Memorandum

DATE: October 26, 2011
TO: All Lockheed Martin Employees
FROM: Bob Stevens, Chairman and Chief Executive Officer
           Chris Kubasik, President and Chief Operating Officer

SUBJECT: Our Third-Quarter Results: Strong Performance with Focus on the Future

Today we reported third-quarter results that demonstrate continued strong operational and financial performance while implementing cost reduction measures that will enable us to keep pace with a complex global security and economic climate. Once again, we reported workforce reductions. That’s the hardest thing we do, but it’s one of the ways we can operate more efficiently to support customers contending with tightened budgets while providing value to our shareholders.

During the quarter, we grew sales and earnings per share, and we generated more than $500 million in cash from operations. As a result, we were able to return value to our shareholders through our highest ever quarterly share repurchases and a 33 percent increase in dividends beginning later this year. We also used cash to make pension fund contributions of $960 million and capital investments of more than $200 million. To further strengthen our portfolio, we completed the purchase on Sept. 27 of QTC Holdings, a leading provider of healthcare IT services to the U.S. Government. We’re confident this will further distinguish our IS&GS Business Area in the government IT market.

Across the Corporation, we recorded key milestones and deliveries this past quarter for both U.S. Government and global customers, including: starting construction on the nation’s fifth Littoral Combat Ship, which is the third one we’ll build; delivering MH-60S Seahawk helicopters to our first international customer, the Royal Thai Navy; intercepting two targets using the Terminal High Altitude Area Defense system; delivering software to the FAA to enable GPS technology for New York City’s airports; launching the JUNO spacecraft to explore Jupiter and the GRAIL spacecraft to the Moon; and delivering five F-16s, 13 C-130Js and one upgraded C-5 aircraft.

We also established the Executive Office of the Chairman to enhance the Corporation’s responsiveness, agility and performance. As members of the Executive Office, we’ll both act interchangeably to promptly address and resolve operational and functional issues as they arise. This will enhance the Corporation’s responsiveness to our stakeholders and elevate our ability to anticipate trends that shape our future and act decisively.

Today marks 10 years since we were placed under contract to work in partnership with DoD to deliver the F-35 Joint Strike Fighter, an unprecedented national security asset that will be the backbone of tactical aviation for generations. Progress continues on the Systems Development and Demonstration (SDD) contract, with test flights and test points ahead of year-to-date goals. We also completed successful sea trials for the Short Take Off/Vertical Landing variant and delivered five production aircraft for pilot training to the U.S. Air Force in the quarter. 

We are performing the SDD contract concurrently with initial production Lots 1 through 4, and as expected, we are implementing design changes resulting from the development efforts in the early stage of production. For Lot 5, we and our industry team have continued to work in an effort to meet our customer’s desired aircraft delivery dates, despite not yet receiving the additional funding required to continue the advanced procurement. As a result, as of September 25, 2011, we have approximately $750 million in potential termination liability exposure. Without additional funding or contract coverage, we estimate that our exposure by the end of 2011 will be approximately $1.2 billion. We are in the process of negotiating with our customer to obtain additional funding and finalize the contract.

We are exceedingly proud of the highly skilled men and women delivering the F-35’s unparalleled capabilities and technology that will strengthen U.S. and allied forces through greater interoperability and capability at a lower cost. The F-35 work performed day in and day out spans multiple Business Areas and represents our full commitment to deliver the aircraft on time and within budget. 

Across our business, many of our customers are facing declining budgets, the extent of which will become clearer in the months ahead. Consequently, they expect products and services to cost less. Trends for next year indicate sales growth will be even tougher to realize given fiscal constraints in U.S. and global markets. We have made significant progress on reducing overhead and realizing savings through technical innovations, but there’s more work to do. We must take decisive action – every day – to extract cost from our products and processes and make fundamental changes in the way we do business.

In the face of this demanding environment, we have never been prouder of your resolve and your unequaled dedication to maintaining a global security leadership role for our company while operating with the highest standards of ethics and integrity. Our continued success through the end of 2011 – and into 2012 – will require all of us to stay focused on achieving operational excellence. Every day, you demonstrate the character of our company through your shared values and focus on our customers. Thank you for your dedication, we know you’ll maintain that level of professionalism as we work together to finish the year strong.