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    LOCKHEED MARTIN CORPORATION 2013 ANNUAL REPORT LOCKHEED MARTIN CORPORATION 2013 Annual Report


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    2013 FINANCIAL HIGHLIGHTS (In millions, except per share data) 2013 2012 2011 Net Sales $45,358 $47,182 $46,499 Segment Operating Profit 5,752 5,583 5,281 Consolidated Operating Profit 4,505 4,434 4,020 Net Earnings From Continuing Operations 2,950 2,745 2,667 Net Earnings 2,981 2,745 2,655 Diluted Earnings Per Common Share Continuing Operations 9.04 8.36 7.85 Net Earnings 9.13 8.36 7.81 Cash Dividends Per Common Share 4.78 4.15 3.25 Average Diluted Common Shares Outstanding 327 328 340 Cash and Cash Equivalents $ 2,617 $ 1,898 $ 3,582 Total Assets 36,188 38,657 37,908 Total Debt 6,152 6,308 6,460 Stockholders’ Equity 4,918 39 1,001 Common Shares Outstanding at Year-End 319 321 321 Net Cash Provided by Operating Activities $ 4,546 $ 1,561 $ 4,253 NOTE: For additional information regarding the amounts presented above, including the reconciliation of Segment Operating Profit to Consolidated Operating Profit, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data in this Annual Report. On the Cover: MAVEN to Unlock the Mysteries of Mars The Mars Atmosphere Volatile EvolutioN, or MAVEN, spacecraft will be the first to survey the upper atmosphere of Mars with a goal of understanding how the Red Planet’s atmosphere and climate changed over time. MAVEN’s findings will help scientists determine when and for how long liquid water could have been stable on the surface – a key indicator of whether Mars ever harbored life. MAVEN launched November 18, 2013 aboard an Atlas V rocket, and is scheduled to arrive at Mars on September 22, 2014.


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    Dear Fellow StockholDerS 2013 was a year of dynamic change. As the world’s leading aerospace and global security company, we embraced that change, continued our record of exceptional performance, and positioned Lockheed Martin for continued success. We took proactive steps to strengthen our core and international business, drive opportunities in adjacent markets, streamline our cost structure to improve affordability, and deliver innovations that will address our customers’ challenges today and tomorrow. Performance has always been our hallmark, and 2013 was no exception. With our customers grappling with increasing budget uncertainty, our goal was to be an anchor of dependability. We kept our promises, delivered on our commitments and acted with integrity in everything we did. This continued commitment to performance translated into higher operating margins, stronger cash flows and a record backlog. In short, we created value for our stockholders, delivered cutting-edge products for our customers, and positioned Lockheed Martin for the future. Our Leadership Team: From left to right: Orlando P. Carvalho, Executive Vice President, Aeronautics; Patrick M. Dewar, Executive Vice President, Lockheed Martin International; Sondra L. Barbour, Executive Vice President, Information Systems & Global Solutions; Richard F. Ambrose, Executive Vice President, Space Systems; Marillyn A. Hewson, Chairman, President and Chief Executive Officer; Bruce L. Tanner, Executive Vice President and Chief Financial Officer; Richard H. Edwards, Executive Vice President, Missiles and Fire Control; Dale P. Bennett, Executive Vice President, Mission Systems and Training. This letter includes references to segment operating profit, segment margin and free cash flow, which are non-GAAP financial measures. For reconciliations between our non-GAAP measures and the nearest GAAP measures, please refer to the Form 10-K portion of this Annual Report. I 2013 AnnuAl RepoRt


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    cash flow to our stockholders. We paid $1.5 billion in dividends — 2013 was our eleventh year in a row of a double-digit per share dividend increase. We also repurchased 16.2 million shares of stock for $1.8 billion. In total, we returned almost 90 percent of free cash flow to stockholders. At the same time, we invested $836 million into our business in capital expenditures, improving the quality and efficiency of our operations. Delivering for Our Customers We were encouraged to see Congress pass a two-year budget agreement in December. The stability created by this agreement will improve our ability to plan for the future and is a welcome step toward a long-term solution to our nation’s budgetary challenges. We’re committed to supporting our customers by meeting our commitments, driving affordability and improving our agility and responsiveness. Our portfolio Lockheed Martin Chairman, President and CEO Marillyn Hewson is strategically aligned with the technologies and services our customers want — both now and in the future. As the global security landscape evolves, we Creating Value for Our Stockholders believe that the need for powerful, flexible systems like the F-35 Lightning II, Littoral Combat Ship, integrated In this time of budget constraints and changing market missile defense, information technology and advanced dynamics, we know the importance of creating value for satellites will grow. By coupling superior performance you, our stockholders, by improving profitability and with a portfolio aligned to our customers’ needs, we generating strong returns and cash. believe that we’re positioned to meet the demands of customers around the globe. Our stock closed the year at $148.66 per share, up from $92.29 per share at the close of 2012 — a 61 percent Across our portfolio, we delivered many key increase. In total, we generated a 68 percent total achievements in 2013: stockholder return, a result of continued outstanding financial performance and a strong dividend yield. F-35 Lightning II: 2013 was another year of Financial highlights include: accelerating progress on our 5th generation, multirole, multi-variant, stealth fighter. The F-35 achieved • Sales of $45.4 billion, down 4 percent versus 2012. numerous milestones this year: • Record segment operating profit of $5.8 billion. • Record segment margin of 12.7 percent. • The F-35A completed its first in-flight missile launch. • Record diluted earnings per share from continuing • The F-35B, Short Take-off Vertical Landing operations of $9.04. (STOVL) variant completed its first vertical take-off, • Record backlog of $82.6 billion. first vertical night landing, and first vertical night • Net earnings from continuing operations increased landing at sea on the USS Wasp. 7 percent to about $3.0 billion. • The F-35C carrier variant completed its first in-flight • Cash from operations of $4.5 billion, after making dual refueling, where two fighters were refueled pension contributions of $2.25 billion. simultaneously by a Lockheed Martin KC-130 Hercules. Cash generation is built into our operating discipline, • The Netherlands selected the F-35 as the official and we used that cash to deliver value to you while replacement for its fleet of F-16s. investing in our future. We continued to exceed our • We celebrated the production of the 100th F-35. commitment of returning at least 50 percent of free lockheed MARtin coRpoRAtion II


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    Our continued focus on affordability is helping us Information Technology: On the IT front, we marked adapt to our customers’ budget constraints. Costs of major deliveries and strategic international growth in the airframe have declined 55 percent from initial 2013. We delivered new crime-solving capabilities via production fighters to those rolling off the production the FBI’s Next Generation Identification system that line today. And we’re continuing our efforts to decrease improve latent fingerprint search accuracy to help solve costs across the entire program. cold cases and advance crime-solving capabilities. We were also awarded a contract to provide the United Littoral Combat Ship (LCS): It’s “full speed ahead” for Kingdom’s Ministry of Justice with Service Integration the LCS program as the fleet continues to grow. A fast, and Management support to deliver consolidated IT maneuverable surface combatant, the LCS is a flexible, services across the organization’s complex, multi- versatile platform built for today’s dynamic global supplier IT environment. And we were selected to security environment. This operational flexibility means design and secure the Active Network Infrastructure for it can take on missions ranging from mine-clearing NATO’s new headquarters in Brussels, Belgium. to anti-submarine and anti-surface warfare, as well as security and humanitarian missions in both coastal and As industry and government face growing threats open waters. This year the USS Freedom deployed to from persistent cyber attackers, we have been equally Southeast Asia and participated in its first Cooperation determined in defending against them. For our cyber Afloat Readiness Training exercise. And USS Freedom security customers — and for our own internal networks delivered humanitarian assistance and disaster relief — we have developed robust threat detection and supplies to the Philippines in response to the devastation mitigation processes for safeguarding IT resources and caused by Typhoon Haiyan. The USS Fort Worth securing vital assets. completed final contractor trials in San Diego, and in December we launched the Milwaukee. Construction of Satellites and Space Systems: Our space portfolio the Detroit, Little Rock, and Sioux City is under way. marked a number of milestone launches in 2013. In March, the U.S. Air Force’s second Space Based Missile Defense: Our air and missile defense systems Infrared System (SBIRS) Geosynchronous Earth Orbit demonstrated an unmatched ability to protect against (GEO-2) satellite also launched successfully. SBIRS the full spectrum of 21st century threats — from hostile delivers critical missile warning information that helps aircraft to cruise and ballistic missiles. Years ago we protect the U.S. and its allies. The second Mobile User pioneered the combat-proven “hit-to-kill” technology Objective System (MUOS) satellite was launched that defeats incoming targets and their payloads through in July. The MUOS constellation delivers secure, force of impact alone. Three of our business segments prioritized voice and data communications, a first for participated in a ground-breaking Missile Defense mobile warfighters who need high-speed mission data Agency test that proved the value of an integrated, on the move. NASA’s Mars Atmosphere and Volatile layered missile shield. Aegis Ballistic Missile Defense; EvolutioN (MAVEN) spacecraft launched in November the Terminal High Altitude Area Defense (THAAD); from Cape Canaveral Air Force Station, Florida. As and the Command, Control, Battle Management and pictured on the cover of this annual report, MAVEN will Communications systems worked together to intercept perform the first dedicated mission to survey the upper two ballistic missile targets that were launched nearly atmosphere of Mars. simultaneously. In addition, the Medium Extended Air Defense System (MEADS), firing PAC-3 Missiles, Positioning for the Future intercepted and destroyed two targets attacking simultaneously from opposite directions — an With U.S. federal budgets under pressure and long-term unprecedented feat. These tests proved yet again that fiscal challenges on the horizon, we’re taking proactive the capability and maturity of our portfolio of missile measures to position Lockheed Martin for growth defense systems are unequaled. and continued success. Our major areas of focus are growing internationally, improving our affordability and We continue to see strong demand for our missile innovating for growth. defense systems. In 2013 we signed a $3.9 billion THAAD production contract that includes systems for Growing Internationally: Lockheed Martin is a global both the U.S. Army and the United Arab Emirates, and company. We do business in 70 nations around the Kuwait became the sixth international customer for the world and have more than 1,000 global partnerships. PAC-3 Missile. III 2013 AnnuAl RepoRt


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    And with a growing international backlog, we are facilities, with closures expected to be complete by well positioned with respect to our goal of growing mid-2015. international sales over the next few years to over 20 percent of total revenue. These decisions followed a review of our current facility capacity and future workload projections and To accelerate the growth of our international business, are part of our initiative to reduce costs and make our in July we announced the formation of Lockheed products and services more affordable. Since 2008, Martin International, a new organization responsible for we’ve reduced overhead costs, cut capital expenses, growing our global business. removed 7.2 million square feet of facility space, and made the difficult decision to reduce our workforce Our path to a more robust global portfolio includes: from 146,000 employees to approximately 115,000. The actions announced in November will further streamline • Strengthening partnerships with customers, suppliers our facility footprint by nearly 2.5 million square feet and educational institutions, so we can offer more and lower our overhead costs. value to in-country economies, industries and citizens. Closing facilities and reducing our workforce of • Drawing on the depth and breadth of our portfolio dedicated employees are among the most difficult to create enterprise-wide offerings that integrate the decisions we make. We took these actions because we best of the technologies, services and expertise that believe they will make Lockheed Martin a stronger, Lockheed Martin has to offer. leaner, healthier company — one that is better • Sharpening and unifying our focus, resources and positioned to serve our customers and compete both strategies in each international market through the domestically and internationally. Lockheed Martin International team. Innovating for Growth: We continued to push the We took proactive steps in 2013 to expand our envelope to drive the development of new technologies, international presence. We acquired the Amor Group, make our existing products more relevant and shape the a United Kingdom-based company that expands our future. In 2013 we increased our independent research capabilities in information technology solutions for and development investment by 13 percent to the energy, transport and public services sectors. And $697 million as part of our commitment to innovating we won a number of international contracts, including for growth. the renewal of our air traffic control work in the UK, C-130Js for Saudi Arabia, IT networks for the UK, We’re bringing next-generation innovation to directed Joint Air to Surface Standoff Missiles in Finland, and energy weapon systems. We successfully demonstrated helicopter targeting and radar systems for the Republic a prototype laser system that can defeat incoming of Korea. Our F-35 final assembly and checkout facility rockets, unmanned aircraft in flight, as well as small is up and running in Italy. We believe that these strategic boats. The results of 2013 testing of the Area Defense moves — coupled with our already strong portfolio — Anti-Munitions system included destroying eight will lead to robust international growth in the future. small free-flying rockets at a range of just under a mile. High-energy lasers are a complement to traditional, Improving our Affordability: As our customers face missile intercept systems and have unique attributes, increasingly complex mission demands, we are including very low cost-per-engagement and minimal committed to helping them do more with less. That collateral damage. means finding ways to run our operations more efficiently and to reduce costs. In 2013, we made Two of our business segments collaborated difficult decisions and took action to ensure we remain to demonstrate that one operator can fly and competitive in a dynamic marketplace. control multiple unmanned aerial systems (UAS) simultaneously. We integrated the prototype Unmanned In November we announced plans to close our Carrier Launched Airborne Surveillance and Strike operations in Newtown, Pennsylvania; Akron, Ohio; vehicle from Aeronautics with a command and control Goodyear, Arizona; and Horizon City, Texas. We will system from Information Systems & Global Solutions. also close four buildings on our Sunnyvale, California, Our systems worked in concert with Navy systems campus. The important work being performed in these to provide UAS operators with richer intelligence facilities will transition to other Lockheed Martin and a more integrated picture of the battlefield. This lockheed MARtin coRpoRAtion IV


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    companies in our industry for environmental, social and governance performance as ranked by MSCI, a leading provider of indices and portfolio analytics. Leading the Way No review of 2013 would be complete without thanking Robert J. Stevens for his many years of service as Chairman and CEO of Lockheed Martin Employee Photo Here Corporation. His strong leadership guided our company through a period of sustained growth and exceptional performance. We salute Bob as a colleague and a friend, and we wish him the best in all his future endeavors. As we look ahead to 2014, we do so with confidence. Our performance and innovation are as strong as ever. Our portfolio is well-aligned to our customers’ current and future needs. And our strategy has us positioned for success on the global stage. We will not flinch in Jan Phillips, an Aeronautics production employee in Fort Worth, meeting our customers’ most challenging expectations, assembles components for the F-35 Lightning II and we will not falter in delivering innovation that innovation is an example of our ability to collaborate will help our customers strengthen global security, across our portfolio to make our systems more relevant deliver essential citizen services and advance scientific and valuable for our customers. discovery. We look forward to a bright future with confidence and determination. Another arena where we’re innovating for growth is sustainability. This continues to be a key priority for us, as we apply innovative solutions to protect the environment, strengthen communities and drive responsible growth. One example of how innovation in sustainability is opening new markets is Ocean Marillyn A. Hewson Thermal Energy Conversion (OTEC). OTEC uses the Chairman, President and ocean’s natural thermal gradient to generate power. On Chief Executive Officer an average day, 60 million square kilometers of tropical seas absorb an amount of solar radiation equivalent to the energy produced by approximately 250 billion barrels of oil. The temperature difference between deep and shallow ocean waters offers tremendous potential for producing energy. In 2013 we signed a contract with Reignwood Group to develop and build a 10-megawatt OTEC power plant. This plant will be the largest OTEC project developed to date, and represents a new adjacent market growth opportunity for the Corporation. For our ongoing sustainability efforts, we were pleased to be recognized by a number of outside organizations. We were named to a highly-respected benchmark for sustainability, the 2013 Dow Jones Sustainability North America Index. CDP (formerly the Carbon Disclosure Project) scored us one of the top companies worldwide on its 2013 Global Carbon Performance Leadership Index. And we advanced to be among the top three V 2013 AnnuAl RepoRt


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    CORPORATE DIRECTORY (As of February 14, 2014) BOARD OF DIRECTORS Nolan D. Archibald Thomas J. Falk Douglas H. McCorkindale Retired Executive Chairman Chairman and Retired Chairman of the Board Chief Executive Officer Gannett Co., Inc. Stanley Black & Decker, Inc. Kimberly-Clark Corporation Joseph W. Ralston Rosalind G. Brewer Marillyn A. Hewson Vice Chairman President and Chairman, President and The Cohen Group Chief Executive Officer Chief Executive Officer Sam’s Club (a division of Lockheed Martin Corporation Anne Stevens Walmart Stores, Inc.) Chairman and Principal Gwendolyn S. King SA IT Services David B. Burritt President Executive Vice President and Podium Prose Chief Financial Officer (A Washington, D.C. – based United States Steel Corporation Speaker’s Bureau) James O. Ellis, Jr. James M. Loy Retired President and Senior Counselor Chief Executive Officer The Cohen Group Institute of Nuclear Power Operations EXECUTIVE OFFICERS Richard F. Ambrose Patrick M. Dewar Maryanne R. Lavan Executive Vice President Executive Vice President Senior Vice President, Space Systems Lockheed Martin General Counsel and International Corporate Secretary Sondra L. Barbour Executive Vice President Richard H. Edwards Kenneth R. Possenriede Information Systems & Executive Vice President Vice President and Treasurer Global Solutions Missiles and Fire Control Bruce L. Tanner Dale P. Bennett Christopher J. Gregoire Executive Vice President and Executive Vice President Vice President, Controller and Chief Financial Officer Mission Systems and Training Chief Accounting Officer Orlando P. Carvalho Marillyn A. Hewson Executive Vice President Chairman, President and Aeronautics Chief Executive Officer LOCKHEED MARTIN CORPORATION VI


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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, 2013 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. ‘ 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 12b-2 of the Exchange Act). Yes ‘ No È The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant computed by reference to the last sales price of such stock, as of the last business day of the registrant’s most recently completed second fiscal quarter, which was June 28, 2013, was approximately $34.6 billion. There were 321,430,271 shares of our common stock, $1 par value per share, outstanding as of January 31, 2014. DOCUMENTS INCORPORATED BY REFERENCE Portions of Lockheed Martin Corporation’s 2014 Definitive Proxy Statement are incorporated by reference into Part III of this Form 10-K.


