# Table	of	Contents

# United	States

# SECURITIES	AND	EXCHANGE	COMMISSION

# ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF

# THE	SECURITIES	EXCHANGE	ACT	OF	1934

For	the	fiscal	year	ended	December	31,	2012

Commission	file	number	1-11437

# LOCKHEED	MARTIN	CORPORATION

(Exact	name	of	registrant	as	specified	in	its	charter)

Maryland

(State	or	other	jurisdiction	of incorporation	or	organization)

(I.R.S.	Employer

Identification	No.)

(Address	and	telephone	number	of	principal	executive	offices)

# Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

Title	of	each	class

Common	Stock,	$1	par	value

Name	of	each	exchange	on	which	registered

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		x				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		x

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		x				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		x				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.				x

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		x						Accelerated	filer		¨						Non-accelerated	filer		¨						Smaller	reporting	company		¨

Indicate	by	check	mark	whether	the	registrant	is	a	shell	company	(as	defined	in	Rule	12-b2	of	the	Exchange	Act).	Yes		¨				No		x

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	22,	2012,	was	approximately	$27.5	billion.

Indicate	the	number	of	shares	outstanding	of	each	of	the	registrant's	classes	of	common	stock,	as	of	the	latest	practicable	date.	Common	Stock,	$1	par	value, 322,583,334	shares	outstanding	as	of	January	31,	2013.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

Portions	of	Lockheed	Martin	Corporation's	2013	Definitive	Proxy	Statement	are	incorporated	by	reference	in	Part	III	of	this Form	10-K.

# CONTENTS

| Item	1 | Business | 3 |
| :--- | :--- | :--- |
| Item\t1A | Risk\tFactors | \t\t9 |
| Item\t1B | Unresolved\tStaff\tComments | 17 |
| Item\t2 | Properties | 17 |
| Item\t3 | Legal\tProceedings | 18 |
| Item\t4 | Mine\tSafety\tDisclosures | 18 |
| Item\t4(a) | Executive\tOfficers\tof\tthe\tRegistrant | 18 |
| Part\tII |  |  |
| Item\t5 | Market\tfor\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 20 |
| Item\t6 | Selected\tFinancial\tData | 22 |
| Item\t7 | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 23 |
| Item\t7A | Quantitative\tand\tQualitative\tDisclosures\tAbout\tMarket\tRisk | 53 |
| Item\t8 | Financial\tStatements\tand\tSupplementary\tData | 54 |
| Item\t9 | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 88 |
| Item\t9A | Controls\tand\tProcedures | 88 |
| Item\t9B | Other\tInformation | 90 |
| Part\tIII |  |  |
| Item\t10 | Directors,\tExecutive\tOfficers\tand\tCorporate\tGovernance | 91 |
| Item\t11 | Executive\tCompensation | 91 |
| Item\t12 | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | 92 |
| Item\t13 | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | 92 |
| Item\t14 | Principal\tAccounting\tFees\tand\tServices | 92 |
| Part\tIV |  |  |
| Item\t15 | Exhibits\tand\tFinancial\tStatement\tSchedules | 93 |
| Signatures |  | 97 |

Exhibits

# 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	and	products.	We	also	provide	a	broad	range	of	management,	engineering,	technical,	scientific,	logistic,	and	information	services.	We	serve	both domestic	and	international	customers	with	products	and	services	that	have	defense,	civil,	and	commercial	applications,	with	our	principal	customers	being	agencies	of the	U.S.	Government.	In	2012,	82%	of	our	$47.2	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	that	is	characterized	by	both	increasing	complexity	in	global	security,	as	well	as	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	more	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	in	a	disciplined	manner	with	a	focus	on	adjacent	markets	close	to	our core	capabilities.	Despite	the	challenges	we	face,	we	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	be	successful	in	this	environment,	and	return	cash	to	investors	in	the	form	of	dividends	and	share	repurchases.

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	20817-1877.	Our	telephone	number	is	(301)	897-6000.	Our	website	home	page	on	the Internet	is	www.lockheedmartin.com.	We	make	our	website	content	available	for	information	purposes	only.	It	should	not	be	relied	upon	for	investment	purposes,	nor	is it	incorporated	by	reference	into	this	Form	10-K.

Throughout	this	Form	10-K,	we	incorporate	by	reference	information	from	parts	of	other	documents	filed	with	the	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.

We	make	our	annual	report	on	Form	10-K,	quarterly	reports	on	Form	10-Q,	current	reports	on	Form	8-K,	and	proxy	statement	for	our	annual	stockholders'	meeting, as	well	as	any	amendments	to	those	reports,	available	free	of	charge	through	our	website	as	soon	as	reasonably	practical	after	we	electronically	file	the	material	with,	or furnish	it	to,	the	SEC.	You	can	learn	more	about	us	by	reviewing	our	SEC	filings.	Our	SEC	filings	can	be	accessed	through	the	investor	relations	page	of	our	website, www.lockheedmartin.com/investor.	The	SEC	also	maintains	a	website	at	www.sec.gov	that	contains	reports,	proxy	statements,	and	other	information	regarding	SEC registrants,	including	Lockheed	Martin	Corporation.

# Business	Segments

We	organize	our	business	segments	based	on	the	nature	of	the	products	and	services	offered.	Effective	December	31,	2012,	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.	This structure	reflects	the	reorganization	of	our	former	Electronic	Systems	business	segment	into	the	new	MFC	and	MST	business	segments	in	order	to	streamline	our operations	and	enhance	customer	alignment.	In	connection	with	this	reorganization,	management	layers	at	our	former	Electronic	Systems	business	segment	and	our former	Global	Training	and	Logistics	(GTL)	business	were	eliminated,	and	the	former	GTL	business	was	split	between	the	two	new	business	segments.	In	addition, operating	results	for	Sandia	Corporation,	which	manages	the	Sandia	National	Laboratories	for	the	U.S.	Department	of	Energy,	and	our	equity	interest	in	the	U.K.	Atomic Weapons	Establishment	joint	venture	were	transferred	from	our	former	Electronic	Systems	business	segment	to	our	Space	Systems	business	segment.

The	amounts,	discussion,	and	presentation	of	our	business	segments	reflect	this	reorganization	for	all	years	presented	in	this	Annual	Report	on	Form	10-K.	For more	information	concerning	our	segment	presentation,	including	comparative

segment	net	sales,	operating	profit,	and	related	financial	information	for	2012,	2011,	and	2010,	see	"Business	Segment	Results	of	Operations"	in	Management's Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	and	"Note	3	–	Information	on	Business	Segments"	of	our	consolidated	financial	statements.

# Aeronautics

In	2012,	our	Aeronautics	business	segment	generated	net	sales	of	$15.0	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	allied	countries.	In	2012,	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	2012	and	20%	of	our	total	consolidated	net	sales	in	each	of	2011	and	2010.

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:

Ÿ F-35	Lightning	II	Joint	Strike	Fighter	–	international	multi-role,	fifth	generation	stealth	fighter;

Ÿ F-22	Raptor	–	air	dominance	and	multi-mission	fifth	generation	stealth	fighter;

Ÿ F-16	Fighting	Falcon	–	low-cost,	combat-proven,	international	multi-role	fighter;

Ÿ 	 C-130	Hercules	–	international	tactical	airlifter;	and

Ÿ 	 C-5M	Super	Galaxy	–	strategic	airlifter.

The	F-35	program	is	the	largest	in	our	corporation	generating	14%	of	our	total	consolidated	net	sales,	as	well	as	45%	of	Aeronautics'	net	sales	in	2012.	The	F-35 program	consists	of	multiple	contracts.	The	development	contract	is	being	performed	concurrently	with	the	low-rate	initial	production	(LRIP)	contracts.	Concurrent performance	of	development	and	production	contracts	is	used	for	complex	programs	to	test	airplanes,	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	to	continue	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	and	Navy	variants	of the	aircraft,	commitments	from	our	eight	international	partners	and	two	international	customers,	as	well	as	expressions	of	interest	from	other	countries.	For	additional information	on	the	F-35	program,	see	"Status	of	F-35	Program"	and	"Industry	Considerations"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and Results	of	Operations.

Although	production	and	deliveries	of	F-22	aircraft	were	completed	in	2012,	Aeronautics	continues	to	provide	on-going	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	at	all operational	bases,	including	training	systems,	customer	support,	integrated	support	planning,	supply	chain	management,	aircraft	modifications	and	heavy	maintenance, sustained	engineering,	support	products,	and	systems	engineering.

Currently,	Aeronautics	produces	F-16	aircraft	for	international	customers.	Aeronautics	also	provides	service-life	extension,	modernization,	and	other	upgrade programs	for	our	customers'	F-16	aircraft.	In	2012,	we	were	awarded	a	contract	to	upgrade	145	of	Taiwan's	F-16	aircraft.

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	34	C-130J	aircraft	in	2012,	including	eight	to	international	customers.

Aeronautics	also	provides	support	services	for	the	existing	U.S.	Air	Force	C-5A/B/C/M	Galaxy	fleet	and	a	modernization	program	to	convert	49	Galaxy	aircraft	to the	C-5M	Super	Galaxy	configuration.	The	modernization	effort	includes	avionics	upgrades	comprised	of	a	new	cockpit	with	a	digital,	all-weather	flight	control	system and	autopilot,	a	new	communications	suite,	flat-panel	displays,	and	enhanced	navigation	and	safety	equipment;	as	well	as	installing	new	engines	that	will	produce	more thrust,	enabling	a	shorter	takeoff,	increased	climb	rate,	an	increased	cargo	load,	and	longer	range.	We	delivered	four	C-5M	aircraft	in	2012.

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	the	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	2012,	our	IS&GS	business	segment	generated	net	sales	of	$8.8	billion,	which	represented	19%	of	our	total	consolidated	net	sales.	IS&GS'	customers	include	the various	government	agencies	of	the	U.S.	and	allied	countries	around	the	world	and	military	services,	as	well	as	commercial	and	other	customers.	In	2012,	U.S.

Government	customers	accounted	for	95%,	international	customers	accounted	for	4%,	and	U.S.	commercial	and	other	customers	accounted	for	1%	of	IS&GS'	net	sales. IS&GS	has	been	impacted	by	the	continuing	downturn	in	the	federal	information	technology	budgets	and	the	impact	of	the	continuing	resolution	that	was	effective	on October	1,	2012,	the	start	of	the	U.S.	Government's	fiscal	year.

