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    L OCKHEED M ARTIN C ORPORATION 2009 A NNUAL R EPORT F-35 Lightning II: The Backbone of Next Generation Tactical Aviation for America and its Allies


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    2009 FINANCIAL HIGHLIGHTS(a) (In millions, except per share data) 2009 2008 2007 Net sales $45,189 $42,731 $41,862 Operating profit from business segments 5,155 4,970 4,691 Consolidated operating profit 4,466 5,131 4,527 Net earnings 3,024 3,217 3,033 Earnings per diluted share 7.78 7.86 7.10 Average diluted common shares outstanding 388.9 409.4 427.1 Net cash provided by operating activities $ 3,173 $ 4,421 $ 4,238 Cash dividends per common share 2.34 1.83 1.47 Cash, cash equivalents and short-term investments 2,737 2,229 2,981 Total assets 35,111 33,439 28,926 Total debt 5,052 3,805 4,407 Stockholders’ equity 4,129 2,865 9,805 Common shares outstanding at year-end 373 393 409 Debt-to-total-capital ratio 55% 57% 31% Return on invested capital(b) 19.9% 21.7% 21.4% NOTES: (a) For additional information, including a discussion of matters affecting the comparability of the information presented above, refer to Selected Financial Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Notes to Consolidated Financial Statements in our 2009 Annual Report on Form 10-K. (b) For additional information concerning return on invested capital, including its definition and use, see Note (f) to the Consolidated Financial Data—Five Year Summary in the Annual Report on Form 10-K.


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    DEAR FELLOW STOCKHOLDERS, In the past year the men and women of Lockheed Martin, through their commitment to excellence, delivered solid results and helped our customers achieve some of their most critical missions. In 2009, our sales of $45.2 billion represented a 6 percent increase over 2008, and we generated $3.2 billion in operating cash after making discretionary pension contributions of $1.5 billion. From Left to Right: Linda R. Gooden, Executive Vice President, Information Systems & Global Services; Joanne M. Maguire, Executive Vice President, Space Systems; Christopher E. Kubasik, President and Chief Operating Officer; Robert J. Stevens, Chairman and Chief Executive Officer; Bruce L. Tanner, Executive Vice President and Chief Financial Officer; Marillyn A. Hewson, Executive Vice President, Electronic Systems; Ralph D. Heath, Executive Vice President, Aeronautics. Photograph taken in Lockheed Martin’s Center for Leadership Excellence which opened in 2009. LOCKHEED MARTIN CORPORATION 1 2009 ANNUAL REPORT


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    We also repurchased 24.9 million shares of System, clearing the way for further our common stock and paid dividends progress on the FBI’s new advanced- of $908 million during the year, marking biometrics system; the seventh consecutive year that we increased our dividend payment by more • Flew the Advanced Composite Cargo than 10 percent. Aircraft for the first time, demonstrating that composite technology has the We made great progress on programs that potential to reduce production costs as represent the future of global security, well as extend aircraft life; including the critical Joint Strike Fighter/ F-35 and the Littoral Combat Ship (LCS) • Launched the last in a series of eight programs. Our second LCS, USS Fort modernized Global Positioning System Worth, is more than 30 percent complete (GPS) IIR satellites, known worldwide and is being built on time and on cost. And for serving the navigation needs of both in November, we completed a successful military and civilian users; first flight of the first optimized Conventional Take-Off and Landing • Conducted reliability tests on the latest version of the F-35 Lightning II. production lot of the Joint Air-to-Surface Standoff Missile – in We also made important advancements in which we exceeded program cyber security, one of the top priorities for performance requirements – and our company as well as for every business, completed the sixth flight demonstration government agency, and citizen test of the Extended Range variant of worldwide. In November, we opened our the missile, which was successful in NexGen Cyber Innovation and Technology every test; Center, a world-class research and development laboratory in which we can • Conducted the 130th consecutive collaborate with our partners and successful launch since 1989 of our customers to stay ahead of those who Trident II D-5 fleet ballistic missile, a would attack critical IT infrastructures. record unmatched by any other large ballistic missile or space launch vehicle. In other notable program achievements in 2009 we: While we can point proudly to what we accomplished in 2009, we were • Completed the critical design review for disappointed by the capping of F-22 the Airborne and Maritime/Fixed production at 187 aircraft, termination of Station Joint Tactical Radio Systems the VH-71 Presidential Helicopter program (AMF JTRS), an advanced tactical and the cancellation of the Multiple Kill wireless radio system for the U.S. Vehicle (MKV), the Transformational Army, Air Force, and Navy; Communications Satellite (TSAT) and its ground segment (TSAT Mission • Completed the critical design review for Operations System). These setbacks, the Next Generation Identification driven largely by shifting customer LOCKHEED MARTIN CORPORATION 2 2009 ANNUAL REPORT


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    priorities and requirements, presented real customers are asking us to do more, and do challenges to the business and drove it more affordably, as they experience layoffs of 4,150 employees in 2009. greater fiscal pressure and growing mission requirements. We have responded by During the year, we also demonstrated our putting strategies in place to meet their long-standing commitment to leadership needs, enhance our competitiveness, and development with the opening of our sustain growth. Center for Leadership Excellence on our Headquarters campus in Bethesda, Md. Consequently, our goals for 2010 are clear: Recognizing our progressive stance in this arena, Fortune Magazine named Lockheed • Contain program costs; Martin among the top 25 companies for leaders in 2009. • Shorten cycle times; We continue to be extremely proud of our • Drive innovation and flexibility into our employees, not only for their skills and products; and capabilities, but also for their character and integrity. As in years past, our employees • Deliver on our commitments. continued to show extraordinary generosity, both in the time they devote to To help meet these goals and further their communities and in their financial strengthen our business, we have made contributions. Collectively, in 2009, our organizational and executive management employees volunteered 1.4 million hours of changes. service in their communities and gave more than $22 million to charitable causes Among those changes, we appointed of their choice. Combined with the Christopher E. Kubasik as President and Corporation’s philanthropic donations of Chief Operating Officer. Chris brings a $24 million, Lockheed Martin provided broad range of skills and experience to the powerful support to worthy causes around job, having served previously as our Chief the world. Financial Officer and as Executive Vice President of the Electronic Systems business area. He understands our Looking Ahead in 2010 customers’ changing environment and will lead our operations with an uncompromising commitment to perform We have opened this year with a firm on all programs. resolve to keep Lockheed Martin on a steady path to financial vitality, agility in We appointed Marillyn A. Hewson to the marketplace, and an unyielding succeed Chris as Executive Vice President standard of performance excellence. of Electronic Systems. With a 26-year record of distinguished achievement at Along with our industry peers, we face Lockheed Martin, Marillyn brings significant challenges in 2010. Our outstanding leadership and deep LOCKHEED MARTIN CORPORATION 3 2009 ANNUAL REPORT


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    knowledge of the industry to her new customers’ expectations on this vital position. We recently reorganized our program and do not expect a substantial Electronic Systems business area to more setback. closely align our capabilities with our customers’ needs, improve the affordability • Later this year, the U.S. Navy is of our offerings, and sharpen the focus of expected to choose between the our efforts to capture new business. Lockheed Martin-designed LCS and a competing design as the basis for up to We also named John T. Lucas as Senior 51 future ships. USS Freedom, our first Vice President of Human Resources. John LCS, deployed in February – two years has more than 25 years of human resources early – and interdicted a vessel carrying leadership experience in the illicit drugs in its first week of manufacturing, pharmaceutical, and operations. technology industries. He is bringing new insights and approaches to our efforts to • Sales of the C-130J, our advanced, attract, retain and grow the very best versatile airlifter, are robust in both the workforce possible. domestic and international markets. Despite the challenging business • Our PAC-3, Terminal High Altitude conditions, we are highly confident and Area Defense, and Aegis programs are optimistic about our future. Several factors performing superbly, and are the contribute to our optimism: cornerstone of effective missile defense worldwide. • Engineering development on the F-35 is 86 percent complete and yielding • We foresee increased demand for outstanding results in early ground and classified satellites and additional orders flight tests compared to legacy for Advanced Extremely High aircraft. We have had some cost growth Frequency and Space-Based Infrared and schedule delays, which we are System spacecraft. addressing aggressively. In February, U.S. Defense Secretary Robert Gates We also anticipate strong international announced a restructuring of the growth over the next several years. As a program that withholds $614 million in leader in providing global security progress payments until we demonstrate solutions, we see growing demand for our improved performance. The products and services as governments restructuring also adds one year to the around the world face increasingly program’s development phase and complex threats. Consequently, we are reduces the government’s planned 2010 expanding our international presence purchase by nine aircraft, for a total through mutually beneficial partnerships commitment of 43 for the year with the with governments and industry worldwide. opportunity for more, depending on our Our goal is to grow international sales from performance. We are making excellent the current 14 percent to at least 20 percent progress toward meeting all of our of our business over the next five years. LOCKHEED MARTIN CORPORATION 4 2009 ANNUAL REPORT


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    The Global Security Mission All of us are constantly mindful of that monumental responsibility, and we are proud to serve. Every day the men and women of Lockheed Martin are reminded of the vital February 25, 2010 importance of the work they do in support of our customers’ global security mission. We are increasingly called upon to apply innovation, technology, and talent to the emerging and complex threats we all face in the new reality of the global security environment. We support governments in humanitarian and peacekeeping Robert J. Stevens operations, the efficient delivery of Chairman and Chief Executive Officer services to their citizens, and in their efforts to build the institutional Special note: We would like to express our mechanisms that promote stability, peace, thanks to our Lead Director, James R. and economic development. Ukropina, and to Frank Savage, both of whom will retire from the Board this year. The Lockheed Martin team never loses We are extremely grateful for their sight of those who depend on us. We know valuable contributions to Lockheed that, in many cases, it is our dedication to Martin. The independent directors of our excellence that means the difference Board have elected Douglas H. between liberty and terrorism … between McCorkindale as our new Lead Director, peace and war … between life and death. effective April 22, 2010. LOCKHEED MARTIN CORPORATION 5 2009 ANNUAL REPORT


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    CORPORATE DIRECTORY (As of February 25, 2010) BOARD OF DIRECTORS E. C. “Pete” Aldridge Jr. Gwendolyn S. King James M. Schneider Former Under Secretary President Chairman of Defense Podium Prose Horizon Bank, SSB (A Washington, D.C. – based Nolan D. Archibald Speaker’s Bureau) Anne Stevens Chairman, President and Former Chief Executive Chief Executive Officer James M. Loy Officer The Black & Decker Senior Counselor Carpenter Technology Corporation The Cohen Group Corporation David B. Burritt Douglas H. McCorkindale Robert J. Stevens Vice President and Retired Chairman Chairman and Chief Financial Officer Gannett Co., Inc. Chief Executive Officer Caterpillar Inc. Lockheed Martin Corporation Joseph W. Ralston James O. Ellis Jr. Vice Chairman James R. Ukropina President and The Cohen Group Chief Executive Officer Chief Executive Officer Directions LLC Institute of Nuclear Power Frank Savage (A Management and Operations Chief Executive Officer Consulting Firm) Savage Holdings LLC EXECUTIVE OFFICERS Mark R. Bostic Ralph D. Heath John C. McCarthy Acting Vice President and Executive Vice President Vice President and Treasurer Controller Aeronautics Robert J. Stevens James B. Comey Marillyn A. Hewson Chairman and Senior Vice President and Executive Vice President Chief Executive Officer General Counsel Electronic Systems Bruce L. Tanner Linda R. Gooden Christopher E. Kubasik Executive Vice President and Executive Vice President President and Chief Financial Officer Information Systems & Chief Operating Officer Global Services Joanne M. Maguire Executive Vice President Space Systems LOCKHEED MARTIN CORPORATION 6 2009 ANNUAL REPORT


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    United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2009 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 (I.R.S. Employer incorporation or organization) Identification No.) 6801 Rockledge Drive, Bethesda, Maryland 20817-1877 (301/897-6000) (Address and telephone number of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered Common Stock, $1 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È 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 È No ‘ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer È Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act). Yes ‘ No È State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Approximately $30.9 billion as of June 28, 2009. Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Common Stock, $1 par value, 375,428,680 shares outstanding as of January 31, 2010. DOCUMENTS INCORPORATED BY REFERENCE Portions of Lockheed Martin Corporation’s 2010 Definitive Proxy Statement are incorporated by reference in Part III of this Form 10-K.


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    LOCKHEED MARTIN CORPORATION FORM 10-K For the Fiscal Year Ended December 31, 2009 CONTENTS Part I Page Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 4(a) Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Part II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 26 Financial Section Roadmap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Industry Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Discussion of Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Liquidity and Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Capital Structure and Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Contractual Commitments and Off-Balance Sheet Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Acquisition and Divestiture Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Quantitative and Qualitative Disclosure of Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Recent Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Management’s Report on the Financial Statements and Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, Regarding Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on the Audited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Consolidated Statement of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Consolidated Statement of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 1. Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 2. Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 3. Other Income (Expense), Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 4. Information on Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 2


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    LOCKHEED MARTIN CORPORATION FORM 10-K For the Fiscal Year Ended December 31, 2009 CONTENTS (continued) Part II (continued) Page 5. Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 6. Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 7. Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 8. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 9. Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 10. Postretirement Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 11. Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 12. Stock-Based Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 13. Legal Proceedings, Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 14. Acquisitions and Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 15. Fair Value Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 16. Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 17. Summary of Quarterly Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . 90 Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Part III Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Item 13 Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . 92 Item 14 Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Part IV Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Exhibits 3


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    PART I ITEM 1. BUSINESS General Lockheed Martin Corporation is a global security company that is principally engaged in the research, design, development, manufacture, integration, and sustainment of advanced technology systems and products. We also provide a broad range of management, engineering, technical, scientific, logistic, and information services. We serve both domestic and international customers with products and services that have defense, civil, and commercial applications, with our principal customers being agencies of the U.S. Government. We were formed in 1995 by combining the businesses of Lockheed Corporation and Martin Marietta Corporation. We are a Maryland corporation. In 2009, 85% of our net sales were made to the U.S. Government, either as a prime contractor or as a subcontractor. Each of our business segments is heavily dependent on sales to the U.S. Government. Our U.S. Government sales were made to both Department of Defense (DoD) and non-DoD agencies. Sales to foreign governments (including foreign military sales funded, in whole or in part, by the U.S. Government) amounted to 13% of net sales in 2009, while 2% of our net sales were made to commercial and other customers. Our principal executive offices are located at 6801 Rockledge Drive, Bethesda, Maryland 20817-1877. Our telephone number is (301) 897-6000. Our website home page on the Internet is www.lockheedmartin.com. We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K. Throughout this Form 10-K, we incorporate by reference information from parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC allows us to disclose important information by referring to it in this manner, and you should review that information. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statement for our annual shareholders’ meeting, as well as any amendments to those reports, available free of charge through our website as soon as reasonably practical after we electronically file that material with, or furnish it to, the SEC. You can learn more about us by reviewing our SEC filings. Our SEC filings can be accessed through the investor relations page of our website, www.lockheedmartin.com/investor. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, and other information regarding SEC registrants, including Lockheed Martin Corporation. Business Segments We operate in four principal business segments: Aeronautics, Electronic Systems, Information Systems & Global Services, and Space Systems. For more information concerning our segment presentation, including comparative segment sales, operating profits, and related financial information for 2009, 2008, and 2007, see Note 4 – Information on Business Segments beginning on page 66 of this Form 10-K. Aeronautics Aeronautics is engaged in the research, design, development, manufacture, integration, sustainment, support, and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles, and related technologies. In 2009, net sales at Aeronautics of $12.2 billion represented 27% of our total net sales. Aeronautics has three principal lines of business, and the percentage that each contributed to its 2009 net sales was: 72% Combat Aircraft Air Mobility 13% 15% Other Aeronautics Programs 4