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    Lockheed Martin Corporation Form 10-K For the Year Ended December 31, 2013 Table of Contents PART I Page ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ITEM 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ITEM 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 24 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 ITEM 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . 87 ITEM 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 ITEM 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 PART III ITEM 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 ITEM 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . 89 ITEM 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 PART IV ITEM 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95


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    PART I ITEM 1. Business. General We are a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We also provide a broad range of management, engineering, technical, scientific, 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. In 2013, 82% of our $45.4 billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 61% from the Department of Defense (DoD)), 17% were from international customers (including foreign military sales (FMS) contracted through the U.S. Government), and 1% were from U.S. commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security, and information technology, including cyber security. We are operating in an environment characterized by both increasing complexity in global security and continuing economic pressures in the U.S. and globally. A significant component of our strategy in this environment is to focus on program execution, improving the quality and predictability of the delivery of our products and services, and placing security capability quickly into the hands of both our domestic and international customers at affordable prices. Recognizing that our customers are resource constrained, we are endeavoring to develop and extend our portfolio domestically in a disciplined manner with a focus on adjacent markets close to our core capabilities, as well as growing our international sales. We continue to focus on affordability initiatives as demonstrated by our plan to close and consolidate several of our facilities as we announced in November 2013. We also expect to continue to invest in technologies to fulfill new mission requirements for our customers, and invest in our people so that we have the technical skills necessary to succeed without limiting our ability to return cash to our investors in the form of dividends and share repurchases. We operate in five business segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and Fire Control (MFC), Mission Systems and Training (MST), and Space Systems. We organize our business segments based on the nature of the products and services offered. Aeronautics In 2013, our Aeronautics business segment generated net sales of $14.1 billion, which represented 31% of our total consolidated net sales. Aeronautics’ customers include the military services and various other government agencies of the U.S., and other countries. In 2013, U.S. Government customers accounted for 78% and international customers accounted for 22% of Aeronautics’ net sales. Net sales from Aeronautics’ combat aircraft products and services represented 21% of our total consolidated net sales in each of 2013 and 2012, and 20% of our total consolidated net sales in 2011. 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. Aeronautics’ major programs include: • F-35 Lightning II Joint Strike Fighter – international multi-role, multi-variant, fifth generation stealth fighter; • C-130 Hercules – international tactical airlifter; • F-16 Fighting Falcon – low-cost, combat-proven, international multi-role fighter; • F-22 Raptor – air dominance and multi-mission fifth generation stealth fighter; and • C-5M Super Galaxy – strategic airlifter. The F-35 program is the largest in our corporation generating 16% of our total consolidated net sales, as well as 50% of Aeronautics’ net sales in 2013. The F-35 program consists of a development contract and multiple production contracts. The development contract is being performed concurrent with the production contracts. Concurrent performance of development and production contracts is used for complex programs to test aircraft, shorten the time to field systems, and achieve overall cost savings. We expect the development portion of the F-35 program will be substantially complete in 2017, with less significant efforts continuing into 2019. Production of the aircraft is expected to continue for many years given the U.S. Government’s current inventory objective of 2,443 aircraft for the Air Force, Marine Corps, and Navy; commitments from our eight international partners and two international customers; as well as expressions of interest from other countries. During 2013, we delivered 35 aircraft to our domestic and international partners, resulting in total deliveries of 73 production aircraft as of December 31, 2013. We have 93 production aircraft in backlog as of December 31, 2013, including orders from our international partners. For additional information on the F-35 program, see “Status of the F-35 Program” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. 3


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    Aeronautics produces and provides support and sustainment services for the C-130J Super Hercules, as well as upgrades and support services for the legacy C-130 Hercules worldwide fleet. We delivered 25 C-130J aircraft in 2013, including six to international customers, and our backlog extends through the middle of 2015. We currently have advanced funding from the U.S. Government for additional C-130J aircraft not currently in backlog. Aeronautics currently produces F-16 aircraft for international customers. Aeronautics also provides service-life extension, modernization, and other upgrade programs for our customers’ F-16 aircraft. We delivered 13 F-16 aircraft in 2013, and our backlog extends through the middle of 2017. While production and deliveries of F-22 aircraft were completed in 2012, Aeronautics continues to provide modernization and sustainment activities for the U.S. Air Force’s F-22 aircraft fleet. The modernization program comprises upgrading existing systems requirements, developing new systems requirements, and adding capabilities and enhancing the performance of the weapon systems. The sustainment program consists of sustaining the weapon systems of the F-22 fleet, providing training systems, customer support, integrated support planning, supply chain management, aircraft modifications and heavy maintenance, systems engineering, and support products. Aeronautics provides sustainment services for the existing U.S. Air Force C-5 Galaxy fleet and modernization activities to convert 49 C-5 Galaxy aircraft to the C-5M Super Galaxy configuration. These modernization activities include the installation of new engines, landing gear and systems, and other improvements that will enable a shorter takeoff, a higher climb rate, an increased cargo load, and longer flight range. As of December 31, 2013, we had delivered 13 C-5M aircraft under these modernization activities, including six C-5M aircraft delivered in 2013. In addition to the above aircraft programs, Aeronautics is involved in advanced development programs incorporating innovative design and rapid prototype applications. Our Advanced Development Programs (ADP) organization, also known as Skunk Works®, is focused on future systems, including unmanned aerial systems and next generation capabilities for advanced strike, intelligence, surveillance, reconnaissance, situational awareness, and air mobility. We continue to explore technology advancement and insertion in our existing aircraft. 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, development, and production. Information Systems & Global Solutions In 2013, our IS&GS business segment generated net sales of $8.4 billion, which represented 18% of our total consolidated net sales. IS&GS’ customers include the various government agencies of the U.S. and other countries, military services, as well as commercial and other customers. In 2013, U.S. Government customers accounted for 93%, international customers accounted for 5%, and U.S. commercial and other customers accounted for 2% of IS&GS’ net sales. IS&GS has been impacted by the continued downturn in federal information technology budgets. IS&GS provides advanced technology systems and expertise, integrated information technology solutions, and management services across a broad spectrum of applications for civil, defense, intelligence, and other government customers. In addition, IS&GS supports the needs of customers in data analytics, cyber security, air traffic management, and energy demand management. IS&GS provides network-enabled situational awareness, delivers communications and command and control capability through complex mission solutions for defense applications, and integrates complex global systems to help our customers gather, analyze, and securely distribute critical intelligence data. Also, IS&GS is responsible for various classified systems and services in support of vital national security systems. While IS&GS has a portfolio of many smaller contracts as compared to our other business segments, this business segment’s major programs include: • The Hanford Mission Support contract, a program to provide infrastructure and site support services to the Department of Energy. • The Command, Control, Battle Management and Communications (C2BMC) contract, a program to increase the integration of the Ballistic Missile Defense System for the U.S. Government. • The En Route Automation Modernization (ERAM) contract, a program to replace the Federal Aviation Administration’s infrastructure with a modern automation environment that includes new functions and capabilities. • The Defense Information Systems Agency (DISA) – Global Information Grid Services Management-Operations contract, a program to provide operations and maintenance to the DoD’s global data network. • The National Science Foundation’s U.S. Antarctic Support program, which manages sites and equipment to enable universities, research institutions, and federal agencies to conduct scientific research in the Antarctic. 4


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    Missiles and Fire Control In 2013, our MFC business segment generated net sales of $7.8 billion, which represented 17% of our total consolidated net sales. MFC’s customers include the military services, principally the U.S. Army, and various government agencies of the U.S. and other countries, as well as commercial and other customers. In 2013, U.S. Government customers accounted for 67% and international customers accounted for 33% of MFC’s net sales. MFC provides air and missile defense systems; tactical missiles and air-to-ground precision strike weapon systems; logistics and other technical services; fire control systems; mission operations support, readiness, engineering support, and integration services; and manned and unmanned ground vehicles. MFC’s major programs include: • The Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD) air and missile defense programs. PAC-3 is an advanced defensive missile for the U.S. Army and international customers designed to intercept and eliminate incoming airborne threats using kinetic energy. THAAD is a transportable defensive missile system for the U.S. Government and international customers designed to engage targets both within and outside of the Earth’s atmosphere. • The Multiple Launch Rocket System (MLRS), Hellfire, Joint Air-to-Surface Standoff Missile (JASSM), and Javelin tactical missile programs. MLRS is a highly mobile, automatic system that fires surface-to-surface rockets and missiles from the M270 and High Mobility Artillery Rocket System platforms produced for the U.S. Army and international customers. Hellfire is an air-to-ground missile used on rotary and fixed-wing aircraft, which is produced for the U.S. Army, Navy, Marine Corps, and international customers. JASSM is an air-to- ground missile launched from fixed-wing aircraft, which is produced for the U.S. Air Force and international customers. Javelin is a shoulder-fired anti-armor rocket system, which is produced for the U.S. Army, Marine Corps, and international customers. • The Apache, Sniper®, and Low Altitude Navigation and Targeting Infrared for Night (LANTIRN®) fire control systems programs. The Apache fire control system provides weapons targeting capability for the Apache helicopter for the U.S. Army and international customers. Sniper® is a targeting system for fixed-wing aircraft, and LANTIRN® is a combined navigation and targeting system for fixed-wing aircraft. Both Sniper® and LANTIRN® are produced for the U.S. Air Force and international customers. • The Special Operations Forces Contractor Logistics Support Services program, which provides logistics support services to the special operations forces of the U.S. military. • MFC’s technical services business provides a comprehensive portfolio of technical and sustainment services to enhance our customers’ mission success, with core markets in engineering services; global aviation solutions; command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) product support; counter threat services; and education and sustainment services. Mission Systems and Training In 2013, our MST business segment generated net sales of $7.1 billion, which represented 16% of our total consolidated net sales. MST’s customers include the military services, principally the U.S. Navy, and various government agencies of the U.S. and other countries, as well as commercial and other customers. In 2013, U.S. Government customers accounted for 75%, international customers accounted for 23%, and U.S. commercial and other customers accounted for 2% of MST’s net sales. MST provides ship and submarine mission and combat systems; mission systems and sensors for rotary and fixed-wing aircraft; sea and land-based missile defense systems; radar systems; the Littoral Combat Ship (LCS); simulation and training services; and unmanned systems and technologies. MST’s major programs include: • The Aegis Combat System, a fleet ballistic missile defense system for the U.S. Navy and international customers and is also a sea-based element of the U.S. missile defense system. • The LCS, a surface combatant for the U.S. Navy designed to operate in shallow waters. • MH-60 mission systems and sensors, including the digital cockpit and weapons, which MST provides for the MH-60 maritime helicopter produced for the U.S. Navy and international customers. • The TPQ-53 Radar System, a sensor that quickly locates and neutralizes mortar and rocket threats, produced for the U.S. Army and international customers. • The MK-41 Vertical Launching System (VLS), a shipborne missile canister launching system that provides rapid-fire launch capability, produced for the U.S. Navy and international customers. 5


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    Space Systems In 2013, our Space Systems business segment generated net sales of $8.0 billion, which represented 18% of our total consolidated net sales. Space Systems’ customers include various government agencies of the U.S. and commercial customers. In 2013, U.S. Government customers accounted for 98%, international customers accounted for 1%, and U.S. commercial and other customers accounted for 1% of Space Systems’ net sales. Net sales from Space Systems’ satellite products and services represented 12% of our total consolidated net sales in each of 2013, 2012, and 2011. Space Systems is engaged in the research and development, design, engineering, and production of satellites, strategic and defensive missile systems, and space transportation systems. Space Systems is also responsible for various classified systems and services in support of vital national security systems. Space Systems’ major programs include: • The Trident II D5 Fleet Ballistic Missile, a program with the U.S. Navy for the only current submarine-launched intercontinental ballistic missile in production in the U.S. • The Space Based Infrared System (SBIRS), which provides the U.S. Air Force with enhanced worldwide missile launch detection and tracking capabilities. • The Advanced Extremely High Frequency (AEHF) system, the next generation of highly secure communications satellites for the U.S. Air Force. • The Orion Multi-Purpose Crew Vehicle (Orion), a spacecraft for the National Aeronautics and Space Administration (NASA) utilizing new technology for human exploration missions beyond low earth orbit. • Global Positioning System (GPS) III, a program to modernize the GPS satellite system for the U.S. Air Force. • The Geostationary Operational Environmental Satellite R-Series (GOES-R), which is the National Oceanic and Atmospheric Association’s next generation of meteorological satellites. • The Mobile User Objective System (MUOS), a next-generation narrow band satellite communication system for the U.S. Navy. Operating profit for our Space Systems business segment includes our share of earnings for our investment in United Launch Alliance, which provides expendable launch services to the U.S. Government. Financial and Other Business Segment Information For additional information regarding our business segments, including comparative segment net sales, operating profit, and related financial information for 2013, 2012, and 2011, see “Business Segment Results of Operations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Note 4 – Information on Business Segments” of our consolidated financial statements. Competition Our broad portfolio of products and services competes both domestically and internationally against the products and services of other large aerospace, defense, and information technology companies, as well as numerous smaller competitors, particularly in certain of our services businesses. We often form teams with other companies that are competitors in other efforts to provide customers with the best mix of capabilities to address specific requirements. In some areas of our business, customer requirements are changing to encourage expanded competition, such as information technology contracts where there may be a wide range of small to large contractors bidding on procurements. Principal factors of competition include the value of our products and services to the customer; technical and management capability; the ability to develop and implement complex, integrated system architectures; financing and total cost of ownership; our demonstrated ability to execute and perform against contract requirements; and our ability to provide timely solutions. The competition for international sales is subject to additional U.S. Government stipulations (e.g., export restrictions, market access, technology transfer, industrial cooperation, and contracting practices). We may compete against domestic and foreign companies (or teams) for contract awards by international governments. International competitions also may be subject to different laws or contracting practices of international governments that may affect how we structure our bid for the procurement. In many international procurements, 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. 6


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    Patents We routinely apply for and own a substantial number of U.S. and international patents related to the products and services we 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 our 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, we do not 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 Certain of our products require relatively scarce raw materials. Historically, we 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 aircraft. Aluminum lithium, which we use for F-16 aircraft structural components, 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. 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 profits. 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 Regulations Our business is heavily regulated. We contract with numerous U.S. Government agencies and entities, including all branches of the U.S. military, the Departments of Defense, Homeland Security, Justice, Commerce, Health and Human Services, Transportation, and Energy, the U.S. Postal Service, the Social Security Administration, the Federal Aviation Administration, NASA, and the U.S. Environmental Protection Agency. 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 types of contract negotiations; • impose specific and unique cost accounting practices that may differ from U.S. generally accepted accounting principles; • impose acquisition regulations, which may change or be replaced over time, that define allowable and unallowable costs and otherwise govern our right to reimbursement under certain cost-based U.S. Government contracts; • require specific security controls to protect DoD controlled unclassified technical information and restrict the use and dissemination of information classified for national security purposes and the export of certain products, services, and technical data; and • require the review and approval of contractor business systems, defined in the regulations as: (i) Accounting System; (ii) Estimating System; (iii) Earned Value Management System, for managing cost and schedule performance on certain complex programs; (iv) Purchasing System; (v) Material Management and Accounting System, for planning, controlling, and accounting for the acquisition, use, issuing, and disposition of material; and (vi) Property Management System. 7


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    The U.S. Government may terminate any of our government contracts and subcontracts either at its convenience or for default based on our performance. If a contract is terminated for convenience, we generally would be protected by provisions covering reimbursement for costs incurred on the contract and profit on those costs. If a contract is terminated for default, we generally would be entitled to payments for our work that has been accepted by the U.S. Government, however, the U.S. Government could make claims to reduce the contract value or recover its procurement costs and could assess other special penalties. For more information regarding the U.S. Government’s right to terminate our contracts, see Item 1A – Risk Factors. For more information regarding government contracting laws and regulations, see Item 1A - Risk Factors as well as “Critical Accounting Policies – Contract Accounting / Sales Recognition” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 U.S. Government programs. The internal controls addressing the financial reporting of classified programs are consistent with the internal control practices for non- classified contracts. Our operations are subject to and affected by various federal, state, local, and foreign environmental protection laws and regulations regarding the discharge of materials into the environment or otherwise regulating the protection of the environment. While the extent of our financial exposure cannot in all cases be reasonably estimated, the costs of environmental compliance have not had, and we do not expect that these costs will have, a material adverse effect on our earnings, financial position, and cash flow, primarily because most of our environmental costs are allowable in establishing the price of our products and services under our contracts with the U.S. Government. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or cleanup to the extent probable and estimable, see “Critical Accounting Policies – Environmental Matters” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Note 13 – Legal Proceedings, Commitments, and Contingencies” of our consolidated financial statements. See also the discussion of environmental matters within Section 1A - Risk Factors. Backlog At December 31, 2013, our backlog was $82.6 billion compared with $82.3 billion at December 31, 2012. Backlog is converted into sales in future periods as work is performed or deliveries are made. Approximately $35.4 billion, or 43%, of our backlog at December 31, 2013 is expected to be converted into sales in 2014. Our backlog includes both funded (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 indefinite-delivery, indefinite-quantity orders in our backlog. If any of our contracts with firm orders were to be terminated, our backlog would be reduced by the expected value of the unfilled orders of such contracts. Funded backlog was $55.0 billion at December 31, 2013, as compared to $54.8 billion at December 31, 2012. For backlog related to each of our business segments, see “Business Segment Results of Operations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Research and Development We conduct research and development activities under customer-sponsored 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. Generally, these costs are allocated among all contracts and programs in progress under U.S. Government contractual arrangements. Costs we incur under customer-sponsored research and development programs pursuant to contracts are included in net sales and cost of sales. Under certain arrangements in which a customer shares in product development costs, our portion of the unreimbursed costs is expensed as incurred in cost of sales. Independent research and development costs charged to cost of sales were $697 million in 2013, $616 million in 2012, and $585 million in 2011. See “Research and development and similar costs” in “Note 1 – Significant Accounting Policies” of our consolidated financial statements. Employees At December 31, 2013, we had approximately 115,000 employees, about 95% of whom were located in the U.S. Approximately 15% of our employees are covered by any one of approximately 60 separate collective bargaining agreements 8