IS&GS	provides	management	services,	integrated	information	technology	solutions,	and	advanced	technology	systems	and	expertise	across	a	broad	spectrum	of applications	for	civil,	defense,	intelligence,	and	other	government	customers.	IS&GS	supports	the	needs	of	customers	in	cyber-security,	health	care,	energy	and environmental	protection	management,	transportation,	space	exploration,	human	capital	planning,	financial	services,	data	protection	and	sharing,	and	biometrics.	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.	IS&GS	is	also	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:

Ÿ 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.

Ÿ The	En-Route	Automation	Modernization	(ERAM)	contract,	which	is	a	program	to	replace	the	Federal	Aviation	Administration's	infrastructure	with	a modern	automation	environment	that	includes	new	functions	and	capabilities.

Ÿ The	Hanford	Mission	Support	contract,	which	provides	infrastructure	and	site	support	services	to	the	Department	of	Energy.

Ÿ 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.

# Missiles	and	Fire	Control

In	2012,	our	MFC	business	segment	generated	net	sales	of	$7.5	billion,	which	represented	16%	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	allied	countries,	as	well	as	commercial	and	other	customers.	In	2012,	U.S. Government	customers	accounted	for	70%	and	international	customers	accounted	for	30%	of	MFC's	net	sales.

MFC	provides	air	and	missile	defense	systems;	tactical	missiles	and	air-to-ground	precision	strike	weapon	systems;	fire	control	systems;	mission	operations support,	readiness,	engineering	support,	and	integration	services;	logistics	and	other	technical	services;	and	manned	and	unmanned	ground	vehicles.	MFC's	major programs	include:

Ÿ 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.

Ÿ The	Multiple	Launch	Rocket	System	(MLRS),	Hellfire,	Javelin,	and	Joint	Air-to-Surface	Standoff	Missile	(JASSM)	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.	Javelin	is	a	shoulder-fired	anti-armor	rocket	system,	which	is	produced for	the	U.S.	Army,	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.

helicopter	for	the	U.S.	Army	and	international	customers.	Sniper^®

navigation	and	targeting	system	for	fixed-wing	aircraft.	Both	Sniper^®

Ÿ The	Special	Operations	Forces	Contractor	Logistics	Support	Services	program,	which	provides	logistics	support	services	to	the	special	operations	forces of	the	U.S.	military.

# Mission	Systems	and	Training

In	2012,	our	MST	business	segment	generated	net	sales	of	$7.6	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	allied	countries,	as	well	as	commercial	and	other	customers.	In	2012,	U.S. Government	customers	accounted	for	75%,	international	customers	accounted	for	24%,	and	U.S.	commercial	and	other	customers	accounted	for	1%	of	MST's	net	sales.

MST	provides	surface	ship	and	submarine	combat	systems;	sea	and	land-based	missile	defense	systems;	radar	systems;	mission	systems	and	sensors	for	rotary	and fixed-wing	aircraft;	littoral	combat	ships;	simulation	and	training	services;	unmanned	technologies	and	platforms;	ship	systems	integration;	and	military	and	commercial training	systems.	MST's	major	programs	include:

Ÿ The	Aegis	Combat	System,	which	is	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.

Ÿ The	MK-41	Vertical	Launching	System	(VLS)	is	a	shipborne	missile	canister	launching	system	that	provides	for	rapid-fire	launch	capability,	which	is produced	for	the	U.S.	Navy	and	international	customers.

Ÿ The	TPQ-53	Radar	System	is	a	sensor	that	quickly	locates	and	neutralizes	mortar	and	rocket	threats,	which	is	produced	for	the	U.S.	Army	and international	customers.

Ÿ 	 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	the	Royal	Australian	Navy,	and	was	selected	by	the	Danish	government	in	December	2012.

Ÿ The	Littoral	Combat	Ship	(LCS),	which	is	a	surface	combatant	for	the	U.S.	Navy	designed	to	operate	in	shallow	waters.	We	delivered	our	second	LCS vessel,	the	USS	Fort	Worth,	to	the	U.S.	Navy	in	2012.	Construction	is	progressing	on	our	third	and	fourth	LCS	vessels,	the	Milwaukee	and	the	Detroit, which	are	scheduled	for	completion	in	2014	and	2015.

Ÿ The	Persistent	Threat	Detection	System	(PTDS),	which	is	a	lighter-than-air	continuous	communications	and	persistent	surveillance	system	produced	for the	U.S.	Army.	Deliveries	on	the	PTDS	program	completed	in	2012.

# Space	Systems

In	2012,	our	Space	Systems	business	segment	generated	net	sales	of	$8.3	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	2012,	U.S.	Government	customers	accounted	for	95%,	international customers	accounted	for	4%,	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	2012	and	2011,	and	13%	in	2010.

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:

Ÿ The	Space-Based	Infrared	System	(SBIRS)	program,	which	provides	the	U.S.	Air	Force	with	enhanced	worldwide	missile	launch	detection	and	tracking capabilities.

Ÿ The	Advanced	Extremely	High	Frequency	(AEHF)	system,	which	is	the	next	generation	of	highly	secure	communications	satellites	for	the	U.S.	Air Force.

Ÿ The	Mobile	User	Objective	System	(MUOS),	which	is	a	next-generation	narrow	band	satellite	communication	system	for	the	U.S.	Navy.

Ÿ 	 Global	Positioning	System	(GPS)	III,	which	is	a	program	to	modernize	the	GPS	satellite	system	for	the	U.S.	Air	Force.

Ÿ The	Geostationary	Operational	Environmental	Satellite	R-Series	(GOES-R),	which	is	the	National	Oceanic	and	Atmospheric	Association's	next generation	of	meteorological	satellites.

Ÿ The	Trident	II	D5	Fleet	Ballistic	Missile,	which	is	a	program	with	the	U.S.	Navy	for	the	only	current	submarine-launched	intercontinental	ballistic missile	in	production	in	the	U.S.

Ÿ The	Orion	Multi-Purpose	Crew	Vehicle	(Orion)	program,	an	advanced	crew	capsule	for	the	National	Aeronautics	and	Space	Administration	(NASA) utilizing	new	technology	for	human	exploration	beyond	low	earth	orbit	that	replaces	the	Space	Shuttle.

Operating	results	for	our	Space	Systems	business	segment	include	our	equity	interests	in	United	Launch	Alliance,	which	provides	expendable	launch	services	for the	U.S.	Government,	United	Space	Alliance,	which	provided	processing	activities	for	the	Space	Shuttle	program	and	is	winding	down	following	the	completion	of	the last	Space	Shuttle	mission	in	2011,	and	a	joint	venture	that	manages	the	U.K.'s	Atomic	Weapons	Establishment	program.	Additionally,	operating	results	for	Space Systems	include	Sandia	Corporation,	which	manages	and	operates	Sandia	National	Laboratories	for	the	U.S.	Department	of	Energy.

# Competition

Our	broad	portfolio	of	products	and	services	competes	against	the	products	and	services	of	other	large	aerospace,	defense,	and	information	technology	companies, as	well	as	numerous	smaller	competitors,	particularly	in	the	IS&GS	segment.	We	often	form	teams	with	other	companies	that	are	competitors	in	other	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:	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;	release	of	technology;	our	demonstrated	ability	to	execute	and	perform	against	contract	requirements;	and our	ability	to	provide	timely	solutions.

The	competition	for	foreign	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	other	governments.	International competitions	also	may	be	subject	to	different	laws	or	contracting	practices	of	other	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.

# 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

Aspects	of	our	business	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	Regulation

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	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:

Ÿ require	certification	and	disclosure	of	all	cost	or	pricing	data	in	connection	with	certain	types	of	contract	negotiations;

Ÿ impose	specific	and	unique	cost	accounting	practices	that	may	differ	from	U.S.	generally	accepted	accounting	principles;

Ÿ 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;

Ÿ restrict	the	use	and	dissemination	of	information	classified	for	national	security	purposes	and	the	export	of	certain	products,	services,	and	technical	data; and

Ÿ require	the	review	and	approval	of	contractor	business	systems,	defined	in	the	regulations	as:	(i)	Accounting;	(ii)	Estimating;	(iii)	Earned	Value Management	Systems	(EVMS,	for	managing	cost	and	schedule	performance	on	certain	complex	programs);	(iv)	Purchasing;	(v)	Material	Management and	Accounting	System	(MMAS,	for	planning,	controlling,	and	accounting	for	the	acquisition,	use,	issuing,	and	disposition	of	material);	and (vi)	Property	Management	systems.

For	more	information	regarding	government	contracting	laws	and	regulations,	see	Item	1A	-	Risk	Factors	as	well	as	"Industry	Considerations"	and	"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.

# Backlog

At	December	31,	2012,	our	backlog	was	$82.3	billion	compared	with	$80.7	billion	at	December	31,	2011.	Backlog	is	converted	into	sales	in	future	periods	as	work is	performed	or	deliveries	are	made.	Approximately	$35.0	billion,	or	43%,	of	our	total	2012	year-end	backlog	is	expected	to	be	converted	into	sales	in	2013.

Our	backlog	includes	both	funded	(unfilled	firm	orders	for	our	products	and	services	for	which	funding	has	been	both	authorized	and	appropriated	by	the	customer –	Congress,	in	the	case	of	U.S.	Government	agencies)	and	unfunded	(firm	orders	for	which	funding	has	not	been	appropriated)	amounts.	We	do	not	include	unexercised options	or	potential	indefinite-delivery,	indefinite-quantity	orders	in	our	backlog.	If	any	of	our	contracts	were	to	be	terminated,	our	backlog	would	be	reduced	by	the expected	value	of	the	remaining	terms	of	such	contracts.	Funded	backlog	was	$54.8	billion	at	December	31,	2012,	as	compared	to	$55.1	billion	at	December	31,	2011. 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-funded	contracts	and	with	our	own	independent	research	and	development	funds.	Our	independent research	and	development	costs	include	basic	research,	applied	research,

development,	systems,	and	other	concept	formulation	studies.	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	costs	of	sales	were	$616	million	in	2012,	$585	million	in	2011,	and	$639	million	in	2010.	See	"Research	and development	and	similar	costs"	in	"Note	1	–	Significant	Accounting	Policies"	of	our	consolidated	financial	statements.