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    Our customers include the military services and various government agencies of the United States and allied countries around the world. In 2009, U.S. Government customers accounted for approximately 83% of the segment’s net sales. Combat Aircraft Our Combat Aircraft business designs, develops, produces, and provides systems support for fighter aircraft. Our major fighter aircraft programs include: • The F-35 Lightning II Joint Strike Fighter – international multi-role, stealth fighter; • The F-22 Raptor – air dominance and multi-mission stealth fighter; and • The F-16 Fighting Falcon – low-cost, combat-proven, international multi-role fighter. The F-35 program continued work on development and Low Rate Initial Production (LRIP) aircraft during 2009. Given the size of the F-35 program, we anticipate that there will be a number of studies released related to the program schedule and production quantities as part of the normal DoD, Congressional, and international partners’ oversight and budgeting process. Production of the F-22 will be completed in 2012, with on-going modernization and sustainment activities continuing thereafter. We continue to produce F-16 aircraft for foreign governments under both foreign military and direct commercial sales. Air Mobility In Air Mobility, we design, develop, produce, and provide full system support and sustainment of tactical and strategic airlift aircraft. Our major programs include production, support, and sustainment of the C-130J Super Hercules, upgrade and support of the legacy C-130 Hercules worldwide fleet, support of the existing C-5A/B/C Galaxy fleet, and modification of Galaxy aircraft to the modernized C-5M Super Galaxy configuration. Other Aeronautics Programs (Including Advanced Research and Development) We are involved in advanced development programs incorporating innovative design and rapid prototype applications. Our Advanced Development Programs (ADP) organization, known as the Skunk Works, is focused on future systems including unmanned aerial vehicles and next generation capabilities for long-range strike, intelligence, surveillance, reconnaissance/battle space awareness, and air mobility. We continue to explore technology advancement and insertion in existing aircraft, such as the F-35, F-22, F-16, and C-130. We also are involved in numerous network enabled activities that allow separate systems to work together to increase effectiveness, and continue to invest in new technologies to maintain and enhance competitiveness in military aircraft design and development. Global Sustainment As part of each of our Aeronautics lines of business, we provide a full range of logistics support, sustaining engineering, aviation upgrades, modifications, and maintenance, repair, and overhaul (MRO) for all of our lines of aircraft, including the F-35, the F-22, the F-16, the C-130, the C-5, the P-3 Orion maritime patrol aircraft, and the U-2 Dragon Lady high-altitude reconnaissance aircraft. As the original equipment manufacturer for numerous platforms, we are focused on expanding our global sustainment services, which is an increasingly important portion of the Aeronautics business. Electronic Systems Our Electronic Systems segment manages complex programs and designs, develops, and integrates hardware and software solutions to ensure the mission readiness of armed forces and government agencies worldwide. Major lines of business include: air and missile defense; tactical missiles; weapon fire control systems; surface ship and submarine combat systems, anti-submarine and undersea warfare systems; land, sea-based, and airborne radars; surveillance and reconnaissance systems; simulation and training systems; and integrated logistics and sustainment services. 5


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    In 2009, net sales of $12.2 billion at Electronic Systems represented 27% of our total net sales. Electronic Systems has three principal lines of business, and the percentage each contributed to its 2009 net sales was: Maritime Systems & Sensors 39% Missiles & Fire Control 22% 39% Platforms & Training U.S. Government customers accounted for approximately 70% of the segment’s total net sales in 2009. Maritime Systems & Sensors Maritime Systems & Sensors (MS2) provides ship systems integration, including command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) capability across shore-based command centers; surface ship and submarine combat systems; sea-based missile defense systems; sensors; tactical avionics; port traffic management systems; missile launching systems; aerostat surveillance systems; technologies associated with renewable energy systems; and supply-chain management programs and systems. Core programs include the Aegis Weapon System, which is a fleet defense system and a sea-based element of the U.S. missile defense system, and the Littoral Combat Ship, which is a surface combatant designed to operate in shallow waters. Missiles & Fire Control Missiles & Fire Control (M&FC) develops and produces land-based, air, and theater missile-defense systems, tactical battlefield missiles, electro-optical systems, fire-control and sensor systems, and precision-guided weapons and munitions. We also provide sustainment and logistic services in support of fire control and tactical missile programs. Core programs include the Terminal High Altitude Area Defense (THAAD) system, which is a transportable defensive missile system designed to engage targets both within and outside of the Earth’s atmosphere, and the PAC-3 missile, which is an advanced defensive missile designed to intercept incoming airborne threats. Platforms & Training Platforms & Training (P&T) integrates mission-specific applications for fixed- and rotary-wing aircraft, including logistics and sustainment; develops and integrates postal automation and material handling systems; develops tactical wheeled vehicles; and provides simulation, training, and support services. We also manage and operate the Sandia National Laboratories for the U.S. Department of Energy. Effective January 1, 2010, the ground vehicles line of business from the former Systems Integration – Owego, which includes the Joint Light Tactical Vehicle program, was realigned as part of Missiles & Fire Control. Additionally, the remaining Systems Integration – Owego businesses were realigned with the former Maritime Systems & Sensors line of business to form a new line of business, Mission Systems & Sensors. Information Systems & Global Services Our Information Systems & Global Services (IS&GS) segment provides federal services, Information Technology (IT) solutions, and advanced technology expertise across a broad spectrum of applications and customers. IS&GS provides full life-cycle support and highly specialized talent in the areas of software and systems engineering, including capabilities in space, air, and ground systems, and also provides logistics, mission operation support, peacekeeping, and nation-building services for a wide variety of defense and civil government agencies in the U.S. and abroad. IS&GS has a large number of indefinite delivery, indefinite quantity (IDIQ) and task order types of contracts. 6


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    In 2009, net sales of $12.1 billion at IS&GS represented 27% of our total net sales. IS&GS has three principal lines of business and the percentage that each contributed to its 2009 net sales was: 36% Civil 37% Defense 27% Intelligence In 2009, U.S. Government customers accounted for approximately 94% of the segment’s total net sales. Civil Our Civil line of business supports the nation’s needs in the areas of human capital, data protection and sharing, financial services, energy and environment, health, security, human exploration, biometrics, and transportation. Its core programs include the Decennial Response Integration System (DRIS 2010) contract, which will provide a multi-channel system for the 2010 U.S. Census data, and En-Route Automation Modernization (ERAM), which is a program to replace the Federal Aviation Administration’s infrastructure with a modern automation environment that includes new functions and capabilities. Defense Our Defense line of business provides net-enabled situation awareness, and delivers communications and command and control capabilities through complex mission solutions to defense, National Aeronautics and Space Administration (NASA), National Oceanic and Atmospheric Administration (NOAA), and international customers. Its core programs include the Command and Control, Battle Management, and Communications contract, a program to increase the integration of the Ballistic Missile Defense System, and the Joint Tactical Radio System contract, which provides software programmable tactical radios with voice, data, and video communications to Army, Navy, and Air Force platforms. Intelligence Our Intelligence line of business designs and integrates the complex, global systems that help our customers gather, analyze, and securely distribute critical intelligence data. Its core programs include GeoScout, which is a program to develop advanced intelligence processing, and the FBI’s Sentinel IT infrastructure program. Space Systems Space Systems is engaged in the design, research and development, engineering, and production of satellites, strategic and defensive missile systems, and space transportation systems, including activities related to the Space Shuttle and its planned replacement. In 2009, net sales of $8.7 billion at Space Systems represented approximately 19% of our total net sales. Space Systems has three principal lines of business, and the percentage that each contributed to its 2009 net sales was: 67% Satellites 16% Strategic & Defensive Missile Systems 17% Space Transportation Systems In 2009, U.S. Government customers accounted for approximately 97% of the segment’s net sales. 7


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    Satellites Our Satellites business designs, develops, manufactures, and integrates advanced technology satellite systems for government and commercial applications. We are responsible for various classified systems and services in support of vital national security systems. Its core programs include the Space-Based Infrared System (SBIRS) program, which provides the nation with enhanced worldwide detection and tracking capabilities; the Mobile User Objective System (MUOS), which is a next-generation narrow band satellite communication system for the U.S. Navy; the Advanced Extremely High Frequency (AEHF) system, which is the DoD’s next generation of highly secure communications satellites; and the Global Positioning Satellite III (GPS III) system, which is the next generation of global positioning satellites. Strategic & Defensive Missile Systems Strategic & Defensive Missile Systems includes missile defense technologies and systems, and fleet ballistic missiles. We have been the sole supplier of strategic fleet ballistic missiles to the U.S. Navy since 1955. The Trident II D5 is the only current submarine-launched intercontinental ballistic missile in production in the United States. Under the targets and countermeasures program, we manage missile defense targets hardware and software for the Missile Defense Agency (MDA), providing realistic test environments for the system being developed by the MDA to defend against all classes of ballistic missiles. Space Transportation Systems Space Transportation Systems includes portions of the next generation human space flight system. We lead an industry team supporting NASA in the design, test, build, integration, and operational capability of the Orion crew exploration vehicle, an advanced crew capsule design utilizing state-of-the-art technology that is planned to succeed the Space Shuttle. Through ownership interests in two joint ventures, Space Transportation Systems also includes Space Shuttle processing activities (United Space Alliance) and expendable launch services for the U.S. Government (United Launch Alliance). The Space Shuttle is expected to finish its final flight mission in 2010 and our programs involving its launch and processing activities will end at that time. Competition Our broad portfolio of products and services competes against the products and services of other large aerospace, defense, and information technology companies, as well as numerous smaller competitors (particularly in the IS&GS segment). We often form teams with other companies that are competitors in other areas to provide customers with the best mix of capabilities to address specific requirements. In some instances, which are more prevalent in our IS&GS-Civil line of business, we may also compete with a government-led bidding entity. In some areas of our business, customer requirements are changing to encourage expanded competition, as with the commercial access to space initiative. Principal factors of competition include: technical and management capability; the ability to develop and implement complex, integrated system architectures; affordability; financing and total cost of ownership; release of technology; past performance; and our ability to provide timely solutions. International sales are subject to a wide variety of U.S. Government controls (e.g., export restrictions, market access, technology transfer, industrial cooperation, and contracting practices). In addition, the purchasing government’s relationship with the U.S. and its industrial cooperation programs are also important factors in determining the outcome of a competition. It is common for international customers to require contractors to comply with their industrial cooperation regulations, sometimes referred to as offset requirements, and we have undertaken foreign offset agreements as part of securing some international business. For more information concerning offset agreements, see “Contractual Commitments and Off-Balance Sheet Arrangements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 49 of this Form 10-K. Patents We routinely apply for and own a substantial number of U.S. and foreign patents related to the products and services our business segments provide. In addition to owning a large portfolio of intellectual property, we also license intellectual property to and from third parties. The U.S. Government has licenses in our patents that are developed in performance of government contracts, and it may use or authorize others to use the inventions covered by such patents for government purposes. Unpatented research, development, and engineering skills also make an important contribution to our business. Although our intellectual property rights in the aggregate are important to the operation of our business segments, we do not 8


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    believe that any existing patent, license, or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on our business taken as a whole. Raw Materials and Seasonality Aspects of our business require relatively scarce raw materials. We historically have been successful in obtaining the raw materials and other supplies needed in our manufacturing processes. We seek to manage raw materials supply risk through long-term contracts and by maintaining a stock of key materials in inventory. Aluminum and titanium are important raw materials used in certain of our Aeronautics and Space Systems programs. Long-term agreements have helped enable a continued supply of aluminum and titanium. Carbon fiber is an important ingredient in the composite material that is used in our Aeronautics programs, such as the F-35. Nicalon fiber also is a key material used on the F-22 aircraft. One type of carbon fiber and the nicalon fiber that we use are currently only available from single-source suppliers. Aluminum lithium, which we use for F-16 structural components, also is currently only available from limited sources. We have been advised by some suppliers that pricing and the timing of availability of materials in some commodities markets can fluctuate widely. These fluctuations may negatively affect price and the availability of certain materials, including titanium. While we do not anticipate material problems regarding the supply of our raw materials and believe that we have taken appropriate measures to mitigate these variations, if key materials become unavailable or if pricing fluctuates widely in the future, it could result in delay of one or more of our programs, increased costs, or reduced award fees. No material portion of our business is considered to be seasonal. Various factors can affect the distribution of our sales between accounting periods, including the timing of government awards, the availability of government funding, product deliveries, and customer acceptance. Government Contracts and Regulation Our businesses are heavily regulated in most of our fields of endeavor. We deal with numerous U.S. Government agencies and entities, including all of the branches of the U.S. military, NASA, the U.S. Postal Service, the Social Security Administration, and the Departments of Defense, Energy, Justice, Health and Human Services, Homeland Security, State, and Transportation. Similar government authorities exist in other countries and regulate our international efforts. We must comply with and are affected by laws and regulations relating to the formation, administration, and performance of U.S. Government and other contracts. These laws and regulations, among other things: • require certification and disclosure of all cost or pricing data in connection with certain contract negotiations; • impose specific and unique cost accounting practices that may differ from U.S. generally accepted accounting principles (GAAP) and therefore require reconciliation; • impose acquisition regulations that define allowable and unallowable costs and otherwise govern our right to reimbursement under certain cost-based U.S. Government contracts; and • restrict the use and dissemination of information classified for national security purposes and the export of certain products and technical data. Government contracts are conditioned upon the continuing availability of legislative appropriations. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods become unavailable. Congress usually appropriates funds on a fiscal-year basis even though contract performance may extend over many years. Consequently, at the outset of a program, the contract is usually partially funded, and Congress annually determines if additional funds are to be appropriated to the contract. In addition, significant cost overruns could require a special certification from the Secretary of Defense to Congress to allow work under the contract to continue. The U.S. Government and other governments may terminate any of our government contracts or subcontracts either at their convenience or for default based on performance. A portion of our business is classified by the U.S. Government and cannot be specifically described. The operating results of these classified programs are included in our consolidated financial statements. The business risks associated with classified programs historically have not differed materially from those of our other government programs. 9


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    Backlog At December 31, 2009, our total negotiated backlog was $78.0 billion compared with $80.9 billion at the end of 2008. Of our total 2009 year-end backlog, approximately $46.0 billion, or 59%, is not expected to be filled within one year. In April 2009, the DoD terminated for convenience two of our significant programs: the VH-71 Presidential Helicopter Replacement program, and the TSAT Mission Operations System (TMOS) contract, representing the ground support infrastructure for the TSAT program. These contract terminations reduced our negotiated backlog by approximately $2.6 billion. Our backlog includes both funded (unfilled firm orders for our products and services for which funding has been both authorized and appropriated by the customer – Congress, in the case of U.S. Government agencies) and unfunded (firm orders for which funding has not been appropriated) amounts. We do not include unexercised options or potential IDIQ orders in our backlog. If any of our contracts were to be terminated by the U.S. Government, our backlog would be reduced by the expected value of the remaining terms of such contracts. Funded backlog was $49.0 billion at December 31, 2009. The backlog for each of our business segments is provided as part of Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Discussion of Business Segments” beginning on page 39 of this Form 10-K. Research and Development We conduct research and development activities under customer-funded contracts and with our own independent research and development funds. Our independent research and development costs include basic research, applied research, development, systems, and other concept formulation studies. These costs generally are allocated among all contracts and programs in progress under U.S. Government contractual arrangements. Corporation-sponsored product development costs not otherwise allocable are charged to expense when incurred. Under certain arrangements in which a customer shares in product development costs, our portion of the unreimbursed costs is expensed as incurred. Independent research and development costs charged to costs of sales were $750 million in 2009, $719 million in 2008, and $678 million in 2007. See “Research and development and similar costs” in Note 1 – Significant Accounting Policies on page 63 of this Form 10-K. Employees At December 31, 2009, we had approximately 140,000 employees, over 90% of whom were located in the U.S. We have a continuing need for numerous skilled and professional personnel to meet contract schedules and obtain new and ongoing orders for our products. The majority of our employees possess a security clearance. The demand for workers with security clearances who have specialized engineering, information technology, and technical skills within the aerospace, defense, and information technology industries is likely to remain high for the foreseeable future, while growth of the pool of trained individuals with those skills has not matched demand. As a result, we are competing with other companies with similar needs in hiring skilled employees. Management considers employee relations to be good. Approximately 15% of our employees are covered by any one of approximately seventy separate collective bargaining agreements with various unions. A number of our existing collective bargaining agreements expire in any given year. Historically, we have been successful in renegotiating expiring agreements without any material disruption of operating activities. Forward-Looking Statements This Form 10-K contains statements that, to the extent they are not recitations of historical fact, constitute forward- looking statements within the meaning of federal securities law. The words believe, estimate, anticipate, project, intend, expect, plan, outlook, scheduled, forecast, and similar expressions are intended to help identify forward-looking statements. Statements and assumptions with respect to future sales, income and cash flows, program performance, the outcome of litigation, environmental remediation cost estimates, and planned acquisitions or dispositions of assets are examples of forward-looking statements. Numerous factors, including potentially the risk factors described in the following section, could affect our forward-looking statements and actual performance. ITEM 1A. RISK FACTORS An investment in our common stock or debt securities involves risks and uncertainties. Although we attempt to identify, manage, and mitigate risks to our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. You should consider the following factors carefully, in addition to the other information contained in this Form 10-K, before deciding to purchase our securities. 10


