273
)
 
 
Less: CAS pension cost
 
494

 
 
641

 
 
Net FAS/CAS pension adjustment
 
$
524

 
 
$
368

 
 
 
 
 
 
 
 
 
 
Service and non-service cost reconciliation
 
 
 
 
 
 
 
FAS pension service cost
 
$
(25
)
 
 
$
(129
)
 
 
Less: CAS pension cost
 
494

 
 
641

 
 
FAS/CAS operating adjustment
 
469

 
 
512

 
 
Non-operating FAS pension income (expense)
 
55

 
 
(144
)
 
 
Net FAS/CAS pension adjustment
 
$
524

 
 
$
368

 
 
We recover CAS pension and other postretirement benefit plan cost through the pricing of our products and services on U.S. Government contracts and, therefore, recognize CAS cost in each of our business segment’s net sales and cost of sales. Our consolidated financial statements must present FAS pension and other postretirement benefit plan expense calculated in accordance with FAS requirements under U.S. GAAP. The operating portion of the net FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension income (expense) and total CAS pension cost. The non-service FAS pension income (expense) component is included in other non-operating income (expense), net in our consolidated statements of earnings. As a result, to the extent that CAS pension cost exceeds the service cost component of FAS pension income (expense), we have a favorable FAS/CAS operating adjustment.
The corporation will have FAS pension income in 2020, compared to FAS pension expense in prior periods. We will no longer have service costs for certain of our plans as a result of completing the planned freeze of our salaried pension plans effective January 1, 2020 that was previously announced on July 1, 2014. See “Note 6 – Postretirement Benefit Plans” for additional information regarding the corporation’s FAS pension expense or income and CAS pension cost.

11



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

Net sales by products and services, contract type, customer, and geographic region were as follows (in millions):
 
 
Quarter Ended March 29, 2020
 
 
Aeronautics
 
MFC
 
RMS
 
Space
 
Total
Net sales
 
 
 
 
 
 
 
 
 
 
Products
 
$
5,455

 
$
2,275

 
$
2,986

 
$
2,450

 
$
13,166

Services
 
914

 
344

 
760

 
467

 
2,485

Total net sales
 
$
6,369

 
$
2,619

 
$
3,746

 
$
2,917

 
$
15,651

Net sales by contract type
 
 
 
 
 
 
 
 
 
 
Fixed-price
 
$
4,584

 
$
1,718

 
$
2,482

 
$
519

 
$
9,303

Cost-reimbursable
 
1,785

 
901

 
1,264

 
2,398

 
6,348

Total net sales
 
$
6,369

 
$
2,619

 
$
3,746

 
$
2,917

 
$
15,651

Net sales by customer
 
 
 
 
 
 
 
 
 
 
U.S. Government
 
$
4,033

 
$
1,955

 
$
2,788

 
$
2,483

 
$
11,259

International (a)
 
2,321

 
660

 
855

 
420

 
4,256

U.S. commercial and other
 
15

 
4

 
103

 
14

 
136

Total net sales
 
$
6,369

 
$
2,619

 
$
3,746

 
$
2,917

 
$
15,651

Net sales by geographic region
 
 
 
 
 
 
 
 
 
 
United States
 
$
4,048

 
$
1,959

 
$
2,891

 
$
2,497

 
$
11,395

Asia Pacific
 
995

 
75

 
318

 
28

 
1,416

Europe
 
948

 
168

 
167

 
398

 
1,681

Middle East
 
328

 
407

 
207

 
(6
)
 
936

Other
 
50

 
10

 
163

 

 
223

Total net sales
 
$
6,369

 
$
2,619

 
$
3,746

 
$
2,917

 
$
15,651

 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter Ended March 31, 2019
 
 
Aeronautics
 
MFC
 
RMS
 
Space
 
Total
Net sales
 
 
 
 
 
 
 
 
 
 
Products
 
$
4,796

 
$
1,916

 
$
3,059

 
$
2,199

 
$
11,970

Services
 
788

 
434

 
703

 
441

 
2,366

Total net sales
 
$
5,584

 
$
2,350

 
$
3,762

 
$
2,640

 
$
14,336

Net sales by contract type
 
 
 
 
 
 
 
 
 
 
Fixed-price
 
$
4,170

 
$
1,535

 
$
2,619

 
$
523

 
$
8,847

Cost-reimbursable
 
1,414

 
815

 
1,143

 
2,117

 
5,489

Total net sales
 
$
5,584

 
$
2,350

 
$
3,762

 
$
2,640

 
$
14,336

Net sales by customer
 
 
 
 
 
 
 
 
 
 
U.S. Government
 
$
3,435

 
$
1,633

 
$
2,675

 
$
2,236

 
$
9,979

International (a)
 
2,095

 
670

 
995

 
395

 
4,155

U.S. commercial and other
 
54

 
47

 
92

 
9

 
202

Total net sales
 
$
5,584

 
$
2,350

 
$
3,762

 
$
2,640

 
$
14,336

Net sales by geographic region
 
 
 
 
 
 
 
 
 
 
United States
 
$
3,489

 
$
1,680

 
$
2,767

 
$
2,245

 
$
10,181

Asia Pacific
 
906

 
122

 
330

 
8

 
1,366

Europe
 
798

 
122

 
198

 
381

 
1,499

Middle East
 
337

 
413

 
285

 
6

 
1,041

Other
 
54

 
13

 
182

 

 
249

Total net sales
 
$
5,584

 
$
2,350

 
$
3,762

 
$
2,640

 
$
14,336

 
 
 
 
 
 
 
 
 
 
 

(a) 
International sales include foreign military sales (FMS) contracted through the U.S. Government and direct commercial sales to international governments and other international customers.