# Employees

At	December	31,	2012,	we	had	about	120,000	employees,	approximately	95%	of	whom	were	located	in	the	U.S.	We	have	a	continuing	need	for	numerous	skilled and	professional	personnel	to	meet	contract	schedules	and	obtain	new	and	ongoing	orders	for	our	products.	The	majority	of	our	employees	possess	a	security	clearance. The	demand	for	workers	with	security	clearances	who	have	specialized	engineering,	information	technology,	and	technical	skills	within	the	aerospace,	defense,	and information	technology	industries	is	likely	to	remain	high	for	the	foreseeable	future,	while	growth	of	the	pool	of	trained	individuals	with	those	skills	has	not	matched demand.	As	a	result,	we	are	competing	with	other	companies	with	similar	needs	in	hiring	skilled	employees.

Approximately	15%	of	our	employees	are	covered	by	any	one	of	approximately	65	separate	collective	bargaining	agreements	with	various	unions.	A	number	of	our existing	collective	bargaining	agreements	expire	in	any	given	year.	Historically,	we	have	been	successful	in	renegotiating	expiring	agreements	without	any	material disruption	of	operating	activities.	Management	considers	employee	relations	to	be	good.

# 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.

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	future	financial	results	likely	will	be	different	from	those	projected	due	to	the	inherent	nature	of	projections,	and	may	be	better	or	worse	than	expected.	Given these	uncertainties,	you	should	not	rely	on	forward-looking	statements.	The	forward-looking	statements	contained	in	this	Form	10-K	speak	only	as	of	the	date	of	this Form	10-K.	We	expressly	disclaim	a	duty	to	provide	updates	to	forward-looking	statements	after	the	date	of	this	Form	10-K	to	reflect	the	occurrence	of	subsequent events,	changed	circumstances,	changes	in	our	expectations,	or	the	estimates	and	assumptions	associated	with	them.	The	forward-looking	statements	in	this	Form	10-K are	intended	to	be	subject	to	the	safe	harbor	protection	provided	by	the	federal	securities	laws.

# 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	consider	the	following	factors	carefully,	in	addition	to	the	other	information	contained	in	this Form	10-K,	before	deciding	to	purchase	our	securities.

We	depend	heavily	on	U.S.	Government	contracts.	Our	programs	could	be	materially	reduced,	extended,	or	terminated	as	a	result	of	the	government's continuing	assessment	of	priorities,	changes	in	government	priorities,	the	implementation	of	sequestration,	or	other	budget	cuts	intended	to	avoid sequestration.	These	matters	and/or	delays	in	the	budget	process,	including	a	continuing	resolution,	could	adversely	affect	our	ability	to	grow	or	maintain	our sales,	earnings,	and	cash	flow.

We	derived	82%	of	our	consolidated	net	sales	from	U.S.	Government	customers	in	2012,	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.

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.

Should	Congress	and	the	Administration	fail	to	change	or	further	delay	the	pending	sequestration	of	appropriations	in	government	fiscal	year	(GFY)	2013	imposed by	the	Budget	Control	Act	of	2011	(Budget	Act)	now	scheduled	to	take	effect	on	March	1,	2013,	our	customers'	budgets	would	be	reduced	significantly	and	there	would be	a	direct	and	significant	reduction	in	our	customers'	contract	awards.	While	we	understand	customers	have	started	to	plan	for	sequestration,	the	specific	effects	of sequestration	are	not	yet	available	and	cannot	be	determined	by	us.	The	automatic	across-the-board	cuts	from	sequestration	would	approximately	double	the	amount	of the	ten-year	$487	billion	reduction	in	defense	spending	that	began	in	GFY	2012	already	required	by	the	Budget	Act,	including	the	budget	for	Overseas	Contingencies Operations	and	any	unobligated	balances	from	prior	years,	and	would	have	significant	consequences	to	our	business	and	industry.	Non-DoD	agencies	would	also	have significantly	reduced	budgets.	There	would	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	would	severely	impact	advanced	manufacturing	operations	and engineering	expertise,	and	accelerate	the	loss	of	skills	and	knowledge.	Consequently,	we	expect	that	sequestration,	or	other	budgetary	cuts	in	lieu	of	sequestration,	would have	a	material	effect	on	our	corporation.	For	more	information	regarding	sequestration,	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	14%	of	our	total	consolidated	net	sales	in	2012,	and	is	expected	to	represent	a	higher	percentage	of	our	sales	in	future	years.	For	more information	regarding	the	F-35	program,	see	"Status	of	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.

In	years	when	the	U.S.	Government	does	not	complete	its	budget	process	before	the	end	of	its	fiscal	year	(September	30),	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.	The	U.S.	Government	is	currently	operating under	a	continuing	resolution	that	is	effective	through	March	27,	2013,	and	its	budget	for	GFY	2013	has	not	been	finalized.	Historically,	this	has	not	had	a	material effect	on	our	business,	although	we	did	experience	a	decrease	in	contract	awards	and	sales	at	our	IS&GS	business	segment	during	the	fourth	quarter	of	2012	due	to	the continued	downturn	in	federal	information	technology	budgets	impacted	by	the	continuing	resolution.	Should	the	continuing	resolution	be	prolonged	further	or	extended through	the	entire	government	fiscal	year	or	decisions	regarding	sequestration	remain	pending,	it	may	cause	additional	government	contract	awards	to	shift	and	cause	our results	of	operations	to	vary	between	periods.	In	limited	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,	debarment	from	bidding	on	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	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	Federal	Acquisition	Regulations	(FAR).

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	(DCMA),	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	receivables	for certain	contract	types	such	as	cost-reimbursable	contracts	and	fixed-price	incentive-fee	contracts.	Withholds	are	capped	at	5%	of	billings	when	deficiencies	impact	a single	business	system	and	10%	when	deficiencies	impact	multiple	systems,	and	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.	Such	deficiencies	have	not	impacted	our	internal	control	over	financial	reporting.	For example,	the	U.S.	Government	is	currently	withholding	certain	funds	on	receivables	for	the	F-35	program	due	to	the	DCMA's	prior	withdrawal	of	its	validation	and determination	of	compliance	of	the	Earned	Value	Management	Systems	at	our	Fort	Worth,	Texas	location.	In	2012,	the	DCMA	conducted	a	compliance	review	and concluded	that	although	we	have	made	notable	progress	toward	compliance,	additional	corrective	actions	are	necessary	to	achieve	full	compliance.

If	an	audit	or	investigation	uncovers	improper	or	illegal	activities,	we	may	be	subject	to	civil	or	criminal	penalties	and	administrative	sanctions,	including termination	of	contracts,	forfeiture	of	profits,	suspension	of	payments,	fines,	and	suspension	or	prohibition	from	doing	business	with	the	U.S.	Government.	In	addition, we	could	suffer	serious	reputational	harm	if	allegations	of	impropriety	were	made	against	us.	Similar	government	oversight	exists	in	most	other	countries	where	we conduct	business.

# Increased	competition	and	bid	protests	in	a	budget-constrained	environment	may	make	it	more	difficult	to	maintain	our	financial	performance.

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.	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	even	loss	of	the	contract	if	our competitors	protest	or	challenge	contracts	that	are	awarded	to	us.	Multi-award	contracts	require	that	we	make	sustained	efforts	to	obtain	task	orders	under	the	contract. 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.	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.	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.

# International	sales	may	pose	different	risks.

In	2012,	our	sales	to	international	customers	accounted	for	17%	of	our	total	consolidated	net	sales.	As	a	company,	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	exposures	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	2012,	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	other	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	certain	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	or	debarment	from	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	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 transactions.

Our	international	business	is	highly	sensitive	to	changes	in	regulations,	political	environments,	or	security	risks	may	affect	our	ability	to	conduct	business	in	foreign markets,	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	(both	in	the	U.S.	and	abroad)	and	U.S.	foreign	policy.

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,	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	joint	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.

# 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	systems	and	products.	New	technologies may	be	untested	or	unproven.	Failure	of	some	of	these	products	and	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.	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.

Substantial	claims	resulting	from	an	accident,	failure	of	our	products	or	services,	or	other	incident,	or	liability	arising	from	our	products	and	services	in	excess	of any	indemnity	and	our	insurance	coverage	(or	for	which	indemnity	or	insurance	is	not	available	or	not	obtained)	could	adversely	impact	our	financial	condition,	cash flows,	or	operating	results.	Any	accident,	even	if	fully	indemnified	or	insured,	could	negatively	affect	our	reputation	among	our	customers	and	the	public,	and	make	it more	difficult	for	us	to	compete	effectively.	It	also	could	affect	the	cost	and	availability	of	adequate	insurance	in	the	future.

# Our	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	finally	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)),	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	despite	the	actual	costs	we	incur.	We	have	to	absorb	any	costs	in	excess	of	the	fixed	price. Under	time-and-materials	contracts,	we	are	paid	for	labor	at	negotiated	hourly	billing	rates	and	for	certain	expenses.

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.

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	under	pressures	that	may	result	in	a	change	in	contract	types	referenced	above	earlier	in	program	maturity	than	is traditional.	An	example	of	this	is	the	use	of	fixed-price	incentive-fee	contracts	for	the	LRIP	4	and	LRIP	5	contracts	on	the	F-35	program	while	the	development	contract is	running	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	government	in	certain	circumstances	requiring	that	bid	and	proposal	costs	be	included	in	general and	administrative	costs,	rather	than	charged	directly	to	contracts,	and	potentially	lowering	the	cap	on	the	recoverability	of	executive	compensation.

Other	policies	could	negatively	impact	our	working	capital	and	cash	flow.	For	example,	the	government	has	expressed	a	preference	for	requiring	progress	payment provisions	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.

# We	are	the	prime	contractor	on	most	of	our	contracts	and	if	our	subcontractors,	suppliers,	or	teaming	agreement	or	joint	venture	partners	fail	to	perform their	obligations,	our	performance	and	our	ability	to	win	future	business	could	be	harmed.

