LOCKHEED MARTIN CORPORATION

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Product Sales Our product sales represent 78% of our total sales in 2015 and 79% of our total sales in 2014. Product sales decreased $211 million, or 1%, in 2015 as compared to 2014. Lower product sales of about $290 million at Space Systems, approximately $250 million at MFC and approximately $110 million at IS&GS were offset by higher product sales of about $320 million at MST and approximately $120 million at Aeronautics. The decrease in product sales at Space Systems was attributable to lower volume for government satellite programs (primarily Advanced Extremely High Frequency (AEHF). Product sales at MFC decreased due to lower volume on air and missile defense systems programs (primarily PAC-3). The decline in product sales at IS&GS was a result of key program completions, lower customer funding levels and increased competition, coupled with the fragmentation of existing large contracts into multiple smaller contracts that are awarded primarily on the basis of price. The increase in product sales at MST was primarily attributable to product sales from Sikorsky, which we acquired in the fourth quarter of 2015. Product sales at Aeronautics increased primarily due to higher volume on F-35 production contracts, as well as increased deliveries on our C-5 program; partially offset by fewer aircraft deliveries for our C-130 and F-16 programs and lower sustainment activities on our F-22 program. Our product sales represent 79% of our total sales in both 2014 and 2013. Product sales increased $402 million, or 1%, in 2014 as compared to 2013. Higher product sales of about $815 million at Aeronautics and approximately $280 million at MFC were partially offset by lower product sales of about $275 million at Space Systems, approximately $235 million at IS&GS and approximately $185 million at MST. The increase in product sales at Aeronautics was attributable to higher volume on F-35 production contracts and sustainment activities, increased aircraft deliveries (F-16 program) and increased risk retirements (F-22 program). Product sales at MFC increased as a result of increased volume on air and missile defense systems programs (primarily THAAD), and increased deliveries on fire control programs (including the Apache Fire Control System (Apache)). The decline in product sales at Space Systems was due to lower volume for government satellite programs (primarily Advanced Extremely High Frequency (AEHF), Global Positioning System III (GPS-III), and Mobile User Objective System (MUOS)); and as a result of mission solutions’ programs transitioning from development to operations and support, wind-down or completion of certain programs, and defense budget cuts. The decline in product sales at Space Systems was partially offset by increased volume in the Orion program (primarily the first unmanned test flight of the Orion Multi-Purpose Crew Vehicle (MPCV)). Lower product sales at IS&GS were primarily due to the wind down or completion of certain programs and decreased volume in technical services programs reflecting market pressures. Lower product sales at MST were primarily driven by the wind-down or completion of certain command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) programs (primarily PTDS). Service Sales Our service sales represent 22% of our total sales in 2015 and 21% of our total sales in 2014. Service sales increased $743 million, or 8%, in 2015 as compared to 2014. The increase in service sales was primarily attributable to higher service sales of approximately $530 million at Aeronautics and about $190 million at Space Systems. Higher service sales at Aeronautics were primarily due to increased sustainment activities (primarily F-35). The increase in service sales at Space Systems was primarily due to service sales of entities acquired in the third quarter of 2014. Our service sales represent 21% of our total sales in both 2014 and 2013. Service sales decreased $160 million, or 2%, in 2014 as compared to 2013. Lower service sales of approximately $225 million at IS&GS and approximately $120 million at MST were partially offset by higher service sales at Space Systems of about $190 million. The decline in service sales at IS&GS was primarily due to various technical services programs as a result of decreased volume reflecting market pressures. The decline in service sales at MST was primarily due to the wind-down or completion of certain programs. The increase in sales at Space Systems was primarily due to commercial space transportation programs resulting from launch-related activities. 34
Cost of Sales Cost of sales, for both products and services, consist of materials, labor, subcontracting costs, an allocation of indirect costs (overhead and general and administrative), as well as the costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers. 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 to complete the contract. Our consolidated cost of sales were as follows (in millions): 2015 2014 2013 Cost of sales – products $(32,006) $(31,965) $(31,346) % of product sales 89.2% 88.6% 87.8% Cost of sales – services (9,011) (8,393) (8,588) % of service sales 87.9% 88.3% 88.8% Goodwill impairment charges — (119) (195) Severance charges (102) — (201) Other unallocated, net 187 132 (841) Total cost of sales $(40,932) $(40,345) $(41,171) Due to the nature of percentage-of-completion accounting, changes in our cost of sales for both products and services are typically accompanied by changes in our net sales. The following discussion of material changes in our consolidated cost of sales for products and services should be read in tandem with the preceding discussion of changes in our consolidated net sales and our business segment results of operations. We have not identified any developing trends in cost of sales for products and services that would have a material impact on our future operations. Product Costs Product costs increased approximately $41 million, or less than 1%, in 2015 as compared to 2014. Increased product costs of approximately $445 million at MST and about $180 million at Aeronautics, were offset by decreases in product costs of approximately $325 million at Space Systems, $195 million at MFC and $65 million at IS&GS. Increases in product costs at MST were due primarily to the Sikorsky