12



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

Our Aeronautics business segment includes our largest program, the F-35 Lightning II Joint Strike Fighter, an international multi-role, multi-variant, stealth fighter aircraft. Net sales for the F-35 program represented approximately 28% of our total consolidated net sales for the quarter ended March 29, 2020 and 26% of our total consolidated net sales for the quarter ended March 31, 2019.
Total assets for each of our business segments were as follows (in millions):
 
 
March 29,
2020
 
December 31,
2019
Assets
 
 
 
 
 
 
Aeronautics
 
$
10,003

 
 
$
9,109

 
Missiles and Fire Control
 
5,210

 
 
5,030

 
Rotary and Mission Systems
 
18,901

 
 
18,751

 
Space
 
6,164

 
 
5,844

 
Total business segment assets
 
40,278

 
 
38,734

 
Corporate assets (a)
 
8,970

 
 
8,794

 
Total assets
 
$
49,248

 
 
$
47,528

 
(a) 
Corporate assets primarily include cash and cash equivalents, deferred income taxes, assets for the portion of environmental costs that are probable of future recovery and investments held in a separate trust.
NOTE 4 – CONTRACT ASSETS AND LIABILITIES
Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract liabilities include advance payments and billings in excess of revenue recognized. Contract assets and contract liabilities were as follows (in millions):
 
 
March 29,
2020
 
December 31,
2019
Contract assets
 
$
10,189

 
 
$
9,094

 
Contract liabilities
 
7,205

 
 
7,054

 
Contract assets increased $1.1 billion during the quarter ended March 29, 2020, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the quarter ended March 29, 2020 for which we have not yet billed our customers. There were no significant credit or impairment losses related to our contract assets during the quarters ended March 29, 2020 and March 31, 2019.
Contract liabilities increased $151 million during the quarter ended March 29, 2020, primarily due to payments received in excess of revenue recognized on these performance obligations. During the quarter ended March 29, 2020, we recognized $1.6 billion of our contract liabilities that existed at December 31, 2019 as revenue. During the quarter ended March 31, 2019, we recognized $1.8 billion of our contract liabilities at December 31, 2018 as revenue.
NOTE 5 – INVENTORIES
Inventories consisted of the following (in millions):
 
 
March 29,
2020

December 31,
2019
Materials, spares and supplies
 
$
521

 
 
$
532

 
Work-in-process
 
2,717

 
 
2,783

 
Finished goods
 
301

 
 
304

 
Total inventories
 
$
3,539

 
 
$
3,619

 

Costs incurred to fulfill a contract in advance of the contract being awarded are included in inventories as work-in-process if we determine that those costs relate directly to a contract or to an anticipated contract that we can specifically

13



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

identify and contract award is probable, the costs generate or enhance resources that will be used in satisfying performance obligations, and the costs are recoverable (referred to as pre-contract costs). Pre-contract costs that are initially capitalized in inventory are generally recognized as cost of sales consistent with the transfer of products and services to the customer upon the receipt of the anticipated contract. All other pre-contract costs, including start-up costs, are expensed as incurred. As of March 29, 2020 and December 31, 2019, $519 million and $493 million of pre-contract costs were included in inventories.
NOTE 6 – POSTRETIREMENT BENEFIT PLANS
Our pretax net periodic benefit (income) cost related to our qualified defined benefit pension plans and retiree medical and life insurance plans consisted of the following (in millions):
 
 
Quarters Ended
 
 
March 29,
2020
 
March 31,
2019
Qualified defined benefit pension plans
 
 
 
 
 
 
Service cost
 
$
25

 
 
$
129

 
Interest cost
 
385

 
 
452

 
Expected return on plan assets
 
(566
)
 
 
(575
)
 
Recognized net actuarial losses
 
212

 
 
351

 
Amortization of prior service credits
 
(86
)
 
 
(84
)
 
Total net periodic benefit (income) cost
 
$
(30
)
 
 
$
273

 
Retiree medical and life insurance plans
 
 
 
 
 
 
Service cost
 
$
3

 
 
$
4

 
Interest cost
 
18

 
 
24

 
Expected return on plan assets
 
(32
)
 
 
(28
)
 
Recognized net actuarial losses
 
(1
)
 
 
1

 
Amortization of prior service costs
 
10

 
 
10

 
Total net periodic benefit (income) cost
 
$
(2
)
 
 
$
11

 

As previously announced on July 1, 2014, we completed the final step of the planned freeze of our qualified and nonqualified defined benefit pension plans for salaried employees effective January 1, 2020; the plans are now fully frozen. With the freeze complete, the majority of our salaried employees participate in an enhanced defined contribution retirement savings plan.
We record the service cost component of net periodic benefit cost (primarily for our bargained plans beginning in 2020) as part of cost of sales and the non-service cost components of net periodic benefit cost as part of other non-operating income (expense), net in the consolidated statements of earnings.
The recognized net actuarial losses and amortization of prior service credits or costs in the table above, along with similar costs related to our other postretirement benefit plans ($5 million for the quarter ended March 29, 2020 and $11 million for the quarter ended March 31, 2019) were reclassified from accumulated other comprehensive loss (AOCL) and recorded as a component of net periodic benefit (income) cost for the periods presented. These costs totaled $140 million ($110 million, net of tax) during the quarter ended March 29, 2020 and $289 million ($227 million, net of tax) during the quarter ended March 31, 2019 and were recorded on our consolidated statements of comprehensive income as an increase to other comprehensive income.
The required funding of our qualified defined benefit pension plans is determined in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection Act of 2006 (PPA), along with consideration of CAS and Internal Revenue Code rules. There were no contributions to our qualified defined benefit pension plans during the quarters ended March 29, 2020 and March 31, 2019.