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    with various unions. A number of our existing collective bargaining agreements expire in any given year. Historically, we have been successful in negotiating renewals to expiring agreements without any material disruption of operating activities. Management considers employee relations to be good. Available Information We are a Maryland corporation and were formed in 1995 by combining the businesses of Lockheed Corporation and Martin Marietta Corporation. Our principal executive offices are located at 6801 Rockledge Drive, Bethesda, Maryland 20817. Our telephone number is (301) 897-6000 and 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 Annual Report on Form 10-K (Form 10-K). Throughout this Form 10-K, we incorporate by reference information from parts of other documents filed with the U.S. 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. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements for our annual stockholders’ meetings, and amendments to those reports are available free of charge on our website, www.lockheedmartin.com/investor, as soon as reasonably practical after we electronically file the material with, or furnish it to the SEC. In addition, copies of our annual report will be made available, free of charge, upon written request. 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. Forward-Looking Statements This Form 10-K contains statements which, to the extent that they are not recitations of historical fact, constitute forward-looking statements within the meaning of the federal securities laws, and are based on our current expectations and assumptions. The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “scheduled,” “forecast,” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties. 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. Our actual financial results likely will be different from those projected due to the inherent nature of projections. Given these uncertainties, the forward-looking statements should not be relied on in making investment decisions. The forward- looking statements contained in this Form 10-K speak only as of the date of its filing. Except where required by applicable law, we expressly disclaim a duty to provide updates to forward-looking statements after the date of this Form 10-K to reflect subsequent events, changed circumstances, changes in 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. ITEM 1A. Risk Factors. An investment in our common stock or debt securities involves risks and uncertainties. We seek to identify, manage, and mitigate risks to our business, but risk and uncertainty cannot be eliminated or necessarily predicted. You should carefully consider the following factors, in addition to the other information contained in this Annual Report on Form 10-K, before deciding to purchase our common stock or debt securities. We depend heavily on contracts with the U.S. Government. We derived 82% of our consolidated net sales from the U.S. Government in 2013, including 61% from the Department of Defense (DoD). We expect to continue to derive most of our sales from work performed under U.S. Government contracts. Those 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. Consequently, contracts are often partially funded initially and additional funds are committed only as Congress makes further appropriations. If we incur costs in excess of funds obligated on a contract, we may be at risk for reimbursement of those costs unless and until additional funds are obligated to the contract. 9


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    The programs in which we participate must compete with other programs and policy imperatives for consideration during the budget and appropriation process. Concerns about increased deficit spending, along with continued economic challenges, continue to place pressure on U.S. and international customer budgets. While we believe that our programs are well aligned with national defense and other priorities, shifts in domestic and international spending and tax policy, changes in security, defense, and intelligence priorities, the affordability of our products and services, general economic conditions and developments, and other factors may affect a decision to fund or the level of funding for existing or proposed programs. The Budget Control Act of 2011 (Budget Control Act) established limits on discretionary spending, which provided for reductions to planned defense spending of $487 billion over a 10 year period that began with government fiscal year (GFY) 2012 (a U.S. Government fiscal year starts on October 1 and ends on September 30). The Budget Control Act also provided for additional automatic spending reductions, known as sequestration, which went into effect on March 1, 2013, that would reduce planned defense spending by another $500 billion over a nine-year period that began in GFY 2013. These additional spending reductions are arbitrary as they would be applied across-the-board to numerous programs and contracts without regard to national priorities. While the defense budget will sustain the largest single reduction, other civil agencies and programs are also impacted by significant spending reductions. In light of the Budget Control Act and deficit reduction pressures, it is likely that discretionary spending by the U.S. Government will remain constrained for a number of years. For GFY 2013, which ended on September 30, 2013, sequestration resulted in a $37 billion reduction to the defense budget in addition to reductions as a result of the discretionary spending limits already imposed under the Budget Control Act. The impacts of sequestration in GFY 2013 were less than originally expected due to congressional actions that reduced the cuts as well as the DoD’s ability to allocate a portion of the reductions to prior year unobligated balances and multi-year investment appropriations. Accordingly, we have experienced minimal impacts to date. In December 2013, Congress and the Administration enacted the Bipartisan Budget Act of 2013 (Bipartisan Budget Act). Notably, the Bipartisan Budget Act increased the limits on discretionary spending for GFY 2014 and GFY 2015 imposed by the Budget Control Act, among other fiscal changes. In particular, the Bipartisan Budget Act allows for approximately $63 billion of additional funding, including approximately $22 billion and $9 billion for defense spending during GFY 2014 and GFY 2015, respectively, and similar amounts for nondefense programs over the same period. The revised defense spending limits are set at approximately $520 billion for GFY 2014 and approximately $521 billion for GFY 2015. This agreement allows for more certainty in the budget planning process and provides the DoD the flexibility to better address its priorities. However, the Bipartisan Budget Act retains the lower spending limits, including the across-the-board spending reduction methodology, for GFYs 2016 through 2021 as provided for in the Budget Control Act. As a result, there remains uncertainty regarding how sequester cuts beyond GFY 2015 will be applied as the DoD and other agencies may have significantly less flexibility regarding how to allocate cuts in future years. While we have not yet seen the specific budget allocations by program, we continue to believe that our portfolio of products will continue to be well supported in a strategically focused allocation of budget resources. While the recent budget actions provide a more measured and strategic approach to addressing the U.S. Government’s fiscal challenges, sequestration remains a long-term concern. If not further modified, sequestration could have significant negative impacts on our industry and company in future periods. There may be disruption of ongoing programs, impacts to our supply chain, contractual actions (including partial or complete terminations), potential facilities closures, and thousands of personnel reductions across the industry that will severely impact advanced manufacturing operations and engineering expertise, and accelerate the loss of skills and knowledge. Sequestration, or other budgetary cuts in lieu of sequestration, could have a material negative effect on our company as would any failure to address issues raised by the debt ceiling. Additionally, we are seeking to lessen our dependence on contracts with the U.S. Government by focusing on expanding into adjacent markets close to our core capabilities and growing international sales but may not be successful in this strategy. In response to continued declines in U.S. Government spending as well as the rapidly changing competitive and economic landscape, in November 2013 we announced a plan to close and consolidate several of our facilities and reduce our workforce by approximately 4,000 positions. We expect these facility closures and workforce reductions will be substantially complete by the middle of 2015; see more information in “Note 2 – Restructuring Charges” of our consolidated financial statements. Further actions as described above may be necessary in future periods and could result in severance and other charges that may have an adverse impact on our results of operations. For more information regarding U.S. Government budget pressures, see “Industry Considerations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Under such conditions, large or complex programs, which consist of multiple contracts and phases, are potentially subject to increased scrutiny. Our largest program, the F-35, represented 16% of our total consolidated net sales in 2013, and is expected to represent a higher percentage of our sales in future years. A decision to cut spending or reduce planned orders 10


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    could have an adverse impact on our results of operations. For more information regarding the F-35 program, see “Status of the F-35 Program” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Based upon our diverse range of defense, homeland security, and information technology products and services, we believe that this makes it less likely that cuts in any specific contract or program will have a long-term effect on our business. However, termination of multiple or large programs or contracts could adversely affect our business and future financial performance. We could 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 other reasons. Potential changes in funding priorities may afford new or additional opportunities for our businesses in terms of existing, follow-on, or replacement programs. While we would expect to compete, and be well positioned as the incumbent on existing programs, we may not be successful, or the replacement programs may be funded at lower levels. On January 17, 2014, the U.S. Government passed its GFY 2014 budget to finance all activities through September 30, 2014, the end of its current fiscal year, after operating under continuing resolution temporary funding measures from October 1, 2013 to January 18, 2014. The budget provides discretionary defense spending at levels consistent with the planned defense spending limits in the Bipartisan Budget Act and eliminated much of the uncertainty and inefficiency in procuring products and services under the continuing resolution. In years when the U.S. Government does not complete its budget process before the end of its fiscal year, government operations typically are funded through a continuing resolution that authorizes agencies of the U.S. Government to continue to operate, but does not authorize new spending initiatives. When the U.S. Government operates under a continuing resolution, delays can occur in contract awards due to lack of funding. Historically, this has not had a material effect on our business. Should a continuing resolution be used to fund U.S. Government Operations after GFY 2014 or decisions regarding sequestration remain pending, it may cause additional government contract awards to be delayed, canceled, or funded at lower levels and cause our results of operations to vary between periods. In some circumstances, we may continue to work without funding, and use our funds, in order to meet our customer’s desired delivery dates for products or services. Such funds could be at risk if the U.S. Government does not provide authorization and additional funding to our programs. We are subject to a number of procurement laws and regulations. Our business and our reputation could be adversely affected if we fail to comply with these laws. 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 impose certain risks and costs on our business. A violation of specific laws and regulations could harm our reputation and result in the imposition of fines and penalties, the termination of our contracts, suspension or debarment from bidding on or being awarded contracts, loss of our ability to export products or services, and civil or criminal investigations or proceedings. In some instances, these laws and regulations impose terms or rights that are different than those typically found in commercial 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 our 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-reimbursable 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. We attempt to ensure that adequate funds are available by notifying the customer when its estimated costs, including those associated with a possible termination for convenience, approach levels specified as being allotted to its programs. 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, occasionally programs do not have sufficient funds appropriated to cover the termination costs were the government to terminate them for convenience. Under such circumstances, the U.S. Government could assert that it is not required to appropriate additional funding. 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 the case of termination for default, the U.S. Government could make claims to reduce the contract value or recover its procurement costs and could assess other special penalties. However, under such circumstances we have rights and remedial actions under laws and the Federal Acquisition Regulations (FAR). 11


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    In addition, certain of our U.S. Government contracts span one or more base years and multiple option years. The U.S. Government generally has the right not to exercise option periods and may not exercise an option period for various reasons. However, the U.S. Government may exercise option periods, even for contracts for which it is expected that our costs may exceed the contract price or ceiling. U.S. Government agencies, including the Defense Contract Audit Agency, the Defense Contract Management Agency, and various agency Inspectors General, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, its cost structure, its business systems, and compliance with applicable laws, regulations, and standards. Any costs found to be misclassified may be subject to repayment. We have unaudited and/or unsettled incurred cost claims related to past years, which places risk on our ability to issue final billings on contracts for which authorized and appropriated funds may be expiring. Certain deficiencies identified during government audits of contractor business systems may result in the government withholding payments on our billings. Such deficiencies have not impacted our internal control over financial reporting. Withholding payments on billings are capped at 5% of billings when deficiencies impact a single business system and 10% when deficiencies impact multiple systems. Such withholdings are typically reduced to 2% after the contractor’s corrective action plan has been accepted and progress to implement the corrective actions has been demonstrated, and are withdrawn upon satisfactory completion and verification of the corrective action plan. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including reductions of the value of contracts, contract modifications or terminations, forfeiture of profits, suspension of payments, penalties, 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. Similar government oversight exists in most other countries where we conduct business. Our profitability and cash flow may vary based on the mix of our contracts and programs, our performance, our ability to control costs, and evolving U.S. Government procurement policies. Our profitability and cash flow 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 determined, particularly under award and incentive-fee contracts. Our backlog includes a variety of contract types which are intended to address changing risk and reward profiles as a program matures. Contract types include cost-reimbursable, fixed-price incentive-fee, fixed-price, and time-and-materials contracts. Contracts for development programs with complex design and technical challenges are typically cost-reimbursable. Under cost-reimbursable contracts, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance-based. In these cases, the associated financial risks primarily relate to a reduction in fees, and the program could be cancelled if cost, schedule, or technical performance issues arise. Other contracts in backlog are for the transition from development to production (e.g., low-rate initial production (LRIP) contracts), which includes the challenge of starting and stabilizing a manufacturing production and test line while the final design is being validated. These generally are cost-reimbursable or fixed-price incentive-fee contracts. Under a fixed-price incentive-fee contract, the allowable costs incurred are eligible for reimbursement, but are subject to a cost-share arrangement, which affects profitability. Generally, 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. There are also contracts for production as well as operations and maintenance of the delivered products that have the challenge of achieving a stable production and delivery rate, while maintaining operability of the product after delivery. These contracts are mainly fixed-price, although some operations and maintenance contracts are time-and-materials type. Under fixed-price contracts, we receive a fixed price regardless of 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. The failure to perform to customer expectations and contract requirements may result in reduced fees or losses 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 adversely affected, particularly if we are unable to justify an increase in contract value to our customers. Cost overruns or the failure to perform on existing programs also may adversely affect our ability to retain existing programs and win future contract awards. 12


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    The U.S. Government is currently pursuing and implementing policies that could negatively impact our profitability. Changes in procurement policy favoring more incentive-based fee arrangements, different award fee criteria, or government contract negotiation offers that indicate what our costs should be may affect the predictability of our profit rates. Our customers are subject to pressures that may result in a change in contract types referenced above earlier in a program’s maturity than is traditional. An example of this is the use of fixed-price incentive-fee contracts for recent LRIP contracts on the F-35 program while the development contract is being performed concurrently. Our customers may also pursue non- traditional contract provisions in negotiation of contracts. For example, changes resulting from the F-35 development contract may need to be implemented on the production contracts, a concept referred to as concurrency, which may require us to pay for a portion of the concurrency costs. Other examples include, but are not limited to, the U.S. Government in certain circumstances requiring that bid and proposal costs be included in general and administrative costs, rather than charged directly to contracts, and the U.S. Government enacting legislation that will decrease the level of allowable employee compensation, which will reduce our operating profit. Other policies could negatively impact our working capital and cash flow. For example, the government has expressed a preference for requiring progress payments rather than performance based payments on new fixed-price contracts, which if implemented, delays our ability to recover a significant amount of costs incurred on a contract and thus affects the timing of our cash flows. Increased competition and bid protests in a budget-constrained environment may make it more difficult to maintain our financial performance. We are facing increased competition, particularly in information technology and cyber security at our Information Systems & Global Solutions business segment, from non-traditional competitors outside of the aerospace and defense industry, in addition to our customers determining to source work internally rather than hiring a contractor. At the same time, our customers are facing budget constraints, trying to do more with less by cutting costs, identifying more affordable solutions, and reducing product development cycles. 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. Additionally, our competitors are also focusing on increasing their international sales to partially mitigate the effect of reduced U.S. Government budgets. To remain competitive, we consistently must provide superior performance, advanced technology solutions, and service at an affordable cost and with the agility that our customers require to satisfy their mission objectives. As a leader in defense and global security, we have a large number of programs for which we are the incumbent contractor. A substantial portion of our business is awarded through competitive bidding. The U.S. Government increasingly has relied upon competitive contract award types, including indefinite-delivery, indefinite-quantity, GSA Schedule, and other multi-award contracts, which has the potential to create pricing pressure and increase our cost by requiring that we submit multiple bids and proposals. In addition, multi-award contracts require that we make sustained efforts to obtain task orders under the contract. The competitive bidding process entails substantial costs and managerial time to prepare bids and proposals for contracts that may not be awarded to us or may be split among competitors. Following award, we may encounter significant expenses, delays, contract modifications, or bid protests from unsuccessful bidders on new program awards. Bid protests could result in significant expenses to us, contract modifications or even loss of the contract award. Even where a bid protest does not result in the loss of a contract award, the resolution can extend the time until the contract activity can begin and, therefore, delay our recognizing sales. We are the prime contractor on most of our contracts and if our subcontractors, suppliers, or teaming agreement or venture partners fail to perform their obligations, our performance and our ability to win future business could be harmed. For most of our contracts we rely on other companies to provide materials, major components, and products, and to perform a portion of the services that we provide to our customers. Such arrangements may involve subcontracts, teaming arrangements, ventures, or supply agreements with other companies upon which we rely (contracting parties). There is a risk that we may have disputes with our contracting parties, including disputes regarding the quality and timeliness of work performed, the workshare provided to that party, customer concerns about the other party’s performance, our failure to extend existing task orders or issue new task orders, or our hiring of the personnel of a subcontractor, teammate, or venture partner, or vice versa. In addition, changes in the economic environment, including defense budgets and constraints on available financing, may adversely affect the financial stability of our contracting parties and their ability to meet their performance requirements or to provide needed supplies on a timely basis. A failure by one or more of our contracting parties to provide the agreed-upon supplies or perform the agreed-upon services on a timely basis may affect our ability to perform 13


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    our obligations and require that we transition the work to other companies. Contracting party 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. Additionally, our efforts to increase the efficiency of our operations and improve the affordability of our products and services could negatively impact our ability to attract and retain suppliers. International sales may pose different risks. In 2013, 17% of our net sales were from international customers. We have a strategy to grow international sales over the next several years, inclusive of sales of F-35 aircraft to our international partners and other countries. International sales are subject to numerous political and economic factors, regulatory requirements, significant competition, and other risks associated with doing business in foreign countries. Our exposure to such risks may increase if our international sales grow as we anticipate. Our international business is conducted through foreign military sales (FMS) contracted through the U.S. Government or direct commercial sales (DCS) with international customers. In 2013, approximately half of our sales to international customers were FMS while the other half were DCS. These transaction types differ as FMS transactions represent sales by the U.S. Government to international governments and our contract with the U.S. Government is subject to FAR. By contrast, DCS transactions represent sales by us directly to another government or international customer. All sales to international customers are subject to U.S. and foreign laws and regulations, including, without limitation, regulations relating to import- export control, technology transfer restrictions, taxation, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act and other anti-corruption laws, and the anti-boycott provisions of the U.S. Export Administration Act. We frequently team with international subcontractors and suppliers who are also exposed to similar risks. While we have stringent policies in place to comply with such laws and regulations, failure by us, our employees, or others working on our behalf to comply with these laws and regulations could result in administrative, civil, or criminal liabilities, including suspension, proposed debarment, or debarment from bidding for or performing government contracts or suspension of our export privileges, which could have a material adverse effect on us. While international sales, whether contracted as FMS or DCS, present risks that are different, and potentially greater, than those encountered in our domestic business, DCS with international customers may impose even greater risks as such transactions involve commercial relationships with parties with whom we have less familiarity and where there may be significant cultural differences. Additionally, international procurement rules and regulations, contract laws and regulations, and contractual terms differ from those in the U.S., are less familiar to us, may be interpreted differently by foreign courts, are officially documented in the local language and, therefore, potentially subject to errors in translation, and frequently have terms less favorable to us than the FAR. Export and import, tax, and currency risk may also be increased for DCS with international customers. While these risks are potentially greater than those encountered in our domestic business, our profit margins are typically higher on DCS with international customers. Our international business is highly sensitive to changes in regulations, political environments, or security risks that may affect our ability to conduct business outside of the U.S., including those regarding investment, procurement, taxation, and repatriation of earnings. Our international business may also be impacted by changes in foreign national priorities and government budgets and may be further impacted by global economic conditions and fluctuations in foreign currency exchange rates. Sales of military products are also affected by defense budgets and U.S. foreign policy. Additionally, the timing of orders from our international customers can be less predictable than for our domestic customers and may lead to fluctuations in the amount reported each year for our international sales. In conjunction with defense procurements, some international customers require contractors to provide additional incentives or to comply with industrial cooperation regulations, including entering into industrial cooperation agreements, sometimes referred to as offset agreements. Offset agreements may require in-country purchases, technology transfers, local manufacturing support, and financial support projects as an incentive, or as a condition to a contract award. In some countries, these offset agreements may require the establishment of a venture with a local company, which must control the venture. In these and other situations, Lockheed Martin could be liable for violations of law for actions taken by these entities such as laws related to anti-corruption, import and export, anti-boycott restrictions, or local laws with which we are not familiar. Offset agreements generally extend over several years and may provide for penalties in the event we fail to perform in accordance with the offset requirements which are typically subjective and can be outside our control. Our business involves significant risks and uncertainties that may not be covered by indemnity or insurance. A significant portion of our business relates to designing, developing, and manufacturing advanced defense and technology products and systems. New technologies may be untested or unproven. Failure of some of these products and 14