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    Our existing U.S. Government contracts are subject to continued appropriations by Congress and may be terminated or delayed if future funding is not made available. Reduced funding for defense procurement and research and development programs could result in terminated or delayed contracts and adversely affect our ability to grow or maintain our sales and profitability. We rely heavily upon sales to the U.S. Government including both DoD and non-DoD agencies, obtaining 85% of our sales from U.S. Government customers in 2009. Future sales from orders placed under our existing U.S. Government contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds on a fiscal-year basis even though contract performance may extend over many years. U.S. Government programs in which we participate, or in which we may seek to participate in the future, must compete with other programs for consideration during our nation’s budget formulation and appropriation processes, and may be affected by changes in general economic conditions. Budget decisions made in this environment may have long-term consequences for our size and structure and that of the defense industry. We believe that our programs are a high priority for national defense and other imperatives, but there remains the possibility that one or more of our programs will be reduced, extended, or terminated. Reductions in our existing programs, unless offset by other programs and opportunities, could adversely affect our ability to grow our sales and profitability. In this regard, we are pursuing a strategy in which we seek to expand and complement our existing products and services by moving into adjacent businesses in which we believe that our core competencies will enable us to successfully compete. We may seek to move into adjacent businesses through investments, acquisitions, joint ventures, or by developing our internal capabilities. If we are not successful in this effort, we may not be able to grow our sales and profitability at the rates we anticipate or may have deployed financial and management resources sub-optimally. We provide a wide range of defense, homeland security, and information technology products and services to the U.S. Government. Although we believe that this diversity makes it less likely that cuts in any specific contract or program will have a long-term effect on us, termination of multiple or large programs or contracts could adversely affect our business and future financial performance. In addition, termination of large programs or multiple contracts at a particular business site could require us to evaluate the continued viability of operating that site. Changes in global security strategy and planning may affect future procurement priorities and existing programs. We cannot predict whether potential changes in security, defense, and intelligence priorities will afford new or additional opportunities for our businesses in terms of existing, follow-on, or replacement programs, or whether we would have to close existing manufacturing facilities or incur expenses beyond those that would be reimbursed if one or more of our existing contracts were terminated for convenience due to lack of funding or changes in priorities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Industry Considerations” beginning on page 27 of this report. We are continuing to invest in business opportunities where we can use our customer knowledge, technical strength, and systems integration capabilities to win new business. Whether we are successful in continuing to grow sales and profits will depend, in large measure, on whether we are able to deliver the best value solutions for our customer. As a U.S. Government contractor, we are subject to a number of procurement rules and regulations. We must comply with and are affected by laws and regulations relating to the award, administration, and performance of U.S. Government contracts. Government contract laws and regulations affect how we do business with our customers and, in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties, the termination of our contracts, or debarment from bidding on contracts. In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the U.S. Government may terminate any of our government contracts and subcontracts either at its convenience or for default based on performance. Upon termination for convenience of a fixed-price type contract, we normally are entitled to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-process, and an allowance for profit on the contract or adjustment for loss if completion of performance would have resulted in a loss. Upon termination for convenience of a cost reimbursement contract, we normally are entitled to reimbursement of allowable costs plus a portion of the fee. Allowable costs would include our cost to terminate agreements with our suppliers and subcontractors. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to termination and is determined by negotiation. Our ability to 11


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    recover is subject to the U.S. Government’s having appropriated sufficient funds to cover the termination costs. As funds are typically appropriated on a fiscal-year basis and as the costs of a termination for convenience may exceed the costs of continuing a program in a given fiscal year, many on-going programs do not have sufficient funds appropriated to cover the termination costs were the government to terminate them for convenience. The U.S. Government is not required to appropriate additional funding under these circumstances. A termination arising out of our default may expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders. In addition, on those contracts for which we are teamed with others and are not the prime contractor, the U.S. Government could terminate a prime contract under which we are a subcontractor, notwithstanding the quality of our services as a subcontractor. In addition, our U.S. Government contracts typically span one or more base years and multiple option years. The U.S. Government generally has the right to not exercise option periods and may not exercise an option period if the agency is not satisfied with our performance on the contract. Our business could be adversely affected by a negative audit by the U.S. Government. U.S. Government agencies, including the Defense Contract Audit Agency and various agency Inspectors General, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure, and compliance with applicable laws, regulations, and standards. The U.S. Government also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s management, purchasing, property, estimating, compensation, accounting, and information systems. Any costs found to be misclassified may be subject to repayment. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with the U.S. Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. The nature of our business involves significant risks and uncertainties that may not be covered by indemnity or insurance. Elements of our business provide products and services where insurance or indemnification may not be available, including: • Designing, developing, integrating, producing, sustaining, and supporting products using: • advanced and unproven technologies; • explosive or other inherently dangerous components; • systems such as spacecraft, satellites, intelligence systems, and homeland security applications that operate in extreme, high demand, or high risk conditions; • Designing, developing, integrating, producing, sustaining, and supporting products to collect, archive, retrieve, fuse, distribute, and analyze various types of information; • Deploying employees in countries with unstable or competing governments, in areas subject to peacekeeping or humanitarian missions, in areas of armed conflict, at military installations, or accompanying armed forces in the field; and • Training others to operate or repair advanced technology products or provide security or other homeland security- related services. Failure of some of these products and services could result in extensive loss of life or property damage. Sometimes these products and services are controversial and our role in providing them could subject us to criticism or harm our reputation. Certain products and services may raise questions with respect to issues of civil liberties, intellectual property, trespass, conversion, and similar concepts. The legal obligations of those working with developing technologies and the resulting products and services may raise issues of first impression, and the legal decisions that do deal with these questions may differ from jurisdiction to jurisdiction on a global basis. Indemnification by the U.S. Government to cover potential claims or liabilities resulting from a failure of technologies developed and deployed may be available in some instances for our defense businesses, but may not be available for homeland security purposes. In addition, there are some instances where the U.S. Government could provide indemnification under applicable law, but elects not to do so. Although we maintain insurance for some business risks, it is not possible to obtain coverage to protect against all operational risks and liabilities. We generally seek, and in certain cases have obtained, limitation of potential liabilities related to the sale and use of our homeland security products and services through 12


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    qualification by the Department of Homeland Security under the SAFETY Act provisions of the Homeland Security Act of 2002. SAFETY Act qualification is less useful and may not be available to mitigate potential liability for products and services sold internationally. Where we are unable to secure indemnification or qualification under the SAFETY Act or choose not to do so, we may nevertheless elect to provide the product or service when we think the related risks are manageable or when emergency conditions relative to national security make qualification impracticable. Substantial claims resulting from an accident, failure of our product or service, other incident, or liability arising from our products and services in excess of any indemnity and our insurance coverage (or for which indemnity or insurance is not available or was not obtained) could harm our financial condition, cash flows, and operating results. Any accident, even if fully indemnified or insured, could negatively affect our reputation among our customers and the public, and make it more difficult for us to compete effectively. It also could affect the cost and availability of adequate insurance in the future. Our earnings and margins may vary based on the mix of our contracts and programs. Our backlog includes both cost reimbursable and fixed-price contracts. Cost reimbursable contracts generally have lower profit margins than fixed-price contracts. Production contracts mainly are fixed-price contracts, and developmental contracts generally are cost reimbursable contracts. Our earnings and margins may vary materially depending on the types of long-term government contracts undertaken, the nature of the products produced or services performed under those contracts, the costs incurred in performing the work, the achievement of other performance objectives, and the stage of performance at which the right to receive fees is finally determined (particularly under award and incentive fee contracts). Under fixed-price contracts, we receive a fixed price despite the actual costs we incur. We have to absorb any costs in excess of the fixed price. Under time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses. Under cost reimbursable contracts, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. If our costs exceed the contract target cost or are not allowable under the applicable regulations, we may not be able to obtain reimbursement for all costs and may have our fees reduced or eliminated. The failure to perform to customer expectations and contract requirements may result in reduced fees and affect our financial performance in that period. Under each type of contract, if we are unable to control costs, our operating results could be affected adversely. Cost overruns or the failure to perform on existing programs also may affect adversely our ability to keep existing programs and win future contract awards. If our subcontractors or suppliers fail to perform their contractual obligations, our prime contract performance and our ability to win future business could be harmed. Many of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services that we must provide to our customers. There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor, the workshare provided to the subcontractor, customer concerns about the subcontract and the subcontractor’s performance, our failure to extend existing task orders or issue new task orders under a subcontract, or our hiring of the personnel of a subcontractor or vice versa. In addition, our subcontractors may be affected by changes in the economic environment and constraints on available financing to meet their performance requirements or provide needed supplies on a timely basis. A failure by one or more of our subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may affect our ability to perform our obligations as the prime contractor. Subcontractor performance deficiencies may affect our operating results and could result in a customer terminating our contract for default. A default termination could expose us to liability and affect our ability to compete for future contracts and orders. In addition, a delay in obtaining components and parts from our suppliers may affect our ability to meet our customers’ needs and may affect our profitability. We use estimates in accounting for many of our programs. Changes in our estimates may affect future financial results. Contract accounting requires judgment relative to assessing risks, estimating contract sales and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total sales and cost at completion is complicated and subject to many variables. For example, assumptions have to be made regarding the length of time to complete the contract because costs also include expected increases in wages and prices for materials. Similarly, assumptions have to be made regarding the future impacts of efficiency initiatives and cost reduction efforts. Incentives or penalties related to performance on contracts are considered in estimating sales and profit rates, and are recorded when there is sufficient information for us to assess anticipated performance. Estimates of award and incentive fees are also used in estimating sales and profit rates based on actual and anticipated awards. 13


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    Because judgments and estimates are required, materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances, or estimates may affect adversely our future period financial performance. For additional information on accounting policies and internal controls we have in place for recognizing sales and profits, see our discussion under Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Critical Accounting Policies – Contract Accounting / Revenue Recognition” beginning on page 31 and “Controls and Procedures” beginning on page 53, and “Sales and earnings” in Note 1 – Significant Accounting Policies on page 62 of this Form 10-K. New accounting standards could result in changes to our methods of quantifying and recording accounting transactions, and could affect our financial results and financial position. Changes to GAAP arise from new and revised standards, interpretations, and other guidance issued by the Financial Accounting Standards Board, the SEC, and others. In addition, the U.S. Government may issue new or revised Cost Accounting Standards or Cost Principles. The effects of such changes may include prescribing an accounting method where none had been previously specified, prescribing a single acceptable method of accounting from among several acceptable methods that currently exist, or revoking the acceptability of a current method and replacing it with an entirely different method, among others. Changes may result in unanticipated effects on our results of operations or other financial measures. The level of returns on postretirement benefit plan assets and changes in the actuarial assumptions used could affect our earnings and cash flows in future periods. Our earnings may be positively or negatively impacted by the amount of expense we record for our postretirement benefit plans. This is particularly true with expense for our defined benefit pension plans. GAAP requires that we calculate expense for the plans using actuarial valuations. These valuations are based on assumptions that we make relating to financial market and other economic conditions. Changes in key economic indicators can result in changes in the assumptions we use. The key year-end assumptions used to estimate pension expense for the following year are the discount rate, the expected long-term rate of return on plan assets, and the rate of increase in future compensation levels. Our benefit plan expense and plan funding requirements also may be affected by our actual return on plan assets, and by legislation and other government regulatory actions. For a discussion regarding how our financial statements may be affected by benefit plan accounting policies, see Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Critical Accounting Policies – Postretirement Benefit Plans” beginning on page 33 and Note 10 – Postretirement Benefit Plans beginning on page 74 of this Form 10-K. International sales and suppliers may pose potentially greater risks. Our international business may pose greater risks than our domestic business due to the potential for greater volatility in foreign economic and political environments. In addition, international procurement rules and regulations, contract laws and regulations, and contractual terms are different from those in the United States, imposing additional risks on us. In return, the greater risks of our international business are often accompanied by the potential to earn higher profits than from our domestic business. Our international business also is highly sensitive to changes in foreign national priorities and government budgets, which may be further impacted by global economic conditions. Sales of military products are affected by defense budgets (both in the U.S. and abroad) and U.S. foreign policy. Sales of our products and services internationally are subject to U.S. and local government regulations and procurement policies and practices including regulations relating to import-export control. Violations of export control rules could result in suspension of our ability to export items from one or more business units or the entire Corporation. Depending on the scope of the suspension, this could have a material effect on our ability to perform certain international contracts. There also are U.S. and international regulations relating to investments, exchange controls, taxation, and repatriation of earnings, as well as currency, political, and economic risks. We also frequently team with international subcontractors and suppliers who are exposed to similar risks. In international sales, we face substantial competition from both domestic manufacturers and foreign manufacturers whose governments sometimes provide research and development assistance, marketing subsidies, and other assistance for their products. Some international customers require contractors to comply with industrial cooperation regulations and enter into industrial cooperation agreements, sometimes referred to as offset agreements. Offset agreements may require in-country purchases, manufacturing, and financial support projects as a condition to obtaining orders or other arrangements. Offset 14


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    agreements generally extend over several years and may provide for penalties in the event we fail to perform in accordance with offset requirements. See “Contractual Commitments and Off-Balance Sheet Arrangements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 49 of this Form 10-K. If we fail to manage acquisitions, divestitures, and other transactions successfully, our financial results, business, and future prospects could be harmed. In pursuing our business strategy, we routinely conduct discussions, evaluate targets, and enter into agreements regarding possible investments, acquisitions, joint ventures, and divestitures. As part of our business strategy, we seek to identify acquisition opportunities that will expand or complement our existing products and services, or customer base, at attractive valuations. We often compete with others for the same opportunities. To be successful, we must conduct due diligence to identify valuation issues and potential loss contingencies, negotiate transaction terms, complete and close complex transactions, and manage post-closing matters (e.g., integrate acquired companies and employees, realize anticipated operating synergies, and improve margins) efficiently and effectively. Investment, acquisition, joint venture, and divestiture transactions often require substantial management resources and have the potential to divert our attention from our existing business. If we are not successful in identifying and closing these transactions, we may not be able to maintain a competitive leadership position or may be required to expend additional resources to develop capabilities internally in certain segments. In evaluating transactions, we are required to make valuation assumptions and exercise judgment regarding business opportunities and potential liabilities. Our assumptions or judgment may prove to be inaccurate. Our due diligence reviews may not identify all of the material issues necessary to accurately estimate the cost and potential loss contingencies of a particular transaction, including potential exposure to regulatory sanctions resulting from the acquisition target’s previous activities. Future acquisitions, if funded by issuing stock or incurring indebtedness, could dilute returns to existing stockholders, or adversely affect our credit rating or future financial performance. We also may incur unanticipated costs or expenses, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation, and other liabilities. We believe that we have established appropriate procedures and processes to mitigate many of these risks, but there is no assurance that our integration efforts and business acquisition strategy will be successful. Divestitures may result in continued financial involvement through guarantees or other financial arrangements for a period of time following the transaction. Nonperformance by divested businesses could affect our future financial results. Joint ventures operate under shared control with other parties. Under the equity method of accounting for nonconsolidated joint ventures, we recognize our share of the operating results of these ventures in our results of operations. Our operating results may be affected by the performance of businesses over which we do not exercise control. Business disruptions could seriously affect us. Our business may be affected by disruptions including, but not limited to: threats to physical security of our facilities and employees, including senior executives; terrorist acts; information technology attacks or failures; damaging weather or other acts of nature; and pandemics or other public health crises. The costs related to these events may not be fully mitigated by insurance or other means. Disruptions could affect our internal operations or services provided to customers, and could impact our sales, increase our expenses, or adversely affect our reputation or our stock price. Unforeseen environmental costs could impact our future earnings. Our operations are subject to and affected by a variety of federal, state, local, and foreign environmental protection laws and regulations. We are involved in environmental responses at some of our facilities and former facilities, and at third-party sites not owned by us where we have been designated a potentially responsible party by the Environmental Protection Agency (EPA) or by a state agency. In addition, we could be affected by future regulations imposed in response to concerns over climate change and other actions commonly referred to as “green initiatives.” We currently are developing a comprehensive program to reduce the effects of our operations on the environment. We manage various government-owned facilities on behalf of the government. At such facilities, environmental compliance and remediation costs historically have been the responsibility of the government, and we have relied (and continue to rely with respect to past practices) upon government funding to pay such costs. Although the government remains responsible for capital and operating costs associated with environmental compliance, responsibility for fines and penalties associated with environmental noncompliance typically are borne by either the government or the contractor, depending on the contract and the relevant facts. 15