14



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

NOTE 7 – LEGAL PROCEEDINGS AND CONTINGENCIES
We are a party to or have property subject to litigation and other proceedings that arise in the ordinary course of our business, including matters arising under provisions relating to the protection of the environment, and are subject to contingencies related to certain businesses we previously owned. These types of matters could result in fines, penalties, cost reimbursements or contributions, compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal proceedings described below, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular interim reporting period. Among the factors that we consider in this assessment are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim. Our assessment of these factors may change over time as individual proceedings or claims progress.
Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may have been incurred, GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We follow a thorough process in which we seek to estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion of legal proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.
Legal Proceedings
As a result of our acquisition of Sikorsky Aircraft Corporation (Sikorsky), we assumed the defense of and any potential liability for two civil False Claims Act lawsuits pending in the U.S. District Court for the Eastern District of Wisconsin. In October 2014, the U.S. Government filed a complaint in intervention in the first suit, which was brought by qui tam relator Mary Patzer, a former Derco Aerospace (Derco) employee. In May 2017, the U.S. Government filed a complaint in intervention in the second suit, which was brought by qui tam relator Peter Cimma, a former Sikorsky Support Services, Inc. (SSSI) employee. In November 2017, the Court consolidated the cases into a single action for discovery and trial.
The U.S. Government alleges that Sikorsky and two of its wholly-owned subsidiaries, Derco and SSSI, violated the civil False Claims Act and the Truth in Negotiations Act in connection with a contract the U.S. Navy awarded to SSSI in June 2006 to support the Navy’s T-34 and T-44 fixed-wing turboprop training aircraft. SSSI subcontracted with Derco, primarily to procure and manage spare parts for the training aircraft. The U.S. Government contends that SSSI overbilled the Navy on the contract as the result of Derco’s use of prohibited cost-plus-percentage-of-cost pricing to add profit and overhead costs as a percentage of the price of the spare parts that Derco procured and then sold to SSSI. The U.S. Government also alleges that Derco’s claims to SSSI, SSSI’s claims to the Navy, and SSSI’s yearly Certificates of Final Indirect Costs from 2006 through 2012 were false and that SSSI submitted inaccurate cost or pricing data in violation of the Truth in Negotiations Act for a sole-sourced, follow-on “bridge” contract. The U.S. Government’s complaints assert common law claims for breach of contract and unjust enrichment.
The U.S. Government further alleged violations of the Anti-Kickback Act and False Claims Act based on a monthly “chargeback,” through which SSSI billed Derco for the cost of certain SSSI personnel, allegedly in exchange for SSSI’s permitting a pricing arrangement that was “highly favorable” to Derco. On January 12, 2018, the Corporation filed a partial motion to dismiss intended to narrow the U.S. Government’s claims, including by seeking dismissal of the Anti-Kickback Act allegations. The Corporation also moved to dismiss Cimma as a party under the False Claims Act’s first-to-file rule, which permits only the first relator to recover in a pending case. The District Court granted these motions, in part, on July 20, 2018, dismissing the Government’s claims under the Anti-Kickback Act and dismissing Cimma as a party to the litigation.
The U.S. Government seeks damages of approximately $52 million, subject to trebling, plus statutory penalties. We believe that we have legal and factual defenses to the U.S. Government’s remaining claims. Although we continue to evaluate our liability and exposure, we do not currently believe that it is probable that we will incur a material loss. If, contrary to our expectations, the U.S. Government prevails in this matter and proves damages at or near $52 million and

15



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

is successful in having such damages trebled, the outcome could have an adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
On February 8, 2019, the Department of Justice (DOJ) filed a complaint in the U.S. District Court for the Eastern District of Washington alleging, among other counts, civil False Claims Act and civil Anti-Kickback Act violations against Mission Support Alliance, LLC (MSA), Lockheed Martin, Lockheed Martin Services, Inc. (LMSI) and a current Lockheed Martin vice president. The dollar amount of damages sought is not specified but DOJ seeks treble damages with respect to the False Claims Act and penalties that are subject to doubling under the Anti-Kickback Act. The allegations relate primarily to information technology services performed by LMSI under a subcontract to MSA and the pricing by MSA and LMSI of those services as well as Lockheed Martin’s payment of standard incentive compensation to certain employees who were seconded to MSA, including the vice president. MSA is a joint venture that holds a prime contract to provide infrastructure support services at DOE’s Hanford facility. On April 23, 2019, the parties each filed partial motions to dismiss the U.S. Government’s False Claims Act and Anti-Kickback Act allegations. On January 13, 2020, the court dismissed the Anti-Kickback Act claim against all defendants with prejudice and denied the motions to dismiss the False Claims Act claims.
On August 16, 2016, we divested our former Information Systems & Global Solutions (IS&GS) business segment to Leidos Holdings, Inc. (Leidos) in a transaction that resulted in IS&GS becoming part of Leidos (the Transaction). In the Transaction, Leidos acquired IS&GS’ interest in MSA and the liabilities related to Lockheed Martin’s participation in MSA. Included within the liabilities assumed were those associated with this lawsuit. Lockheed Martin transferred to Leidos a reserve of approximately $38 million established by Lockheed Martin with respect to its potential liability and that of its affiliates and agreed to indemnify Leidos with respect to the liabilities assumed for damages to Leidos for 100% of amounts in excess of this reserve up to $64 million and 50% of amounts in excess of $64 million.
We cannot reasonably estimate our exposure at this time, but it is possible that a settlement by or judgment against any of the defendants could implicate Lockheed Martin’s indemnification obligations as described above. At present, in view of what we believe to be the strength of the defenses, our belief that Leidos assumed the liabilities, and our view of the structure of the indemnity, we do not believe it probable that we will incur a material loss and have not taken any reserve.
On April 24, 2009, we filed a declaratory judgment action against the New York Metropolitan Transportation Authority and its Capital Construction Company (collectively, the MTA) asking the U.S. District Court for the Southern District of New York to find that the MTA is in material breach of our agreement based on the MTA’s failure to provide access to sites where work must be performed and the customer-furnished equipment necessary to complete the contract. The MTA filed an answer and counterclaim alleging that we breached the contract and subsequently terminated the contract for alleged default. The primary damages sought by the MTA are the costs to complete the contract and potential re-procurement costs. While we are unable to estimate the cost of another contractor to complete the contract and the costs of re-procurement, we note that our contract with the MTA had a total value of $323 million, of which $241 million was paid to us, and that the MTA is seeking damages of approximately $190 million. We dispute the MTA’s allegations and are defending against them. Additionally, following an investigation, our sureties on a performance bond related to this matter, who were represented by independent counsel, concluded that the MTA’s termination of the contract was improper. Finally, our declaratory judgment action was later amended to include claims for monetary damages against the MTA of approximately $95 million. This matter was taken under submission by the District Court in December 2014, after a five-week bench trial and the filing of post-trial pleadings by the parties. We continue to await a decision from the District Court. Although this matter relates to our former IS&GS business, we retained the litigation when we divested IS&GS in 2016.
Environmental Matters
We are involved in proceedings and potential proceedings relating to soil, sediment, surface water, and groundwater contamination, disposal of hazardous substances, and other environmental matters at several of our current or former facilities, facilities for which we may have contractual responsibility, and at third-party sites where we have been designated as a potentially responsible party (PRP). A substantial portion of environmental costs will be included in our net sales and cost of sales in future periods pursuant to U.S. Government regulations. At the time a liability is recorded for future environmental costs, we record assets for estimated future recovery considered probable through the pricing of products and services to agencies of the U.S. Government, regardless of the contract form (e.g., cost-reimbursable, fixed-price). We continually evaluate the recoverability of our assets for the portion of environmental costs that are probable of