acquisition, including costs of Sikorsky products, intangible amortization and adjustments required to account for the acquisition in the fourth quarter of 2015. Higher product costs at Aeronautics were attributable to the reasons stated above for higher product sales, as well as decreased risk retirements (primarily F-22). The changes in product costs at Space Systems, MFC and IS&GS were attributable to the reasons stated above for higher product sales. Product costs increased $619 million, or 2%, in 2014 as compared to 2013. Product costs increased approximately $815 million at Aeronautics and approximately $325 million at MFC. Increases in product costs at Aeronautics and MFC were primarily due to the reasons described above for higher product sales at each respective business segment and net warranty reserve adjustments recorded in 2014 at MFC (including Joint Air-to-Surface Standoff Missile (JASSM), and Guided Multiple Launcher Rocker Systems (GMLRS)). These increases in product costs were partially offset by decreases of about $195 million at IS&GS, $255 million at Space Systems and $70 million at MST, primarily due to the reasons described above for lower product sales at each respective business segment. Additionally, lower product costs at MST were partially offset by costs related to the settlements of contract cost matters on certain programs in the prior year (including a portion of the terminated presidential helicopter program) that were not repeated in 2014 and higher reserves recorded on certain training and logistics solutions programs during 2014. The 0.8% increase in product costs as a percentage of product sales in 2014 compared to 2013 was primarily due to the reasons described above for increasing product costs at MFC, and decreased risk retirements at Aeronautics (primarily F-16). Service Costs Service costs increased $618 million, or 7%, in 2015 compared to 2014. Higher service costs of approximately $450 million at Aeronautics and about $230 million at Space Systems were due to the reasons stated above for higher service sales. These increases in service costs were partially offset by a decrease in service costs of about $80 million at MFC due primarily to lower service costs on various air and missile defense programs. Service costs decreased $195 million, or 2%, in 2014 as compared to 2013. Lower service costs of about $230 million at IS&GS, approximately $100 million at MST, and approximately $40 million at Aeronautics were partially offset by an increase in service costs of approximately $160 million at Space Systems. The decline at IS&GS was primarily attributable to 35
Page 1 and 2: LOCKHEED MARTIN CORPORATION 2015 AN
Page 3 and 4: DEAR FELLOW STOCKHOLDERS:
Page 5 and 6: Lockheed Martin Chairman, President
Page 7 and 8: More than 4,800 Lockheed Martin emp
Page 9 and 10: UNITED STATES SECURITIES AND EXCHAN
Page 11 and 12: PART I ITEM 1. Business. General We
Page 13 and 14: sustainment activities. The develop
Page 15 and 16: U.S. and other countries, as well a
Page 17 and 18: Aluminum and titanium are important
Page 19 and 20: www.lockheedmartin.com/investor, as
Page 21 and 22: unsettled incurred cost claims rela
Page 23 and 24: performance deficiencies may affect
Page 25 and 26: equity investments is in our Space
Page 27 and 28: factors, including actual returns o
Page 29 and 30: events or significant changes in ci
Page 31 and 32: ITEM 4(a). Executive Officers of th
Page 33 and 34: PART II ITEM 5. Market for Registra
Page 35 and 36: ITEM 6. Selected Financial Data. (I
Page 37 and 38: Strategic Actions Acquisition of Si
Page 39 and 40: government shutdowns could arise. W
Page 41: connection with former government s
Page 45 and 46: We expect to recover a substantial
Page 47 and 48: Business Segment Results of Operati
Page 49 and 50: The following tables reflect the im
Page 51 and 52: We have a number of programs that a
Page 53 and 54: Backlog Backlog increased in 2015 c
Page 55 and 56: $15 million for fire control progra
Page 57 and 58: Space Systems’ operating profit i
Page 59 and 60: The following table provides a summ
Page 61 and 62: Revolving Credit Facilities On Octo
Page 63 and 64: Purchase obligations in the precedi
Page 65 and 66: The percentage-of-completion method
Page 67 and 68: Actuarial Assumptions The plan asse
Page 69 and 70: We enter into agreements (e.g., adm
Page 71 and 72: The carrying value of each reportin
Page 73 and 74: material (Note 15). A 10% appreciat
Page 75 and 76: Lockheed Martin Corporation Consoli
Page 81 and 82: Percentage-of-Completion Method - T
Page 83 and 84: 10 to 40 years for buildings and fi
Page 85 and 86: future cash payments are not fixed
Page 87 and 88: Note 3 - Acquisitions and Divestitu
Page 89 and 90: value using an appropriate discount
Page 91 and 92: Subsequent to the program realignme
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divestitures; the effects of certai
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Selected Financial Data by Business
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Work-in-process inventories at Dece
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Note 10 - Debt Our long-term debt c
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The net periodic benefit cost recog
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The following table provides the am
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As of December 31, 2015 and 2014, t
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Accumulated Other Comprehensive Los
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PSUs In January 2015, we granted ce
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eviews we consider these and other
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$50 million and $180 million at our
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ITEM 9. Changes in and Disagreement
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ITEM 9B. Other Information. None. P
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4.1 Indenture, dated May 15, 1996,
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10.25 Lockheed Martin Supplementary
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CERTIFICATION OF BRUCE L. TANNER PU
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GENERAL INFORMATION As of December
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