Most	of	our	contracts	involve	subcontracts	or	teaming	arrangements	with	other	companies	upon	which	we	rely	to	perform	a	portion	of	the	services	that	we	must provide	to	our	customers.	We	also	sometimes	bid	on	contracts	through	joint	ventures	that	award	work	through	these	entities,	rather	than	through	subcontract	or	teaming arrangements.	There	is	a	risk	that	we	may	have	disputes	with	our	subcontractors,	teammates,	or	venture	members,	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	member,	or	vice	versa.	In	addition,	the	contracting	parties	on	which	we	rely	may	be affected	by	changes	in	the	economic	environment	and	constraints	on	available	financing	to	meet	their	performance	requirements	or	provide	needed	supplies	on	a	timely basis.	A	failure	by	one	or	more	of	those	contracting	parties	to	provide	the	agreed-upon	supplies	or	perform	the	agreed-upon	services	on	a	timely	basis	may	affect	our ability	to	perform	our	obligations.	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.

The	funding	and	costs	associated	with	our	pension	and	postretirement	medical	plans	are	dependent	on	economic	factors	such	as	discount	rates	and	long-term rates	of	return	on	our	plan	assets	as	well	as	other	actuarial	assumptions	which	may	cause	our	earnings,	cash	flows,	and	stockholders'	equity	to	fluctuate significantly	from	year	to	year.

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	expected	rates	of	increase	in	future	compensation	levels, employee	turnover	and	mortality,	as	well	as	the	timing	of	funding.	Changes	in	these	factors	also	affect	our	plan	funding,	cash	flow,	earnings,	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)	and	Pension	Protection	Act	(PPA).	We	generally	are	able	to	recover	these	costs	related	to	our	plans	as	allowable	costs on	our	U.S.	Government	contracts,	including	FMS,	but	there	are	delays	between	when	we	contribute	cash	to	the	plans	under	pension	funding	rules	and	recover	it	under government	cost	accounting	rules.	Effective	February	2012,	the	cost	accounting	rules	were	revised	to	harmonize	the

measurement	and	period	assignment	of	the	pension	cost	allocable	to	government	contracts	with	the	PPA	(CAS	Harmonization).	The	cost	impact	of	CAS	Harmonization will	be	phased	in	beginning	in	2013	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	9	–	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,	joint 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,	and	manage	post-closing	matters	(e.g.,	integrate	acquired companies	and	employees	and	realize	anticipated	operating	synergies)	efficiently	and	effectively.	Acquisition,	divestiture,	joint	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.

Joint	ventures	or	equity	investments	operate	under	shared	control	with	other	parties.	Under	the	equity	method	of	accounting	for	nonconsolidated	joint	ventures	and investments,	we	recognize	our	share	of	the	operating	results	of	these	ventures	in	our	results	of	operations.	Our	operating	results	may	be	affected	by	the	performance	of businesses	over	which	we	do	not	exercise	control.	The	most	significant	impact	of	our	equity	investments	is	in	our	Space	Systems	business	segment	where	approximately 24%	of	its	2012	operating	profit	was	derived	from	its	equity	investments	in	three	joint	ventures	(see	"Space	Systems"	above).	Management	closely	monitors	the	results of	operations	and	cash	flows	generated	by	these	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,	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	attempts	to	gain	access	to	our	company	sensitive information,	as	do	our	customers,	suppliers,	subcontractors	and	joint	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,	joint	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.	Occurrence	of	any	of	these	events	could adversely	affect	our	internal	operations,	the	services	we	provide	to	our	customers,	loss	of	competitive	advantages	derived	from	our	research	and	development	efforts	or other	intellectual	property,	early	obsolescence	of	our	products	and	services,	our	future	financial	results,	our	reputation	or	our	stock	price.

# 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	(EPA)	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,	and	by	other	actions	commonly	referred	to	as	"green	initiatives."	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.

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.	Both	the	EPA	and	the California	Office	of	Environmental	Health	Hazard	Assessment	announced	plans	in	January	2011	to	regulate	two	chemicals,	perchlorate	and	hexavalent	chromium,	to levels	in	drinking	water	that	are	expected	to	be	substantially	lower	than	the	existing	public	health	goals	or	standards	established	in	California.	The	rulemaking	processes are	lengthy	and	may	take	years	to	complete.	If	substantially	lower	standards	are	adopted,	we	would	expect	a	material	increase	in	our	estimates	for	environmental liabilities	and	the	related	assets	for	the	portion	of	the	increased	costs	that	are	probable	of	future	recovery	in	the	pricing	of	our	products	and	services	for	the	U.S. Government.	The	amount	that	would	be	allocable	to	our	non-U.S.	Government	contracts	or	that	is	determined	to	be	unallowable	for	pricing	under	U.S.	Government contracts	would	be	expensed,	which	may	have	a	material	effect	on	our	earnings	in	any	particular	interim	reporting	period.	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	12	–	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	12	–	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	large	numbers	of	skilled	personnel,	including	personnel	holding	security	clearances,	to	support	the	growth	of	the enterprise	and	to	replace	individuals	who	have	terminated	employment	due	to	retirement	or	other	reasons.	To	the	extent	that	the	demand	for	qualified	personnel	exceeds supply,	we	could	experience	higher	labor,	recruiting,	or	training	costs	in	order	to	attract	and	retain	such	employees,	or	could	experience	difficulties	in	performing	under our	contracts	if	our	needs	for	such	employees	were	unmet.	We	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,	or	specific	actions	such	as	workforce	reductions,	we	must	successfully	manage	the transfer	of	critical	knowledge	from	those	individuals.

We	also	must	manage	leadership	development	and	succession	planning	throughout	our	business	and	have	processes	in	place	for	management	transition,	which	was critical	during	our	recent	executive	management	changes.	To	the	extent	that	we	are	unable	to	attract,	develop,	retain,	and	protect	leadership	talent	successfully,	we	could experience	business	disruptions	and	impair	our	ability	to	achieve	business	objectives.

Historically,	where	employees	are	covered	by	collective	bargaining	agreements	with	various	unions,	we	have	been	successful	in	negotiating	renewals	to	expiring agreements	without	any	material	disruption	of	operating	activities.	This	does	not	assure,	however,	that	we	will	be	successful	in	our	efforts	to	negotiate	renewals	of	our existing	collective	bargaining	agreements	when	they	expire.	If	we	were	unsuccessful	in	those	efforts,	there	is	the	potential	that	we	could	incur	unanticipated	delays	or expenses	in	the	programs	affected	by	any	resulting	work	stoppages.

# Our	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	$10.4	billion	of	goodwill	assets	recorded	on	our	Balance Sheet	as	of	December	31,	2012	from	previous	acquisitions	over	time,	which	represent	greater	than	25%	of	our	total	assets,	and	are	subject	to	annual	impairment	testing. 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	related goodwill	assets.

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,	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	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,	2012,	we	operated	in	523	locations	(including	offices,	manufacturing	plants,	warehouses,	service	centers,	laboratories,	and	other	facilities) throughout	the	U.S.	and	internationally.	Of	these,	we	owned	45	locations	aggregating	approximately	29.0	million	square	feet,	and	leased	space	at	478	locations aggregating	approximately	23.7	million	square	feet.	Consistent	with	our	cost	reduction	initiatives,	we	reduced	our	leased	space	by	approximately	1.5	million	square	feet during	2012.	We	also	manage	or	occupy	various	government-owned	facilities	under	leases	and	various	other	arrangements.	The	U.S.	Government	also	furnishes equipment	that	we	use	in	some	of	our	businesses.

At	December	31,	2012,	our	business	segments	occupied	facilities	at	the	following	major	locations:

Ÿ	 Aeronautics	–	Palmdale,	California;	Marietta,	Georgia;	Greenville,	South	Carolina;	and	Fort	Worth	and	San	Antonio,	Texas.

Ÿ Information	Systems	&	Global	Solutions	–	Goodyear,	Arizona;	Sunnyvale,	California;	Colorado	Springs	and	Denver,	Colorado;	Gaithersburg	and	Rockville,

Maryland	and	other	locations	within	the	Washington,	D.C.	metropolitan	area;	Valley	Forge,	Pennsylvania;	and	Houston,	Texas.

Ÿ	 Missiles	and	Fire	Control	–	Camden,	Arkansas;	Orlando,	Florida;	Lexington,	Kentucky;	and	Grand	Prairie,	Texas.

Ÿ	 Mission	Systems	and	Training	–	Orlando,	Florida;	Baltimore,	Maryland;	Moorestown/Mt.	Laurel,	New	Jersey;	Owego	and	Syracuse,	New	York;	Akron,	Ohio;	and Manassas,	Virginia.

Ÿ Space	Systems	–	Huntsville,	Alabama;	Sunnyvale,	California;	Denver,	Colorado;	Albuquerque,	New	Mexico;	and	Newtown,	Pennsylvania.

Ÿ	 Corporate	activities	–	Lakeland,	Florida	and	Bethesda,	Maryland.

The	following	is	a	summary	of	our	square	feet	of	floor	space	by	business	segment	at	December	31,	2012	(in	millions):

|  |  |  | Government- |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Owned | Leased | Owned | Total |
| Aeronautics | 5.2 | 3.5 | \t14.7 | \t\t23.4 |
| Information\tSystems\t&\tGlobal\tSolutions | 2.5 | 6.3 | — | 8.8 |
| Missiles\tand\tFire\tControl | 3.9 | 5.3 | 1.3 | \t\t10.5 |
| Mission\tSystems\tand\tTraining | 5.7 | 5.9 | 0.4 | \t\t12.0 |
| Space\tSystems | 8.7 | 1.7 | 7.9 | \t\t18.3 |
| Corporate\tactivities | 3.0 | 1.0 | — | 4.0 |
| Total | 29.0 | \t23.7 | \t24.3 | \t\t77.0 |

Some	of	our	owned	properties	are	leased	to	third	parties.	In	the	area	of	manufacturing,	most	of	the	operations	are	of	a	job-order	nature,	rather	than	an	assembly	line process,	and	productive	equipment	has	multiple	uses	for	multiple	products.	Management	believes	that	all	of	our	major	physical	facilities	are	in	good	condition	and	are adequate	for	their	intended	use.

# ITEM	3. LEGAL	PROCEEDINGS

We	are	a	party	to	or	have	property	subject	to	litigation	and	other	proceedings,	including	matters	arising	under	provisions	relating	to	the	protection	of	the environment,	and	are	subject	to	contingencies	related	to	certain	businesses	we	previously	owned.	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	quarter.	We	cannot	predict	the	outcome	of	legal	proceedings	with	certainty.	These	matters	include	the	proceedings	summarized	in	"Note	12	– Legal	Proceedings,	Commitments,	and	Contingencies"	of	our	consolidated	financial	statements.