16



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

future recovery by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and contract mix, our history of receiving reimbursement of such costs, and efforts by some U.S. Government representatives to limit such reimbursement. We include the portions of those environmental costs expected to be allocated to our non-U.S. Government contracts or determined not to be recoverable under U.S. Government contracts, in our cost of sales at the time the liability is established.
At March 29, 2020 and December 31, 2019, the aggregate amount of liabilities recorded relative to environmental matters was $812 million and $810 million, most of which are recorded in other noncurrent liabilities on our consolidated balance sheets. We have recorded assets for the portion of environmental costs that are probable of future recovery totaling $705 million and $703 million at March 29, 2020 and December 31, 2019, most of which are recorded in other noncurrent assets on our consolidated balance sheets, for the estimated future recovery of these costs, as we consider the recovery probable based on the factors previously mentioned. We project costs and recovery of costs over approximately 20 years.
Environmental remediation activities usually span many years, which makes estimating liabilities a matter of judgment because of uncertainties with respect to assessing the extent of the contamination as well as such factors as changing remediation technologies and changing regulatory environmental standards. There are a number of former and present operating facilities that we are monitoring or investigating for potential future remediation. We perform quarterly reviews of the status of our environmental remediation sites and the related liabilities and receivables. Additionally, in our quarterly reviews, we consider these and other factors in estimating the timing and amount of any future costs that may be required for remediation activities, and record a liability when it is probable that a loss has occurred or will occur and the loss can be reasonably estimated. The amount of liability recorded is based on our estimate of the costs to be incurred for remediation at a particular site. We do not discount the recorded liabilities, as the amount and timing of future cash payments are not fixed or cannot be reliably determined. We reasonably cannot determine the extent of our financial exposure in all cases as, although a loss may be probable or reasonably possible, in some cases it is not possible at this time to estimate the loss or reasonably possible loss or range of loss.
We also pursue claims for recovery of costs incurred or for contribution to site remediation costs against other PRPs, including the U.S. Government, and are conducting remediation activities under various consent decrees, orders, and agreements relating to soil, groundwater, sediment, or surface water contamination at certain sites of former or current operations. Under agreements related to certain sites in California, New York and Washington, the U.S. Government reimburses us an amount equal to a percentage, specific to each site, of expenditures for certain remediation activities in the U.S. Government’s capacity as a PRP under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).
In addition to the proceedings and potential proceedings discussed above, California previously established a maximum level of the contaminant hexavalent chromium in drinking water of 10 parts per billion (ppb). This standard was successfully challenged by the California Manufacturers and Technology Association (CMTA) for failure to conduct the required economic feasibility analysis. In response to the court’s ruling, the State Water Resources Control Board (State Board), a branch of the California Environmental Protection Agency, withdrew the hexavalent chromium standard from the published regulations, leaving only the 50 ppb standard for total chromium. The State Board has indicated it will work to re-establish a hexavalent chromium standard. Further, the U.S. Environmental Protection Agency (U.S. EPA) is considering whether to regulate hexavalent chromium.
California is also reevaluating its existing drinking water standard of 6 ppb for perchlorate, and the U.S. EPA is taking steps to regulate perchlorate in drinking water. If substantially lower standards are adopted, in either California or at the federal level for perchlorate or for hexavalent chromium, we expect a material increase in our estimates for environmental liabilities and the related assets for the portion of the increased costs that are probable of future recovery in the pricing of our products and services for the U.S. Government. The amount that would be allocable to our non-U.S. Government contracts or that is determined not to be recoverable under U.S. Government contracts would be expensed, which may have a material effect on our earnings in any particular interim reporting period.
We are also evaluating the potential impact of existing and contemplated legal requirements addressing a class of compounds known generally as per- and polyfluoroalkyl compounds (PFAS).  PFAS compounds have been used ubiquitously, such as in fire-fighting foams, manufacturing processes, and stain- and stick-resistant products (e.g., Teflon, stain-resistant fabrics).  Because we have used products and processes over the years containing some of those compounds, it is likely that they exist as contaminants at many of our cleanup sites.  Governmental authorities have

17



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

announced plans, and in some instances have begun, to regulate certain of these compounds at extremely low concentrations in drinking water, which could lead to increased cleanup costs at many of our sites.
Letters of Credit, Surety Bonds and Third-Party Guarantees
We have entered into standby letters of credit and surety bonds issued on our behalf by financial institutions, and we have directly issued guarantees to third parties primarily relating to advances received from customers and the guarantee of future performance on certain contracts. Letters of credit and surety bonds generally are available for draw down in the event we do not perform. In some cases, we may guarantee the contractual performance of third parties such as joint venture partners. We had total outstanding letters of credit, surety bonds and third-party guarantees aggregating $3.2 billion and $3.6 billion at March 29, 2020 and December 31, 2019. Third-party guarantees do not include guarantees issued on behalf of subsidiaries and other consolidated entities.
At March 29, 2020 and December 31, 2019, third-party guarantees totaled $725 million and $996 million, of which approximately 67% and 76% related to guarantees of contractual performance of joint ventures to which we currently are or previously were a party. These amounts represent our estimate of the maximum amounts we would expect to incur upon the contractual non-performance of the joint venture, joint venture partners or divested businesses. Generally, we also have cross-indemnities in place that may enable us to recover amounts that may be paid on behalf of a joint venture partner.
In determining our exposures, we evaluate the reputation, performance on contractual obligations, technical capabilities and credit quality of our current and former joint venture partners and the transferee under novation agreements all of which include a guarantee as required by the FAR. There were no material amounts recorded in our financial statements related to third-party guarantees or novation agreements.
NOTE 8 – FAIR VALUE MEASUREMENTS
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following (in millions):
 