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    Most of the laws governing environmental matters include criminal provisions. If we were to be convicted of a violation of the Federal Clean Air Act or the Clean Water Act, the facility or facilities involved in the violation could be placed by the EPA on the “Excluded Parties List” maintained by the General Services Administration. The listing would continue until the EPA concluded that the cause of the violation had been cured. Listed facilities cannot be used in performing any U.S. Government contract while so listed by the EPA. We have incurred and will likely continue to incur liabilities under various federal and state statutes for the cleanup of pollutants previously released into the environment. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. Among the variables management must assess in evaluating costs associated with these cases and remediation sites generally are the status of site assessment, extent of the contamination, changing cost estimates, evolution of technologies used to remediate the site, and continually evolving governmental environmental standards and cost allowability issues. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or cleanup to the extent estimable, see “Critical Accounting Policies-Environmental Matters” in Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 35 and in Note 13 – Legal Proceedings, Commitments and Contingencies on page 84 of this Form 10-K. Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our profitability. Our business operates in many locations under government jurisdictions that impose taxes based on income and other criteria. Changes in domestic or foreign tax laws and regulations, or their interpretation, could result in higher or lower tax rates assessed, changes in the taxability of certain revenues or activities, or changes in the deductibility of certain expenses, thereby affecting our tax expense and profitability. In addition, audits by tax authorities could result in unanticipated increases in our tax expense. We are involved in a number of legal proceedings. We cannot predict the outcome of litigation and other contingencies with certainty. Our business may be adversely affected by the outcome of legal proceedings and other contingencies (including environmental remediation costs) that cannot be predicted with certainty. As required by GAAP, we estimate material loss contingencies and establish reserves based on our assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time. Subsequent developments in legal proceedings may affect our assessment and estimates of the loss contingency recorded as a liability or as a reserve against assets in our financial statements. For a description of our current legal proceedings, see Item 3 – Legal Proceedings beginning on page 18 and Note 13 – Legal Proceedings, Commitments and Contingencies beginning on page 84 of this Form 10-K. In order to be successful, we must attract and retain key employees. Our business has a continuing need to attract large numbers of skilled personnel, including personnel holding security clearances, to support the growth of the enterprise and to replace individuals who have terminated employment due to retirement or for other reasons. To the extent that the demand for qualified personnel exceeds supply, we could experience higher labor, recruiting, or training costs in order to attract and retain such employees, or could experience difficulties in performing under our contracts if our needs for such employees were unmet. We also must manage leadership development and executive succession throughout our business. To the extent that we are unable to attract, develop, retain, and protect leadership talent successfully, we could experience business disruptions and impair our ability to achieve business objectives. Historically, where employees are covered by collective bargaining agreements with various unions, we have been successful in negotiating renewals to expiring agreements without any material disruption of operating activities. This does not assure, however, that we will be successful in our efforts to negotiate renewals of our existing collective bargaining agreements when they expire. If we were unsuccessful in those efforts, there is the potential that we could incur unanticipated delays or expenses in the programs affected by any resulting work stoppages. Our forward-looking statements and projections may prove to be inaccurate. Our actual financial results likely will be different from those projected due to the inherent nature of projections and may be better or worse than projected. Given these uncertainties, you should not rely on forward-looking statements. The 16


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    forward-looking statements contained in this Form 10-K speak only as of the date of this Form 10-K. We expressly disclaim a duty to provide updates to forward-looking statements after the date of this Form 10-K to reflect the occurrence of subsequent events, changed circumstances, changes in our expectations, or the estimates and assumptions associated with them. The forward-looking statements in this Form 10-K are intended to be subject to the safe harbor protection provided by the federal securities laws. In addition, general economic conditions and trends, including interest rates, government budgets, and inflation, can and do affect our businesses. For a discussion identifying additional risk factors and important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see the preceding discussion of Government Contracts and Regulation beginning on page 9, Risk Factors beginning on page 10, Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 26, and Note 1 – Significant Accounting Policies beginning on page 61 of this Form 10-K. Other factors, in addition to those described, may affect our forward- looking statements or actual results. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 17


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    ITEM 2. PROPERTIES At December 31, 2009, we operated in 572 locations (including offices, manufacturing plants, warehouses, service centers, laboratories, and other facilities) throughout the United States and internationally. Of these, we owned 44 locations aggregating approximately 30 million square feet, and leased space at 528 locations aggregating approximately 27 million square feet. We also manage or occupy various government-owned facilities. The government provides use of its facilities under various terms. The U.S. Government also furnishes equipment that we use in some of our businesses. At December 31, 2009, our business segments occupied facilities at the following major locations that housed in excess of 500,000 square feet of floor space: • Aeronautics—Palmdale, California; Marietta, Georgia; Greenville, South Carolina; and Fort Worth and San Antonio, Texas. • Electronic Systems—Camden, Arkansas; Orlando, Florida; Baltimore, Maryland; Eagan, Minnesota; Moorestown/Mt. Laurel, New Jersey; Albuquerque, New Mexico; Owego and Syracuse, New York; Akron, Ohio; Grand Prairie, Texas; and Manassas, Virginia. • Information Systems & Global Services—Goodyear, Arizona; San Jose and Sunnyvale, California; Colorado Springs and Denver, Colorado; Gaithersburg and Rockville, Maryland and other locations within the Washington, D.C. metropolitan area; Valley Forge, Pennsylvania; and Houston, Texas. • Space Systems—Sunnyvale, California and Denver, Colorado. • Corporate activities—Bethesda, Maryland. The following is a summary of our floor space by business segment at December 31, 2009: Government- (Square feet in millions) Leased Owned Owned Total Aeronautics 3.7 5.2 15.2 24.1 Electronic Systems 11.1 10.3 6.3 27.7 Information Systems and Global Services 9.3 2.8 — 12.1 Space Systems 1.7 8.6 .9 11.2 Corporate activities .8 2.9 — 3.7 Total 26.6 29.8 22.4 78.8 Some of our owned properties, primarily classified under Corporate activities, are leased to third parties. A portion of our activity is related to engineering and research and development, which is not susceptible to productive capacity analysis. In the area of manufacturing, most of the operations are of a job-order nature, rather than an assembly line process, and productive equipment has multiple uses for multiple products. Management believes that all of our major physical facilities are in good condition and are adequate for their intended use. ITEM 3. LEGAL PROCEEDINGS We are a party to or have property subject to litigation and other proceedings, including matters arising under provisions relating to the protection of the environment. We believe the probability is remote that the outcome of these matters will have a material adverse effect on the Corporation as a whole. The results of legal proceedings, however, cannot be predicted with certainty. These matters include the proceedings summarized in Note 13 – Legal Proceedings, Commitments and Contingencies beginning on page 84 of this Form 10-K. From time-to-time, agencies of the U.S. Government investigate whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil, or criminal liabilities, including repayments, fines, or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. Government contracting. U.S. Government investigations often take years to complete and many result in no adverse action against us. We are subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. As a result, we are a party to or have our property subject to various lawsuits or proceedings involving environmental protection matters. Due in part to their complexity and pervasiveness, such requirements have resulted in us being involved with related legal proceedings, claims, and remediation obligations. The extent of our financial exposure cannot in all cases be reasonably estimated at this time. For information 18


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    regarding these matters, including current estimates of the amounts that we believe are required for remediation or clean-up to the extent estimable, see “Critical Accounting Policies – Environmental Matters” in Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page 35, and in Note 13 – Legal Proceedings, Commitments and Contingencies beginning on page 84 of this Form 10-K. Like many other industrial companies in recent years, we are a defendant in lawsuits alleging personal injury as a result of exposure to asbestos integrated into our premises and certain historical products. We have never mined or produced asbestos and no longer incorporate it in any currently manufactured products. We have been successful in having a substantial number of these claims dismissed without payment. The remaining resolved claims have settled for amounts that are not material individually or in the aggregate. A substantial majority of the asbestos-related claims have been covered by insurance or other forms of indemnity. Based on the information currently available, we do not believe that resolution of these asbestos-related matters will have a material adverse effect upon the Corporation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2009. ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers are listed below, as well as information concerning their age at December 31, 2009, positions and offices held with the Corporation, and principal occupation and business experience over the past five years. There were no family relationships among any of our executive officers and directors. All officers serve at the pleasure of the Board of Directors. Mark R. Bostic (53), Acting Vice President and Controller (Chief Accounting Officer) Mr. Bostic has served as Acting Vice President and Controller and Chief Accounting Officer since August 2009, and as Vice President of Accounting since February 2006. He previously served as Vice President – Assistant Controller (Acting) from July 2005 to January 2006 and Director, Corporate Accounting from April 2001 to June 2005. James B. Comey (49), Senior Vice President and General Counsel Mr. Comey has served as Senior Vice President and General Counsel since October 2005. He previously served as Deputy Attorney General of the United States from 2003 to 2005. Linda R. Gooden (56), Executive Vice President – Information Systems & Global Services Ms. Gooden has served as Executive Vice President – Information Systems & Global Services since January 2007. She previously served as Deputy Executive Vice President – Information & Technology Services from October 2006 to December 2006, and President, Lockheed Martin Information Technology from September 1997 to December 2006. Ralph D. Heath (61), Executive Vice President – Aeronautics Mr. Heath has served as Executive Vice President – Aeronautics since January 2005. Marillyn A. Hewson (56), Executive Vice President – Electronic Systems Ms. Hewson has served as Executive Vice President – Electronic Systems since January 2010. She previously served as President, Systems Integration – Owego from September 2008 to December 2009; Executive Vice President – Global Sustainment for Aeronautics from March 2007 to August 2008; President, Lockheed Martin Logistics Services from January 2007 to February 2007; and President and General Manager, Kelly Aviation Center, LP from August 2004 to December 2006. Christopher E. Kubasik (48), President and Chief Operating Officer Mr. Kubasik has served as President and Chief Operating Officer since January 2010. He previously served as Executive Vice President – Electronic Systems from September 2007 to December 2009, and as Chief Financial Officer from February 2001 to August 2007. 19


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    Joanne M. Maguire (55), Executive Vice President – Space Systems Ms. Maguire has served as Executive Vice President – Space Systems since July 2006. She previously served as Vice President and Deputy of Lockheed Martin Space Systems Company from July 2003 to June 2006. John C. McCarthy (62), Vice President and Treasurer Mr. McCarthy has served as Vice President and Treasurer since April 2006. He previously served as Vice President of Finance and Business Operations for Aeronautics from March 2000 to March 2006. Robert J. Stevens (58), Chairman and Chief Executive Officer Mr. Stevens has served as Chairman of the Board since April 2005 and Chief Executive Officer since August 2004, and previously served as President from October 2000 to December 2009. Bruce L. Tanner (50), Executive Vice President and Chief Financial Officer Mr. Tanner has served as Executive Vice President and Chief Financial Officer since September 2007. He previously served as Vice President of Finance and Business Operations for Aeronautics from April 2006 to August 2007, and Vice President of Finance and Business Operations for Electronic Systems from May 2002 to March 2006. 20


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    PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES At January 31, 2010, we had 37,713 holders of record of our common stock, par value $1 per share. Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol LMT. Information concerning the stock prices based on intra-day trading prices as reported on the NYSE composite transaction tape and dividends paid during the past two years is as follows: Common Stock – Dividends Paid Per Share and Market Prices Dividends Paid Per Share Market Prices (High-Low) Quarter 2009 2008 2009 2008 First $0.57 $0.42 $85.90 – $57.41 $110.25 – $90.44 Second 0.57 0.42 87.06 – 65.21 110.60 – 98.44 Third 0.57 0.42 82.92 – 72.20 120.30 – 97.80 Fourth 0.63 0.57 79.65 – 67.39 115.01 – 67.38 Year $2.34 $1.83 $87.06 – $57.41 $120.30 – $67.38 Stockholder Return Performance Graph The following graph compares the total return on a cumulative basis of $100 invested in Lockheed Martin common stock on December 31, 2004 to the Standard and Poor’s (S&P) Aerospace & Defense Index and the S&P 500 Index. 250 200 150 100 50 - 4 5 05 05 5 6 6 06 6 7 07 07 7 8 08 08 8 9 09 09 9 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 n- p- p- n- p- n- p- n- p- ec ar ec ar n ec ar ec ar ec ar ec Ju Se Ju Se Ju Se Ju Se Ju Se M M M M M D D D D D D LMT S&P 500 S&P Aero The S&P Aerospace & Defense Index comprises General Dynamics Corporation, Goodrich Corporation, Honeywell International, Inc., ITT Corporation, L3 Communications Holdings, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Precision Castparts Corporation, Raytheon Company, Rockwell Collins, Inc., The Boeing Company, and United Technologies Corporation. The stockholder return performance indicated on the graph is not a guarantee of future performance. This graph is not deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933 or the Exchange Act. 21


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    Issuer Purchases of Equity Securities The following table provides information about our repurchases of common stock during the three-month period ended December 31, 2009. Total Number of Shares Maximum Number of Average Price Purchased as Part of Shares That May Yet Total Number of Paid Per Publicly Announced Be Purchased Under Period Shares Purchased Share Program (a) the Program (b) October (September 28, 2009 – October 25, 2009) 1,347,500 $73.61 1,347,500 34,076,804 November (October 26, 2009 – November 29, 2009) 2,886,346 73.19 2,886,346 31,190,458 December (November 30, 2009 – December 31, 2009) 2,324,334 76.80 2,324,334 28,866,124 (a) We repurchased a total of 6,558,180 shares of our common stock during the quarter ended December 31, 2009 under a share repurchase program that we announced in October 2002. (b) Our Board of Directors has approved a share repurchase program for the repurchase of up to 178.0 million shares of our common stock from time-to-time, including 20.0 million shares authorized for repurchase by our Board of Directors in September 2009. Under the program, management has discretion to determine the number and price of the shares to be repurchased, and the timing of any repurchases, in compliance with applicable law and regulation. As of December 31, 2009, we had repurchased a total of 149.2 million shares under the program. Equity Compensation Plan Information The following table provides information about our equity compensation plans that authorize the issuance of shares of Lockheed Martin common stock to employees and directors. The information is provided as of December 31, 2009. Number of securities Number of securities remaining to be issued upon Weighted average available for future issuance exercise of exercise price of under equity compensation outstanding options, outstanding options, plans (excluding securities Plan category warrants, and rights warrants, and rights reflected in first column) Equity compensation plans approved by security holders (a) (b) (c) 25,823,245 $74.04 11,891,588 Equity compensation plans not approved by security holders (d) 1,808,374 — 3,191,626 Total (b) (c) (d) 27,631,619 $74.04 15,083,214 (a) As of December 31, 2009, there were 11,302,646 shares available for grant under the Lockheed Martin Corporation Amended and Restated 2003 Incentive Performance Award Plan (“IPA Plan”) as options, stock appreciation rights (“SARs”), Restricted Stock Awards (“RSAs”), or Restricted Stock Units (“RSUs”); there are no restrictions on the number of the available shares that may be issued in respect of SARs or stock units. As currently in effect, no more than 28% of shares authorized under the IPA Plan (12,460,000 shares) may be issued as restricted stock. As of December 31, 2009, 3,298,184 shares have been granted as restricted stock under the IPA Plan (25,000 as RSAs and 3,273,184 as RSUs). Of the 11,302,646 shares available for grant on December 31, 2009, 3,563,774 and 1,798,014 shares are issuable pursuant to grants on February 1, 2010, of options and RSUs, respectively. Amounts in the third column of the table also include 588,942 shares that may be issued under the Lockheed Martin Corporation 2009 Directors Equity Plan (“Directors Equity Plan”), and 3,669 shares that may be issued under the Lockheed Martin Corporation Directors’ Deferred Stock Plan (“Directors’ Deferred Stock Plan”), a plan that was approved by the stockholders in 1995; effective May 1, 1999, no additional shares may be awarded under the Directors’ Deferred Stock Plan. Stock units payable in cash only under the IPA Plan, predecessors to the IPA Plan, or other plans sponsored by the Corporation are not included in the table. For RSAs, shares are issued at the date of grant but remain subject to forfeiture; for RSUs, shares are issued once the restricted period ends and the shares are no longer forfeitable. (b) At December 31, 2009, a total of 131,354 shares of Lockheed Martin common stock were issuable upon the exercise of the options assumed by the Corporation in connection with the COMSAT Corporation acquisition. The weighted average exercise price of those outstanding options was $23.59 per share. The amounts exclude 2,996 stock grants held in a trust pursuant to the Deferred Compensation Plan for Directors of Lockheed Corporation. No further grants may be made under the assumed plans. 22


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    (c) The maximum number of shares of stock that may be subject to stock options, SARs, RSAs, and RSUs granted or issued under the IPA Plan in any calendar year is 1.6% of the Corporation’s outstanding shares of stock on December 31 of the calendar year immediately preceding the date of grant of the award, calculated in a manner consistent with the method used for calculating outstanding shares for reporting in the Annual Report. (d) Employees may defer Management Incentive Compensation Plan (“MICP”) and Long-Term Incentive Performance (“LTIP”) amounts earned and payable to them to the Deferred Management Incentive Compensation Plan (“DMICP”). At the election of the employee, deferred amounts are credited as phantom stock units at the closing price of our stock on the date the deferral is effective. Amounts equal to our dividend are credited as stock units at the time we pay a dividend. Following termination of employment, a number of shares of stock equal to the number of stock units credited to the employee’s DMICP account are distributed to the employee. There is no discount or value transfer on the stock distributed. As a result, the phantom stock units also were not considered in calculating the total weighted average exercise price in the table. 23