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    services could result in extensive loss of life or property damage. Accordingly, we also may incur liabilities that are unique to our products and services, including combat and air mobility aircraft, missile and space systems, command and control systems, air traffic control management systems, cyber security, homeland security, and training programs. In some, but not all circumstances, we may be entitled to certain legal protections or indemnifications from our customers, either through U.S. Government indemnifications under Public Law 85-804, qualification of our products and services by the Department of Homeland Security under the SAFETY Act provisions of the Homeland Security Act of 2002, contractual provisions, or otherwise. We endeavor to obtain insurance coverage from established insurance carriers to cover these risks and liabilities. The amount of insurance coverage that we maintain may not be adequate to cover all claims or liabilities, existing coverage may be cancelled while we remain exposed to the risk, and it is not possible to obtain insurance to protect against all operational risks and liabilities. For example, we are limited in the amount of insurance we can obtain to cover certain natural hazards such as earthquakes, and we have significant operations in geographic areas prone to this risk, such as Sunnyvale, California. Even if insurance coverage is available, we may not be able to obtain it at a price or on terms acceptable to us. Additionally, disputes with insurance carriers over coverage terms or the insolvency of one or more of our insurance carriers may significantly affect the amount or timing of our cash flows. Substantial costs resulting from an accident, failure of or defect in our products or services, natural catastrophe, or other incident, or liability arising from our products and services in excess of any legal protection, indemnity and our insurance coverage (or for which indemnity or insurance is not available or not obtained) could adversely impact our financial condition, cash flows, or operating results. Any accident or failure of or defect in our products or services, 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. Pension funding and costs are dependent on several economic assumptions which if changed may cause our future earnings and cash flow to fluctuate significantly as well as affect the affordability of our products and services. Many of our employees are covered by defined benefit pension plans, and we provide certain health care and life insurance benefits to eligible retirees. The impact of these plans on our U.S. generally accepted accounting principles (GAAP) earnings may be volatile in that the amount of expense we record for our postretirement benefit plans may materially change from year to year because those calculations are sensitive to funding levels as well as changes in several key economic assumptions, including interest rates, rates of return on plan assets, and other actuarial assumptions including participant mortality estimates, expected rates of increase in future compensation levels and employee turnover. Changes in these factors also affect our plan funding, cash flow, and stockholders’ equity. In addition, the funding of our plans and recovery of costs on our contracts, as described below, may also be subject to changes caused by legislative or regulatory actions. With regard to cash flow, in the past few years we have made substantial cash contributions to our plans in excess of the amounts required by the Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Pension Protection Act of 2006 (PPA). We generally are able to recover these contributions related to our plans as allowable costs on our U.S. Government contracts, including FMS, but there is a lag between when we contribute cash to our plans under pension funding rules and recover it under U.S. Government Cost Accounting Standards (CAS). Effective February 2012, the CAS rules were revised to harmonize the measurement and period assignment of the pension cost allocable to government contracts with the PPA (CAS Harmonization). In 2013, the cost impact of CAS Harmonization started being phased in with the goal of better aligning the CAS cost and ERISA funding requirements being fully achieved in 2017. For more information on how these factors could impact earnings, financial position, cash flow and stockholders’ equity, see “Critical Accounting Policies – Postretirement Benefit Plans” in Management’s Discussion and Analysis of Financial Conditions and Results of Operations and “Note 10 – Postretirement Plans” of our consolidated financial statements. 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 acquisitions, divestitures, ventures, and equity investments. We seek to identify acquisition or investment 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, integrate acquired companies and employees, and realize anticipated operating synergies efficiently and effectively. 15


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    Acquisition, divestiture, venture, and investment transactions often require substantial management resources and have the potential to divert our attention from our existing business. Unidentified pre-closing liabilities could affect our future financial results. Ventures or equity investments operate under shared control with other parties. Under the equity method of accounting for nonconsolidated ventures and investments, we recognize our share of the operating profit 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. The most significant impact of our equity investments is in our Space Systems business segment where approximately 29% of its 2013 operating profit was derived from its share of earnings from equity method investees. Our business could be negatively affected by cyber or other security threats or other disruptions. As a U.S. defense contractor, we face cyber threats, insider threats, threats to the physical security of our facilities and employees, and terrorist acts, as well as the potential for business disruptions associated with information technology failures, natural disasters, or public health crises. We routinely experience cyber security threats, threats to our information technology infrastructure and unauthorized attempts to gain access to our company sensitive information, as do our customers, suppliers, subcontractors and venture partners. We may experience similar security threats at customer sites that we operate and manage as a contractual requirement. Prior cyber attacks directed at us have not had a material impact on our financial results, and we believe our threat detection and mitigation processes and procedures are adequate. The threats we face vary from attacks common to most industries to more advanced and persistent, highly organized adversaries who target us because we protect national security information. If we are unable to protect sensitive information, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted. Although we work cooperatively with our customers, suppliers, subcontractors, venture partners, and acquisitions to seek to minimize the impact of cyber threats, other security threats or business disruptions, we must rely on the safeguards put in place by these entities, which may affect the security of our information. These entities have varying levels of cyber security expertise and safeguards and their relationships with government contractors, such as Lockheed Martin, may increase the likelihood that they are targeted by the same cyber threats we face. The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. Additionally, some cyber technologies we develop, particularly those related to homeland security, may raise potential liabilities related to intellectual property and civil liberties, including privacy concerns, which may not be fully insured or indemnified by other means. Occurrence of any of these events could adversely affect our internal operations, the services we provide to our customers, our future financial results, our reputation or our stock price; or such events could result in the loss of competitive advantages derived from our research and development efforts or other intellectual property, early obsolescence of our products and services, or contractual penalties. Environmental costs could affect our future earnings as well as the affordability of our products and services. 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 U.S. Environmental Protection Agency or by a state agency. In addition, we could be affected by future regulations imposed in response to concerns over climate change, other aspects of the environment, or natural resources. We have an ongoing 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. Some environmental laws include criminal provisions. An environmental law conviction could affect our ability to be awarded future, or perform existing, U.S. Government contracts. 16


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    We have incurred and will continue to incur liabilities under various federal, state, local, and foreign statutes for environmental protection and remediation. 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, impacts on natural resources, 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 probable and estimable, see “Critical Accounting Policies – Environmental Matters” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Note 13 – Legal Proceedings, Commitments, and Contingencies” of our consolidated financial statements. 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 that cannot be predicted with certainty. As required by GAAP, we estimate 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 and “Note 13 – Legal Proceedings, Commitments, and Contingencies” of our consolidated financial statements. In order to be successful, we must attract and retain key employees and manage leadership transitions effectively. Our business has a continuing need to attract and retain large numbers of skilled personnel, including personnel holding security clearances, to meet contract schedules, support the growth of the enterprise, and to replace individuals who have retired or departed for other reasons. To the extent that the demand for skilled 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 increasingly compete with commercial technology companies outside of the aerospace and defense industry for qualified technical and scientific positions as the number of qualified domestic engineers is decreasing. To the extent that these companies grow faster than our industry, or face fewer cost and product pricing constraints, they may be able to offer higher compensation to job candidates or our existing employees. To the extent that we lose experienced personnel through wage competition, normal attrition (including retirement), or specific actions such as workforce reductions, we must successfully manage the transfer of critical knowledge from those individuals. This will become increasingly important as our workforce demographic shifts toward a higher population that is nearing retirement. Additionally, we may face issues arising from our efforts to increase the efficiency of our operations and improve the affordability of our products and services, including difficulties associated with moving or consolidating operations, reducing the size of the workforce, attracting and retaining key personnel, and from compliance with our legal obligations, including under Federal labor law and any applicable collective bargaining agreements. We also must manage leadership development and succession planning throughout our business and have processes in place for management transition and the transfer of knowledge. To the extent that we are unable to attract, develop, and retain 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 estimates and projections may prove to be inaccurate. The accounting for some of our most significant activities is based on judgments and estimates, which are complex and subject to many variables. For example, accounting for sales using the percentage-of-completion method requires that we assess risks and make assumptions regarding schedule, cost, technical, and performance issues for each of our thousands of contracts, many of which are long-term in nature. Another example is the $10.3 billion of goodwill assets recorded on our Balance Sheet as of December 31, 2013 from previous acquisitions that were made over time, which represent greater than 25% of our total assets, and are subject to annual impairment testing and more frequent testing upon the occurrence of certain events or significant changes in circumstances that indicate goodwill may be impaired. If we experience changes or factors arise that negatively affect the expected cash flows of a reporting unit, we may be required to write off all or a portion of the 17


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    reporting unit’s related goodwill assets. In 2013, we recorded a non-cash goodwill impairment charge of $195 million, net of state tax benefits. See “Critical Accounting Policies - Goodwill” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Note 1 – Significant Accounting Policies” for more information on this impairment charge. Changes in U.S. or foreign tax laws, including possibly with retroactive effect, and audits by tax authorities could result in unanticipated increases in our tax expense and affect profitability and cash flows. For example, proposals to lower the U.S. corporate income tax rate would require us to reduce our net deferred tax assets upon enactment of the related tax legislation, with a corresponding material, one-time increase to income tax expense, but our income tax expense and payments would be materially reduced in subsequent years. Actual financial results could differ from our judgments and estimates. Refer to “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and “Note 1 – Significant Accounting Policies” of our consolidated financial statements for a complete discussion of our significant accounting policies and use of estimates. ITEM 1B. Unresolved Staff Comments. None. ITEM 2. Properties. At December 31, 2013, we owned or leased building space (including offices, manufacturing plants, warehouses, service centers, laboratories, and other facilities) at 518 locations primarily in the U.S. Additionally, we manage or occupy various U.S. Government-owned facilities under lease and other arrangements. At December 31, 2013, we had significant operations in the following locations: • Aeronautics – Palmdale, California; Marietta, Georgia; Greenville, South Carolina; Fort Worth and San Antonio, Texas; and Montreal, Canada. • Information Systems & Global Solutions – Goodyear, Arizona; Sunnyvale, California; Colorado Springs and Denver, Colorado; Gaithersburg and Rockville, Maryland; Valley Forge, Pennsylvania; and Houston, Texas. • Missiles and Fire Control – Camden, Arkansas; Orlando, Florida; Lexington, Kentucky; and Grand Prairie, Texas. • Mission Systems and Training – Orlando, Florida; Baltimore, Maryland; Moorestown/Mt. Laurel, New Jersey; Owego and Syracuse, New York; Akron, Ohio; and Manassas, Virginia. • Space Systems – Huntsville, Alabama; Sunnyvale, California; Denver, Colorado; Albuquerque, New Mexico; and Newtown, Pennsylvania. • Corporate activities – Lakeland, Florida and Bethesda, Maryland. In November 2013, we committed to a plan to vacate our leased facilities in Goodyear, Arizona and Akron, Ohio, and close our owned facility in Newtown, Pennsylvania and certain owned buildings at our Sunnyvale, California facility. We expect these closures, which include approximately 2.5 million square feet of facility space, will be substantially complete by the middle of 2015. For information regarding these matters, see “Note 2 – Restructuring Charges” of our consolidated financial statements. The following is a summary of our square feet of floor space by business segment at December 31, 2013, inclusive of the facilities that we plan to vacate as mentioned above (in millions): U.S. Government- Owned Leased Owned Total Aeronautics 5.8 2.7 14.2 22.7 Information Systems & Global Solutions 2.5 5.7 — 8.2 Missiles and Fire Control 4.2 5.1 1.3 10.6 Mission Systems and Training 5.8 5.3 0.4 11.5 Space Systems 8.5 1.6 7.9 18.0 Corporate activities 3.0 0.9 — 3.9 Total 29.8 21.3 23.8 74.9 We believe our facilities are in good condition and adequate for their current use. We may improve, replace, or reduce facilities as considered appropriate to meet the needs of our operations. 18


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    ITEM 3. Legal Proceedings. We are a party to or have property subject to litigation and other proceedings that arise in the ordinary course of our business, including matters arising under provisions relating to the protection of the environment, and are subject to contingencies related to certain businesses we previously owned. These types of matters could result in fines, penalties, compensatory or treble damages or non-monetary relief. We believe the probability is remote that the outcome of these matters will have a material adverse effect on the Corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings in any particular interim reporting period. We cannot predict the outcome of legal or other proceedings with certainty. These matters include the proceedings summarized in “Note 13 – Legal Proceedings, Commitments, and Contingencies” of our consolidated financial statements. We are subject to federal, state, local and foreign 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 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, and “Note 13 – Legal Proceedings, Commitments, and Contingencies” of our consolidated financial statements. As a U.S. Government contractor, we are subject to various audits and investigations by the U.S. Government to determine 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, proposed debarment, debarment from eligibility for future U.S. Government contracting, or suspension of export privileges. Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S. Government. U.S. Government investigations often take years to complete and many result in no adverse action against us. We also provide products and services to customers outside of the U.S., which are subject to U.S. and foreign laws and regulations and foreign procurement policies and practices. Our compliance with local regulations or applicable U.S. Government regulations may also be audited or investigated. ITEM 4. Mine Safety Disclosures. Not applicable. ITEM 4(a). Executive Officers of the Registrant. Our executive officers as of February 14, 2014 are listed below, with their ages on that date, positions and offices currently held, and principal occupation and business experience during at least the last five years. There were no family relationships among any of our executive officers and directors. All officers serve at the discretion of the Board of Directors. Richard F. Ambrose (age 55), Executive Vice President – Space Systems Mr. Ambrose has served as Executive Vice President of Space Systems since April 2013. He previously served as Vice President and Deputy, Space Systems from July 2012 to March 2013; President, Information Systems & Global Solutions - Security from January 2011 to June 2012; and Vice President and General Manager, Space Systems - Surveillance and Navigations Systems from January 2008 to December 2010. Sondra L. Barbour (age 51), Executive Vice President – Information Systems & Global Solutions Ms. Barbour has served as Executive Vice President of Information Systems & Global Solutions since April 2013. She previously served as Senior Vice President and Chief Information Officer from January 2012 to March 2013, and Vice President and Chief Information Officer from February 2008 to January 2012. 19


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    Dale P. Bennett (age 57), Executive Vice President – Mission Systems and Training Mr. Bennett has served as Executive Vice President of Mission Systems and Training since December 2012. He previously served as President, Mission Systems & Sensors from August 2011 to December 2012; President, Global Training and Logistics from June 2010 to July 2011; and President, Simulation, Training & Support from July 2005 to May 2010. Orlando P. Carvalho (age 55), Executive Vice President – Aeronautics Mr. Carvalho has served as Executive Vice President of Aeronautics since March 2013. He previously served as Executive Vice President and General Manager, F-35 Program from March 2012 to March 2013; Vice President and Deputy, F-35 Program from August 2011 to March 2012; President, Mission Systems & Sensors from January 2010 to July 2011; and Vice President and General Manager, Surface Systems Ballistic Missile Defense Programs from January 2006 to January 2010. Patrick M. Dewar (age 53), Executive Vice President – Lockheed Martin International Mr. Dewar has served as Executive Vice President of Lockheed Martin International since July 2013. He previously served as Senior Vice President, Corporate Strategy and Business Development from October 2010 to June 2013; and Vice President, Corporate International Business Development from January 2009 to September 2010. Richard H. Edwards (age 57), Executive Vice President – Missiles and Fire Control Mr. Edwards has served as Executive Vice President of Missiles and Fire Control since December 2012. He previously served as Executive Vice President, Program and Technology Integration, Missiles and Fire Control from June 2012 to December 2012; and Vice President, Tactical Missiles and Combat Maneuver Systems from July 2005 to June 2012. Christopher J. Gregoire (age 45), Vice President, Controller, and Chief Accounting Officer Mr. Gregoire has served as Vice President, Controller, and Chief Accounting Officer since March 2010. He previously was employed by Sprint Nextel Corporation from August 2006 to May 2009, most recently as Principal Accounting Officer and Assistant Controller, and was a partner at Deloitte & Touche LLP from September 2003 to July 2006. Marillyn A. Hewson (age 60), Chairman, President and Chief Executive Officer Ms. Hewson has served as Chairman, President and Chief Executive Officer since January 2014. She previously served as Chief Executive Officer and President from January 2013 to December 2013; President and Chief Operating Officer from November 2012 to December 2012; Executive Vice President of Electronic Systems from January 2010 to December 2012; and President, Systems Integration – Owego from September 2008 to December 2009. Maryanne R. Lavan (age 54), Senior Vice President, General Counsel and Corporate Secretary Ms. Lavan has served as Senior Vice President and General Counsel since June 2010 and Corporate Secretary since September 2010. She previously served as Vice President, Internal Audit from February 2007 to June 2010. Kenneth R. Possenriede (age 54), Vice President and Treasurer Mr. Possenriede has served as Vice President and Treasurer since July 2011. He previously served as Vice President, Finance and Business Operations of Electronic Systems from July 2008 to June 2011. Bruce L. Tanner (age 54), Executive Vice President and Chief Financial Officer Mr. Tanner has served as Executive Vice President and Chief Financial Officer since September 2007. 20


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    PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market, Price, and Dividend Information Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol LMT. As of January 31, 2014, there were 33,547 holders of record of our common stock. The following table sets forth the high and low intra-day trading prices of our common stock as reported on the NYSE and cash dividends paid each quarter within the past two years. Dividends Paid Per Share Stock Prices (High-Low) Quarter 2013 2012 2013 2012 First $1.15 $1.00 $ 96.59 - $ 85.88 $91.01 - $79.05 Second 1.15 1.00 109.26 - 94.00 92.24 - 80.14 Third 1.15 1.00 131.60 - 105.54 93.99 - 83.15 Fourth 1.33 1.15 149.99 - 121.52 95.92 - 87.08 Year $4.78 $4.15 $149.99 - $ 85.88 $95.92 - $79.05 Stock Performance Graph The following performance graph provides a comparison of the cumulative total return to stockholders of our common stock, assuming reinvestment of dividends, with cumulative total returns for the Standard and Poor’s (S&P) 500 Index, the S&P Aerospace and Defense Index, and the S&P Industrials Index during the five years ended December 31, 2013. The performance graph assumes $100 was originally invested in each of our common stock and the indices on December 31, 2008. The cumulative total return indicated in the performance graph is not a guarantee of future performance. $300 $250 $200 $150 $100 $50 8 Ju 9 Se 9 D 9 M 9 Ju 0 Se 0 D 0 M 0 Ju 1 Se 1 D 1 M 1 Ju 2 Se 2 D 2 M 2 Ju 3 Se 3 D 3 3 -0 -0 0 0 -0 -1 1 1 -1 -1 1 1 -1 -1 1 1 -1 -1 1 1 -1 n- p- n- p- n- p- n- p- n- p- ec ar ec ar ec ar ec ar ec ar ec D M Lockheed Martin Common Stock S&P 500 Index S&P Aerospace and Defense Index S&P Industrials Index The S&P Aerospace and Defense Index is comprised of The Boeing Company, General Dynamics Corporation, Honeywell International Inc., L-3 Communications Holdings, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Precision Castparts Corp., Raytheon Company, Rockwell Collins, Inc., Textron Inc., and United Technologies Corporation. The S&P Industrials Index is comprised of those companies in the S&P 500 Index classified as members of the industrials sector as defined by the Global Industry Classification Standard. 21