 
March 29, 2020
 
December 31, 2019
 
 
Total
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
Assets
 
 
 
 
 
 
 
 
Mutual funds
 
$
979

 
$
979

 
$

 
$
1,363

 
$
1,363

 
$

U.S. Government securities
 
77

 

 
77

 
99

 

 
99

Other securities
 
299

 
132

 
167

 
319

 
171

 
148

Derivatives
 
66

 

 
66

 
18

 

 
18

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
 
37

 

 
37

 
23

 

 
23

Assets measured at NAV (a)
 
 
 
 
 
 
 
 
 
 
 
 
Other commingled funds
 
19

 
 
 
 
 
19

 
 
 
 
(a) 
Net Asset Value (NAV) is the total value of the fund divided by the number of the fund’s shares outstanding.
Substantially all assets measured at fair value, other than derivatives, represent investments held in a separate trust to fund certain of our non-qualified deferred compensation plans and are recorded in other noncurrent assets on our consolidated balance sheets. The fair values of mutual funds and certain other securities are determined by reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs. The fair values of U.S. Government and other securities are determined using pricing models that use observable inputs (e.g., interest rates and yield curves observable at commonly quoted intervals), bids provided by brokers or dealers or quoted prices of securities with similar characteristics. The fair values of derivative instruments, which consist of foreign currency forward contracts, including embedded derivatives, and interest rate swap contracts, are primarily determined based on the present value of future cash flows using model-derived valuations that use observable inputs such as interest rates, credit spreads and foreign currency exchange rates.
The derivatives outstanding at both March 29, 2020 and December 31, 2019 consist of foreign currency forward contracts, interest rate swaps and foreign currency related contract embedded derivatives. We use derivative instruments

18



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

principally to reduce our exposure to market risks from changes in foreign currency exchange rates and interest rates. We do not enter into or hold derivative instruments for speculative trading purposes. We transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into foreign currency hedges such as forward and option contracts that change in value as foreign currency exchange rates change. Our most significant foreign currency exposures relate to the British pound sterling, the euro, the Canadian dollar and the Australian dollar. These contracts hedge forecasted foreign currency transactions in order to mitigate fluctuations in our earnings and cash flows associated with changes in foreign currency exchange rates. We designate foreign currency hedges as cash flow hedges. We also are exposed to the impact of interest rate changes primarily through our borrowing activities. For fixed rate borrowings, we may use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings in order to reduce the amount of interest paid. These swaps are designated as fair value hedges. For variable rate borrowings, we may use fixed interest rate swaps, effectively converting variable rate borrowings to fixed rate borrowings in order to mitigate the impact of interest rate changes on earnings. These swaps are designated as cash flow hedges. We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are intended to mitigate certain economic exposures.
The aggregate notional amount of our outstanding interest rate swaps at both March 29, 2020 and December 31, 2019 was $750 million. The aggregate notional amount of our outstanding foreign currency hedges at March 29, 2020 and December 31, 2019 was $3.5 billion and $3.8 billion. The fair values of our outstanding interest rate swaps and foreign currency hedges at March 29, 2020 and December 31, 2019 were not significant. Derivative instruments did not have a material impact on net earnings and comprehensive income during the quarters ended March 29, 2020 and March 31, 2019. Substantially all of our derivatives are designated for hedge accounting.
In addition to the financial instruments listed in the table above, we hold other financial instruments, including cash and cash equivalents, receivables, accounts payable and debt. The carrying amounts for cash and cash equivalents, receivables and accounts payable approximated their fair values. The estimated fair value of our outstanding debt was $15.7 billion and $15.9 billion at March 29, 2020 and December 31, 2019. The outstanding principal amount of debt was $13.8 billion at both March 29, 2020 and December 31, 2019, excluding $1.1 billion and $1.2 billion of unamortized discounts and issuance costs at March 29, 2020 and December 31, 2019. The estimated fair values of our outstanding debt were determined based on observable inputs (Level 2).
NOTE 9 – STOCKHOLDERS’ EQUITY
Repurchases of Common Stock
During the quarter ended March 29, 2020, we repurchased 0.7 million shares for $264 million under repurchase plans pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, some of which were settled subsequent to the end of the first quarter. We also entered into an accelerated share repurchase (ASR) agreement to repurchase $500 million of our common stock through April 2020. Under the terms of the ASR agreement, we made a payment of $500 million and received an initial delivery of 1.0 million shares of our common stock. The total number of shares of common stock to be received is based on an average volume-weighted average price (VWAP) of our common stock during the term of the ASR agreement, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR agreement. Based on the average VWAP as of April 20, 2020, we expect to receive approximately 0.5 million additional shares upon final settlement.
The total remaining authorization for future common share repurchases under our share repurchase program was $2.0 billion as of March 29, 2020. As we repurchase our common shares, we reduce common stock for the $1 of par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in capital. If additional paid-in capital is reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings. Due to the volume of repurchases and the prices at which these were made, additional paid-in capital was reduced to zero, with the remainder of the excess purchase price over par value of $733 million recorded as a reduction to retained earnings during the quarter ended March 29, 2020.
Dividends
We declared cash dividends totaling $677 million ($2.40 per share) and $623 million ($2.20 per share) during the quarters ended March 29, 2020 and March 31, 2019. Dividends paid during the quarters ended March 29, 2020 and

19



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

March 31, 2019 are higher than dividends declared due to dividend-equivalents paid to holders of RSUs and PSUs. These dividend-equivalents are accrued during the vesting period and are paid upon the vesting of the RSUs and PSUs.
Restricted Stock Unit Grants
During the quarter ended March 29, 2020, we granted certain employees approximately 0.5 million RSUs with a weighted average grant date fair value of $384.17 per RSU. The grant date fair value of these RSUs is equal to the closing market price of our common stock on the grant date less a discount to reflect the delay in payment of dividend-equivalent cash payments that are made only upon vesting, which is generally three years from the grant date. We recognize the grant date fair value of RSUs, less estimated forfeitures, as compensation expense ratably over the requisite service period, which is shorter than the vesting period if the employee is retirement eligible on the date of grant or will become retirement eligible before the end of the vesting period.
 Accumulated Other Comprehensive Loss
Changes in the balance of AOCL, net of tax, consisted of the following (in millions):
 