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    ITEM 6. SELECTED FINANCIAL DATA Consolidated Financial Data – Five Year Summary (In millions, except per share data and ratios) 2009 (a) 2008 (b) 2007 (c) 2006 (d) 2005 (e) OPERATING RESULTS Net Sales $ 45,189 $ 42,731 $ 41,862 $ 39,620 $ 37,213 Cost of Sales (40,965) (38,082) (37,628) (36,186) (34,676) 4,224 4,649 4,234 3,434 2,537 Other Income (Expense), Net 242 482 293 336 316 Operating Profit 4,466 5,131 4,527 3,770 2,853 Interest Expense (305) (341) (352) (361) (370) Other Non-Operating Income (Expense), Net 123 (88) 193 183 133 Earnings Before Income Taxes 4,284 4,702 4,368 3,592 2,616 Income Tax Expense (1,260) (1,485) (1,335) (1,063) (791) Net Earnings $ 3,024 $ 3,217 $ 3,033 $ 2,529 $ 1,825 EARNINGS PER COMMON SHARE Basic $ 7.86 $ 8.05 $ 7.29 $ 5.91 $ 4.15 Diluted $ 7.78 $ 7.86 $ 7.10 $ 5.80 $ 4.10 CASH DIVIDENDS PER COMMON SHARE $ 2.34 $ 1.83 $ 1.47 $ 1.25 $ 1.05 CONDENSED BALANCE SHEET DATA Cash and Cash Equivalents $ 2,391 $ 2,168 $ 2,648 $ 1,912 $ 2,244 Other Current Assets 10,086 8,515 8,292 8,252 8,285 Property, Plant and Equipment, Net 4,520 4,488 4,320 4,056 3,924 Goodwill 9,948 9,526 9,387 9,250 8,447 Other Assets 8,166 8,742 4,279 4,761 4,844 $ 35,111 $ 33,439 $ 28,926 $ 28,231 $ 27,744 Current Maturities of Long-Term Debt $ — $ 242 $ 104 $ 34 $ 202 Other Current Liabilities 10,703 10,300 9,933 9,661 9,340 Long-Term Debt, Net 5,052 3,563 4,303 4,405 4,784 Accrued Pension Liabilities 10,823 12,004 1,192 3,025 2,097 Other Postretirement Benefit Liabilities 1,308 1,386 928 1,496 1,277 Other Liabilities 3,096 3,079 2,661 2,726 2,177 Stockholders’ Equity 4,129 2,865 9,805 6,884 7,867 Total $ 35,111 $ 33,439 $ 28,926 $ 28,231 $ 27,744 COMMON SHARES AT YEAR-END 373 393 409 421 432 CASH FLOW DATA Cash Provided by Operating Activities $ 3,173 $ 4,421 $ 4,238 $ 3,765 $ 3,204 Cash Used for Investing Activities (1,518) (907) (1,205) (1,655) (499) Cash Used for Financing Activities (1,476) (3,938) (2,300) (2,460) (1,511) RETURN ON INVESTED CAPITAL (f) 19.9% 21.7% 21.4% 19.2% 14.5% NEGOTIATED BACKLOG $ 78,006 $ 80,914 $ 76,660 $ 75,905 $ 74,825 Notes to Five Year Summary (a) Includes a reduction in income tax expense of $69 million ($0.18 per share) resulting from the closure of Internal Revenue Service examinations for the years 2005-2007 and for the year 2008. (b) Includes the effects of items not considered in the assessment of the operating performance of our business segments (see the section, “Results of Operations – Unallocated Corporate Income (Expense), Net” in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)) which increased operating profit by $193 million, $126 million after tax ($0.31 per share). (c) Includes the effects of items not considered in the assessment of the operating performance of our business segments which increased operating profit by $71 million, $46 million after tax ($0.11 per share). Also includes a reduction in income tax expense of $59 million ($0.14 per share) resulting from the closure of Internal Revenue Service examinations for the years 2003 and 2004 and claims we filed for additional extraterritorial income tax benefits for years prior to 2005. On a combined basis, these items increased net earnings by $105 million after tax ($0.25 per share). 24


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    (d) Includes the effects of items not considered in the assessment of the operating performance of our business segments which increased operating profit by $230 million, $150 million after tax ($0.34 per share). Also includes a charge of $16 million, $11 million after tax ($0.03 per share), in other non-operating income (expense), net for a debt exchange, and a reduction in income tax expense of $62 million ($0.14 per share) resulting from a tax benefit related to claims we filed for additional extraterritorial income exclusion tax benefits. On a combined basis, these items increased net earnings by $201 million after tax ($0.45 per share). (e) Includes the effects of items not considered in the assessment of the operating performance of our business segments which, on a combined basis, increased operating profit by $173 million, $113 million after tax ($0.25 per share). (f) We define return on invested capital (ROIC) as net earnings plus after-tax interest expense divided by average invested capital (stockholders’ equity plus total debt), after adjusting stockholders’ equity by adding back adjustments related to postretirement benefit plans. We believe that reporting ROIC provides investors with greater visibility into how effectively we use the capital invested in our operations. We use ROIC as one of the inputs in our evaluation of multi-year investment decisions and as a long-term performance measure, and also use it as a factor in evaluating management performance under certain of our incentive compensation plans. ROIC is not a measure of financial performance under generally accepted accounting principles, and may not be defined and calculated by other companies in the same manner. ROIC should not be considered in isolation or as an alternative to net earnings as an indicator of performance. We calculate ROIC as follows: (In millions) 2009 2008 2007 2006 2005 Net earnings $ 3,024 $ 3,217 $ 3,033 $ 2,529 $ 1,825 Interest expense (multiplied by 65%) 1 198 222 229 235 241 Return $ 3,222 $ 3,439 $ 3,262 $ 2,764 $ 2,066 Average debt 2, 5 $ 4,054 $ 4,346 $ 4,416 $ 4,727 $ 5,077 Average equity 3, 5 3,155 8,236 7,661 7,686 7,590 Average benefit plan adjustments 4, 5 8,960 3,256 3,171 2,006 1,545 Average invested capital $16,169 $15,838 $15,248 $14,419 $14,212 Return on invested capital 19.9% 21.7% 21.4% 19.2% 14.5% 1 Represents after-tax interest expense utilizing the federal statutory rate of 35%. Interest expense is added back to net earnings as it represents the return to debt holders. Debt is included as a component of average invested capital. 2 Debt consists of long-term debt, including current maturities of long-term debt, and short-term borrowings (if any). 3 Equity includes non-cash adjustments, primarily related to benefit plan adjustments as discussed in Note 4 below. 4 Average benefit plan adjustments reflect the cumulative value of entries identified in our Statement of Stockholders’ Equity related to adjustments to recognize the funded status of our benefit plans. The total of annual benefit plan adjustments to equity were: 2009 = $495 million; 2008 = $(7,253) million; 2007 = $1,706 million; 2006 = $(1,883) million; and 2005 = $(105) million. As these entries are recorded in the fourth quarter, the value added back to our average equity in a given year is the cumulative impact of all prior year entries plus 20% of the current year entry value. The cumulative impact of benefit plan adjustments through December 31, 2004 was $(1,524) million. 5 Yearly averages are calculated using balances at the start of the year and at the end of each quarter. 25


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    ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Section Roadmap The financial section of our Form 10-K includes management’s discussion and analysis, our consolidated financial statements, the notes to those financial statements and a five year summary of financial information. We have prepared the following summary, or “roadmap,” to assist in your review of the financial section. It is designed to give you an overview of our Company and summarize some of the more important activities and events that occurred during 2009. Our Business Lockheed Martin is a global security company that principally is engaged in the research, design, development, manufacture, integration, and sustainment of advanced technology systems and products. We provide a broad range of management, engineering, technical, scientific, logistic, and information services. We serve both domestic and international customers with products and services that have defense, civil, and commercial applications, with our principal customers being agencies of the U.S. Government. Net sales to our U.S Government customer accounted for 85% of our total net sales in 2009 (84% in 2008 and 2007), either as a prime contractor or as a subcontractor. Our U.S. Government sales were made to both Department of Defense (DoD) and non-DoD agencies. Of the remaining 15% of net sales in 2009, approximately 13% related to sales to foreign government customers (including foreign military sales funded, in whole or in part, by the U.S. Government), with the remainder attributable to commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security, and government information technology. We operate in four principal business segments: Aeronautics, Electronic Systems, Information Systems & Global Services (IS&GS), and Space Systems. As a systems integrator, our products and services range from electronics and information systems (including integrated net-centric solutions), to missiles, aircraft, and spacecraft. We organize our business segments based on the nature of the products and services offered. Financial Section Overview The financial section includes the following: Management’s discussion and analysis, or MD&A (pages 26 through 53) – provides our management’s view about industry trends, risks, uncertainties, accounting policies that we view as critical in light of our business, our results of operations (including discussion of the key performance drivers of each of our business segments), our financial position, cash flows, commitments and contingencies, important events, transactions that have occurred over the last three years, and forward-looking information, as appropriate. Reports related to the financial statements and internal control over financial reporting (pages 54 through 56) – include the following: • A report from management indicating our responsibility for financial reporting, the financial statements, and the system of internal control over financial reporting, including an assessment of the effectiveness of those controls; • A report from Ernst & Young LLP, an independent registered public accounting firm, which includes their opinion on the effectiveness of our system of internal control over financial reporting; and • A report from Ernst & Young LLP which includes their opinion on the fair presentation of our financial statements based on their audits. Financial statements (pages 57 through 60) – include our Consolidated Statements of Earnings, Cash Flows, and Stockholders’ Equity for each of the last three years, and our Consolidated Balance Sheet as of the end of the last two years. Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). Notes to the financial statements (pages 61 through 90) – provide insight into, and are an integral part of, our financial statements. The notes contain explanations of our significant accounting policies, details about certain captions on the financial statements, information about significant events or transactions that have occurred, discussions about legal proceedings, commitments and contingencies, and selected financial information relating to our business segments. The notes to the financial statements also are prepared in accordance with GAAP. 26


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    Highlights The financial section of our Form 10-K describes our ongoing operations, including discussions about particular lines of business or programs, our ability to finance our operating activities, and trends and uncertainties in our industry and how they might affect our future operations. We also discuss items that affected our results, which were not considered in senior management’s assessment of the operating performance of our business segments. We separately disclose these items to assist you in your evaluation of the overall operating performance and financial condition of our consolidated company. We would like to draw your attention to the following items disclosed in this financial section and where you will find them: Topic Location(s) Critical accounting policies: Contract accounting/revenue recognition Page 31 and page 62 Postretirement benefit plans Page 33 and page 74 Environmental matters Page 35, page 62 and page 85 Goodwill Page 36 and page 61 Stock-based compensation Page 37, page 64 and page 81 Discussion of business segments Page 39 and page 66 Liquidity and cash flows Page 46 and page 59 Capital structure and resources Page 48, page 58, page 60 and page 81 Legal proceedings, commitments and contingencies Page 49 and page 84 Income taxes Page 64 and page 71 Industry Considerations U.S. Government Business Budget Priorities The U.S. Government continues to focus on developing and implementing spending, tax, and other initiatives to stimulate the economy and create jobs. The Administration is attempting to balance decisions regarding defense, homeland security, and other federal spending priorities with the cost and impact of these economic stimulus initiatives, particularly in the longer term. Although some specific priorities and initiatives may change from year to year, the investments and acquisitions we have made have been focused on aligning our businesses to address what we believe are the most enduring national imperatives and critical mission areas. But the possibility remains that one or more of our programs could be reduced, extended, or terminated as a result of the Administration’s assessment of priorities. The Administration’s spending priorities for next year were announced on February 1, 2010 with the submission of the President’s Budget Request for Fiscal Year 2011. We are assessing those priorities, as well as potential Congressional reaction to the proposals in the budget request. On first review, all of our key priorities appear to be well supported in the President’s budget request for fiscal year 2011. One exception is the proposal to cancel the NASA Constellation program, which impacts the Orion Crew Exploration Vehicle for which we are currently under contract. In addition, the President’s budget proposes a three-year spending freeze on specified non-DoD/civil agencies, and we are assessing the potential effect of that action on our non-DoD/civil agency programs and priorities. Every year, Congress must approve or revise the proposals contained in the annual President’s budget request through enactment of appropriations bills and other policy legislation, which then require final Presidential approval. The outcome of the federal budget process has a direct effect on our business, both as a prime contractor and a subcontractor on programs specifically targeted for expansion, completion, or termination. Department of Defense Business The DoD base budget has seen consistent growth over the past ten years, enabling it to grow from $300 billion at the start of the last decade to almost $550 billion in the fiscal year 2011 President’s Budget Request. Within the base budget, investment funding, which includes procurement and research, development, test, and evaluation (RDT&E), has grown from $104 billion in fiscal year 2001 to almost $190 billion in fiscal year 2011. As reflected in the fiscal year 2011 budget projections, overall defense spending is expected to continue to increase slightly over the next several years. The DoD base budget for fiscal year 2011 provided modest nominal growth above fiscal 27


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    year 2010, of 3.4%. Current estimates for the budget for fiscal year 2012 and beyond indicate that these will be about one percent real growth above the rate of inflation. On December 19, 2009, Congress completed action on the last of the fiscal year 2010 appropriations bills. With very few exceptions, our key programs were well supported in the appropriations bills. As we expected, Congress did not reverse the decisions to complete the F-22 Raptor program after delivery of 187 aircraft, cancel the VH-71 Presidential Helicopter (VH-71) program, terminate the Multiple Kill Vehicle (MKV) program, and cancel the Transformational Satellite (TSAT) program. In June 2009, we received notification that the VH-71 contract was terminated for convenience. We also received notification in June that the TSAT Mission Operations System (TMOS) contract, representing the ground support infrastructure for the TSAT program, was terminated for convenience. Funding for the additional four F-22 Raptor aircraft was approved by Congress, although we have not yet definitized the contract for that work. All remaining authorized work on the MKV program was completed in 2009, and no further work is expected to be authorized. Congress is just beginning its review of the fiscal year 2011 budget, and we are in the process of assessing the potential effect of the President’s fiscal year 2011 budget proposal on our future operations. The fiscal year 2011 budget proposal provides more than $11.7 billion to fund development activities and the production of 43 F-35 Lightning II Joint Strike Fighters. Substantial funding is also requested for the C-130J tactical airlifter, C-5M modernization, Aegis Weapons System continuation, and the Littoral Combat Ship. The Administration has proposed, and Congress thus far has agreed, to fund U.S. military operations in Afghanistan and Iraq, and other unforeseeable contingency or peacekeeping operations, through a separate Overseas Contingency Operations (OCO) funding outside of the base DoD budget. Congress approved nearly $130 billion for OCO funding in the fiscal year 2010 appropriations bill, and the Administration has requested $165 billion in the fiscal year 2011 budget request. This contingency funding enables DoD to proceed with critical recapitalization and modernization programs in the base budget, rather than diverting funds available for modernization to pay for the Afghanistan and Iraq missions and other unforeseen operations. Depending on the status of ongoing contingencies in Iraq and Afghanistan, the Administration will assess the level and composition of overseas contingency budget requests going forward. Although Congress has continued to express concern about the size of budget requests for Afghanistan and Iraq, funding for ongoing operations has not been significantly curtailed by Congress to date, and these requests are expected to decrease in size as U.S. troops redeploy from Iraq as planned over the next eighteen months. The recently released fiscal year 2010 Quadrennial Defense Review (QDR) validates the Pentagon’s April 2009 decisions on program focus, budget priorities, and the preeminence of ensuring success in Afghanistan and Iraq. The Pentagon stated that “the fiscal year 2010 defense budget represented a down payment on re-balancing the department’s priorities in keeping with the lessons learned and capabilities gained from the wars in Iraq and Afghanistan. Those shifts are continued in the fiscal year 2011 budget and institutionalized in this QDR and out-year budget plan.” As a result of adjustments that were made earlier in the year, new program terminations were largely absent in the QDR. Overall, Intelligence, surveillance, and reconnaissance (ISR), Long Range Strike, international cooperation, and partner capacity were emphasized, each of which are strengths for us. Additionally, the increased role of 5th generation aircraft and the F-35 received QDR endorsement, as well as expanding the AC-130 fleet, increasing UAV capabilities, experimenting with conventional prompt global strike prototypes, and forces being enabled and enhanced by cyberspace, space, ballistic missile defense, and counter-weapons of mass destruction (WMD) capabilities. While the need for acquisition reform is also addressed in the QDR, most of the focus areas addressed are already under discussion between industry and the Department. In 2009, legislation was enacted on a number of acquisition reform initiatives resulting in new acquisition policies and procedures. In addition, as the U.S. Government seeks to clarify its overall policy regarding contractor performance of certain governmental functions, we are monitoring related pending regulatory actions regarding mitigation of potential organizational conflicts of interest that may impact our business in the future. We believe our broad mix of programs and capabilities continues to position us favorably to support the current and future needs of the DoD. For example, the need for more affordable logistics and sustainment, expansive use of information technology and knowledge-based solutions, and vastly improved levels of network and cybersecurity, all appear to be national priorities. To meet these changing dynamics, we have been growing our portfolio of expertise, diversifying our business, and expanding systems integration skills into adjacent businesses and programs that include surface naval vessels, rotary wing aviation and land vehicles. We are expanding production of the C-130J Super Hercules tactical airlifter to meet the needs of the U.S. Government and international customers. We also are preparing for increased production of the F-35 Lightning II Joint Strike Fighter for 28