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    Purchases of Equity Securities The following table provides information about our repurchases of our common stock during the quarter ended December 31, 2013 that is registered pursuant to Section 12 of the Securities Exchange Act of 1934. Amount Available for Total Number of Future Share Total Shares Purchased Repurchases Number of Average as Part of Publicly Under the Shares Price Paid Announced Plans or Plans or Period (a) Purchased Per Share Programs (b) Programs (b) (in millions) September 30, 2013 – October 27, 2013 216,631 $127.10 169,097 $3,731 October 28, 2013 – November 24, 2013 680,142 $136.36 669,856 $3,639 November 25, 2013 – December 31, 2013 484,995 $141.57 484,188 $3,571 Total 1,381,768(c) $136.73 1,323,141 $3,571 (a) We close our books and records on the last Sunday of each month to align our financial closing with our business processes, except for the month of December, as our fiscal year ends on December 31. As a result, our fiscal months often differ from the calendar months. For example, September 30, 2013 was the first day of our October 2013 fiscal month. (b) On October 25, 2010, our Board of Directors approved a share repurchase program (the Program) pursuant to which we are authorized to repurchase our common stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current market prices. Under the Program, management has discretion to determine the dollar amount of shares to be repurchased up to an authorized amount of $9.5 billion, which has been updated by the Board of Directors since the inception of the Program, and the timing of any repurchases in compliance with applicable law and regulation. We may also make purchases under the Program pursuant to a Rule 10b5-1 plan. The Program does not have an expiration date. (c) During the quarter ended December 31, 2013, the total number of shares purchased included 58,627 shares that were transferred to us by employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock units. These purchases were made pursuant to a separate authorization by our Board of Directors and are not included within the Program. 22


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    ITEM 6. Selected Financial Data. (In millions, except per share data) 2013 2012 2011 2010 2009 Operating results Net sales $45,358 $47,182 $46,499 $45,671 $43,867 Operating profit (a)(b) 4,505 4,434 4,020 4,105 4,477 Net earnings from continuing operations (a)(b)(c) 2,950 2,745 2,667 2,614 2,967 Net earnings (d) 2,981 2,745 2,655 2,878 2,973 Net earnings from continuing operations per common share Basic (a)(b)(c) 9.19 8.48 7.94 7.18 7.71 Diluted (a)(b)(c) 9.04 8.36 7.85 7.10 7.63 Net earnings per common share Basic (d) 9.29 8.48 7.90 7.90 7.73 Diluted (d) 9.13 8.36 7.81 7.81 7.64 Cash dividends declared per common share $ 4.78 $ 4.15 $ 3.25 $ 2.64 $ 2.34 Balance sheet Cash, cash equivalents and short-term investments (b)(e) $ 2,617 $ 1,898 $ 3,582 $ 2,777 $ 2,737 Total current assets 13,329 13,855 14,094 12,893 12,529 Goodwill 10,348 10,370 10,148 9,605 9,948 Total assets (b) 36,188 38,657 37,908 35,113 35,167 Total current liabilities 11,120 12,155 12,130 11,401 10,910 Long-term debt, net (e) 6,152 6,158 6,460 5,019 5,052 Total liabilities (b) 31,270 38,618 36,907 31,616 31,201 Stockholders’ equity (b) 4,918 39 1,001 3,497 3,966 Common shares at year-end 319 321 321 346 373 Cash flow information Net cash provided by operating activities (b)(f) $ 4,546 $ 1,561 $ 4,253 $ 3,801 $ 3,487 Net cash used for investing activities (1,121) (1,177) (788) (533) (1,798) Net cash used for financing activities (2,706) (2,068) (2,144) (3,398) (1,466) Backlog $82,600 $82,300 $80,700 $78,400 $77,300 (a) Our operating profit, earnings, and earnings per share were affected by a non-cash goodwill impairment charge of $195 million ($176 million or $.54 per share, after tax) (Note 1) and severance charges of $201 million ($130 million or $.40 per share, after tax) in 2013 (Note 2); severance charges of $136 million ($88 million or $.26 per share, after tax) in 2011 (Note 2); and charges for the Voluntary Executive Separation Program and facilities consolidation totaling $220 million ($143 million or $.38 per share, after tax) in 2010. (b) The impact of our postretirement benefit plans can cause our operating profit, earnings, cash flows, and amounts recorded on our Balance Sheets to fluctuate. Accordingly, our earnings were affected by FAS/CAS pension expense of $482 million, $830 million, $922 million, $454 million, and $456 million in 2013, 2012, 2011, 2010, and 2009. Our 2012 pension contributions of $3.6 billion, as compared to $2.25 billion made in 2013 and $2.3 billion made in 2011, caused fluctuations in our operating cash flows and cash balance between each of those years. Fluctuations in our total assets, total liabilities, and stockholders’ equity between years from 2010 to 2013 primarily were due to the annual measurement of the funded status of our postretirement benefit plans at the end of 2013, 2012, and 2011. See “Critical Accounting Policies - Postretirement Benefit Plans” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information. (c) Our net earnings from continuing operations included an $89 million reduction in income tax expense in 2011 through the elimination of liabilities for unrecognized tax benefits (Note 8); tax expense of $96 million in 2010 as a result of health care legislation that eliminated the tax deduction for company-paid retiree prescription drug expenses to the extent they are reimbursed under Medicare Part D; and a $69 million income tax benefit in 2009 for the resolution of certain tax matters. (d) Our net earnings were affected by the items in notes (a), (b), and (c) above, as well as items related to discontinued operations such as a $184 million gain ($.50 per share) in 2010 on the sale of Enterprise Integration Group, and $73 million ($.20 per share) of benefits for certain adjustments related to Pacific Architects and Engineers in 2010. (e) The increase in our cash and long-term debt from 2010 to 2011 primarily was due to the issuance of $2.0 billion of long-term notes in 2011, partially offset by our redemption of $584 million in long-term notes in 2011 (Note 9). (f) The fluctuations in our net cash provided by operating activities between years from 2011 to 2013 were due to changes in working capital in addition to our pension contributions discussed in note (b) above. See “Liquidity and Cash Flows” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information. 23


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    ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Business Overview We are a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We also provide a broad range of management, engineering, technical, scientific, 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. In 2013, 82% of our $45.4 billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 61% from the Department of Defense (DoD)), 17% were from international customers (including foreign military sales (FMS) contracted through the U.S. Government), and 1% were from U.S. commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security, and information technology, including cyber security. We operate in five business segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and Fire Control (MFC), Mission Systems and Training (MST), and Space Systems. We organize our business segments based on the nature of the products and services offered. We are operating in an environment characterized by both increasing complexity in global security and continuing economic pressures in the U.S. and globally. A significant component of our strategy in this environment is to focus on program execution, improving the quality and predictability of the delivery of our products and services, and placing security capability quickly into the hands of both our domestic and international customers at affordable prices. Recognizing that our customers are resource constrained, we are endeavoring to develop and extend our portfolio domestically in a disciplined manner with a focus on adjacent markets close to our core capabilities, as well as growing our international sales. We continue to focus on affordability initiatives as demonstrated by our plan to close and consolidate several of our facilities as we announced in November 2013. We also expect to continue to invest in technologies to fulfill new mission requirements for our customers, and invest in our people so that we have the technical skills necessary to succeed without limiting our ability to return at least 50% of free cash flow1 to our investors in the form of dividends and share repurchases. We expect 2014 net sales will decline slightly from 2013 due to projected lower net sales at Space Systems and IS&GS, partially offset by an anticipated increase in net sales at Aeronautics. We expect our 2014 segment operating profit will also decrease from 2013 at a slightly higher percentage rate than the decline in net sales due an anticipated decrease in segment operating profit at each of our business segments, with the exception of Aeronautics. Accordingly, segment operating profit margin is also expected to be lower than 2013 levels. For additional information related to trends in net sales and operating profit at our business segments, see the “Business Segment Results of Operations” section below. Industry Considerations U.S. Government Funding Constraints The U.S. Government, our principal customer, continues to face significant fiscal and economic challenges such as financial deficits, budget uncertainty, increasing debt levels, and an economy with restrained growth. In order to address these challenges, the U.S. Government continues to focus on discretionary spending, entitlement programs, taxes, and other initiatives to stimulate the economy, create jobs, and reduce the deficit. In doing so, the Administration and Congress must balance decisions regarding defense, homeland security, and other federal spending priorities in a constrained fiscal environment largely imposed by the Budget Control Act of 2011 (Budget Control Act). The Budget Control Act established limits on discretionary spending, which provided for reductions to planned defense spending of $487 billion over a 10 year period that began with government fiscal year (GFY) 2012 (a U.S. Government fiscal year starts on October 1 and ends on September 30). The Budget Control Act also provided for additional automatic spending reductions, known as sequestration, which went into effect on March 1, 2013, that would reduce planned defense spending by another $500 billion over a nine-year period that began in GFY 2013. These additional spending reductions are arbitrary as they would be applied across-the-board to numerous programs and contracts without regard to national priorities. While the defense budget will sustain the largest single reduction, other civil agencies and programs are also impacted by significant spending reductions. In light of the Budget Control Act and deficit reduction pressures, it is likely that discretionary spending by the U.S. Government will remain constrained for a number of years. 1 We define free cash flow as cash from operations as determined under U.S. generally accepted accounting principles (GAAP), less capital expenditures as presented on our Statements of Cash Flows. 24


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    For GFY 2013, which ended on September 30, 2013, sequestration resulted in a $37 billion reduction to the defense budget in addition to reductions as a result of the discretionary spending limits already imposed under the Budget Control Act. The impacts of sequestration in GFY 2013 were less than originally expected due to congressional actions that reduced the cuts as well as the DoD’s ability to allocate a portion of the reductions to prior year unobligated balances and multi-year investment appropriations. Accordingly, we have experienced minimal impacts to date. In December 2013, Congress and the Administration enacted the Bipartisan Budget Act of 2013 (Bipartisan Budget Act). Notably, the Bipartisan Budget Act increased the limits on discretionary spending for GFY 2014 and GFY 2015 imposed by the Budget Control Act, among other fiscal changes. In particular, the Bipartisan Budget Act allows for approximately $63 billion of additional funding, including approximately $22 billion and $9 billion for defense spending during GFY 2014 and GFY 2015, respectively, and similar amounts for nondefense programs over the same period. The revised defense spending limits are set at approximately $520 billion for GFY 2014 and approximately $521 billion for GFY 2015. This agreement allows for more certainty in the budget planning process and provides the DoD the flexibility to better address its priorities. However, the Bipartisan Budget Act retains the lower spending limits, including the across-the-board spending reduction methodology, for GFYs 2016 through 2021 as provided for in the Budget Control Act. As a result, there remains uncertainty regarding how sequester cuts beyond GFY 2015 will be applied as the DoD and other agencies may have significantly less flexibility regarding how to allocate cuts in future years. While we have not yet seen the specific budget allocations by program, we continue to believe that our portfolio of products will continue to be well supported in a strategically focused allocation of budget resources. On January 17, 2014, the U.S. Government passed its GFY 2014 budget to finance all activities through September 30, 2014, the end of its current fiscal year, after operating under continuing resolution temporary funding measures from October 1, 2013 to January 18, 2014. The budget provides discretionary defense spending at levels consistent with the planned defense spending limits in the Bipartisan Budget Act and eliminated much of the uncertainty and inefficiency in procuring products and services under the continuing resolution. Under continuing resolutions, partial-year funding is available at prior year levels, subject to certain restrictions, but new spending initiatives are not authorized. Other Matters While the recent budget actions provide a more measured and strategic approach to addressing the U.S. Government’s fiscal challenges, sequestration remains a long-term concern. If not further modified, sequestration could have significant negative impacts on our industry and company in future periods. There may be disruption of ongoing programs, impacts to our supply chain, contractual actions (including partial or complete terminations), potential facilities closures, and thousands of personnel reductions across the industry that will severely impact advanced manufacturing operations and engineering expertise, and accelerate the loss of skills and knowledge. Sequestration, or other budgetary cuts in lieu of sequestration, could have a material negative effect on our company as would any failure to address issues raised by the debt ceiling. Additionally, we are seeking to lessen our dependence on contracts with the U.S. Government by focusing on expanding into adjacent markets close to our core capabilities and growing international sales but may not be successful in this strategy. Despite the continued uncertainty surrounding U.S. Government budgets, the investments and acquisitions we have made in recent years have sought to align our businesses with what we believe are the most critical national priorities and mission areas. The possibility remains, however, that our programs could be materially reduced, extended, or terminated as a result of the U.S. Government’s continuing assessment of priorities, changes in government priorities, the implementation of sequestration (particularly in those circumstances where sequestration is implemented across-the-board without regard to national priorities), or other budget cuts in lieu of sequestration. Additionally, decreases in production volume associated with sequestration, or other budget cuts in lieu of sequestration, will increase unit costs making our products less affordable for both our domestic and international customers. Sequestration may also result in significant rescheduling or termination activity with our supplier base. Such activity could result in claims from our suppliers, which may include both the amount established in any settlement agreements, the costs of evaluating the supplier settlement proposals, and the costs of negotiating settlement agreements. Furthermore, sequestration, or other budgetary cuts in lieu of sequestration, could result in severance charges. We expect costs associated with claims from our suppliers and severance charges will be recovered from our customers. Generally, we expect that the impact of sequestration or other budget reductions in lieu of sequestration on our operating results will lag in certain of our businesses with longer cycles such as our Aeronautics and Space Systems business segments, and our products businesses within our MFC and MST business segments, due to our production contract backlog. However, our businesses with smaller, short-term contracts are the most susceptible to the impacts of budget reductions, such as our IS&GS business segment and certain services businesses within our MFC and MST business segments. 25


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    Other Business Considerations International Business A key component of our strategic plan is to grow our international sales. To accomplish this growth, we continue to focus on expanding our in-country presence and strengthening our relationships internationally through partnerships and local production joint technology offices. For example, in 2013 we acquired Amor Group, a United Kingdom-based company, and we opened a new in-country office in Saudi Arabia that will enable development of partnerships to create products and enhance our offerings in technology, aerospace, and security sectors. We conduct business with international customers primarily through our Aeronautics, MFC, and MST business segments. In our Aeronautics business segment, there remains strong international interest in the F-35 program. The F-35 program includes commitments from eight international partner countries and two international customers; as well as expressions of interest from other countries. The U.S. Government and the eight partner countries continue to work together on the design, testing, production, and sustainment of the F-35. The international role on the program is growing as we opened the final assembly and checkout facility in Italy and began international pilot and maintainer training in 2013. We delivered three F-35 aircraft to international partners in 2013, including two aircraft to the Netherlands and one aircraft to the United Kingdom. The number of F-35 aircraft for international customers in recent low-rate initial production (LRIP) contracts continues to increase, with the LRIP 6 and 7 contracts including new aircraft awards for Australia, Italy, Norway, and the United Kingdom. Other areas of international expansion at our Aeronautics business segment include the F-16 and C-130J programs. The award from Iraq in 2013 for 18 additional F-16 aircraft extends production through the middle of 2017. Also, we delivered the first C-130J Super Hercules aircraft to both the Republic of Tunisia and to Israel in 2013. The delivery to Tunisia marks the first to an African country. Our MFC business segment produces the Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD) air and missile defense systems, which continue to generate significant international interest. The PAC-3 is an advanced missile defense system designed to intercept incoming airborne threats. During 2013, we received an award to provide PAC-3 missile defense equipment to Kuwait. Other international customers include Japan, Germany, the Netherlands, Taiwan, and the United Arab Emirates (UAE). In 2013, we also finalized the multi-billion dollar award for the THAAD missile defense system from the UAE, which is the first international customer for this system. Other countries in the Middle East and the Asia-Pacific region have also expressed interest in our air and missile defense systems. In our MST business segment, we continue to experience international interest in the Aegis Ballistic Missile Defense System. We perform activities in the development, production, ship integration and test, and lifetime support for ships of international customers such as Canada, Japan, Spain, Korea, and Australia. In 2013, we received an award from Japan to upgrade processors and other equipment on their ballistic missile defense ships. The Littoral Combat Ship (LCS) is another significant program generating interest from potential international customers. Status of the F-35 Program The F-35 program consists of a development contract and multiple production contracts. The development contract is being performed concurrent with the production contracts. Concurrent performance of development and production contracts is used for complex programs to test aircraft, shorten the time to field systems, and achieve overall cost savings. We expect the development portion of the F-35 program will be substantially complete in 2017, with less significant efforts continuing into 2019. Production of the aircraft is expected to continue for many years given the U.S. Government’s current inventory objective of 2,443 aircraft for the Air Force, Marine Corps, and Navy; commitments from our eight international partners and two international customers; as well as expressions of interest from other countries. On the development contract, the U.S. Government continues to complete various operational tests, including ship trials, mission system evaluations, and weapons testing, with the aircraft surpassing 10,000 flight hours. In 2013, we reduced the profit booking rate on the development contract after revising our estimate of fees that we expect to earn on the contract as well as our estimates of the remaining costs to complete the development contract. These revisions collectively reduced profit by $85 million during 2013, which reflect the inception-to-date impact of the change in the profit booking rate. Progress continues to be made on the production of aircraft. In 2013, the F-35 program reached a significant milestone as we completed the assembly of the 100th aircraft. During 2013, we delivered 35 aircraft to our domestic and international partners, resulting in total deliveries of 73 production aircraft as of December 31, 2013. We have 93 production aircraft in backlog as of December 31, 2013, including orders from our international partners. 26