 
Postretirement
Benefit Plans
 
Other, net
 
AOCL
Balance at December 31, 2019
 
$
(15,528
)
 
$
(26
)
 
$
(15,554
)
Other comprehensive income before reclassifications
 

 
5

 
5

Amounts reclassified from AOCL
 
 
 
 
 
 
Recognition of net actuarial losses (a)
 
172

 

 
172

Amortization of net prior service credits (a)
 
(62
)
 

 
(62
)
Other
 

 
(102
)
 
(102
)
Total reclassified from AOCL
 
110

 
(102
)
 
8

Total other comprehensive income
 
110

 
(97
)
 
13

Balance at March 29, 2020
 
$
(15,418
)
 
$
(123
)
 
$
(15,541
)
 
 
 
 
 
 
 
Balance at December 31, 2018
 
$
(14,254
)
 
$
(67
)
 
$
(14,321
)
Other comprehensive income before reclassifications
 

 
(5
)
 
(5
)
Amounts reclassified from AOCL
 
 
 
 
 
 
Recognition of net actuarial losses (a)
 
287

 

 
287

Amortization of net prior service credits (a)
 
(60
)
 

 
(60
)
Other
 

 
5

 
5

Total reclassified from AOCL
 
227

 
5

 
232

Total other comprehensive income
 
227

 

 
227

Balance at March 31, 2019
 
$
(14,027
)
 
$
(67
)
 
$
(14,094
)
(a) 
Reclassifications from AOCL related to our postretirement benefit plans were recorded as a component of net periodic benefit cost for each period presented (see “Note 6 – Postretirement Benefit Plans”).
NOTE 10 – OTHER
Changes in Estimates
Significant estimates and assumptions are made in estimating contract sales and costs, including the profit booking rate. At the outset of a long-term contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract, as well as variable consideration, and assess the effects of those risks on our estimates of sales and total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead, general and administrative and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset or localization agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the

20



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract or may increase the variable consideration we expect to receive on the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase or our estimates of variable consideration we expect to receive decrease. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate. When estimates of total costs to be incurred on a contract exceed total estimates of the transaction price, a provision for the entire loss is determined at the contract level and is recorded in the period in which the loss is determined.
In addition, comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts for which we recognize revenue over time using the percentage-of-completion cost-to-cost method to measure progress towards completion. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate, resulting in an increase in the estimated total costs to fulfill the performance obligations and a reduction in the profit booking rate. Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other items, which may or may not impact sales. Favorable items may include the positive resolution of contractual matters, cost recoveries on severance and restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring charges, except for significant severance actions, which are excluded from segment operating results; reserves for disputes; certain asset impairments; and losses on sales of certain assets.
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, increased segment operating profit by approximately $465 million during the quarter ended March 29, 2020 and $565 million during the quarter ended March 31, 2019. These adjustments increased net earnings by approximately $367 million ($1.30 per share) during the quarter ended March 29, 2020 and $446 million ($1.57 per share) during the quarter ended March 31, 2019. We recognized net sales from performance obligations satisfied in prior periods of approximately $530 million during the quarter ended March 29, 2020 and $670 million during the quarter ended March 31, 2019, which primarily relate to changes in profit booking rates that impacted revenue.
As previously disclosed in our 2019 Form 10-K, we are responsible for a program to design, develop and construct a ground-based radar at our Rotary and Mission Systems (RMS) business segment. The program has experienced performance issues for which we have periodically accrued reserves. As of March 29, 2020, cumulative losses were approximately $225 million on this program. We may continue to experience issues related to customer requirements and our performance under this contract and have to record additional charges. However, based on the losses previously recorded and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional losses, if any, would be material to our operating results or financial condition.
As previously disclosed in our 2019 Form 10-K, we have a program, EADGE-T, to design, integrate, and install an air missile defense command, control, communications, computers - intelligence (C4I) system for an international customer that has experienced performance issues and for which we have periodically accrued reserves at our RMS business segment. As of March 29, 2020, cumulative losses remained at approximately $260 million. We continue to monitor program requirements and our performance. At this time, we do not anticipate additional charges that would be material to our operating results or financial condition.
As previously disclosed in our 2019 Form 10-K, we have two commercial satellite programs at our Space business segment for which we have experienced performance issues related to the development and integration of a modernized LM 2100 satellite platform. These programs are for the delivery of three satellites in total, including two that launched in 2019 and one that launched in February 2020. We have periodically revised our estimated costs to complete these developmental commercial programs. As of March 29, 2020, cumulative losses remained at approximately $410 million for these programs. We do not anticipate that additional losses, if any, would be material to our operating results or financial condition.
As previously disclosed in our 2019 Form 10-K, we are responsible for designing, developing and installing an upgraded turret for the Warrior Capability Sustainment Program. In 2018, we revised our estimated costs to complete the program as a consequence of performance issues, and recorded charges at our MFC business segment. As of March 29,