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    the U.S. Navy, Air Force, and Marine Corps, and international partners. We view this program as a significant element of a broader U.S. effort to build the capacity of alliance partners throughout the world. In the areas of space-based intelligence and information superiority, we have leadership positions on programs such as the Global Positioning Satellite program, Mobile User Objective System, the Advanced Extremely High Frequency system, the Space-Based Infrared System-High, and classified programs. Our products are represented in almost every aspect of land, sea, air, and space-based missile defense, including the Aegis Weapon System program, the Patriot Advanced Capability missile program, the Terminal High Altitude Area Defense system, and the Medium Extended Air Defense System. We continue to perform on contracts to develop and deliver essential munitions, missile, and other systems, such as Hellfire, Guided Multiple Launch Rocket Systems, and EQ-36 radar systems, to our warfighters. We are bringing our systems integration expertise, as well as our existing advanced technology products and services, into adjacent military product lines, such as the Littoral Combat Ship and the Joint Light Tactical Vehicle programs. We also have unmanned systems capabilities, including air, ground, and underwater systems. In the area of command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) programs, our capabilities include the Air Operations Center Weapons System Integrator, the Airborne Maritime Fixed Joint Tactical Radio System, the Warfighter Information Network – Tactical, the Combatant Commanders Integrated Command and Control System, and the Global Communications Support System – Air Force. We have a significant presence in the support and modernization of the DoD’s information technology systems. We see opportunities for expansion of our sustainment and logistical support activities to enhance the longevity and cost- effectiveness of the systems procured by our customers, and for improving global supply chain management. We also see opportunities to grow our business in providing global services and business process management for DoD needs. To date, we have seen no significant impact on our business from implementation of the DoD policy to increase its staffing levels and move work scope currently performed by private contractors back to U.S. Government employees. Over time, however, this work scope realignment has the potential to reduce the level of work performed by outside contractors, including work on certain of our programs. We believe revenue growth in our defense business will match or exceed expected growth in the DoD budget in fiscal year 2011. We expect continued growth in our core and adjacent businesses for both domestic and international customers, as we broaden our portfolio and remain committed to excellence in execution. Our revenues have historically not been significantly dependent on overseas contingency or supplemental funding requests. Many of our programs require funding over several annual government budget cycles. There is always an inherent risk that these and other DoD programs could become potential targets for future reductions or elimination of funding to pay for other programs, either in the Administration’s budget reviews or in the Congressional process of annual appropriations. Non-Department of Defense Business Our experience in the defense arena, together with our core information technology and services expertise, has enabled us to provide products and services to a number of government agencies, including the Departments of Homeland Security, Justice, Commerce, Health and Human Services, State, Transportation, and Energy, the U.S. Postal Service, the Social Security Administration, the Federal Aviation Administration, the National Aeronautics and Space Administration (NASA), the Environmental Protection Agency (EPA), the National Archives, and the Library of Congress. The Administration’s budget proposal for fiscal year 2011 proposes less than one percent nominal growth in civil agency budgets compared to fiscal year 2010. In addition, the President’s budget proposes a three-year freeze in certain civil agency budgets. Both of these proposals must be reviewed by Congress and will be subject to final Congressional approval in the appropriations process. Civil programs must continue to compete with resource requirements for security, economic stimulus, and deficit management. Though we expect to see relatively small increases in total non-defense discretionary spending in the near term, we believe our key programs will continue to be supported in the budgets of the various agencies with which we do business. As previously disclosed, one exception is the proposed cancellation of the program that includes the Orion Crew Exploration Vehicle for which we are currently under contract. We have continued to expand our capabilities in critical intelligence, knowledge management, and e-Government solutions for our customers, including the Social Security Administration and the EPA, as well for the DoD. We also provide program management, business strategy and consulting, complex systems development and maintenance, complete life-cycle software support, information assurance, and enterprise solutions. In the civil arena, we also have not seen significant impact 29


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    on our business from the Administration’s stated policy of returning certain work to U.S. Government employees, known as “in-sourcing”. We believe that there will be continued demand by federal and civil government agencies for upgrading and investing in new information technology systems and solutions. As a result, we continue to focus our resources in support of infrastructure modernization that allows for interoperability and communication across agencies. Our recent experiences with non-DoD agencies have reinforced our strategy of becoming the world’s premier global security company. We have seen the global security environment becoming much more complex and dynamic. The very definition of security has continued to change. Over and above traditional military preparedness, we have seen and been a part of further expansion into more effective counter-terrorism and intelligence capabilities, international cooperation activities requiring more interoperable systems, and humanitarian, peacekeeping, and operational stabilization initiatives. Consistent with our DoD business, more affordable logistics and sustainment, a more expansive use of information technology and knowledge-based solutions, and improved levels of network and cybersecurity all appear to be priorities in our non-DoD business as well. Homeland security, critical infrastructure protection, and improved service levels for civil government agencies also appear to be high customer priorities. The continuing strong emphasis on homeland security may increase demand for our capabilities in areas such as air traffic management, ports, waterways and cargo security, biohazard detection systems for postal equipment, employee identification and credential verification systems, information systems security, and other global security systems solutions. In addition, we may see an increase in demand from the Department of State and the United Nations for mission services, global security and stability operations, and facility services. We have made disciplined acquisitions and investments to reinforce our presence and skills in the information sciences domain. We believe expanded access to continuous high quality situational awareness will remain essential in assuring clarity and reducing uncertainty in today’s environment. The very need for this increased situational awareness will drive the linkage of increasingly robust communication systems, advanced sensing devices and the computers that control them. This capability will enable the meaningful sharing of information, and networks will continue to grow in power and importance to accommodate these new linkages. We also believe the criticality of network security will result in increased demand for cybersecurity and encryption security solutions. We expect to be well-positioned to meet these growing needs. Similar to the risks inherent in our defense business, funding for our civil agency business is contingent on approval in annual appropriations for each of the agencies with which we have business. Major programs may be funded over several annual government budget cycles, with the risk of future reductions or elimination in the Administration’s budget review or in the annual Congressional appropriations process. Other Business Considerations We are exposed to risks associated with U.S. Government contracting, including technological uncertainties, dependence on fewer manufacturing suppliers, and obsolescence, as well as Congressional appropriation and allotment of funds each year. Many of our programs involve the development and application of state-of-the-art technologies aimed at achieving challenging goals. As a result, setbacks, delays, cost growth, and product failures can occur. In years that an appropriations bill has not been signed into law before September 30 (the end of the U.S. Government’s fiscal year), Congress typically passes a continuing resolution that authorizes U.S. Government agencies to continue to operate, generally at the same funding levels from the prior year, but does not authorize new spending initiatives. During periods covered by continuing resolutions (or until the regular appropriation bills are passed), we may experience delays in procurement of products and services due to lack of funding, and those delays may affect our revenue and profit during the period. As a government contractor, we are subject to U.S. Government oversight. The U.S. Government may ask about and investigate our business practices and audit our compliance with applicable rules and regulations. Depending on the results of those audits and investigations, the U.S. Government could make claims against us. Under U.S. Government procurement regulations and practices, an indictment of a government contractor could result in that contractor being fined and suspended from being able to bid on, or be awarded, new U.S. Government contracts for a period of time. A conviction could result in debarment for a specific period of time. Similar government oversight exists in most other countries where we conduct business. Although we cannot predict the outcome of these types of investigations and inquiries with certainty, based on current facts we believe the probability is remote that any of the claims, audits, or investigations pending against us will have a material adverse effect on our business or our results of operations, cash flows, or financial position. 30


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    We have entered into various joint ventures, teaming agreements, and other business arrangements to help support our portfolio of products and services in many of our lines of business, and their activities are closely aligned with our operations. For example, we have a 50% equity interest in United Launch Alliance, L.L.C. (ULA), which provides the production, engineering, test, and launch operations associated with U.S. Government launches on Atlas and Delta launch vehicles. In some cases, we form joint ventures with one or more other contractors for the purpose of pursuing a bid for a particular contract and, if successful, the joint venture serves as the prime contractor under that contract. In those instances, the work under contract is sometimes performed by subcontractors to the joint venture including, but not limited to, the joint venture investors. We attempt to limit our exposure under these arrangements to our investment in the joint venture, which is typically not material, and to the performance of our obligations under the subcontract. While we may in some cases guarantee contractual performance by the joint venture, we are usually cross-indemnified by the other joint venture participants to the extent of their contractual performance obligations. We remain committed to growth in our sales to international customers. We conduct business with foreign governments primarily through Aeronautics and Electronic Systems. Our international sales are composed of “foreign military sales” through the U.S. Government and direct commercial contracts. In Aeronautics, the U.S. Government and eight foreign government partners are working together on the design, testing, production, and sustainment of the F-35 Lightning II. We expect international deliveries to begin in 2011. The F-16 Fighting Falcon has been selected by 25 countries, with 52 follow-on buys from 14 countries. We continue to expand the C-130J Super Hercules air mobility aircraft’s international footprint with customers in 11 countries including recent orders from India and Qatar. In global sustainment, we are leveraging our value as the original equipment manufacturer (OEM) for our major platforms and have set up new production capabilities to provide service life extension, including new wings and support for Norway’s P-3 fleet and the recent awards from the U.S. and Canadian Governments to upgrade their P-3 aircraft. With regard to the Aegis Weapon System, our Electronic Systems segment performs activities in the development, production, ship integration and test, and lifetime support for ships of international customers (e.g., Japan, Spain, Korea, Norway, and Australia). This segment has two contracts with the Canadian Government for the upgrade and support of combat systems on Halifax class frigates and Iroquois class destroyers. Electronic Systems also produces the PAC-3 missile, an advanced defensive missile designed to intercept incoming airborne threats, for international customers including Japan, Germany, the Netherlands and the United Arab Emirates (UAE). IS&GS, through its subsidiary Pacific Architects and Engineers (PAE), continues to increase our presence in certain less developed countries by providing base camp construction, logistics, democratization and management services, among others, through our contracts with such customers as the United Nations and the U.S. Department of State. In addition, IS&GS is providing all data processing for the 2011 population census in England and Wales, including development of the related system. To the extent our contracts and business arrangements with international partners include operations in foreign countries, other risks are introduced into our business, including changing economic conditions, fluctuations in relative currency values, regulation by foreign countries, and the potential for unanticipated cost increases resulting from the possible deterioration of political relations. The nature of our international business also makes us subject to the export control regulations of the U. S. Department of State and the Department of Commerce. If these regulations are violated, it could result in monetary penalties and denial of export privileges. We are currently unaware of any violations of export control regulations that are reasonably likely to have a material adverse effect on our business or our results of operations, cash flows, or financial position. Critical Accounting Policies Contract Accounting / Revenue Recognition Approximately 80% of our net sales are derived from long-term contracts for design, development, and production activities (also referred to as DD&P contracts). Our remaining net sales are derived from contracts to provide other services that are not associated with design, development, or production activities. We consider the nature of our contracts and the types of products and services provided when we determine the proper accounting method for a particular contract. 31


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    Accounting for Design, Development, and Production Contracts For long-term, fixed-price DD&P contracts that, among other factors, require us to provide a number of similar items produced in a stable production environment, we record sales on a percentage of completion basis using units-of-delivery as the basis to measure progress toward completing the contract. For example, we use this method of revenue recognition on our C-130J tactical transport aircraft program and Multiple Launch Rocket System program. For certain other long-term, fixed- price DD&P contracts that, along with other factors, require us to deliver minimal quantities over a longer period of time or to perform a substantial level of development effort in comparison to the total value of the contract, sales are recorded when we achieve performance milestones or using the cost-to-cost method to measure progress toward completion. Under the cost-to-cost method of accounting, we recognize sales based on the ratio of costs incurred to our estimate of total costs at completion. As an example, we use this methodology for our Aegis Weapon System program. In some instances, long-term production programs may require a significant level of development and/or a low rate of initial production in their early phases, but will ultimately require delivery of increased quantities in later, full-rate production stages. In those cases, the revenue recognition methodology may change from the cost-to-cost method to the units-of-delivery method as new contracts for different phases of a program are received after considering, among other factors, program and production stability. As we incur costs under cost-reimbursement-type contracts, we record sales and an estimated profit. Cost-reimbursement-type contracts include time and materials and other level-of-effort-type contracts. Examples of this type of revenue recognition include the F-35 Lightning II Joint Strike Fighter development and low-rate initial production contracts, and the THAAD missile defense program. Most of our long-term contracts are denominated in U.S. dollars, including contracts for sales of military products and services to foreign governments conducted through the U.S. Government (i.e., foreign military sales). As a general rule, we recognize sales and profits earlier in a production cycle when we use the cost-to-cost and milestone methods of percentage of completion accounting than when we use the units-of-delivery method. In addition, our profits and margins may vary materially depending on the types of long-term contracts undertaken, the costs incurred in their performance, the achievement of other performance objectives, and the stage of performance at which the right to receive fees, particularly under award and incentive fee contracts, is finally determined. Award fees and incentives related to performance on DD&P contracts, which are generally awarded at the discretion of the customer, as well as penalties related to contract performance, are considered in estimating sales and profit rates. Estimates of award fees are based on actual awards and anticipated performance. Incentive provisions that increase or decrease earnings based solely on a single significant event are generally not recognized until the event occurs. Those incentives and penalties are recorded when there is sufficient information for us to assess anticipated performance. Accounting for DD&P contracts requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the scope and nature of the work required to be performed on many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables. Contract costs include material, labor, and subcontracting costs, as well as an allocation of indirect costs. We have to make assumptions regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the contract (to estimate increases in wages and prices for materials), performance by our subcontractors, and the availability and timing of funding from our customer, among other variables. For contract change orders, claims, or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. We have accounting policies in place to address these, as well as other contractual and business arrangements to properly account for long-term contracts. Products and services provided under long-term DD&P contracts represented approximately 80% of our net sales for 2009. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if our underlying circumstances were to change. For example, if underlying assumptions were to change such that our estimated profit rate at completion for all DD&P contracts was higher or lower by one percentage point, our 2009 net earnings would have increased or decreased by approximately $235 million. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recorded in the period the loss is determined. 32


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    Accounting for Services Contracts Revenue under contracts for services other than those associated with design, development, or production activities is recognized either as services are performed or when a contractually required event has occurred, depending on the contract. The majority of our services contracts are in our IS&GS segment, including the Automated Flight Service Station contract to provide a network of air traffic facilities and related services, and the U.S. Army Corps of Engineers contract to provide information management and technology services. Services contracts primarily include operations and maintenance contracts and outsourcing-type arrangements. Revenue under such contracts is generally recognized on a straight-line basis over the period of contract performance, unless evidence suggests that the revenue is earned or the obligations are fulfilled in a different pattern. Costs incurred under these services contracts are expensed as incurred, except that initial “set-up” costs are capitalized and recognized ratably over the life of the agreement. Earnings related to services contracts may fluctuate from period to period, particularly in the earlier phases of the contract. Award fees and incentives related to performance on services contracts are recognized when they are fixed and determinable, generally at the date the amount is communicated to us by the customer. Other Contract Accounting Considerations The majority of our sales are driven by pricing based on costs incurred to produce products or perform services under contracts with the U.S. Government. Cost-based pricing is determined under the Federal Acquisition Regulation (FAR). The FAR provides guidance on the types of costs that are allowable in establishing prices for goods and services under U.S. Government contracts. For example, costs such as those related to charitable contributions, interest expense, and certain advertising and public relations activities are unallowable, and therefore not recoverable through sales. In addition, we may enter into advance agreements with the U.S. Government that address the subjects of allowability and allocability of costs to contracts for specific matters. For example, most of the environmental costs we incur for groundwater treatment and soil remediation related to sites operated in prior years are allocated to our current operations as general and administrative costs under FAR provisions and supporting advance agreements reached with the U.S. Government. We closely monitor compliance with, and the consistent application of, our critical accounting policies related to contract accounting. Business segment personnel evaluate our contracts through periodic contract status and performance reviews. Also, regular and recurring evaluations of contract cost, scheduling, and technical matters are performed by management personnel independent from the business segment performing work under the contract. Costs incurred and allocated to contracts are reviewed for compliance with U.S. Government regulations by our personnel, and are subject to audit by the Defense Contract Audit Agency. For other information on accounting policies we have in place for recognizing sales and profits, see our discussion under “Sales and earnings” in Note 1 to the financial statements. Postretirement Benefit Plans Most of our employees are covered by defined benefit pension plans, and we provide certain health care and life insurance benefits to eligible retirees (collectively, postretirement benefit plans – see Note 10). Our earnings may be negatively or positively impacted by the amount of expense or income we record for our postretirement benefit plans. This is particularly true with expense or income for defined benefit pension plans and retiree medical and life insurance plans because those calculations are sensitive to changes in several key economic assumptions and workforce demographics. Non-union represented employees hired on or after January 1, 2006 do not participate in our qualified defined benefit pension plans, but are eligible to participate in our qualified defined contribution plan and our other retirement savings plans. They also have the ability to participate in our retiree medical plans, but we do not subsidize the cost of their participation in those plans as we do with employees hired before January 1, 2006. In accordance with the rules related to postretirement benefit plans under GAAP, we recognize on a plan-by-plan basis the funded status of our postretirement benefit plans as either an asset or liability on our Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax, in stockholders’ equity. The funded status is measured as the difference between the fair value of the plan’s assets and the benefit obligation of the plan. Actuarial Assumptions GAAP requires that the amounts we record, including the expense or income for the plans, be computed using actuarial valuations. These valuations include many assumptions, including assumptions we make regarding financial market and other economic conditions. Changes in key economic indicators can result in changes in the assumptions we use. The primary year-end assumptions used to estimate postretirement benefit plan expense or income for the following calendar year 33