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    Given the size and complexity of the F-35 program, we anticipate that there will be continual reviews related to aircraft performance, program schedule, cost, and requirements as part of the DoD, Congressional, and international partners’ oversight and budgeting processes. Current program challenges include, but are not limited to, supplier and partner performance, software development, level of cost associated with lifecycle operations and sustainment, receiving funding for production contracts on a timely basis, executing future flight tests, and findings resulting from testing. Portfolio Shaping Activities We continuously strive to strengthen our portfolio of products and services to meet the current and future needs of our customers. We accomplish this in part by our independent research and development activities, and through acquisition, divestiture, and internal realignment activities. Internal realignments are designed to more fully leverage existing capabilities and enhance development and delivery of products and services. We selectively pursue the acquisition of businesses and investments at attractive valuations that will expand or complement our current portfolio and allow access to new customers or technologies. We have made a number of niche acquisitions of businesses and investments in affiliates during the past several years. We also may explore the divestiture of businesses. In pursuing our business strategy, we routinely conduct discussions, evaluate targets, and enter into agreements regarding possible acquisitions, divestitures, ventures, and equity investments. Acquisitions We paid $269 million and $259 million in 2013 and 2012 for acquisition activities, primarily related to the acquisition of businesses. In 2013, we acquired Amor Group, a United Kingdom-based company specializing in information technology, civil government services, and the energy market. This acquisition is aligned with our strategy to grow international sales and has been included in our IS&GS business segment. In 2012, we acquired Chandler/May, Inc. (Chandler/May), CDL Systems Ltd. (CDL), and Procerus Technologies, L.C. (Procerus). These companies specialize in the design, development, manufacturing, control, and support of advanced unmanned systems, which expand our offerings in support of our customers’ increased emphasis on advanced unmanned systems and are consistent with our strategy to maintain a portfolio of advanced technology options. These companies are part of our MST business segment where they have been integrated into our portfolio of unmanned systems and technologies to align their product and service offerings to the U.S. Army. In 2011, we paid $624 million for acquisition activities, primarily related to the acquisitions of QTC Holdings Inc. (QTC) and Sim-Industries B.V. (Sim-Industries). QTC provides outsourced medical evaluation services to the U.S. Government and has been included within our IS&GS business segment. Sim-Industries designs, develops, and manufactures full-motion and fixed-based civil aviation flight simulators for a wide range of airline customers and independent pilot training centers worldwide and is part of our MST business segment. These companies complement our core capabilities and align with our strategy to expand into closely related markets and expand our customer base. For additional information, see “Note 14 – Acquisitions and Divestitures” of our consolidated financial statements. Divestitures In pursuing our business strategies, we have also divested certain businesses over the past three years. Recent divestitures consisted of Savi Technology, Inc. (Savi) in 2012 and Pacific Architects and Engineers, Inc. (PAE) in 2011. For additional information, see “Note 14 – Acquisitions and Divestitures” of our consolidated financial statements. 27


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    Consolidated Results of Operations Since our operating cycle is long-term and involves many types of contracts for the design, development, and manufacturing of products and related activities with varying 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 years should be viewed in this context. All per share amounts cited in these discussions are presented on a “per diluted share” basis, unless otherwise noted. Our consolidated results of operations were as follows (in millions, except per share data): 2013 2012 2011 Operating results Net sales $ 45,358 $ 47,182 $ 46,499 Cost of sales (41,171) (42,986) (42,755) Other income, net 318 238 276 Operating profit 4,505 4,434 4,020 Interest expense (350) (383) (354) Other non-operating income (expense), net — 21 (35) Income tax expense (1,205) (1,327) (964) Net earnings from continuing operations 2,950 2,745 2,667 Net earnings (loss) from discontinued operations 31 — (12) Net earnings $ 2,981 $ 2,745 $ 2,655 Diluted earnings (loss) per common share Continuing operations $ 9.04 $ 8.36 $ 7.85 Discontinued operations .09 — (.04) Total $ 9.13 $ 8.36 $ 7.81 Amounts reported in other income, net (primarily our share of earnings or losses from equity method investees) on our Statements of Earnings are included in the segment operating profit and segment operating margins of our “Business Segment Results of Operations” but are excluded from the consolidated net sales and cost of sales tables below. Net Sales Products sales are predominantly generated in our Aeronautics, MFC, MST, and Space Systems business segments, and most of our services sales are generated in our IS&GS and MFC business segments. Our consolidated net sales were as follows (in millions): 2013 2012 2011 Net sales Products $35,691 $37,817 $36,925 Services 9,667 9,365 9,574 Total net sales $45,358 $47,182 $46,499 Substantially all of our contracts are accounted for using the percentage-of-completion method of accounting. Under the percentage-of-completion method, we record net sales on contracts based upon our progress towards completion on a particular contract, as well as our estimate of the profit to be earned at completion. The following discussion of material changes in our consolidated net sales should be read in tandem with the following discussion of changes in our consolidated cost of sales and our “Business Segment Results of Operations” section because, due to the nature of percentage-of- completion accounting, changes in our sales are typically accompanied by a corresponding change in our cost of sales. Products Sales Our products sales represent about 80% of our net sales for both 2013 and 2012. Products sales decreased $2.1 billion, or 6%, in 2013 compared to 2012 primarily due to lower volume and deliveries. Products sales decreased about $915 million at Aeronautics primarily due to fewer aircraft deliveries (primarily F-16 and C-130) and lower volume and risk retirements on F-22 due to completion of aircraft deliveries in 2012, partially offset by increased volume and risk retirements on F-35 production contracts and increased aircraft deliveries on the C-5 program; about $750 million at IS&GS for various programs due to lower volume (such as Next Generation Identification (NGI) and En Route Automation Modernization (ERAM) 28


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    programs); about $440 million at MST due to fewer deliveries (primarily Persistent Threat Detection Systems (PTDS) as final surveillance system deliveries occurred during the second quarter of 2012) and lower volume (primarily integrated warfare systems and sensors programs); and about $405 million at Space Systems due to lower volume (primarily commercial satellites and the Orion Multi-Purpose Crew Vehicle (Orion) program) partially offset by increased volume (primarily various government satellite programs). The decreases were partially offset by higher products sales of about $380 million at MFC due to increased volume and risk retirements (primarily THAAD and deliveries of PAC-3). Our products sales represent about 80% of our net sales for both 2012 and 2011. Products sales increased $892 million, or 2%, in 2012 compared to 2011 primarily due to higher volume and deliveries, as well as higher risk retirements on certain programs. Products sales increased about $555 million at Aeronautics due to increased volume and risk retirements on F-35 production contracts and deliveries (primarily F-16 and C-5), partially offset by decreased volume and risk retirements (primarily F-22); about $510 million at MST due to increased deliveries (primarily PTDS) and increased volume (primarily LCS); about $225 million at Space Systems due to increased volume (primarily commercial satellites and Orion); and about $100 million at MFC due to increased volume (primarily THAAD and PAC-3). These increases partially were offset by lower products sales of about $495 million at IS&GS due to the substantial completion of certain programs (such as Joint Tactical Radio System (JTRS) and U.K. Census). Services Sales Our services sales represent about 20% of our net sales for 2013 and 2012. Services sales increased $302 million, or 3%, in 2013 compared to 2012. Services sales increased about $270 million at IS&GS primarily due to the start-up of certain programs (such as the Defense Information Systems Agency – Global Information Grid Services Management-Operations (DISA GSM-O) and the National Science Foundation Antarctic Support); and about $85 million at Aeronautics primarily due to increased sustainment activities (primarily F-16). The increases were partially offset by lower services sales of about $80 million at MFC for various technical services programs due to lower volume, partially offset by various fire control programs (primarily Special Operations Forces Contractor Logistics Support Services (SOF CLSS)) due to higher volume. Services sales for 2013 were comparable to 2012 at both MST and Space Systems. Our services sales represent about 20% of our net sales for 2012 and 2011. Services sales decreased $209 million, or 2%, in 2012 compared to 2011. Services sales decreased about $105 million at MFC primarily due to lower volume and risk retirements on various technical services programs. Services sales decreased about $60 million at MST primarily due to lower volume on various training services programs. Services sales decreased about $40 million at IS&GS primarily due to the substantial completion of the Outsourcing Desktop Initiative for NASA (ODIN) during 2011 and lower volume on the Hanford Mission Support (Hanford) contract, partially offset by higher net sales from QTC, which was acquired in the fourth quarter of 2011. Cost of Sales Cost of sales, for both products and services, consist of materials, labor, and subcontracting costs, as well as an allocation of indirect costs (overhead and general and administrative). For each of our contracts, we monitor the nature and amount of costs at the contract level, which form the basis for estimating our total costs at the completion of the contract. Our consolidated cost of sales were as follows (in millions): 2013 2012 2011 Cost of sales Cost of products sales $31,346 $33,495 $32,968 % of products sales 87.8% 88.6% 89.3% Cost of services sales 8,588 8,383 8,514 % of services sales 88.8% 89.5% 88.9% Goodwill impairment charge 195 — — Severance charges 201 48 136 Other unallocated costs 841 1,060 1,137 Total cost of sales $41,171 $42,986 $42,755 Due to the nature of percentage-of-completion accounting, changes in our cost of products and services sales are typically accompanied by changes in our net sales. The following discussion of material changes in our consolidated cost of products and services sales should be read in tandem with the preceding discussion of changes in our consolidated net sales and with our “Business Segment Results of Operations” section. We have not identified any developing trends in cost of products and services sales that would have a material impact on our future operations. 29


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    Cost of Products Sales Cost of products sales decreased $2.1 billion, or 6%, in 2013 compared to 2012 primarily due to lower volume and deliveries. Cost of products sales decreased about $770 million at Aeronautics due to fewer aircraft deliveries (primarily F-16 and C-130) and lower volume (primarily F-22), partially offset by increased volume for F-35 production contracts, increased aircraft deliveries and the impact of reducing the profit booking rate in the third quarter of 2013 for the C-5 program and lower risk retirements on various programs (primarily C-130); about $685 million at IS&GS for various programs primarily due to decreased volume; about $570 million at MST primarily due to fewer deliveries and net increased risk retirements for the PTDS program and various integrated warfare systems and sensors programs and for the favorable resolution of certain contract cost matters (including the terminated presidential helicopter program); and about $315 million at Space Systems due to lower volume (primarily commercial satellites and Orion). The decreases were partially offset by higher cost of products sales of about $190 million at MFC due to increased volume (primarily THAAD and deliveries of PAC-3), partially offset by various other programs due increased risk retirements (primarily fire control programs). The 0.8% decrease in the percentage of cost of products sales relative to products sales in 2013 compared to 2012 primarily was due to higher risk retirements (primarily at MFC and MST) and the favorable resolution of contractual matters at MST. Cost of products sales increased $527 million, or 2%, in 2012 compared to 2011 primarily due to higher volume and deliveries. Cost of products sales increased about $520 million at Aeronautics due to increased volume (primarily F-35 production contracts) and increased deliveries (primarily F-16 and C-5); about $485 million at MST due to increased deliveries (primarily PTDS) and volume (primarily LCS), partially offset by reserves of about $55 million for contract cost matters on certain contracts recorded in the fourth quarter of 2011 (including the terminated presidential helicopter program); and about $180 million at Space Systems due to increased volume (primarily commercial satellites programs, Orion and various strategic and defensive missile programs). The increases were partially offset by lower cost of products sales of about $530 million at IS&GS primarily due to the substantial completion of various programs during 2011 and lower volume on various other programs; and about $70 million at MFC due to higher risk retirements (primarily tactical missile and fire control programs) and the favorable resolution of contractual matters, partially offset by increased deliveries (PAC-3) and volume (THAAD). The 0.7% decrease in the percentage of cost of products sales relative to products sales in 2012 compared to 2011 primarily was due to higher risk retirements (primarily at MFC) as well as the favorable resolution of contractual matters at MFC and higher risk retirements and lower reserves on ship and aviation system programs at MST. Cost of Services Sales Our cost of services sales increased $205 million, or 2%, in 2013 compared to 2012. Most of our cost of services sales are in the IS&GS and MFC business segments. The increase in cost of services sales was primarily attributable to higher cost of services sales at our IS&GS and Aeronautics business segments partially offset by lower cost of services sales at our MFC business segment. Cost of services sales increased about $245 million at IS&GS primarily due to the start-up of various programs. Cost of services sales increased about $40 million at Aeronautics primarily due to increased sustainment activities (primarily F-16). Cost of services sales decreased about $75 million at MFC primarily due to lower volume of various technical services programs, partially offset by higher volume from various fire control programs (primarily SOF CLSS). The 0.7% decrease in the percentage of cost of services sales relative to services sales in 2013 compared to 2012 was primarily due to higher risk retirements on sustainment contracts at Aeronautics. Our cost of services sales decreased $131 million, or 2%, in 2012 compared to 2011. The decrease in cost of services sales primarily was attributable to lower cost of services sales at our MFC and MST business segments, partially offset by higher cost of services sales at our IS&GS business segment. Cost of services sales decreased approximately $105 million at MFC primarily due to lower volume on various technical services programs. Cost of services sales decreased approximately $90 million at MST primarily due to lower volume on various training services programs. Cost of services sales increased approximately $80 million at IS&GS primarily due to higher net sales from QTC, which was acquired in the fourth quarter of 2011, and various other services programs partially offset by lower costs from the substantial completion of ODIN in 2011 and lower volume on the Hanford contract. The 0.6% increase in the percentage of cost of services sales relative to services sales in 2012 compared to 2011 was primarily due to risk retirements on the ODIN and Hanford contracts in 2011. Goodwill Impairment Charge In the fourth quarter of 2013, we recorded a non-cash goodwill impairment charge of $195 million, net of state tax benefits, which reduced our net earnings by $176 million ($.54 per share). The charge related to the Technical Services reporting unit within our MFC business segment and was due to the continuing impact of defense budget reductions and related competitive pressures on the Technical Services business, which typically has smaller customer contracts of a shorter duration. For additional information, see the “Critical Accounting Policies – Goodwill” section below and “Note 1 –Significant Accounting Policies” of our consolidated financial statements. 30


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    Restructuring Charges 2013 Actions During 2013, we recorded charges related to certain severance actions totaling $201 million, net of state tax benefits, of which $83 million, $37 million, and $81 million related to our IS&GS, MST, and Space Systems business segments. These charges reduced our net earnings by $130 million ($.40 per share) and primarily related to a plan we committed to in November 2013 to close and consolidate certain facilities and reduce our total workforce by approximately 4,000 positions within our IS&GS, MST, and Space Systems business segments. These charges also include $30 million related to certain severance actions at our IS&GS business segment that occurred in the first quarter of 2013, which were subsequently paid in 2013. The November 2013 plan resulted from a strategic review of these businesses’ facility capacity and future workload projections and is intended to better align our organization and cost structure and improve the affordability of our products and services given the continued decline in U.S. Government spending as well as the rapidly changing competitive and economic landscape. Upon separation, terminated employees will receive lump-sum severance payments primarily based on years of service. During 2013, we paid approximately $15 million in severance payments associated with these actions, with the remainder expected to be paid through the middle of 2015. In addition to the severance charges described above, we expect to incur accelerated and incremental costs (e.g., accelerated depreciation expense related to long-lived assets at the sites to be closed, relocation of equipment and other employee related costs) of approximately $15 million, $50 million, and $135 million at our IS&GS, MST, and Space Systems business segments related to the facility closures and consolidations. The accelerated and incremental costs will be expensed as incurred in the respective business segment’s results of operations through their completion in 2015. We expect to recover a substantial amount of the restructuring charges through the pricing of our products and services to the U.S. Government and other customers in future periods, with the impact included in the respective business segment’s results of operations. Of the total accelerated and incremental costs to be incurred mentioned above, we expect $25 million, net of recoveries, at MST and $55 million, net of recoveries, at Space Systems will be incurred in 2014. Also, we expect the restructuring charges will reduce our 2014 cash flow from operations by approximately $150 million, mostly due to expected severance payments in 2014. 2012 and 2011 Actions During 2012, we recorded charges related to certain severance actions totaling $48 million, net of state tax benefits, of which $25 million related to our Aeronautics business segment and $23 million related to the reorganization of our former Electronic Systems business segment. These charges reduced our net earnings by $31 million ($.09 per share) and consisted of severance costs associated with the elimination of certain positions through either voluntary or involuntary actions. These severance actions resulted from cost reduction initiatives to better align our organization with changing economic conditions. Upon separation, terminated employees received lump-sum severance payments primarily based on years of service, all of which were paid in 2013. During 2011, we recorded charges related to certain severance actions totaling $136 million, net of state tax benefits, of which $49 million, $48 million, and $39 million related to our Aeronautics, Space Systems, and our IS&GS business segments and Corporate Headquarters. These charges reduced our net earnings by $88 million ($.26 per share) and consisted of severance costs associated with the elimination of certain positions through either voluntary or involuntary actions. These severance actions resulted from a strategic review of these businesses and our Corporate Headquarters and are intended to better align our organization and cost structure with changing economic conditions. The workforce reductions at the business segments also reflected changes in program lifecycles, where several of our major programs were either transitioning out of development and into production or were ending. Upon separation, terminated employees received lump-sum severance payments based on years of service. During 2011, we made approximately half of the severance payments associated with these 2011 severance actions, and paid the remaining amounts in 2012. Other Unallocated Costs Other unallocated costs principally include FAS/CAS pension expense, stock-based compensation, and other corporate costs. These costs are not allocated to the business segments and, therefore, are excluded from the costs of products and services sales (see “Note 4 – Information on Business Segments” of our consolidated financial statements for a description of these items). The decreases of $219 million and $77 million in other unallocated costs from 2012 to 2013 and 2011 to 2012 31