21



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

2020, cumulative losses remained at approximately $140 million on this program. We may continue to experience issues related to customer requirements and our performance under this contract and may have to record additional reserves. However, based on the losses already recorded and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional losses, if any, would be material to our operating results or financial condition.
Investment in Advanced Military Maintenance, Repair and Overhaul Center LLC (AMMROC)
As of March 29, 2020, we had an investment in the AMMROC joint venture, which is located in the United Arab Emirates, with a carrying value of $435 million. We account for our investment in AMMROC using the equity method. Substantially all of AMMROC’s current business is dependent on a single customer contract to provide maintenance, repair and overhaul (MRO) services for fixed and rotary wing military aircraft that was up for re-competition. In April 2020, subsequent to the end of our first quarter, the customer announced its intent to award the contract to a competitor. However, the customer has not yet executed the new contract nor defined when or how the MRO services will transition to the competitor. We are working with AMMROC’s management and our joint venture partner to understand our options, including whether there is a basis to challenge the award and retain the MRO services, explore the possibility of AMMROC continuing to provide MRO services as a subcontractor to the competitor, an opportunity to replace the contract with other customer arrangements, or winding down the business. At this time, we cannot determine the extent of the non-cash impairment charge, if any, related to our investment until we fully evaluate the options described above, the customer’s plan to transition the MRO services to the competitor, what may occur with the remaining portion of AMMROC’s business, the potential liquidation of AMMROC’s assets and a final distribution to the owners, and our rights under jurisdictional law and the joint venture agreement, among other items. However, if the customer moves forward with transitioning the MRO services to the competitor and AMMROC is not a subcontractor (or has only a limited role), we expect there would be an adverse impact to AMMROC’s business and the carrying value of our investment, which could be significant and an impairment could occur as early as the second quarter of 2020. Other than the impact to earnings for a potential non-cash impairment charge, currently we do not expect any other significant impacts to our 2020 operating results, financial position or cash flows.
Backlog
Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and is continuously reviewed throughout the contract period. In determining the estimated consideration, we consider the risks related to the technical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers may be reduced, resulting in a reduction of backlog without a corresponding recognition of sales. As of March 29, 2020, our ending backlog was $144.1 billion. We expect to recognize approximately 37% of our backlog over the next 12 months and approximately 62% over the next 24 months as revenue, with the remainder recognized thereafter.
Income Taxes
Our effective income tax rate was 15.4% for the quarter ended March 29, 2020, and 12.4% for the quarter ended March 31, 2019. The rate for the quarter ended March 31, 2019 benefited from additional tax deductions of $65 million, or $0.23 per share, recorded discretely for 2018, based on proposed tax regulations released on March 4, 2019, which clarified that foreign military sales qualify for foreign derived intangible income treatment. The rates for both periods benefited from tax deductions for employee equity awards, the research and development tax credit, tax deductions for foreign derived intangible income, and dividends paid to the corporation's defined contribution plans with an employee stock ownership plan feature.
Sale of Customer Receivables
On occasion, our customers may seek deferred payment terms to purchase our products. In connection with these transactions, we may, at our customer’s request, enter into arrangements for the non-recourse sale of customer receivables to unrelated third-party financial institutions. For accounting purposes, these transactions are not discounted

22



Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

and are treated as a sale of receivables as we have no continuing involvement. The sale proceeds from the financial institutions are reflected in our operating cash flows on the statement of cash flows. We sold customer receivables of $146 million during the quarter ended March 29, 2020 and $104 million during the quarter ended March 31, 2019. There were no gains or losses related to sales of these receivables.
NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR) and other interbank offered rates, which have been widely used as reference rates for various securities and financial contracts, including loans, debt and derivatives. This announcement indicates that the continuation of LIBOR on the current basis is not guaranteed after 2021. Regulators in the U.S. and other jurisdictions have been working to replace these rates with alternative reference interest rates that are supported by transactions in liquid and observable markets, such as the Secured Overnight Financing Rate (SOFR). Currently, our credit facility and certain of our debt and derivative instruments reference LIBOR-based rates. The discontinuation of LIBOR will require these arrangements to be modified in order to replace LIBOR with an alternative reference interest rate, which could impact our cost of funds. Our credit facility includes a provision for the determination of a successor LIBOR rate.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which temporarily simplifies the accounting for contract modifications, including hedging relationships, due to the transition from LIBOR and other interbank offered rates to alternative reference interest rates. For example, entities can elect not to remeasure the contracts at the modification date or reassess a previous accounting determination if certain conditions are met. Additionally, entities can elect to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain conditions are met. The new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference interest rates, but do not expect a significant impact to our operating results, financial position or cash flows.

23



Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Lockheed Martin Corporation

Results of Review of Interim Financial Statements

We have reviewed the accompanying consolidated balance sheet of Lockheed Martin Corporation (the Corporation) as of March 29, 2020, the related consolidated statements of earnings, comprehensive income, cash flows and equity for the quarters ended March 29, 2020 and March 31, 2019, and the related notes (collectively referred to as the “consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Corporation as of December 31, 2019, the related consolidated statements of earnings, comprehensive income, cash flows and equity for the year then ended, and the related notes (not presented herein); and in our report dated February 7, 2020, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Corporation’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Ernst & Young LLP
Tysons, Virginia
April 22, 2020

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ITEM 2. 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, system integration and cybersecurity 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. During the quarter ended March 29, 2020, 72% of our $15.7 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)), 27% 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.
As previously announced on July 1, 2014, we completed the final step of the planned freeze of our qualified and nonqualified defined benefit pension plans for salaried employees effective January 1, 2020; the plans are now fully frozen. With the freeze complete, the majority of our salaried employees participate in an enhanced defined contribution retirement savings plan.
COVID-19
The global outbreak of the coronavirus disease 2019 (COVID-19) was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets.  Lockheed Martin has taken measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support our community in addressing the challenges posed by this global pandemic. The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our programs in the expected timeframe, will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain and cannot be predicted. The outbreak did not have a material impact on our operating results or business in the first quarter of 2020. However, we are beginning to experience some issues in each of our business areas related to COVID-19, primarily in access to some locations and delays of supplier deliveries. We have updated our 2020 sales outlook, as described below, and the ultimate impact of COVID-19 is uncertain.
In accordance with the DoD guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce, our U.S. production facilities have continued to operate in support of essential products and services required to meet national security commitments to the U.S. Government and the U.S. military, however, facility closures or work slowdowns or temporary stoppages could occur. In addition, other countries have different practices and policies that can affect our international operations and the operations of our suppliers and customers. For example, we had a brief pause in operations at the F-35 Final Assembly and Check Out (FACO) facilities in Japan and Italy in March in observance of such countries’ COVID-19 policies and additional closures could occur, and we are seeing impacts from base closures and travel restrictions both within and outside the U.S. In many cases facilities are not operating under full staffing as a result of COVID-19, which could have a longer-term impact. Flight test operations and training are being impacted by travel restrictions as a result of COVID-19, which could delay our deliveries to customers. We also have some limited operations that are not designated as critical infrastructure and therefore have been mandated to close or operate at only minimum basic operations. However, these closures to date have not been material.
The U.S. Government has taken actions in response to COVID-19 to increase progress payments in new and existing contracts and accelerate contract awards through increased use of Undefinitized Contracting Actions (UCAs) to provide cash flow and liquidity for companies in the Defense Industrial Base, including large prime contractors like Lockheed Martin and smaller suppliers. We are implementing multiple actions to help support certain suppliers affected by COVID-19, including accelerating payments of over $150 million to our small and medium-sized supply chain partners, and paying the first $50 million of an additional $450 million in accelerated payments to our global supply base as a result of the actions taken by the DoD in changing the progress payment policy. As described in Item 1A, Risk Factors of our Annual Report on Form 10-K, we rely on other companies to provide materials, major components