From	time-to-time,	agencies	of	the	U.S.	Government	investigate	whether	our	operations	are	being	conducted	in	accordance	with	applicable	regulatory	requirements. U.S.	Government	investigations	of	us,	whether	relating	to	government	contracts	or	conducted	for	other	reasons,	could	result	in	administrative,	civil,	or	criminal liabilities,	including	repayments,	fines,	or	penalties	being	imposed	upon	us,	or	could	lead	to	suspension,	proposed	debarment,	or	debarment	from	eligibility	for	future U.S.	Government	contracting.	U.S.	Government	investigations	often	take	years	to	complete	and	many	result	in	no	adverse	action	against	us.

We	are	subject	to	federal	and	state	requirements	for	protection	of	the	environment,	including	those	for	discharge	of	hazardous	materials	and	remediation	of contaminated	sites.	As	a	result,	we	are	a	party	to	or	have	our	property	subject	to	various	lawsuits	or	proceedings	involving	environmental	protection	matters.	Due	in	part to	their	complexity	and	pervasiveness,	such	requirements	have	resulted	in	us	being	involved	with	related	legal	proceedings,	claims,	and	remediation	obligations.	The extent	of	our	financial	exposure	cannot	in	all	cases	be	reasonably	estimated	at	this	time.	For	information	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	12	–	Legal	Proceedings,	Commitments,	and	Contingencies"	of	our	consolidated financial	statements.

# ITEM	4. MINE	SAFETY	DISCLOSURES

# Not	applicable.

# ITEM	4(a). EXECUTIVE	OFFICERS	OF	THE	REGISTRANT

Our	executive	officers	as	of	February	28,	2013	are	listed	below,	as	well	as	their	age	at	December	31,	2012,	positions	and	offices	currently	held,	and	principal occupation	and	business	experience	over	at	least	the	past	five	years.	There	were	no	family	relationships	among	any	of	our	executive	officers	and	directors.	All	officers serve	at	the	pleasure	of	the	Board	of	Directors.

# Dale	P.	Bennett	(56),	Executive	Vice	President	–	Mission	Systems	and	Training

Mr.	Bennett	has	served	as	Executive	Vice	President	–	Mission	Systems	and	Training	since	December	31,	2012.	He	previously	served	as	President,	Electronic Systems	Mission	Systems	&	Sensors	from	August	2011	to	December	30,	2012,	and	President,	Global	Training	and	Logistics	from	July	2005	to	July	2011.

# Richard	H.	Edwards	(56),	Executive	Vice	President	–	Missiles	and	Fire	Control

Mr.	Edwards	has	served	as	Executive	Vice	President	–	Missiles	and	Fire	Control	since	December	31,	2012.	He	previously	served	as	Executive	Vice	President, Program	and	Technology	Integration,	Electronic	Systems	Missiles	and	Fire	Control	from	June	2012	to	December	30,	2012,	and	Vice	President	Tactical	Missiles	and Combat	Maneuver	Systems,	Electronic	Systems	Missiles	and	Fire	Control	from	July	2005	to	June	2012.

# Linda	R.	Gooden	(59),	Executive	Vice	President	–	Information	Systems	&	Global	Solutions

Ms.	Gooden	has	served	as	Executive	Vice	President	–	Information	Systems	&	Global	Solutions	(IS&GS)	since	January	2007.	Effective	April	1,	2013,	Ms.	Gooden will	step	down	as	Executive	Vice	President	–	IS&GS,	but	will	remain	employed	with	the	Corporation	through	May	1,	2013	when	she	will	retire.	Sondra	L.	Barbour, Senior	Vice	President	and	Chief	Information	Officer,	will	succeed	Ms.	Gooden	as	the	new	Executive	Vice	President	–	IS&GS	effective	April	1,	2013.

# Christopher	J.	Gregoire	(44),	Vice	President	and	Controller	(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	(59),	Chief	Executive	Officer	and	President

Ms.	Hewson	has	served	as	Chief	Executive	Officer	and	President	since	January	2013.	She	previously	served	as	President	and	Chief	Operating	Officer	from November	2012	to	December	2012	and	Executive	Vice	President	–	Electronic	Systems	from	January	2010	to	December	2012;	President,	Systems	Integration	–	Owego from	September	2008	to	December	2009;	Executive	Vice	President	–	Global	Sustainment	for	Aeronautics	from	February	2007	to	August	2008;	President,	Lockheed Martin	Logistics	Services	Company	from	January	2007	to	February	2007;	and	President	and	General	Manager,	Kelly	Aviation	Center,	L.P.	from	August	2004	to December	2007.

# Maryanne	R.	Lavan	(53),	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,	and	Vice	President	–	Ethics	and	Business	Conduct	from	October	2003	to	February	2007.

# Larry	A.	Lawson	(54),	Executive	Vice	President	–	Aeronautics

Mr.	Lawson	has	served	as	Executive	Vice	President	–	Aeronautics	since	April	2012.	He	previously	served	as	Vice	President	and	General	Manager,	F-35	Program, from	June	2010	to	March	2012,	and	Vice	President	and	General	Manager,	F-22	Program,	from	September	2004	to	June	2010.

# Joanne	M.	Maguire	(58),	Executive	Vice	President	–	Space	Systems

Ms.	Maguire	has	served	as	Executive	Vice	President	–	Space	Systems	since	July	2006.	Effective	April	1,	2013,	Ms.	Maguire	will	step	down	as	Executive	Vice President	–	Space	Systems,	but	will	remain	employed	with	the	Corporation	through	May	1,	2013	when	she	will	retire.	Richard	F.	Ambrose,	Vice	President	and	Deputy, Space	Systems,	will	succeed	Ms.	Maguire	as	the	new	Executive	Vice	President	–	Space	Systems	effective	April	1,	2013.

# Kenneth	R.	Possenriede	(52),	Vice	President	and	Treasurer

Mr.	Possenriede	has	served	as	Vice	President	and	Treasurer	since	July	2011.	He	previously	served	as	Vice	President	of	Finance	and	Business	Operations	for Electronic	Systems	from	July	2008	to	June	2011,	and	as	Vice	President	of	Finance	and	Business	Operations	for	Space	Systems	from	September	2007	to	June	2008.

# Robert	J.	Stevens	(61),	Executive	Chairman	and	Strategic	Advisor	to	the	Chief	Executive	Officer

Mr.	Stevens	has	served	as	Executive	Chairman	and	Strategic	Advisor	to	the	Chief	Executive	Officer	since	January	2013.	He	previously	served	as	Chairman	of	the Board	and	Chief	Executive	Officer	from	January	2010	to	December	2012,	and	Chairman	of	the	Board,	President	and	Chief	Executive	Officer	from	April	2005	to January	2010.

# Bruce	L.	Tanner	(53),	Executive	Vice	President	and	Chief	Financial	Officer

Mr.	Tanner	has	served	as	Executive	Vice	President	and	Chief	Financial	Officer	since	September	2007.	He	previously	served	as	Vice	President	of	Finance	and Business	Operations	for	Aeronautics	from	April	2006	to	August	2007,	and	Vice	President	of	Finance	and	Business	Operations	for	Electronic	Systems	from	May	2002	to March	2006.

# PART	II

# ITEM	5. MARKET	FOR	REGISTRANT'S	COMMON	EQUITY,	RELATED	STOCKHOLDER	MATTERS	AND	ISSUER	PURCHASES	OF EQUITY	SECURITIES

At	January	31,	2013,	we	had	34,400	holders	of	record	of	our	common	stock,	par	value	$1	per	share.	Our	common	stock	is	traded	on	the	New	York	Stock	Exchange (NYSE)	under	the	symbol	LMT.	Information	concerning	the	stock	prices	based	on	intra-day	trading	prices	as	reported	on	the	NYSE	composite	transaction	tape	and dividends	paid	during	the	past	two	years	is	as	follows:

# Common	Stock	–	Dividends	Paid	Per	Share	and	Market	Prices

|  | Dividends	Paid	Per	Share | Dividends	Paid	Per	Share | Market	Prices	(High-Low) | Market	Prices	(High-Low) |
| :--- | :--- | :--- | :--- | :--- |
| Quarter | 2012 | 2011 | 2012 | 2011 |
| First | $1.00 | $\t\t.75 | \t$91.01\t–\t$79.05 | \t$82.43\t–\t$69.62 |
| Second | 1.00 | .75 | \t\t 92.24\t–\t\t\t80.14 | \t\t 81.92\t–\t\t\t75.10 |
| Third | 1.00 | .75 | \t\t 93.99\t–\t\t\t83.15 | \t\t 82.23\t–\t\t\t66.36 |
| Fourth | 1.15 | 1.00 | \t\t 95.92\t–\t\t\t87.08 | \t\t 81.86\t–\t\t\t70.37 |
| Year | $4.15 | $3.25 | \t$95.92\t–\t$79.05 | \t$82.43\t–\t$66.36 |

# Stockholder	Return	Performance	Graph

The	following	graph	compares	the	total	return	on	a	cumulative	basis	of	$100	invested	in	Lockheed	Martin	common	stock	on	December	31,	2007	to	the	Standard	and Poor's	(S&P)	500	Index,	S&P	Aerospace	&	Defense	(S&P	Aero)	Index,	and	the	S&P	Industrials	Index.

The	S&P	Aero	Index	comprises	General	Dynamics	Corporation,	Honeywell	International,	Inc.,	L3	Communications	Holdings,	Inc.,	Lockheed	Martin	Corporation, Northrop	Grumman	Corporation,	Precision	Castparts	Corporation,	Raytheon	Company,	Rockwell	Collins,	Inc.,	Textron	Inc.,	The	Boeing	Company,	and	United Technologies	Corporation.	The	stockholder	return	performance	indicated	on	the	graph	is	not	a	guarantee	of	future	performance.

The	S&P	Industrials	Index	comprises	those	companies	included	in	the	S&P	500	Index	that	are	classified	as	members	of	the	industrials	sector	as	defined	by	the Global	Industry	Classification	Standard.