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    were primarily attributable to the decrease in FAS/CAS pension expense, partially offset by fluctuations in other costs associated with various corporate items, none of which were individually significant. We expect FAS/CAS pension income of $345 million in 2014 as further discussed in the “Critical Accounting Policies - Postretirement Benefit Plans” section below. Other Income, Net Other income, net for 2013 was $318 million, compared to $238 million in 2012 and $276 million in 2011. The changes between years primarily were due to fluctuations in equity earnings in investees in our Space Systems business segment, as discussed in the “Business Segment Results of Operations” section below. Interest Expense Interest expense for 2013 was $350 million, compared to $383 million in 2012 and $354 million in 2011. The decrease from 2012 to 2013 was primarily attributable to lower interest rates on our outstanding debt from the December 2012 debt exchange (Note 9). The increase from 2011 to 2012 was primarily due to increased interest expense from the $2.0 billion issuance of long-term debt in September 2011, partially offset by the redemption of $500 million in certain long-term notes in October 2011 (Note 9). Other Non-Operating Income (Expense), Net Other non-operating income, net decreased $21 million from 2012 to 2013 primarily due to a gain from the sale of an investment in 2012. Other non-operating income (expense), net was $21 million in 2012 and $(35) million in 2011, with the change between years primarily due to premiums of $48 million on early extinguishments of debt that occurred in 2011 (Note 9). Income Tax Expense Our effective income tax rate from continuing operations was 29.0% for 2013, 32.6% for 2012, and 26.5% for 2011. The rates generally benefit from tax deductions for U.S. manufacturing activities and tax deductions for dividends paid to our defined contribution plans with an employee stock ownership plan feature. The U.S. manufacturing deduction benefit for 2013 and 2011 reduced our effective tax rate by approximately two percentage points as compared to 2012. These fluctuations between years occurred because our tax-deductible discretionary pension contributions of $2.5 billion in 2012, which reduced U.S. manufacturing deduction benefits by $59 million ($.18 per share), were significantly higher than in 2013 or 2011. Our effective income tax rate for 2013 was reduced by approximately two percentage points because of U.S. research and development (R&D) tax credits. On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012, which retroactively reinstated the R&D tax credit for two years, from January 1, 2012 through December 31, 2013. As the effects of tax law changes are recognized in the period in which new legislation is enacted, $37 million ($.11 per share) of tax benefit attributable to 2012 was recorded during 2013, in addition to $39 million ($.12 per share) of tax benefit attributable to 2013. Since we recorded two years of R&D tax credit in 2013, we expect our effective tax rate to increase in 2014 whether or not Congress reenacts the R&D tax credit for 2014. Our effective tax rate for 2013 was increased by approximately one percentage point due to the non-cash goodwill impairment charge recorded in the fourth quarter of 2013 (Note 1), as only a portion of the charge will qualify for a tax deduction. Our effective income tax rate for 2011 was reduced by approximately two and one-half percentage points because in April 2011 the U.S. Congressional Joint Committee on Taxation completed its review of the Internal Revenue Service (IRS) Appeals Division’s resolution of certain adjustments related to our tax years 2003 through 2008. As a result, we recognized additional tax benefits and reduced our income tax expense for 2011 by $89 million ($.26 per share). Our effective income tax rate for 2011 also was reduced by approximately one percentage point due to R&D tax credits. Future changes in tax law could significantly impact the provision for income taxes, the amount of taxes payable, and the deferred tax asset and liability balances. Recent proposals to lower the U.S. corporate income tax rate would require us to reduce our net deferred tax assets upon enactment of the related tax legislation, with a corresponding material, one-time 32


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    increase to income tax expense, but our income tax expense and payments would be materially reduced in subsequent years. Our net deferred tax assets as of December 31, 2013 and 2012 were $3.9 billion and $6.1 billion, based on a 35% Federal statutory income tax rate, and primarily relate to our postretirement benefit plans. If the Federal statutory income tax rate had been lowered to 25% at December 31, 2013, our net deferred tax assets would have been reduced by $1.1 billion, and we would have recorded a corresponding, one time increase in income tax expense of $1.1 billion. The amount of net deferred tax assets will change periodically based on several factors, including the annual measurement of our postretirement benefit plan obligations and actual cash contributions to our postretirement benefit plans. Net Earnings from Continuing Operations We reported net earnings from continuing operations of $2.95 billion ($9.04 per share) in 2013, $2.75 billion ($8.36 per share) in 2012, and $2.67 billion ($7.85 per share) in 2011. Both net earnings from continuing operations and earnings per share were affected by the factors discussed above. Net Earnings (Loss) from Discontinued Operations Net earnings from discontinued operations for 2013 included a benefit of $31 million resulting from the resolution of certain tax matters related to a business previously sold. Discontinued operations for 2011 included the operating results and other adjustments of Savi, a logistics business sold in 2012 that was in our former Electronic Systems business segment, and PAE, a business sold in 2011 that was formerly within our IS&GS business segment. Net loss from discontinued operations was $12 million ($.04 per share) in 2011, and included a deferred tax asset of $66 million that we expected to realize on the sale of Savi because our tax basis was higher than our book basis. This tax benefit was largely offset by operating losses and other adjustments. For more information, see “Note 14 – Acquisitions and Divestitures” of our consolidated financial statements. Business Segment Results of Operations We operate in five business segments: Aeronautics, IS&GS, MFC, MST, and Space Systems. We organize our business segments based on the nature of the products and services offered. Net sales of our business segments exclude intersegment sales, as these activities are eliminated in consolidation. Intercompany transactions are generally negotiated under terms and conditions that share many similar characteristics (e.g., contract structures, funding profiles, target cost values, contract progress reports) with our third-party contracts, primarily with the U.S. Government. Operating profit of our business segments includes our share of earnings or losses from equity method investees because the operating activities of the equity method investees are closely aligned with the operations of those business segments. Operating profit of our business segments excludes the FAS/CAS pension adjustment described below; expense for stock- based compensation; the effects of items not considered part of management’s evaluation of segment operating performance, such as charges related to goodwill impairment (Note 1) and significant severance actions (Note 2); gains or losses from divestitures (Note 14); the effects of certain legal settlements; corporate costs not allocated to our business segments; and other miscellaneous corporate activities. These items are included in the reconciling item “Unallocated expenses, net” between operating profit from our business segments and our consolidated operating profit. The results of operations of our business segments include pension expense only as determined and funded in accordance with U.S. Government Cost Accounting Standards (CAS). The FAS/CAS pension adjustment represents the difference between pension expense calculated in accordance with GAAP and pension costs calculated and funded in accordance with CAS. CAS governs the extent to which pension costs can be allocated to and recovered on U.S. Government contracts. The CAS cost is recovered through the pricing of our products and services on U.S. Government contracts and, therefore, is recognized in each of our business segments’ net sales and cost of sales. 33


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    The operating results in the following tables exclude businesses included in discontinued operations (Note 14) for all years presented. Summary operating results for each of our business segments were as follows (in millions): 2013 2012 2011 Net sales Aeronautics $14,123 $14,953 $14,362 Information Systems & Global Solutions 8,367 8,846 9,381 Missiles and Fire Control 7,757 7,457 7,463 Mission Systems and Training 7,153 7,579 7,132 Space Systems 7,958 8,347 8,161 Total net sales $45,358 $47,182 $46,499 Operating profit Aeronautics $ 1,612 $ 1,699 $ 1,630 Information Systems & Global Solutions 759 808 874 Missiles and Fire Control 1,431 1,256 1,069 Mission Systems and Training 905 737 645 Space Systems 1,045 1,083 1,063 Total business segment operating profit 5,752 5,583 5,281 Unallocated expenses, net FAS/CAS pension adjustment FAS pension expense (1,948) (1,941) (1,821) Less: CAS cost 1,466 1,111 899 FAS/CAS pension expense (a) (482) (830) (922) Goodwill impairment charge (b) (195) — — Severance charges (c) (201) (48) (136) Stock-based compensation (189) (167) (157) Other, net (180) (104) (46) Total unallocated expenses, net (1,247) (1,149) (1,261) Total consolidated operating profit $ 4,505 $ 4,434 $ 4,020 (a) We expect FAS/CAS pension income in 2014 of about $345 million as further discussed in the “Critical Accounting Policies - Postretirement Benefit Plans” section below. (b) We recognized a non-cash goodwill impairment charge related to the Technical Services reporting unit within our MFC business segment. For more information, see “Note 1 – Significant Accounting Policies” of our consolidated financial statements. (c) See “Note 2 – Restructuring Charges” of our consolidated financial statements for information on charges related to certain severance actions at our business segments and Corporate Headquarters. Severance charges for initiatives that are not significant are included in business segment operating profit. The following segment discussions also include information relating to backlog for each segment. Backlog was approximately $82.6 billion, $82.3 billion, and $80.7 billion at December 31, 2013, 2012, and 2011. These amounts included both funded backlog (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). Backlog does not include unexercised options or task orders to be issued under indefinite-delivery, indefinite- quantity contracts. Funded backlog was approximately $55.0 billion at December 31, 2013. Management evaluates performance on our contracts by focusing on net sales and operating profit, and not by type or amount of operating expense. Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing the business. This approach is consistent with the overall life cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit, and monitors performance on our contracts in a similar manner through their completion. We regularly provide customers with reports of our costs as the contract progresses. The cost information in the reports is accumulated in a manner specified by the requirements of each contract. For example, cost data provided to our customer for a product would typically align to the subcomponents of that product (such as a wing-box on an aircraft), and for services would align to the type of work being performed (such as help-desk support). Our contracts generally are cost-based, which allows for the recovery of costs in the pricing of our products and services. Most of our contracts are bid and negotiated with our customers under circumstances in which we are required to disclose our estimated costs to provide the product or service. 34


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    This approach for negotiating contracts with our U.S. Government customers generally allows for the recovery of our costs. We also may enter into long-term supply contracts for certain materials or components to coincide with the production schedule of certain products and to ensure their availability at known unit prices. Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract, we identify and monitor risks to the achievement of the technical, schedule, and cost aspects of the contract, and assess the effects of those risks on our estimates of total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events), and costs (e.g., material, labor, subcontractor and overhead). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule, and costs in the initial estimated costs at completion. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract. Conversely, our profit booking rates may decrease if the estimated costs to complete the contract increase. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate. We have a number of programs that are designated as classified by the U.S. Government which 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 net sales are primarily derived from long-term contracts for products and services provided to the U.S. Government as well as FMS contracted through the U.S. Government. We account for these contracts, as well as product contracts with non-U.S. Government customers, using the percentage-of-completion method of accounting, which represent substantially all of our net sales. We derive our remaining net sales from contracts to provide services to non-U.S. Government customers, which we account for under the services method of accounting. Under the percentage-of-completion method of accounting, we record sales on contracts based upon our progress towards completion on a particular contract as well as our estimate of the profit to be earned at completion. Cost- reimbursable contracts provide for the payment of allowable costs plus a fee. For fixed-priced contracts, net sales and cost of sales are recognized as products are delivered or as costs are incurred. Due to the nature of the percentage-of-completion method of accounting, changes in our cost of sales are typically accompanied by a related change in our net sales. In the discussion of comparative segment results, changes in net sales and operating profit generally are expressed in terms of volume. Changes in volume refer to increases or decreases in sales resulting from varying production activity levels, deliveries, or service levels on individual contracts. Volume changes typically include a corresponding change in segment operating profit based on the current profit booking rate for a particular contract. In addition, comparability of our sales, segment operating profit, and segment operating margins may be impacted by changes in profit booking rates on our contracts accounted for using the percentage-of-completion method of accounting. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the total estimated costs at completion that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate resulting in an increase in the estimated costs at completion and a reduction of the profit booking rate. Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of such changes. Segment operating profit and segment operating margins may also be impacted, favorably or unfavorably, by other matters such as the resolution of contractual matters; restructuring charges, except for significant severance actions as mentioned above; cost recoveries on all restructuring charges; reserves for disputes; asset impairments; and insurance recoveries; among others. Segment operating profit and items such as risk retirements, reductions of profit booking rates, or other matters are presented net of state income taxes. Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, increased segment operating profit, net of state income taxes, by approximately $2.1 billion, $1.9 billion, and $1.6 billion for 2013, 2012, and 2011. The increase in our consolidated net adjustments for 2013 as compared to 2012 primarily was due to an increase in profit booking rate adjustments at our MST and MFC business segments and, to a lesser extent, the increase in the favorable resolution of contractual matters for the corporation. The increase in our consolidated net adjustments for 2012 as compared to 2011 primarily was due to an increase in profit booking rate adjustments and the favorable resolution of contractual matters at our MST and MFC business segments. The consolidated net adjustments for 2013 and 2012 are inclusive of approximately $600 million and $500 million in unfavorable items, which include a significant profit reduction on the F-35 development contract in both years, as well as a significant profit reduction on the C-5 program in 2013, each as described in our Aeronautics business segment’s results of operations discussion below. Unfavorable items in 2012 were about $100 million higher than 2011, primarily due to a significant profit reduction on the F-35 development contract in 2012 as mentioned above. 35


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    Aeronautics 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. Aeronautics’ major programs include the F-35 Lightning II Joint Strike Fighter, C-130 Hercules, F-16 Fighting Falcon, F-22 Raptor, and the C-5M Super Galaxy. Aeronautics’ operating results included the following (in millions): 2013 2012 2011 Net sales $14,123 $14,953 $14,362 Operating profit 1,612 1,699 1,630 Operating margins 11.4% 11.4% 11.3% Backlog at year-end 28,000 30,100 30,500 2013 compared to 2012 Aeronautics’ net sales for 2013 decreased $830 million, or 6%, compared to 2012. The decrease was primarily attributable to lower net sales of approximately $530 million for the F-16 program due to fewer aircraft deliveries (13 aircraft delivered in 2013 compared to 37 delivered in 2012) partially offset by aircraft configuration mix; about $385 million for the C-130 program due to fewer aircraft deliveries (25 aircraft delivered in 2013 compared to 34 in 2012) partially offset by increased sustainment activities; approximately $255 million for the F-22 program, which includes about $205 million due to decreased production volume as final aircraft deliveries were completed during the second quarter of 2012 and $50 million from the favorable resolution of a contractual matter during the second quarter of 2012; and about $270 million for various other programs (primarily sustainment activities) due to decreased volume. The decreases were partially offset by higher net sales of about $295 million for F-35 production contracts due to increased production volume and risk retirements; approximately $245 million for the C-5 program due to increased aircraft deliveries (six aircraft delivered in 2013 compared to four in 2012) and other modernization activities; and about $70 million for the F-35 development contract due to increased volume. Aeronautics’ operating profit for 2013 decreased $87 million, or 5%, compared to 2012. The decrease was primarily attributable to lower operating profit of about $85 million for the F-22 program, which includes approximately $50 million from the favorable resolution of a contractual matter in the second quarter of 2012 and about $35 million due to decreased risk retirements and production volume; approximately $70 million for the C-130 program due to lower risk retirements and fewer deliveries partially offset by increased sustainment activities; about $65 million for the C-5 program due to the inception-to-date effect of reducing the profit booking rate in the third quarter of 2013 and lower risk retirements; approximately $35 million for the F-16 program due to fewer aircraft deliveries partially offset by increased sustainment activity and aircraft configuration mix. The decreases were partially offset by higher operating profit of approximately $180 million for F-35 production contracts due to increased risk retirements and volume. Operating profit was comparable for the F-35 development contract and included adjustments of approximately $85 million to reflect the inception-to-date impacts of the downward revisions to the profit booking rate in both 2013 and 2012. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $75 million lower for 2013 compared to 2012. 2012 compared to 2011 Aeronautics’ net sales for 2012 increased $591 million, or 4%, compared to 2011. The increase was attributable to higher net sales of approximately $745 million from F-35 production contracts principally due to increased production volume; about $285 million from F-16 programs primarily due to higher aircraft deliveries (37 F-16 aircraft delivered in 2012 compared to 22 in 2011) partially offset by lower volume on sustainment activities due to the completion of modification programs for certain international customers; and approximately $140 million from C-5 programs due to higher aircraft deliveries (four C-5M aircraft delivered in 2012 compared to two in 2011). Partially offsetting the increases were lower net sales of approximately $365 million from decreased production volume and lower risk retirements on the F-22 program as final aircraft deliveries were completed in the second quarter of 2012; approximately $110 million from the F-35 development contract primarily due to the inception-to-date effect of reducing the profit booking rate in the second quarter of 2012 and to a lesser extent lower volume; and about $95 million from a decrease in volume on other sustainment activities partially offset by various other Aeronautics programs due to higher volume. Net sales for C-130 programs were comparable to 2011 as a decline in sustainment activities largely was offset by increased aircraft deliveries. 36


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    Aeronautics’ operating profit for 2012 increased $69 million, or 4%, compared to 2011. The increase was attributable to higher operating profit of approximately $105 million from C-130 programs due to an increase in risk retirements; about $50 million from F-16 programs due to higher aircraft deliveries partially offset by a decline in risk retirements; approximately $50 million from F-35 production contracts due to increased production volume and risk retirements; and about $50 million from the completion of purchased intangible asset amortization on certain F-16 contracts. Partially offsetting the increases was lower operating profit of about $90 million from the F-35 development contract primarily due to the inception-to-date effect of reducing the profit booking rate in the second quarter of 2012; approximately $50 million from decreased production volume and risk retirements on the F-22 program partially offset by a resolution of a contractual matter in the second quarter of 2012; and approximately $45 million primarily due to a decrease in risk retirements on other sustainment activities partially offset by various other Aeronautics programs due to increased risk retirements and volume. Operating profit for C-5 programs was comparable to 2011. Adjustments not related to volume, including net profit booking rate adjustments and other matters described above, were approximately $30 million lower for 2012 compared to 2011. Backlog Backlog decreased in 2013 compared to 2012 mainly due to lower orders on F-16, C-5, and C-130 programs, partially offset by higher orders on the F-35 program. Backlog decreased in 2012 compared to 2011 mainly due to lower orders on F-35 and C-130 programs, partially offset by higher orders on F-16 programs. Trends We expect Aeronautics’ net sales to increase in 2014 in the mid-single digit percentage range as compared to 2013 primarily due to an increase in net sales from F-35 production contracts. Operating profit is expected to increase slightly from 2013, resulting in a slight decrease in operating margins between the years due to program mix. Information Systems & Global Solutions Our IS&GS business segment provides advanced technology systems and expertise, integrated information technology solutions, and management services across a broad spectrum of applications for civil, defense, intelligence, and other government customers. IS&GS has a portfolio of many smaller contracts as compared to our other business segments. IS&GS has been impacted by the continued downturn in federal information technology budgets. IS&GS’ operating results included the following (in millions): 2013 2012 2011 Net sales $8,367 $8,846 $9,381 Operating profit 759 808 874 Operating margins 9.1% 9.1% 9.3% Backlog at year-end 8,300 8,700 9,300 2013 compared to 2012 IS&GS’ net sales decreased $479 million, or 5%, for 2013 compared to 2012. The decrease was attributable to lower net sales of about $495 million due to decreased volume on various programs (command and control programs for classified customers, NGI, and ERAM programs); and approximately $320 million due to the completion of certain programs (such as Total Information Processing Support Services, the Transportation Worker Identification Credential (TWIC), and ODIN). The decrease was partially offset by higher net sales of about $340 million due to the start-up of certain programs (such as the DISA GSM-O and the National Science Foundation Antarctic Support). IS&GS’ operating profit decreased $49 million, or 6%, for 2013 compared to 2012. The decrease was primarily attributable to lower operating profit of about $55 million due to certain programs nearing the end of their lifecycles, partially offset by higher operating profit of approximately $15 million due to the start-up of certain programs. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were comparable for 2013 compared to 2012. 2012 compared to 2011 IS&GS’ net sales for 2012 decreased $535 million, or 6%, compared to 2011. The decrease was attributable to lower net sales of approximately $485 million due to the substantial completion of various programs during 2011 (primarily JTRS; ODIN; and U.K. Census); and about $255 million due to lower volume on numerous other programs (primarily Hanford; 37