25



and products, and to perform a portion of the services that are provided to our customers under the terms of most of our contracts. An extended period of global supply chain disruption caused by the response to COVID-19 could impact our ability to perform on our contracts. To date, we have identified a number of suppliers that have potential delivery impacts due to COVID-19 and, if we are not able to implement alternatives or other mitigations, deliveries and other milestones on affected programs could be adversely impacted.
We continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19. We continue to assess possible implications to our business, supply chain and customers, and to take actions in an effort to mitigate adverse consequences.
2020 Financial Outlook
We currently expect our 2020 net sales to increase in the mid-single digit range from 2019 levels. The projected growth in net sales from 2019 is driven by increased volume at all four business areas. Specifically, the increased growth is driven by the F-35 program at Aeronautics, increased volume in the tactical and strike missiles and air and missile defense businesses at MFC, Sikorsky volume at RMS, and hypersonics volume at Space. Total business segment operating profit margin in 2020 is currently expected to be approximately 10.9%; and we continue to expect cash from operations to be greater than or equal to $7.6 billion.
We are seeing some impact from COVID-19 on our expected 2020 sales growth. However, depending on future developments, the ultimate impact of COVID-19 on our 2020 outlook for sales, segment operating profit margin, earnings and cash flows from operations remains uncertain. Our 2020 outlook assumes, among other things, that our production facilities continue to operate and we do not experience significant work stoppages or closures, we are able to mitigate any supply chain disruptions and these do not worsen, and we are able to recover our costs under contracts and government funding priorities do not change. In addition, our financial performance assumes actual returns on our pension assets during 2020 will be 7.0%, and the discount rate used to re-measure our pension liabilities at year-end 2020 will be 3.25%. Differences between these assumed values and actual values will affect our plan’s funded status and stockholders’ equity as measured at year-end 2020. We are also monitoring the impacts of COVID-19 on the fair value of our assets. While we do not currently anticipate any material impairments on our assets as a result of COVID-19, future changes in expectations for sales, earnings and cash flows related to intangible assets and goodwill below our current projections could cause these assets to be impaired. While these are our current assumptions, this is an emerging situation and these could change, which could affect our outlook. Risk related to these items are described below and under Item 1A, Risk Factors.
Our outlook for 2020 also does not include any non-cash impairment charge related to our equity method investment in the Advanced Military Maintenance, Repair and Overhaul Center LLC (AMMROC) joint venture that could occur as early as the second quarter (see “Other Income, Net” discussion below for more detail). Our outlook also assumes the U.S. Government continues to support and fund our key programs and does not include potential impacts to our programs, including the F-35 program, resulting from U.S. Government actions related to Turkey (see “Other Matters” discussion below for further discussion).
Changes in circumstances may require us to revise our assumptions, which could materially change our current estimate of 2020 net sales, operating margin and cash flows.
The following discussion is a supplement to and should be read in conjunction with the accompanying consolidated financial statements and notes thereto and with our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K).
INDUSTRY CONSIDERATIONS
U.S. Government Funding
On February 10, 2020, the Administration submitted the fiscal year (FY) 2021 President’s Budget, requesting $1.34 trillion in total discretionary funding (a U.S. Government fiscal year starts on October 1 and ends on September 30). The FY 2021 budget requests $672 billion for base discretionary national defense spending, the maximum permitted under the Bipartisan Budget Act of 2019 (BBA-19). The total national defense request is $741 billion, which includes $69 billion requested for Overseas Contingency Operations (OCO). OCO funding does not count toward discretionary spending caps. 

26



The FY 2021 budget requests $705 billion for the DoD, including $636 billion for the base budget and $69 billion for OCO.  The DoD request is only $800 million above the FY 2020 enacted level for both base national defense spending and OCO. 
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the bipartisan $2 trillion economic relief package aimed at helping American workers and businesses impacted by the coronavirus pandemic. The bill includes $10.4 billion for DoD to fund defense health programs, National Guard and hospital ship deployments, and the Defense Procurement Act fund. The funding is identified as emergency and is exempt from the discretionary spending limits of the Budget Control Act of 2011 (BCA).
See also the discussion of U.S. Government funding risks within “Item 1A. Risk Factors” included in our 2019 Form 10‑K.
CONSOLIDATED RESULTS OF OPERATIONS
Our operating cycle is primarily long-term and involves many types of contracts for the design, development and manufacture of products and related activities with varying delivery schedules. Consequently, the results of operations of a particular period, or period-to-period comparisons of sales and profits, may not be indicative of future operating results. The following discussions of comparative results among periods should be reviewed in this context. All per share amounts cited in these discussions are presented on a “per diluted share” basis, unless otherwise noted. Our consolidated results of operations were as follows (in millions, except per share data):
 
 
Quarters Ended
 
 
March 29,
2020
 
March 31,
2019
Net sales
 
$
15,651

 
 
$
14,336

 
Cost of sales
 
(13,560
)
 
 
(12,148
)
 
Gross profit
 
2,091

 
 
2,188

 
Other income, net
 
31

 
 
95

 
Operating profit
 
2,122

 
 
2,283

 
Interest expense
 
(148
)
 
 
(171
)
 
Other non-operating income (expense), net
 
56

 
 
(167
)
 
Earnings before income taxes
 
2,030

 
 
1,945

 
Income tax expense
 
(313
)
 
 
(241
)
 
Net earnings
 
$
1,717

 
 
$
1,704

 
Diluted earnings per common share
 
$
6.08

 
 
$
5.99

 
Certain amounts reported in other income, net, primarily our share of earnings or losses from equity method investees, are included in the operating profit of our business segments. Accordingly, such amounts are included in the discussion of our business segment results of operations.
Net Sales
We generate sales from the delivery of products and services to our customers. Our consolidated net sales were as follows (in millions):
 
 
Quarters Ended
 
 
 
March 29,
2020