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    are the discount rate and the expected long-term rate of return on plan assets for all postretirement benefit plans; the rates of increase in future compensation levels for our defined benefit pension plans; and the health care cost trend rates for our retiree medical plans. We use judgment in reassessing these assumptions each year because we have to consider past and current market conditions, and make judgments about future market trends. We also have to consider factors like the timing and amounts of expected contributions to the plans and benefit payments to plan participants. The discount rate we select impacts both the calculation of the benefit obligation at the end of the year and the calculation of net postretirement benefit plan cost in the subsequent year. The difference between the long-term rate of return on plan assets assumption we select and the actual return on plan assets in any given year affects both the funded status of our benefit plans and the calculation of net postretirement benefit plan cost in subsequent years. We evaluate several data points in order to arrive at an appropriate discount rate. These items include results from cash flow models, quoted rates from long-term bond indices, and changes in long-term bond rates over the past year. As part of our evaluation, we calculate the approximate average yields on securities that were selected to match our projected postretirement benefit plan cash flows. Our postretirement benefit plan cash flows are input into actuarial models that include data for corporate bonds rated AA or better. The available universe of bonds is adjusted to reflect call provisions, outstanding issue amount, and bonds that are considered “outliers” (i.e., bonds with yields significantly above or below the mean of the available universe of bonds). As of December 31, 2009, three actuarial models calculated rates of 5.82%, 5.94%, and 5.89% for our qualified defined benefit pension plans. We also evaluated the annualized Merrill Lynch index for long-term AA corporate bonds (15+ years), which was 6.04% at the close of 2009. On average, these data points were 25 basis points lower than at December 31, 2008. After reviewing all of the above data, we selected 5.875% as the discount rate for calculating our benefit obligations at December 31, 2009, compared to 6.125% used at the end of 2008. The long-term rate of return assumption represents the expected average rate of earnings on the funds invested, or to be invested, to provide for the benefits included in the plan obligation. This assumption is based on several factors including historical market index returns, the anticipated long-term allocation of plan assets, the historical return data for the trust funds, plan expenses, and the potential to outperform market index returns. The actual return in any specific year likely will differ from the assumption, but the average expected return over a long-term future horizon should be approximated by the assumption. As a result, changes in this assumption are less frequent than changes in the discount rate. Any variance in a given year should not, by itself, suggest that the assumption should be changed. Patterns of variances are reviewed over time and then combined with expectations for the future. At December 31, 2009, we concluded that 8.50% was a reasonable estimate for the expected long-term rate of return on plan assets assumption, consistent with the rate used at December 31, 2008. The impact of the change in the discount rate, together with other factors such as the approximate 20% actual return on plan assets resulting from improved market conditions in 2009, was a noncash, after-tax increase to our stockholders’ equity at December 31, 2009 of approximately $495 million. The increase primarily resulted from the excess of our actual return on plan assets over our 8.50% long-term rate of return assumption, which partially was offset by the effects of the decrease in the discount rate. The 2010 pension expense will be approximately $1.4 billion, as compared to $1.0 billion in 2009. The increase in 2010 pension expense is due to the decrease in the discount rate and the continued amortization of the actuarial losses incurred in 2008, which resulted from the significant negative return on plan assets compared to our 8.50% long-term rate of return assumption. The discount rate assumption we select at the end of each year is based on our best estimates and judgment. A reasonably possible change of plus or minus 25 basis points in the 5.875% discount rate assumption at December 31, 2009, with all other assumptions held constant, would decrease or increase the amount of the qualified pension benefit obligation we recorded at the end of 2009 by approximately $1.0 billion, resulting in an after-tax increase or decrease in stockholders’ equity at the end of the year of approximately $650 million. If the 5.875% discount rate at December 31, 2009 that was used to compute 2010 expense for our qualified defined benefit pension plans had been 25 basis points higher or lower, with all other assumptions held constant, the amount of expense projected for 2010 would be lower or higher by approximately $95 million. Valuation of Postretirement Benefit Plan Assets Valuation of the assets held in a number of trusts to support our postretirement benefit plans requires judgment relative to the determination of fair value as of December 31. While many of the asset values are based on quoted prices in active markets for identical assets (e.g., stock of actively traded public companies), the trustees for the trusts use various pricing sources to determine fair values for other assets where their value may be based on quoted prices for similar instruments or 34


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    quoted prices for identical or similar instruments in inactive markets; or amounts derived from valuation models where all significant inputs are based on active markets that can be observed (e.g., fixed income debt securities). For still other investments, values may be derived from valuation models where one or more of the significant inputs into the model cannot be observed and that require the development of relevant assumptions (e.g., investments in private equity funds and real estate funds). For these assets, fair values are determined by the general partners of the funds or independent administrators, typically using both income and market approaches in their valuation models. The funds are also audited by independent auditors annually. We review the trustees’ policies and procedures regarding pricing of investments, their selection of pricing sources, and the statements and supporting documentation we receive from them, in our evaluation of the accuracy and reliability of the pricing data included in the statements. We also assess the potential for adjustment to the fair value of certain investments where there is a lag in the availability of data to support the investment’s value (e.g., private equity funds and investments in real estate partnerships). In those cases, we may solicit preliminary valuation updates at year-end from the funds and partnerships. We use that information, and corroborating data from public markets, to determine if any adjustments should be recorded in the fair values. At December 31, 2009, these types of investments represented approximately 11% of the total fair value of the postretirement benefit plan assets. Other Considerations U.S. Government Cost Accounting Standards (CAS) are a major factor we consider in determining our total pension funding and govern the extent to which our pension costs are allocable to and recoverable under contracts with the U.S. Government. Funded amounts are recovered over time through the pricing of our products and services on U.S. Government contracts, and are recognized in our net sales. The amount of funding required under CAS for our qualified defined benefit pension plans for 2009, and therefore the amount included in our segments’ operating results for the year, was $580 million. For 2010, we expect the funding required under CAS will be about $1.0 billion. Additional funding requirements computed under the Internal Revenue Code (IRC) rules, as well as discretionary payments, are considered to be prepayments under the CAS rules to the extent the amounts exceed CAS funding requirements. These amounts would be recorded on our Balance Sheet and recovered in future periods. In 2009, 2008, and 2007, we made discretionary contributions of $1,482 million, $109 million, and $335 million related to our qualified defined benefit pension plans. Based on our known requirements as of December 31, 2009, including consideration of the discretionary contribution made in 2009, no contributions related to our qualified defined benefit pension plans are expected to be required in 2010. We do expect to make discretionary contributions of $1.4 billion related to our qualified defined benefit pension plans, as we anticipate that funding requirements under the Pension Protection Act (see discussion below) beginning in 2011 will be higher than requirements in previous years. We also may review options for further contributions in 2010. We anticipate recovering approximately $1.0 billion as CAS cost during 2010, with the remainder being recoverable in future years. In August 2006, legislation was enacted related to pension plan funding, known as the Pension Protection Act, in response to the public’s concern over the adequacy of such funding. The law had the effect of accelerating the required amount of annual pension plan contributions under the IRC that most companies are required to pay, beginning in 2008. The legislation provided an exemption for us, as well as other large U.S. defense contractors, that delayed the requirement to accelerate funding. The legislation also requires the CAS Board to modify its pension accounting rules by 2010 to better align the recovery of pension contributions on U.S. Government contracts with the new accelerated funding requirements. The new funding requirements for large U.S. defense contractors have been delayed until the earlier of 2011 or the year in which the changes to the CAS rules are effective. We currently expect that the pension reform funding provisions will impact us and other large U.S. defense contractors in 2011. The CAS Board has not published changes to its pension accounting rules as of December 31, 2009. Environmental Matters We are a party to various agreements, proceedings, and potential proceedings for environmental cleanup issues, including matters at various sites where we have been designated a potentially responsible party (PRP) by the EPA or by a state agency. We enter into agreements (e.g., administrative orders, consent decrees) that document the extent and timing of our environmental remediation obligation. We also are involved in remediation activities at environmental sites where formal agreements either do not exist or do not quantify the extent and timing of our obligation. Environmental cleanup activities 35


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    usually span many years, which makes estimating the costs more judgmental due to, for example, changing remediation technologies. To determine the costs related to cleanup sites, we have to assess the extent of contamination, the appropriate technology to be used to accomplish the remediation, and evolving regulatory environmental standards. We consider these factors in our estimates of the timing and amount of any future costs that may be required for remediation actions, which generally results in the calculation of a range of estimates for a particular environmental site. We record a liability for the amount within the range that we determine to be our best estimate of the cost of remediation or, in cases where no amount within the range is better than another, an amount at the low end of the range. Given the required level of judgment and estimation, it is likely that materially different amounts could be recorded if different assumptions were used or if circumstances were to change (e.g., a change in environmental standards or a change in our estimate of the extent of contamination). We perform quarterly reviews of environmental remediation sites and record liabilities and assets in the period it becomes probable that a liability has been incurred and the amounts can be reasonably estimated (see the discussion under “Environmental Matters” in Notes 1 and 13 to the financial statements). At the end of 2009, the total amount of liabilities recorded on our Balance Sheet for environmental matters was $877 million. We have recorded assets totaling $740 million at December 31, 2009 for the portion of environmental costs that are probable of future recovery in pricing of our products and services for agencies of the U.S. Government. The amount that is expected to be allocated to our commercial businesses or that is determined to be unallowable for pricing under U.S. Government contracts has been expensed through cost of sales. Under agreements reached with the U.S. Government, most of the amounts we spend for groundwater treatment and soil remediation are allocated to our operations as general and administrative costs. Under existing government regulations, these and other environmental expenditures relating to our U.S. Government business, after deducting any recoveries received from insurance or other PRPs, are allowable in establishing prices of our products and services. As a result, most of the expenditures we incur are included in our net sales and cost of sales according to U.S. Government agreement or regulation. As disclosed above, we may record changes in the amount of environmental remediation liabilities as a result of our quarterly reviews of the status of our environmental remediation sites, which would result in a change to the corresponding environmental asset and a charge to earnings. For example, if we were to determine that the liabilities should be increased by $100 million, the corresponding assets would be increased by approximately $85 million, with the remainder recorded as a charge to earnings. This allocation is determined annually, based upon our existing and projected business activities with the U.S. Government. We cannot reasonably determine the extent of our financial exposure at all environmental sites with which we are involved. There are a number of former operating facilities we are monitoring or investigating for potential future remediation. In some cases, although a loss may be probable, it is not possible at this time to reasonably estimate the amount of any obligation for remediation activities because of uncertainties (e.g., assessing the extent of the contamination). During any particular quarter, such uncertainties may be resolved to allow us to estimate and recognize the initial liability to remediate a particular former operating site. The amount of the liability could be material. Upon recognition of the liability, a portion will be recognized as an asset with the remainder charged to operations. If we are ultimately found to have liability at those sites where we have been designated a PRP, we expect that the actual costs of remediation will be shared with other liable PRPs. Generally, PRPs that are ultimately determined to be responsible parties are strictly liable for site cleanup and usually agree among themselves to share, on an allocated basis, the costs and expenses for investigation and remediation of hazardous materials. Under existing environmental laws, responsible parties are jointly and severally liable and, therefore, we are potentially liable for the full cost of funding such remediation. In the unlikely event that we were required to fund the entire cost of such remediation, the statutory framework provides that we may pursue rights of contribution from the other PRPs. The amounts we record do not reflect the fact that we may recover some of the environmental costs we have incurred through insurance or from other PRPs, which we are required to pursue by agreement and U.S. Government regulation. Goodwill We review goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Such events or circumstances could include significant changes in the business climate of our industry, operating performance indicators, competition, or sale or disposal of a portion of a reporting unit. The assessment is performed at the reporting unit level. Our annual testing date is October 1. 36


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    Performing the goodwill impairment test requires judgment, including how we define reporting units and determine their fair value. We consider a component of our business to be a reporting unit if it constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component. We estimate the fair value of each reporting unit using a discounted cash flow methodology that requires significant judgment. Forecasts of future cash flows are based on our best estimate of future sales and operating costs, based primarily on existing firm orders, expected future orders, contracts with suppliers, labor agreements, and general market conditions. The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. We evaluate goodwill for impairment by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value exceeds the estimated fair value, we measure impairment by comparing the derived fair value of goodwill to its carrying value, and any impairment determined is recorded in the current period. Our goodwill at December 31, 2009 amounted to $9.9 billion. We completed our assessment of goodwill as of October 1, 2009 and determined that the estimated fair value of each reporting unit exceeded its corresponding carrying amount and, as such, no impairment existed at that date. Changes in estimates and assumptions we make in conducting our goodwill assessment could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. However, a 25% decrease in the estimated fair value of any of our reporting units at October 1, 2009 would not have resulted in a goodwill impairment charge. We currently do not believe that any of our reporting units are at risk of failing a goodwill impairment test in the near term. Stock-Based Compensation We recognize compensation cost related to all share-based payments, including restricted stock units (RSUs) and stock options. Compensation cost for RSUs is based on the market value of our common stock on the date of the award. We estimate the fair value for stock options at the date of grant using the Black-Scholes option pricing model. Our stock options do not include market or performance conditions. We generally recognize the compensation cost for RSUs and stock options ratably over a three-year vesting period. The Black-Scholes model requires us to make estimates and assumptions in determining certain inputs to the model, including a volatility factor for our stock, an expected life of the option, and a risk-free interest rate. We estimate volatility based on the historical volatility of our daily stock price over the past five years, which is commensurate with the expected life of the options. We base the average expected life on the contractual term of the stock option, historical trends in option exercise activity, and post-vesting employment termination trends. We analyzed the option exercise patterns of our employees and determined there are no significant differences between employee groups. We base the risk-free interest rate on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. We also are required to estimate forfeitures at the date of grant, which we base on historical experience. If any of our estimates or assumptions used in the Black-Scholes model were to change significantly, stock-based compensation expense could differ materially in the future from the amount recorded in 2009. Compensation cost recognized in 2009, 2008, and 2007 totaled $154 million, $155 million, and $149 million. 37