This	graph	is	not	deemed	to	be	"filed"	with	the	U.S.	Securities	and	Exchange	Commission	or	subject	to	the	liabilities	of	Section	18	of	the	Securities	Exchange	Act of	1934	(the	Exchange	Act),	and	should	not	be	deemed	to	be	incorporated	by	reference	into	any	of	our	prior	or	subsequent	filings	under	the	Securities	Act	of	1933	or	the Exchange	Act.

# Issuer	Purchases	of	Equity	Securities

The	following	table	provides	information	about	our	repurchases	of	common	stock	during	the	three-month	period	ended	December	31,	2012.

|  |  |  | Total	Number	of	Shares | for	Future	Share |
| :--- | :--- | :--- | :--- | :--- |
|  |  | Average\tPrice | Purchased\tas\tPart\tof | Repurchases |
| Period | Total\tNumber\tof\nShares\tPurchased | Paid\tPer\nShare | Publicly\tAnnounced\nProgram\t^(a) | Under\nthe\tProgram\t^(b) |
|  |  |  |  | (in\tmillions) |
| October\t1,\t2012\t–\tOctober\t28,\t2012 | 842,445 | $93.38 | 842,445 | $2,522 |
| October\t29,\t2012\t–\tNovember\t25,\t2012 | 872,973 | \t 90.86 | 872,973 | \t 2,443 |
| November\t26,\t2012\t–\tDecember\t31,\t2012 | \t\t1,395,288 | \t 92.02 | \t\t1,395,288 | \t 2,315 |
| Total | \t\t3,110,706 | $92.07 | \t\t3,110,706 | $2,315 |

We	repurchased	a	total	of	3.1	million	shares	of	our	common	stock	for	$286	million	during	the	quarter	ended	December	31,	2012	under	a	share	repurchase	program	that	we	announced	in	October	2010. (a)

Our	Board	of	Directors	has	approved	a	share	repurchase	program	for	the	repurchase	of	our	common	stock	from	time-to-time,	authorizing	an	amount	available	for	share	repurchases	of	$6.5	billion.	Under	the program,	management	has	discretion	to	determine	the	dollar	amount	of	shares	to	be	repurchased	and	the	timing	of	any	repurchases	in	compliance	with	applicable	law	and	regulation.	The	program	does	not	have an	expiration	date.	As	of	December	31,	2012,	we	had	repurchased	a	total	of	54.3	million	shares	under	the	program	for	$4.2	billion. (b)

# ITEM	6. SELECTED	FINANCIAL	DATA

| (In	millions,	except	per	share	data) | 2012 | 2011 | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| OPERATING\tRESULTS |  |  |  |  |  |
| Net\tsales | \t$47,182 | \t$46,499 | \t$45,671 | \t$43,867 | \t$41,212 |
| Operating\tprofit^\t(a) | 4,434 | 4,020 | 4,105 | 4,477 | 4,829 |
| Net\tearnings\tfrom\tcontinuing\toperations^\t(a)(b) | 2,745 | 2,667 | 2,614 | 2,967 | 3,127 |
| Net\tearnings^\t(c) | 2,745 | 2,655 | 2,878 | 2,973 | 3,185 |
| EARNINGS\tPER\tCOMMON\tSHARE |  |  |  |  |  |
| Net\tearnings\tfrom\tcontinuing\toperations |  |  |  |  |  |
| Basic^\t(a) | \t$8.48 | \t$7.94 | \t$7.18 | \t$7.71 | \t$7.82 |
| Diluted^\t(a) | 8.36 | 7.85 | 7.10 | 7.63 | 7.64 |
| Net\tearnings |  |  |  |  |  |
| Basic^\t(c) | 8.48 | 7.90 | 7.90 | 7.73 | 7.97 |
| Diluted^\t(c) | 8.36 | 7.81 | 7.81 | 7.64 | 7.78 |
| CASH\tDIVIDENDS\tPER\tCOMMON\tSHARE | \t$4.15 | \t$3.25 | \t$2.64 | \t$2.34 | \t$1.83 |
| BALANCE\tSHEET |  |  |  |  |  |
| Cash,\tcash\tequivalents\tand\tshort-term\tinvestments^\t(d) | \t$1,898 | \t$3,582 | \t$2,777 | \t$2,737 | \t$2,229 |
| Total\tcurrent\tassets | \t\t 13,855 | \t\t 14,094 | \t\t 12,893 | \t\t 12,529 | \t\t 10,736 |
| Goodwill | \t\t 10,370 | \t\t 10,148 | 9,605 | 9,948 | 9,526 |
| Total\tassets^\t(e) | \t\t 38,657 | \t\t 37,908 | \t\t 35,113 | \t\t 35,167 | \t\t 33,495 |
| Total\tcurrent\tliabilities | \t\t 12,155 | \t\t 12,130 | \t\t 11,401 | \t\t 10,910 | \t\t 10,702 |
| Long-term\tdebt,\tnet^\t(d) | 6,158 | 6,460 | 5,019 | 5,052 | 3,563 |
| Total\tliabilities^\t(e) | \t\t 38,618 | \t\t 36,907 | \t\t 31,616 | \t\t 31,201 | \t\t 30,742 |
| Stockholders'\tequity^\t(e) | 39 | 1,001 | 3,497 | 3,966 | 2,753 |
| COMMON\tSHARES\tAT\tYEAR-END | 321 | 321 | 346 | 373 | 393 |
| CASH\tFLOW\tDATA |  |  |  |  |  |
| Net\tcash\tprovided\tby\toperating\tactivities\t^(f) | \t$1,561 | \t$4,253 | \t$3,801 | \t$3,487 | \t$4,724 |
| Net\tcash\tused\tfor\tinvesting\tactivities | (1,222) | (813) | (573) | (1,832) | (1,210) |
| Net\tcash\tused\tfor\tfinancing\tactivities | (2,023) | (2,119) | (3,358) | (1,432) | (3,994) |
| BACKLOG | \t$82,300 | \t$80,700 | \t$78,400 | \t$77,300 | \t$80,200 |

Our	operating	profit	and	net	earnings	from	continuing	operations	included	severance	charges	of	$48	million	($31	million	or	$.09	per	share,	after	tax)	in	2012	(Note	13);	$136	million	($88	million	or	$.26	per	share, after	tax)	in	2011	(Note	13);	charges	for	the	Voluntary	Executive	Separation	Program	and	facilities	consolidation	totaling	$220	million	($143	million	or	$.38	per	share,	after	tax)	in	2010	(Note	13);	and	non-cash FAS/CAS	pension	adjustment	of	$(830)	million,	$(922)	million,	$(454)	million,	$(456)	million,	and	$128	million	in	2012,	2011,	2010,	2009,	and	2008.	Earnings	per	common	share	benefited	from	the	significant number	of	shares	repurchased	under	our	share	repurchase	program	(Note	10). (a)

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;	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	(Note	7). (b)

Our	net	earnings	were	affected	by	the	items	in	notes	(a)	and	(b)	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	in	2010	for	certain	adjustments	related	to	Pacific	Architects	and	Engineers	in	2010	(Note	14). (c)

The	decrease	in	our	cash	from	2011	to	2012	primarily	was	due	to	an	increase	of	$1.4	billion	in	contributions	to	our	qualified	defined	benefit	pension	plans	during	2012.	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	8).	The	increase	in	our	long-term debt	from	2008	to	2009	primarily	was	due	to	the	issuance	of	$1.5	billion	of	long-term	notes	in	2009. (d)

The	increase	in	our	total	assets	and	total	liabilities	and	decrease	in	stockholders'	equity	from	2011	to	2012	and	from	2010	to	2011	primarily	was	due	to	the	annual	remeasurement	of	the	funded	status	of	our postretirement	benefit	plans	at	December	31,	2012	and	2011	(Note	9). (e)

The	decrease	in	our	net	cash	provided	by	operating	activities	from	2011	to	2012	primarily	was	due	to	changes	in	working	capital	of	$1.7	billion	and	increased	pension	contributions	of	$1.1	billion,	net	of	CAS recoveries.	See	"Liquidity	and	Cash	Flows"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	for	more	information. (f)

# ITEM	7. MANAGEMENT'S	DISCUSSION	AND	ANALYSIS	OF	FINANCIAL	CONDITION	AND	RESULTS	OF	OPERATIONS

# Business	Overview

We	organize	our	business	segments	based	on	the	nature	of	the	products	and	services	offered.	Effective	December	31,	2012,	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.	This structure	reflects	the	reorganization	of	our	former	Electronic	Systems	business	segment	into	the	new	MFC	and	MST	business	segments	in	order	to	streamline	our operations	and	enhance	customer	alignment.	In	connection	with	this	reorganization,	management	layers	at	our	former	Electronic	Systems	business	segment	and	our former	Global	Training	and	Logistics	(GTL)	business	were	eliminated,	and	the	former	GTL	business	was	split	between	the	two	new	business	segments.	In	addition, operating	results	for	Sandia	Corporation,	which	manages	the	Sandia	National	Laboratories	for	the	U.S.	Department	of	Energy,	and	our	equity	interest	in	the	U.K.	Atomic Weapons	Establishment	(AWE)	joint	venture	were	transferred	from	our	former	Electronic	Systems	business	segment	to	our	Space	Systems	business	segment.	The amounts,	discussion,	and	presentation	of	our	business	segments	reflect	this	reorganization	for	all	years	presented	in	this	Annual	Report	on	Form	10-K.

We	are	operating	in	an	environment	that	is	characterized	by	both	increasing	complexity	in	global	security,	as	well	as	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	more	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	in	a	disciplined	manner	with	a	focus	on	adjacent	markets	close	to	our core	capabilities.	Despite	the	challenges	we	face,	we	expect	to	continue	to	invest	in	technologies	to	fulfill	new	mission	requirements	for	our	customers,	invest	in	our people	so	that	we	have	the	technical	skills	necessary	to	be	successful	in	this	environment,	and	return	at	least	50%	of	free	cash	flow 	to	investors	in	the	form	of	dividends and	share	repurchases.