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    Warfighter Information Network-Tactical (WIN-T); Command, Control, Battle Management and Communications (C2BMC); and TWIC). Partially offsetting the decreases were higher net sales of approximately $140 million from QTC, which was acquired early in the fourth quarter of 2011; and about $65 million from increased activity on numerous other programs, primarily federal cyber security programs and PTDS operational support. IS&GS’ operating profit for 2012 decreased $66 million, or 8%, compared to 2011. The decrease was attributable to lower operating profit of approximately $50 million due to the favorable impact of the ODIN contract completion in 2011; about $25 million due to an increase in reserves for performance issues related to an international airborne surveillance system in 2012; and approximately $20 million due to lower volume on certain programs (primarily C2BMC and WIN-T). Partially offsetting the decreases was an increase in operating profit due to higher risk retirements of approximately $15 million from the TWIC program; and about $10 million due to increased activity on numerous other programs, primarily federal cyber security programs and PTDS operational support. Operating profit for the JTRS program was comparable as a decrease in volume was offset by a decrease in reserves. Adjustments not related to volume, including net profit booking rate adjustments and other matters described above, were approximately $20 million higher for 2012 compared to 2011. Backlog Backlog decreased in 2013 compared to 2012 primarily due to lower orders on several programs (such as ERAM and NGI), higher sales on certain programs (the National Science Foundation Antarctic Support and the DISA GSM-O), and declining activities on several smaller programs primarily due to the continued downturn in federal information technology budgets. Backlog decreased in 2012 compared to 2011 primarily due to the substantial completion of various programs in 2011 (primarily ODIN, U.K. Census, and JTRS). Trends We expect IS&GS’ net sales to decline in 2014 in the high single digit percentage range as compared to 2013 primarily due to the continued downturn in federal information technology budgets. Operating profit is also expected to decline in 2014 in the high single digit percentage range consistent with the expected decline in net sales, resulting in margins that are comparable with 2013 results. Missiles and Fire Control Our MFC business segment provides air and missile defense systems; tactical missiles and air-to-ground precision strike weapon systems; logistics and other technical services; fire control systems; mission operations support, readiness, engineering support, and integration services; and manned and unmanned ground vehicles. MFC’s major programs include PAC-3, THAAD, Multiple Launch Rocket System, Hellfire, Joint Air-to-Surface Standoff Missile (JASSM), Javelin, Apache Fire Control System (Apache), Sniper®, Low Altitude Navigation and Targeting Infrared for Night (LANTIRN®), and SOF CLSS. MFC’s operating results included the following (in millions): 2013 2012 2011 Net sales $ 7,757 $ 7,457 $ 7,463 Operating profit 1,431 1,256 1,069 Operating margins 18.4% 16.8% 14.3% Backlog at year-end 15,000 14,700 14,400 2013 compared to 2012 MFC’s net sales for 2013 increased $300 million, or 4%, compared to 2012. The increase was primarily attributable to higher net sales of approximately $450 million for air and missile defense programs (THAAD and PAC-3) due to increased production volume and deliveries; about $70 million for fire control programs due to net increased deliveries and volume; and approximately $55 million for tactical missile programs due to net increased deliveries. The increases were partially offset by lower net sales of about $275 million for various technical services programs due to lower volume driven by the continuing impact of defense budget reductions and related competitive pressures. The increase for fire control programs was primarily attributable to increased deliveries on the Sniper® and LANTIRN® programs, increased volume on the SOF CLSS program, partially offset by lower volume on Longbow Fire Control Radar and other programs. The increase for tactical missile programs was primarily attributable to increased deliveries on JASSM and other programs, partially offset by fewer deliveries on the Guided Multiple Launch Rocket System and Javelin programs. 38


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    MFC’s operating profit for 2013 increased $175 million, or 14%, compared to 2012. The increase was primarily attributable to higher operating profit of approximately $85 million for air and missile defense programs (THAAD and PAC-3) due to increased risk retirements and volume; about $85 million for fire control programs (Sniper®, LANTIRN® and Apache) due to increased risk retirements and higher volume; and approximately $75 million for tactical missile programs (Hellfire and various programs) due to increased risk retirements. The increases were partially offset by lower operating profit of about $45 million for the resolution of contractual matters in the second quarter of 2012; and approximately $15 million for various technical services programs due to lower volume partially offset by increased risk retirements. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $100 million higher for 2013 compared to 2012. 2012 compared to 2011 MFC’s net sales for 2012 were comparable to 2011. Net sales decreased approximately $130 million due to lower volume and risk retirements on various services programs, and about $60 million due to lower volume from fire control systems programs (primarily Sniper®; LANTIRN®; and Apache). The decreases largely were offset by higher net sales of approximately $95 million due to higher volume from tactical missile programs (primarily Javelin and Hellfire) and approximately $80 million for air and missile defense programs (primarily PAC-3 and THAAD). MFC’s operating profit for 2012 increased $187 million, or 17%, compared to 2011. The increase was attributable to higher risk retirements and volume of about $95 million from tactical missile programs (primarily Javelin and Hellfire); increased risk retirements and volume of approximately $60 million for air and missile defense programs (primarily THAAD and PAC-3); and about $45 million from a resolution of contractual matters. Partially offsetting these increases was lower risk retirements and volume on various programs, including $25 million for services programs. Adjustments not related to volume, including net profit booking rate adjustments and other matters described above, were approximately $145 million higher for 2012 compared to 2011. Backlog Backlog increased in 2013 compared to 2012 mainly due to higher orders on the THAAD program and lower sales volume compared to new orders on certain fire control systems programs in 2013, partially offset by lower orders on technical services programs and certain tactical missile programs. Backlog increased in 2012 compared to 2011 mainly due to increased orders and lower sales on fire control systems programs (primarily LANTIRN® and Sniper®) and on various services programs, partially offset by lower orders and higher sales volume on tactical missiles programs. Trends We expect MFC’s net sales to be flat to slightly down in 2014 compared to 2013, primarily due to a decrease in net sales on technical services programs partially offset by an increase in net sales from missiles and fire control programs. Operating profit is expected to decrease in the high single digit percentage range, driven by a reduction in expected risk retirements in 2014. Accordingly, operating profit margin is expected to slightly decline from 2013. Mission Systems and Training Our MST business segment provides ship and submarine mission and combat systems; mission systems and sensors for rotary and fixed-wing aircraft; sea and land-based missile defense systems; radar systems; littoral combat ships; simulation and training services; and unmanned systems and technologies. MST’s major programs include Aegis Combat System (Aegis), LCS, MH-60, TPQ-53 Radar System, and MK-41 Vertical Launching System (VLS). MST’s operating results included the following (in millions): 2013 2012 2011 Net sales $ 7,153 $ 7,579 $ 7,132 Operating profit 905 737 645 Operating margins 12.7% 9.7% 9.0% Backlog at year-end 10,800 10,700 10,500 2013 compared to 2012 MST’s net sales for 2013 decreased $426 million, or 6%, compared to 2012. The decrease was primarily attributable to lower net sales of approximately $275 million for various ship and aviation systems programs due to lower volume 39


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    (primarily PTDS as final surveillance system deliveries occurred during the second quarter of 2012); about $195 million for various integrated warfare systems and sensors programs (primarily Naval systems) due to lower volume; approximately $65 million for various training and logistics programs due to lower volume; and about $55 million for the Aegis program due to lower volume. The decreases were partially offset by higher net sales of about $155 million for the LCS program due to increased volume. MST’s operating profit for 2013 increased $168 million, or 23%, compared to 2012. The increase was primarily attributable to higher operating profit of approximately $120 million related to the settlement of contract cost matters on certain programs (including a portion of the terminated presidential helicopter program); about $55 million for integrated warfare systems and sensors programs (primarily radar and Halifax class modernization programs) due to increased risk retirements; and approximately $30 million for undersea systems programs due to increased risk retirements. The increases were partially offset by lower operating profit of about $55 million for training and logistics programs, primarily due to the recording of approximately $30 million of charges mostly related to lower-of-cost-or-market considerations; and about $25 million for ship and aviation systems programs (primarily PTDS) due to lower risk retirements and volume. Operating profit related to the LCS program was comparable. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $170 million higher for 2013 compared to 2012. 2012 compared to 2011 MST’s net sales for 2012 increased $447 million, or 6%, compared to 2011. The increase in net sales for 2012 was attributable to higher volume and risk retirements of approximately $395 million from ship and aviation system programs (primarily PTDS; LCS; VLS; and MH-60); about $115 million for training and logistics solutions programs primarily due to net sales from Sim-Industries, which was acquired in the fourth quarter of 2011; and approximately $30 million as a result of increased volume on integrated warfare systems and sensors programs (primarily Aegis). Partially offsetting the increases were lower net sales of approximately $70 million from undersea systems programs due to lower volume on an international combat system program and towed array systems; and about $25 million due to lower volume on various other programs. MST’s operating profit for 2012 increased $92 million, or 14%, compared to 2011. The increase was attributable to higher operating profit of approximately $175 million from ship and aviation system programs, which reflects higher volume and risk retirements on certain programs (primarily VLS; PTDS; MH-60; and LCS) and reserves of about $55 million for contract cost matters on ship and aviation system programs recorded in the fourth quarter of 2011 (including the terminated presidential helicopter program). Partially offsetting the increase was lower operating profit of approximately $40 million from undersea systems programs due to reduced profit booking rates on certain programs and lower volume on an international combat system program and towed array systems; and about $40 million due to lower volume on various other programs. Adjustments not related to volume, including net profit booking rate adjustments and other matters described above, were approximately $150 million higher for 2012 compared to 2011. Backlog Backlog increased slightly in 2013 compared to 2012 mainly due to higher orders and lower sales on integrated warfare system and sensors programs (primarily Aegis) and lower sales on various service programs, partially offset by lower orders on ship and aviation systems (primarily MH-60). Backlog increased in 2012 compared to 2011 mainly due to increased orders on ship and aviation system programs (primarily MH-60 and LCS), partially offset by decreased orders and higher sales volume on integrated warfare systems and sensors programs (primarily Aegis). Trends We expect MST’s net sales to be flat in 2014 compared to 2013. Operating profit is expected to decrease in the low double digit percentage range from 2013 primarily due to the absence of favorable contractual resolutions that occurred in 2013 as described above and expected charges, net of recoveries, in 2014 for incremental costs related to the November 2013 restructuring plan as described in the “Consolidated Results of Operations” section above, resulting in a decline in operating margins between the years. Space Systems Our Space Systems business segment is engaged in the research and development, design, engineering, and production of satellites, strategic and defensive missile systems, and space transportation systems. Space Systems is also responsible for various classified systems and services in support of vital national security systems. Space Systems’ major programs include the Trident II D5 Fleet Ballistic Missile (FBM), Space Based Infrared System (SBIRS), Advanced Extremely High 40


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    Frequency (AEHF) system, Orion, Global Positioning Satellite (GPS) III system, Geostationary Operational Environmental Satellite R-Series (GOES-R), and Mobile User Objective System (MUOS). Operating profit for our Space Systems business segment includes our share of earnings for our investment in United Launch Alliance (ULA), which provides expendable launch services to the U.S. Government. Space Systems’ operating results included the following (in millions): 2013 2012 2011 Net sales $ 7,958 $ 8,347 $ 8,161 Operating profit 1,045 1,083 1,063 Operating margins 13.1% 13.0% 13.0% Backlog at year-end 20,500 18,100 16,000 2013 compared to 2012 Space Systems’ net sales for 2013 decreased $389 million, or 5%, compared to 2012. The decrease was primarily attributable to lower net sales of approximately $305 million for commercial satellite programs due to fewer deliveries (zero delivered during 2013 compared to two for 2012); and about $290 million for the Orion program due to lower volume. The decreases were partially offset by higher net sales of approximately $130 million for government satellite programs due to net increased volume; and about $65 million for strategic and defensive missile programs (primarily FBM) due to increased volume and risk retirements. The increase for government satellite programs was primarily attributable to higher volume on AEHF and other programs, partially offset by lower volume on GOES-R, MUOS, and SBIRS programs. Space Systems’ operating profit for 2013 decreased $38 million, or 4%, compared to 2012. The decrease was primarily attributable to lower operating profit of approximately $50 million for the Orion program due to lower volume and risk retirements and about $30 million for government satellite programs due to decreased risk retirements, which were partially offset by higher equity earnings from joint ventures of approximately $35 million. The decrease in operating profit for government satellite programs was primarily attributable to lower risk retirements for MUOS, GPS III, and other programs, partially offset by higher risk retirements for the SBIRS and AEHF programs. Operating profit for 2013 included about $15 million of charges, net of recoveries, related to the November 2013 restructuring plan. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $15 million lower for 2013 compared to 2012. 2012 compared to 2011 Space Systems’ net sales for 2012 increased $186 million, or 2%, compared to 2011. The increase was attributable to higher net sales of approximately $150 million due to increased commercial satellite deliveries (two commercial satellites delivered in 2012 compared to one during 2011); about $125 million from the Orion program due to higher volume and an increase in risk retirements; and approximately $70 million from increased volume on various strategic and defensive missile programs. Partially offsetting the increases were lower net sales of approximately $105 million from certain government satellite programs (primarily SBIRS and MUOS) as a result of decreased volume and a decline in risk retirements; and about $55 million from the NASA External Tank program, which ended in connection with the completion of the Space Shuttle program in 2011. Space Systems’ operating profit for 2012 increased $20 million, or 2%, compared to 2011. The increase was attributable to higher operating profit of approximately $60 million from commercial satellite programs due to increased deliveries and reserves recorded in 2011; and about $40 million from the Orion program due to higher risk retirements and increased volume. Partially offsetting the increases was lower operating profit of approximately $45 million from lower volume and risk retirements on certain government satellite programs (primarily SBIRS); about $20 million from lower risk retirements and lower volume on the NASA External Tank program, which ended in connection with the completion of the Space Shuttle program in 2011; and approximately $20 million from lower equity earnings as a decline in launch related activities at ULA partially was offset by the resolution of contract cost matters associated with the wind-down of United Space Alliance (USA). Adjustments not related to volume, including net profit booking rate adjustments described above, were approximately $15 million higher for 2012 compared to 2011. Equity earnings Total equity earnings recognized by Space Systems (primarily ULA in 2013) represented approximately $300 million, or 29% of this segment’s operating profit during 2013. During 2012 and 2011, total equity earnings recognized by Space Systems from ULA, USA, and the U.K. Atomic Weapons Establishment joint venture represented approximately $265 million and $285 million, or 24% and 27% of this segment’s operating profit. 41


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    Backlog Backlog increased in 2013 compared to 2012 mainly due to higher orders on the Orion program, partially offset by lower orders on government satellite programs (primarily AEHF). Backlog increased in 2012 compared to 2011 mainly due to higher orders on government satellites activities, partially offset by lower orders on the Orion program. Trends We expect Space Systems’ net sales to decline in 2014 in the mid-single digit percentage range as compared to 2013 primarily due to a decrease in volume on satellite programs in 2014. Operating profit is expected to decline in the low double digit percentage range in 2014 primarily due to lower earnings on satellite programs, expected charges, net of recoveries, in 2014 for accelerated depreciation expense and incremental costs related to the November 2013 restructuring plan as described in the “Consolidated Results of Operations” section above, and lower equity earnings. As a result, operating margins are expected to decline between the years. Liquidity and Cash Flows We have a balanced cash deployment strategy to enhance stockholder value and position ourselves to take advantage of new business opportunities when they arise. Consistent with that strategy, we have invested in our business, including capital expenditures and independent research and development, returned cash to stockholders through dividends and share repurchases, made selective acquisitions of businesses, and managed our debt levels. We have generated strong operating cash flows, which have been the primary source of funding for our operations, debt service and repayments, capital expenditures, dividends, share repurchases, acquisitions, and postretirement benefit plan funding. We have accessed the capital markets on limited occasions, as needed or when opportunistic. Our cash balances and cash from operations have historically been sufficient to support our operations and anticipated capital expenditures for the foreseeable future. However, our liquidity and cash flows could be materially impacted in the future if the U.S. Government were to shut down due to impasses over budget and/or debt ceiling negotiations. As discussed in the “Capital Resources” section, we have financing resources available to fund potential cash outflows that are less predictable or more discretionary, should they occur. We also have access to the credit markets, if needed, for liquidity or general corporate purposes, including, but not limited to, our revolving credit facility or the ability to issue commercial paper and letters of credit to support customer advance payments and for other trade finance purposes such as guaranteeing our performance on particular contracts. Cash received from customers, either from the payment of invoices for work performed or for advances in excess of costs incurred, is our primary source of cash. We generally do not begin work on contracts until funding is appropriated by the customer. Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type. We generally bill and collect cash more frequently under cost-reimbursable and time-and-materials contracts, which together represent approximately half of the sales we recorded in 2013, as we are authorized to bill as the costs are incurred or work is performed. A number of our fixed-price contracts may provide for performance-based payments, which allow us to bill and collect cash as we perform on the contract. The amount of performance-based payments and the related milestones are encompassed in the negotiation of each contract. The timing of such payments may differ from our incurrence of costs related to our contract performance, thereby affecting our cash flows. The U.S. Government has indicated that it would consider progress payments as the baseline for negotiating payment terms on fixed-price contracts, rather than performance-based payments. In contrast to negotiated performance-based payment terms, progress payment provisions correspond to a percentage of the amount of costs incurred during the performance of the contract. While the total amount of cash collected on a contract is the same, performance-based payments have had a more favorable impact on the timing of our cash flows. In addition, our cash flows may be affected if the U.S. Government decides to withhold payments on our billings. The amount of withholds was approximately $200 million as of December 31, 2012. We collected substantially all of this amount in 2013 as we resolved certain deficiencies related to U.S. Government audits of our business systems, primarily at our Aeronautics business segment. While the impact of withholding payments delays the receipt of cash, the cumulative amount of cash collected during the life of the contract will not vary. The majority of our capital expenditures for 2013 and those planned for 2014 can be divided into the categories of facilities infrastructure, equipment, and information technology. Expenditures for facilities infrastructure and equipment are generally incurred to support new and existing programs across all of our business segments. For example, we have projects underway in our Aeronautics business segment for facilities and equipment to support production of the F-35 combat aircraft. 42

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