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    Results of Operations Since our operating cycle is long-term and involves many types of DD&P contracts with varying production delivery schedules, the results of operations of a particular year, or year-to-year comparisons of recorded sales and profits, may not be indicative of future operating results. The following discussions of comparative results among periods should be viewed in this context. All per share amounts cited in this discussion are presented on a “per diluted share” basis. Net Sales (In billions) $50 $40 $30 Aeronautics Electronic Systems $20 IS&GS Space Systems $10 $0 2009 2008 2007 The following discussion of operating results provides an overview of our operations by focusing on key elements in our Statement of Earnings. The “Discussion of Business Segments” section that follows describes the contributions of each of our business segments to our consolidated net sales and operating profit for 2009, 2008, and 2007. We follow an integrated approach for managing the performance of our business, and focus the discussion of our results of operations around major products and lines of business versus distinguishing between products and services. Product sales are predominantly generated in the Aeronautics, Electronic Systems, and Space Systems segments, while most of our services revenues are generated in our IS&GS segment. For 2009, net sales were $45.2 billion, a 6% increase over 2008. Net sales for 2008 were $42.7 billion, a 2% increase over 2007. Net sales increased during 2009 in all segments as compared to 2008. Net sales increased during 2008 compared to 2007 in the Electronic Systems and IS&GS segments but declined in Aeronautics primarily due to fewer combat aircraft deliveries and, at Space Systems, due to both government and commercial satellite activities. The U.S. Government is our largest customer, accounting for about 85% of our net sales in 2009 and about 84% in 2008 and 2007. Other income (expense), net was $242 million for 2009 compared to $482 million in 2008. This decrease primarily was due to the recognition of a deferred gain of $108 million in 2008 from the sale of our ownership interest in Lockheed Khrunichev Energia International, Inc. (LKEI) and International Launch Services, Inc. (ILS) in 2006; earnings of $85 million recorded in 2008 associated with reserves related to various land sales that were no longer required; and a loss of $24 million on the 2009 sale of a foreign subsidiary. Other income (expense), net was $482 million for 2008 compared to $293 million in 2007. This increase was primarily due to an additional $86 million in equity earnings in affiliates in 2008 compared to 2007, the recognition of the LKEI and ILS deferred gain in 2008, and the earnings associated with the elimination of reserves related to various land sales in 2008. State income taxes are included in our operations as general and administrative costs and, under U.S. Government regulations, are allowable in establishing prices for the products and services we sell to the U.S. Government. Therefore, a substantial portion of state income taxes is included in our net sales and cost of sales. As a result, the impact on our operating profit of certain transactions and other matters disclosed in this Form 10-K is disclosed net of state income taxes. Our operating profit for 2009 was $4.5 billion, a decrease of 13% compared to 2008. Our operating profit for 2008 was $5.1 billion, an increase of 13% compared to 2007. In 2009, operating profit was negatively impacted by higher unallocated Corporate costs and the decrease in other income (expense), net as discussed above. These declines more than offset increased operating profit at the Aeronautics, Electronic Systems and Space Systems business segments. The higher unallocated Corporate costs in 2009 mainly were attributable to the impact of the FAS/CAS pension adjustment, which resulted in expense in 2009 of $456 million as compared to income in 2008 of $128 million due to the negative actual return on plan assets in 2008 and a lower discount rate at December 31, 2008 compared to December 31, 2007. Except for reductions at Aeronautics, operating profit increased in all business segments in 2008 as compared to 2007. Operating profit in 2008 was favorably impacted by lower unallocated Corporate costs and the increase in other income (expense), net as discussed above. Unallocated Corporate costs in 2008 were favorably impacted by declines in the FAS/CAS pension adjustment, primarily due to the decline in FAS pension expense. 38


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    Interest expense for 2009 was $305 million, or $36 million lower than 2008. The decrease mainly was driven by the August 2008 redemption of our $1.0 billion of floating rate convertible debentures, partially offset by increases resulting from the fourth quarter 2009 issuance of $1.5 billion of long-term notes and the first quarter 2008 issuance of $500 million of long-term notes. Interest expense for 2008 was $341 million, or $11 million lower than 2007. The decrease was primarily attributable to the August 2008 redemption of the floating rate convertible debentures, partially offset by an increase due the first quarter 2008 issuance of $500 million of long-term notes. Other non-operating income (expense), net was income of $123 million in 2009 compared to expense of $88 million in 2008. The increase primarily was due to net unrealized gains on marketable securities held in a Rabbi Trust to fund certain non-qualified employee benefit obligations partially offset by lower interest income on invested cash balances. Other non-operating income (expense), net was expense of $88 million in 2008 compared to income of $193 million in 2007. The decrease in 2008 primarily was due to net unrealized losses on marketable securities held to fund certain non-qualified employee benefit obligations and lower interest income on invested cash balances. Our effective income tax rates were 29.4% for 2009, 31.6% for 2008, and 30.6% for 2007. These rates were lower than the statutory rate of 35% for all periods due to tax benefits for U.S. manufacturing activities, dividends related to our employee stock ownership plans, and the research and development tax credit. In addition, the rate for 2009 reflected a tax benefit of $69 million arising from the resolution of IRS examinations of the 2005 to 2007 and 2008 tax years and an additional tax benefit from the partial elimination of a valuation allowance previously provided against certain foreign company deferred tax assets arising from carryforwards of unused tax benefits. The rate for 2007 reflected a tax benefit of $59 million arising from the closure of the IRS examination of the 2003 and 2004 tax years. We reported net earnings of $3.0 billion ($7.78 per share) in 2009, $3.2 billion ($7.86 per share) in 2008, and $3.0 billion ($7.10 per share) in 2007. Both net earnings and earnings per share were affected by the factors discussed above. In addition, earnings per share has benefitted from the significant number of shares repurchased under our share repurchase program. The effect of those repurchases has been partially offset by common stock issued under our stock-based compensation and defined contribution plans. Discussion of Business Segments We operate in four principal business segments: Aeronautics, Electronic Systems, IS&GS, and Space Systems. We organize our business segments based on the nature of the products and services offered. The Aeronautics segment generally includes fewer programs that have much larger sales and operating results than programs included in the other segments. Due to the large number of comparatively smaller programs in the remaining segments, the discussion of the results of operations of those business segments focuses on lines of business within the segment rather than on specific programs. The following tables of financial information and related discussion of the results of operations of our business segments are consistent with the presentation of segment information in Note 4 to the financial statements. We have a number of programs that are classified by the U.S. Government and cannot be specifically described. The operating results of these classified programs are included in our consolidated and business segment results, and are subjected to the same oversight and internal controls as our other programs. Our Aeronautics business segment is engaged in the research, design, development, manufacture, integration, sustainment, support, and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles, and related technologies. Key Combat Aircraft programs include the F-35 Lightning II, F-16 Fighting Falcon, and F-22 Raptor fighter aircraft. The F-35 has completed the eighth year of development and has entered low rate initial production (LRIP). We expect the first deliveries under the LRIP program to begin in 2010 which, together with other program activities, will result in an increase in sales over 2009 levels. We continue to produce F-16 aircraft for foreign customers, delivering a total of 31 F-16s in 2009 worldwide. We are currently projecting that F-16 sales will decline in 2010 over 2009 levels due to lower deliveries. Aeronautics has been producing F-22s since 1997. As noted previously, the U.S Government has decided to discontinue production of the F-22 after delivery of the 187 aircraft on order, which we expect will occur in early 2012. Key Air Mobility programs include the C-130J Super Hercules and the C-5M Super Galaxy. We are expecting to ramp up production and increase deliveries of C-130J aircraft in 2010, having delivered 16 in 2009. In addition to aircraft production, Aeronautics provides logistics support, sustainment, and upgrade modification services for its aircraft. Sales at Aeronautics are expected to grow overall in 2010 primarily due to the projected increase in F-35 production activities. Our Electronic Systems business segment manages complex programs and designs, develops, and integrates hardware and software solutions to ensure the mission readiness of armed forces and government agencies worldwide. With such a broad portfolio of products and services, many of its activities involve a combination of both development and production 39


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    contracts with varying delivery schedules. This business segment has continued to expand its core competencies as a systems integrator both domestically and internationally. Some of its more significant programs, including the Terminal High Altitude Area Defense (THAAD) system, the Aegis Weapon System, and the Littoral Combat Ship program, demonstrate the diverse products and services Electronic Systems provides. Our IS&GS business segment combines a full range of information competencies with a global delivery capability. The segment provides full life-cycle support and expertise in the areas of software and systems engineering, including capabilities in space, air, and ground systems. It provides logistics, mission operation support, peacekeeping, and nation-building services for a wide variety of defense and civil government agencies in the U.S. and abroad. IS&GS’ key programs and activities include the En-Route Automation Modernization (ERAM) program, the Joint Tactical Radio System (JTRS) program, the Decennial Response Integration System (DRIS 2010) program, and a number of task order vehicles (indefinite delivery, indefinite quantity (IDIQ) contracts) across each of its lines of business. Our Space Systems business segment is engaged in the design, research and development, engineering, and production of satellites, strategic and defensive missile systems, and space transportation systems. Government satellite programs include the Advanced Extremely High Frequency (AEHF) system, the Mobile User Objective System (MUOS), the Global Positioning Satellite III (GPS III) system, and the Space-Based Infrared System (SBIRS). Strategic and missile defense programs include the targets and countermeasures program and the fleet ballistic missile program. Space transportation includes the NASA Orion program. Through ownership interests in two joint ventures, United Launch Alliance (ULA) and United Space Alliance (USA), the segment also includes expendable launch services and Space Shuttle processing activities for the U.S. Government. The Space Shuttle is expected to finish its final flight mission in 2010 and our programs involving its launch and processing activities will end at that time. In the following table of financial data, total operating profit of the business segments is reconciled to the corresponding consolidated amount. Because the activities of the investees in which certain business segments hold equity interests are closely aligned with the operations of those segments, the equity earnings (losses) from those investees are included in the operating profit of the segments. Our largest equity investees are ULA and USA. Their equity earnings are included in Space System’s operating profit. The reconciling item “Unallocated Corporate income (expense), net” includes the FAS/CAS pension adjustment (see the discussion in “Discussion of Business Segments” under “Unallocated Corporate Income (Expense), Net”), costs for stock-based compensation programs, the effects of items not considered part of management’s evaluation of segment operating performance, and Corporate costs not allocated to the operating segments, as well as other miscellaneous Corporate activities. This table shows net sales and operating profit of the business segments and reconciles to the consolidated total. (In millions) 2009 2008 2007 Net Sales Aeronautics $12,201 $11,473 $12,303 Electronic Systems 12,204 11,620 11,143 Information Systems & Global Services 12,130 11,611 10,213 Space Systems 8,654 8,027 8,203 Total $45,189 $42,731 $41,862 Operating Profit Aeronautics $ 1,577 $ 1,433 $ 1,476 Electronic Systems 1,595 1,508 1,410 Information Systems & Global Services 1,011 1,076 949 Space Systems 972 953 856 Total business segments $ 5,155 4,970 4,691 Unallocated Corporate income (expense), net (689) 161 (164) Total $ 4,466 $ 5,131 $ 4,527 The following segment discussions also include information relating to negotiated backlog for each segment. Total negotiated backlog was approximately $78.0 billion, $80.9 billion, and $76.7 billion at December 31, 2009, 2008, and 2007. These amounts included both funded backlog (unfilled firm orders for which funding has been both authorized and appropriated by the customer – Congress in the case of U.S. Government agencies) and unfunded backlog (firm orders for which funding has not yet been appropriated). Negotiated backlog does not include unexercised options or task orders to be issued under indefinite-delivery/indefinite-quantity (IDIQ) contracts. Funded backlog was approximately $49.0 billion at December 31, 2009. 40


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    In our discussion of comparative results, changes in net sales and operating profit are expressed in terms of volume and/ or performance. Volume refers to increases or decreases in sales resulting from varying production activity levels, deliveries or services levels on individual contracts. Volume changes typically include a corresponding change in operating profit based on the estimated profit rate at completion for a particular contract for products. Performance generally refers to changes in contract profit booking rates. These changes on our contracts for products usually relate to profit recognition associated with revisions to total estimated costs at completion of the contracts that reflect improved (or deteriorated) operating or award fee performance on a particular contract. Changes in contract profit booking rates on contracts for products are recognized by recording adjustments in the current period for the inception-to-date effect of the changes on current and prior periods. Recognition of an inception-to-date adjustment in the current or prior periods may affect the comparison of segment operating results. Segment Operating Profit (In millions) $5,500 $4,400 $3,300 Aeronautics Electronic Systems $2,200 IS&GS Space Systems $1,100 $0 2009 2008 2007 Aeronautics Aeronautics’ operating results included the following: (In millions) 2009 2008 2007 Net sales $12,201 $11,473 $12,303 Operating profit 1,577 1,433 1,476 Backlog at year-end 26,700 27,200 26,300 Net sales for Aeronautics increased by 6% in 2009 compared to 2008. During the year, sales increased in all three lines of business. The increase of $296 million in Air Mobility’s sales primarily was attributable to higher volume on the C-130 programs, including deliveries and support activities. There were 16 C-130J deliveries in 2009 and 12 in 2008. Combat Aircraft sales increased $316 million principally due to higher volume on the F-35 program and increases in F-16 deliveries, which partially were offset by lower volume on F-22 and other combat aircraft programs. The $116 million increase in Other Aeronautics Programs mainly was due to higher volume on P-3 programs and advanced development programs, which partially were offset by declines in sustainment activities. Net sales for Aeronautics decreased by 7% in 2008 compared to 2007. The decline in net sales was due to decreases in Combat Aircraft and Air Mobility, which more than offset increases in Other Aeronautics Programs. Combat Aircraft sales declined $947 million due to lower volume on F-16, F-22 and F-35 programs. The $74 million decrease in Air Mobility primarily was due to lower volume on other air mobility programs. There were 12 C-130J deliveries in both 2008 and 2007. The $191 million increase in Other Aeronautics Programs mainly was due to higher volume in sustainment services activities. Operating profit for the segment increased 10% in 2009 compared to 2008. The growth in operating profit primarily was due to increases in Air Mobility and Other Aeronautics Programs. The $70 million increase in Air Mobility’s operating profit primarily was due to the higher volume on C-130J deliveries and C-130 support programs. In Other Aeronautics Programs, operating profit increased $120 million, which mainly was attributable to improved performance in sustainment activities and higher volume on P-3 programs. Additionally, the increase in operating profit included the favorable restructuring of a P-3 modification contract in 2009. Combat Aircraft’s operating profit decreased $22 million during the year primarily due to a reduction in the level of favorable performance adjustments on F-16 programs in 2009 compared to 2008 and lower volume 41


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    on other combat aircraft programs. These decreases more than offset increased operating profit resulting from higher volume and improved performance on the F-35 program and an increase in the level of favorable performance adjustments on the F-22 program in 2009 compared to 2008. Operating profit for the segment decreased 3% in 2008 compared to 2007. Operating profit declines in Combat Aircraft partially were offset by increases in Other Aeronautics Programs and Air Mobility. In Combat Aircraft, operating profit declined $86 million mainly due to lower volume on F-16 programs and lower volume and the decline in 2008 of the amount of favorable inception-to-date performance adjustments on the F-22 program. There was a $34 million increase in Other Aeronautics Programs, which mainly was due to higher volume in sustainment services activities that partially was offset by a decrease in operating profit due to performance on a P-3 modification contract. In Air Mobility, operating profit increased $13 million mainly due to higher volume and improved performance on C-130 support activities, which more than offset a decline on C-5 programs. Backlog decreased in 2009 compared to 2008 mainly due to sales exceeding orders on the F-22 and F-35 programs, which partially were offset by orders exceeding sales on the C-130J and C-5 programs. Backlog increased in 2008 as compared to 2007 primarily due to increased orders on the C-130J and F-35 programs, which were partially offset by declines resulting from sales volume on the F-22 program. Electronic Systems Electronic Systems’ operating results included the following: (In millions) 2009 2008 2007 Net sales $12,204 $11,620 $11,143 Operating profit 1,595 1,508 1,410 Backlog at year-end 21,900 22,500 21,200 Net sales for Electronic Systems increased by 5% in 2009 compared to 2008. During the year, sales increased in all three lines of business. The increase in sales of $394 million at Missiles & Fire Control (M&FC) primarily was due to growth on tactical missile programs and fire control systems. Platforms & Training (P&T) sales increased $122 million, primarily due to growth on simulation and training activities partially offset by lower volume on platform integration activities. The increase in simulation and training also included sales from the first quarter 2009 acquisition of Universal Systems and Technology, Inc. The increase in sales of $67 million at Maritime Systems & Sensors (MS2) mainly was due to higher volume on radar systems, surface naval warfare, and tactical systems programs, which partially were offset by a decline in integrated defense technologies. Net sales for Electronic Systems increased by 4% in 2008 compared to 2007. Sales increases in M&FC and MS2 more than offset a decline in P&T. M&FC sales increased $327 million mainly due to higher volume on fire control and tactical missile programs. MS2 sales grew $189 million primarily due to higher volume on integrated defense technology, undersea warfare and radar systems activities. The decline of $39 million in P&T’s sales mainly was due to lower volume on platform integration activities. Operating profit for the segment increased 6% in 2009 compared to 2008. In 2009, increases in operating profit at M&FC and P&T more than offset declines at MS2. Operating profit increased $114 million at M&FC mainly due to higher volume and improved performance on fire control systems and tactical missile programs. The increase in operating profit of $40 million at P&T primarily was due to higher volume and improved performance on simulation and training activities. Additionally, the increase included a benefit recognized in 2009 from favorably resolving a simulation and training contract matter. These increases partially were offset by lower volume on platform integration activities and a reduction in the level of favorable performance adjustments on distribution technology programs in 2009 compared to 2008. There was a $67 million decrease in operating profit at MS2, which primarily was attributable to lower volume on integrated defense technology programs and a reduction in the level of favorable performance adjustments on tactical systems, integrated defense technology, and undersea warfare programs in 2009 compared to 2008. Operating profit for the segment increased by 7% in 2008 compared to 2007. In 2008, operating profit increases at M&FC and MS2 more than offset a decrease at P&T. Operating profit increased $60 million at M&FC mainly due to improved performance on air defense programs and higher volume on tactical missile and fire control programs. There was a $71 million increase in operating profit at MS2, which mainly was attributable to higher volume and improved performance on integrated defense technology, surface naval warfare, undersea warfare, and radar systems programs. P&T’s operating profit declined $33 million primarily due to performance on platform integration activities. 42

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