Our	outlook	for	2013	is	premised	on	the	assumption	that	sequestration	does	not	occur,	that	the	U.S.	Government	continues	to	support	and	fund	our	programs,	which is	consistent	with	the	continuing	resolution	funding	measure	through	March	27,	2013,	and	that	Congress	approves	defense	budget	legislation	for	government	fiscal	year (GFY)	2013	at	a	level	consistent	with	the	President's	proposed	defense	budget	for	the	second	half	of	the	U.S.	Government's	fiscal	year	2013.	With	these	assumptions, we	expect	2013	net	sales	will	decline	at	a	mid	single	digit	percentage	rate	from	the	record	2012	net	sales	amount,	due	to	an	anticipated	reduction	in	net	sales	at	four	of five	of	our	business	segments	as	discussed	in	the	"Business	Segment	Results	of	Operations"	section	below.	We	expect	our	2013	segment	operating	profit	will	also decrease	from	2012	levels	at	a	slightly	higher	percentage	rate	than	the	decline	in	net	sales	due	to	the	factors	mentioned	in	the	"Business	Segment	Results	of	Operations" section	below,	and	2013	segment	operating	profit	margin	will	accordingly	be	slightly	lower	than	2012	levels.	If	sequestration	or	other	budgetary	cuts	in	lieu	of sequestration	occur,	we	expect	these	budget	reductions	would	have	a	material	effect	on	our	corporation	as	discussed	in	the	"Industry	Considerations"	section	below	and Item	1A-	Risk	Factors.

# Industry	Considerations

# U.S.	Government	Business

# Budget	Priorities

The	U.S.	Government	continues	to	focus	on	discretionary	spending,	entitlements,	tax,	and	other	initiatives	to	stimulate	the	economy,	create	jobs,	and	reduce	the deficit.	The	Administration	and	Congress	are	attempting	to	balance	decisions

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.

regarding	defense,	homeland	security,	and	other	federal	spending	priorities	in	a	constrained	fiscal	environment	imposed	by	the	Budget	Control	Act	of	2011	(Budget Act),	which	reduced	defense	spending	by	a	minimum	of	$487	billion	over	a	ten-year	period	that	began	in	GFY	2012.	In	light	of	the	Budget	Act	and	deficit	reduction pressures	generally,	it	is	likely	that	discretionary	spending	by	the	federal	government	will	remain	constrained	for	a	number	of	years.

Notably,	should	Congress	and	the	Administration	fail	to	change	or	further	delay	the	pending	sequestration	of	appropriations	in	GFY	2013	imposed	by	the	Budget Act,	currently	scheduled	to	take	effect	on	March	1,	2013	as	adjusted	by	the	American	Taxpayer	Relief	Act	of	2012	(Taxpayer	Relief	Act),	both	our	DoD	and	non-DoD customers'	budgets	would	be	reduced	significantly	and	there	would	be	a	direct	and	significant	reduction	in	our	customers'	contract	awards.	Although	the	Taxpayer Relief	Act	delayed	sequestration	two	months	from	January	2,	2013,	to	March	1,	2013,	and	reduced	the	amount	of	the	GFY	2013	budget	cuts,	the	impacts	to	our customers	remain	significant	with	limited	time	to	implement	spending	reductions	required	under	sequestration.

In	addition,	Congress	passed	a	continuing	resolution	funding	measure	for	GFY	2013	to	finance	all	U.S.	Government	activities	through	March	27,	2013.	Under	this continuing	resolution,	partial-year	funding	at	amounts	consistent	with	appropriated	levels	for	GFY	2012	are	available,	subject	to	certain	restrictions,	but	new	spending initiatives	are	not	authorized.	Our	key	programs	continue	to	be	supported	and	funded	under	the	continuing	resolution	financing	mechanism.	However,	during	periods covered	by	continuing	resolutions	(or	until	the	regular	appropriation	bills	are	passed),	and	pending	decisions	related	to	sequestration	we	may	experience	delays	in	the receipt	of	orders	for	our	products	and	services	due	to	lack	of	funding,	and	those	delays	may	affect	our	results	of	operations	and	cash	flows.

While	the	specific	effects	of	sequestration	still	cannot	be	determined,	automatic	across-the-board	cuts	would	approximately	double	the	amount	of	the	ten-year	$487 billion	reduction	in	defense	spending	that	began	in	GFY	2012	already	required	by	the	Budget	Act,	including	the	budget	for	Overseas	Contingencies	Operations	(OCO) and	any	unobligated	balances	from	prior	years,	and	would	have	significant	consequences	to	our	business	and	industry.	Non-DoD	agencies	would	also	have	significantly reduced	budgets.	There	would	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	would	severely	impact	advanced	manufacturing	operations	and	engineering expertise,	and	accelerate	the	loss	of	skills	and	knowledge.

Current	estimates	suggest	that	sequestration	would	reduce	total	GFY	2013	non-military	personnel	defense	funding	by	9%	to	approximately	$500	billion.	In addition,	general	estimates	suggest	that	sequestration	could	result	in	an	approximate	5%	reduction	to	the	total	GFY	2013	non-defense	budget.	However,	if	sequestration goes	into	effect	on	March	1,	2013,	government	agencies	will	have	already	expended	funds	for	several	months	of	GFY	2013.	Therefore,	in	order	to	achieve	the	across- the-board	cuts	imposed	by	sequestration	over	a	shorter	time	period,	the	effective	percentage	reductions	for	the	remaining	months	of	GFY	2013	would	be	higher	than	the above	percentages.	While	current	DoD	planning	for	the	ongoing	continuing	resolution	has	focused	on	operating	accounts	in	lieu	of	other	accounts	such	as	procurement and	research,	development,	training,	and	evaluation	due	to	the	ability	to	quickly	adjust	activities	and	programs	funded	in	these	accounts,	we	understand	that	sequestration related	cuts	are	likely	to	be	applied	across-the-board	at	the	individual	program,	project,	and	activity	level,	thus	impacting	all	defense	programs	and	contractors	regardless of	how	they	align	to	our	country's	most	critical	national	priorities	and	mission	areas.	Consequently,	we	expect	that	sequestration,	or	other	budgetary	cuts	in	lieu	of sequestration,	would	have	a	material	effect	on	our	corporation.

Our	current	sales	outlook	for	2013	is	a	mid	single	digit	percentage	rate	decline	from	our	record	2012	net	sales	amount,	presuming	sequestration	does	not	occur,	the continuing	resolution	ends	on	March	27,	2013,	and	other	factors.	Based	on	our	preliminary	understanding	of	sequestration	and	noting	that	it	is	difficult	to	estimate	how sequestration	would	be	implemented,	we	believe	that,	should	Congress	and	the	Administration	fail	to	change	or	further	delay	sequestration,	our	2013	net	sales	would	be lower	than	2012	net	sales	by	more	than	the	mid	single	digit	outlook	noted	above.	Future	years	could	be	materially	impacted.	However,	subject	to	the	uncertainty described	above,	we	expect	that	the	impact	of	sequestration	on	our	operating	results	may	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	being	funded	with money	from	the	U.S.	Government's	GFY	2012	and	prior	budgets.	We	expect	that	earnings	and	cash	flow	reductions,	prior	to	restructuring	activities,	would	generally follow	a	pattern	similar	to	the	net	sales	reductions.	We	are	unable	to	reasonably	estimate	the	cost	and	cash	flow	impact	of	any	restructuring	initiatives	(potentially including	but	not	limited	to	severance	payments	made	to	employees,	facility	closure	expenses,	and	impairments	of	assets,	including	goodwill)	to	align	our	cost	structure to	a	lower	sales	base.

Sequestration	likely	would	result	in	significant	rescheduling	or	termination	activity	with	our	supplier	base.	Such	activity	likely	would	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.	We	expect	that	these	costs	would	be	recovered	from	our	customers.

Lockheed	Martin	is	committed	to	the	fair	treatment	of	its	employees	and	compliance	with	law.	Accordingly,	if	sequestration	or	other	budget	cuts	intended	to	avoid sequestration	occur,	we	will	provide	affected	employees	the	notice	required	by	the	federal	and	applicable	state	Worker	Adjustment	and	Retraining	Notification	(WARN) Acts	when	we	conclude,	based	on	the	circumstances	and	those	laws,	that	notice	is	required	or	otherwise	appropriate.	The	Office	of	Management	and	Budget	and	DoD have	issued	guidance	intended	to	assure	that	the	costs	of	complying	with	federal	and	state	WARN	Acts	are	recoverable,	and	we	expect	to	recover	these	costs.

Despite	the	continuing	uncertainty	on	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	government's	continuing	assessment	of	priorities,	changes	in	government	priorities,	the	implementation	of	sequestration,	or other	budget	cuts	intended	to	avoid	sequestration.

# Department	of	Defense	Business

The	passage	of	the	Budget	Act	imposed	specific	limits	on	security	and	non-security	spending	beginning	in	GFY	2013.	The	GFY	2013	DoD	base	budget	is	the	first to	reflect	the	reduced	spending	limits	imposed	by	the	Budget	Act	and	is	consistent	with	its	limits	on	discretionary	spending.	The	GFY	2014	request	has	been	delayed	as	a result	of	the	ongoing	federal	budgetary	negotiations.	The	GFY	2014	request	will	likely	reflect	a	continuation	of	the	spending	limits	with	some	variation	as	a	result	of sequester	negotiations.

In	prior	years,	the	Administration	has	requested	and	Congress	has	provided	funds	for	U.S.	military	operations	in	Afghanistan	and	Iraq,	and	other	unforeseeable contingency	or	peacekeeping	operations,	through	a	separate	OCO	funding	outside	of	the	base	DoD	budget.	The	OCO	funding	for	GFY	2012	totaled	$115	billion,	and the	Administration	requested	$88	billion	for	GFY	2013.	We	expect	that	the	fiscal	2014	request	will	continue	these	reductions,	reflecting	the	completion	of	U.S.	military operations	in	Iraq	and	reduced	operations	in	Afghanistan.	Our	net	sales	historically	have	not	been	significantly	dependent	on	overseas	contingency	or	supplemental funding	requests	and,	therefore,	we	continue	to	focus	our	attention	on	the	DoD's	base	budget	for	support	and	funding	of	our	programs.

The	GFY	2013	budget	proposal	reflected	the	Administration's	new	national	security	strategy	and	is	consistent	with	the	lower	spending	levels	imposed	by	the Budget	Act.	We	have	no	specific	indications	that	the	GFY	2014	budget	will	deviate	significantly,	other	than	the	reduction	due	to	the	sequester	delay	as	described	above, from	the	estimated	spending	levels	in	the	GFY	2013	request.	Despite	these	reduced	defense	spending	levels,	we	believe	our	broad	mix	of	programs	and	capabilities continues	to	position	us	favorably	to	support	the	current	and	future	needs	of	the	DoD	and	our	programs	were	well	supported	in	the	GFY	2013	budget	request.	For example,	the	budget	supported	continuation	of	all	three	variants	of	the	F-35	and	maintains	the	same	ultimate	inventory	objective	of	2,443	aircraft	for	the	U.S. Government.	Additionally,	the	DoD	has	specifically	cited	continued	support	for	a	broad	spectrum	of	our	programs.

Given	the	Administration's	emphasis	on	affordability	and	the	need	to	find	further	efficiencies	in	the	management	and	operations	of	DoD,	the	need	for	more affordable	logistics	and	sustainment,	expansive	use	of	information	technology	and	knowledge-based	solutions,	and	vastly	improved	levels	of	network	and	cyber security,	all	remain	national	priorities.	To	address	these	priorities,	we	continue	to	focus	on	growing	our	portfolio	in	these	areas,	diversifying	our	business,	and	expanding into	adjacent	businesses	and	programs	that	include	surface	naval	vessels,	unmanned	aerial	systems,	rotary	wing	aviation,	and	land	vehicles.

# Non-Department	of	Defense	Business

Our	experience	in	the	defense	arena,	together	with	our	core	information	technology	and	services	expertise,	has	enabled	us	to	provide	products	and	services	to	a number	of	government	agencies,	including	the	Departments	of	Homeland	Security,	Justice,	Commerce,	Health	and	Human	Services,	Transportation,	and	Energy,	the U.S.	Postal	Service,	the	Social	Security	Administration	(SSA),	the	Federal	Aviation	Administration,	the	National	Aeronautics	and	Space	Administration,	the	Veterans Administration,	National	Science	Foundation,	and	the	Environmental	Protection	Agency	(EPA).

As	with	the	DoD,	all	other	departments	and	agencies	were	impacted	by	the	Budget	Act.	The	result	would	be	that	budgets	for	GFY	2013	and	beyond	will	be	reduced further	below	the	GFY	2012	budget.	Should	sequester	go	into	effect	on	March	1,	2013,	our	non-DoD	customers	will	also	be	significantly	affected	as	the	across-the-board reductions	will	also	be	applied	to	their	available	GFY	2013	discretionary	funds.	Our	businesses	with	smaller,	short-term	contracts	that	work	with	our	non-DoD customers	could	be	significantly	impacted	by	the	across-the-board	reductions,	such	as	our	IS&GS	business	segment.

We	have	continued	to	expand	our	capabilities	in	critical	intelligence,	knowledge	management,	and	Government	information	technology	solutions	for	our	customers, including	the	SSA	and	the	Centers	for	Medicare	and	Medicaid	Services.	We	also	provide	program	management,	business	strategy	and	consulting,	complex	systems development	and	maintenance,	complete	life-cycle	software	support,	information	assurance,	and	enterprise	solutions.	We	believe	that	there	will	be	continued	demand	by federal	and	civil	government	agencies	for	upgrading	and	investing	in	new	information	technology	systems	and	solutions	in	order	to	reduce	costs	of	operations,	but	at	a slower	pace	in	the	near	term.	In	addition,	we	believe	there	are	opportunities	in	the	health	care	and	energy	space.

Consistent	with	our	DoD	business,	a	more	expansive	use	of	information	technology	and	knowledge-based	solutions,	and	improved	levels	of	network	and	cyber security	all	appear	to	be	priorities	in	our	non-DoD	business	as	well.	Homeland	security,	critical	infrastructure	protection,	and	improved	service	levels	for	civil government	agencies	also	appear	to	be	high	customer	priorities.

# Other	Business	Considerations

# International	Business

We	remain	committed	to	growth	in	our	sales	to	international	customers.	We	conduct	business	with	other	governments	primarily	through	our	Aeronautics,	MFC,	and MST	business	segments.	Our	international	sales	are	comprised	of	FMS	transactions	contracted	through	the	U.S.	Government	and	direct	commercial	sales	transactions	in which	we	sell	directly	to	the	international	customer.

In	Aeronautics,	the	U.S.	Government	and	eight	other	government	development	partners	are	working	together	on	the	design,	testing,	production,	and	sustainment	of the	F-35	Lightning	II,	and	Israel	and	Japan	have	selected	the	F-35	as	their	next	generation	combat	aircraft.	The	first	international	deliveries	of	the	F-35	were	made	in 2012,	with	two	aircraft	delivered	to	the	United	Kingdom.	The	number	of	aircraft	for	international	customers	in	the	more	recent	and	future	low-rate	initial	production (LRIP)	contracts	continues	to	increase.	The	F-16	Fighting	Falcon	has	been	selected	by	26	customers	worldwide,	including	recent	orders	from	Iraq	and	Oman,	with	54 follow-on	buys	from	15	countries.	We	continue	to	expand	the	C-130J	Super	Hercules	air	mobility	aircraft's	international	footprint	with	customers	in	15	countries.	In global	sustainment,	we	are	leveraging	our	value	as	the	original	equipment	manufacturer	(OEM)	for	our	major	platforms,	such	as	our	agreement	to	upgrade	145	F-16 aircraft	for	Taiwan.	We	have	also	set	up	new	production	capabilities	to	provide	service	life	extension,	including	new	wings	and	support	for	the	U.S.,	Norway,	Canada, and	Taiwan's	P-3	fleet.

Our	MFC	business	segment	produces	the	Patriot	Advanced	Capability-3	(PAC-3)	missile,	an	advanced	defensive	missile	designed	to	intercept	incoming	airborne threats,	for	international	customers	including	Japan,	Germany,	the	Netherlands,	Taiwan,	and	the	United	Arab	Emirates	(UAE).	Additionally,	the	UAE	entered	into	a	FMS agreement	with	the	U.S.	Government	for	the	first	international	sale	of	the	Terminal	High	Altitude	Area	Defense	(THAAD)	missile	defense	system,	with	expectations	for further	production	awards.	Other	countries	in	the	Middle	East	as	well	as	those	in	the	Asia-Pacific	region	have	also	expressed	interest	in	our	air	and	missile	defense systems.

In	MST,	with	regard	to	the	Aegis	Combat	System	(Aegis),	we	perform	activities	in	the	development,	production,	ship	integration	and	test,	and	lifetime	support	for ships	of	international	customers	such	as	Japan,	Spain,	Korea,	and	Australia.	The	system	also	has	been	selected	to	be	used	as	a	ground-based	missile	defense	system	in Europe,	referred	to	as	"Aegis	Ashore."	This	business	segment	has	contracts	with	the	Canadian	Government	for	the	upgrade	and	support	of	combat	systems	on	Halifax class	frigates.	The	Littoral	Combat	Ship	(LCS)	is	another	program	generating	interest	from	potential	international	customers.	We	are	responsible	for	integrating	mission systems	and	sensors,	including	the	digital	cockpit	and	weapons,	for	the	MH-60	maritime	helicopter	produced	for	the	Royal	Australian	Navy,	and	in	2012	the	Danish government	signed	an	official	letter	of	offer	and	acceptance	formalizing	its	intent	to	buy	nine	MH-60R	helicopters.	We	continue	to	upgrade	the	United	Kingdom's Warrior	fighting	vehicles,	an	award	received	in	2011.

# Status	of	F-35	Program

The	F-35	program	consists	of	multiple	contracts.	The	development	contract	is	being	performed	concurrently	with	the	LRIP	contracts.	Concurrent	performance	of development	and	production	contracts	is	used	for	complex	programs	to	test	airplanes,	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	to	continue	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,	and	Navy	variants	of	the	aircraft, commitments	from	our	eight	international	partners	and	two	international	customers,	as	well	as	expressions	of	interest	from	other	countries.

On	the	development	contract,	our	flight	tests	and	test	points	were	ahead	of	our	goals	for	the	year	and	the	aircraft	also	surpassed	5,000	flight	hours.	The	development contract	currently	has	$530	million	of	incentive	fees	remaining;	however,	we	expect	to	have	the	opportunity	to	earn	approximately	$350	million	of	this	amount	over	the remainder	of	the	contract.	This	amount	includes	about	$100	million	of	fees	that	we	expect	will	be	allocated	to	specific	milestones	with	the	remainder	allocated	to	a customer	assessment	of	performance	at	the	end	of	the	development	contract.	After	updating	our	estimates	at	completion	on	the	contract	in	2012,	we	reduced	the	profit booking	rate	to	reflect	lower	expected	estimated	fees	at	completion.	The	inception	to	date	impact	of	the	revised	booking	rate	reduced	profit	by	approximately	$85 million	during	2012.	We	will	continue	to	record	profit	at	the	revised	booking	rate	for	the	duration	of	the	contract	unless	further	adjustments	are	necessary.

We	continue	to	make	progress	on	our	production	tempo	with	the	delivery	of	30	aircraft	to	our	domestic	and	international	customers	during	the	year,	bringing	the cumulative	deliveries	total	to	58,	which	includes	20	development	aircraft	and	38	production	aircraft.	We	also	made	significant	contractual	progress	recently	with	the completion	of	negotiations	on	the	LRIP	5	aircraft	contract,	award	of	an	undefinitized	contract	for	certain	LRIP	6	aircraft,	and	received	long	lead	funding	for	LRIP	7 aircraft.	We	have	88	production	aircraft	in	backlog	as	of	December	31,	2012.

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,	receiving	funding	for	LRIP	contracts	on	a	timely	basis,	contractual	withholds,	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,	joint	ventures,	and	equity	investments.

We	used	$304	million	and	$649	million	for	the	acquisitions	of	businesses	in	2012	and	2011.	In	2012,	we	acquired	Chandler/May,	Inc.	(Chandler/May)	and	CDL Systems	Ltd.	(CDL)	in	the	fourth	quarter	and	Procerus	Technologies,	L.C.	(Procerus)	in	the	first	quarter.	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	technology	advanced	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	acquired	QTC	Holdings	Inc.	(QTC)	and	Sim-Industries	B.V.	(Sim	Industries)	in	the	fourth	quarter.	QTC	provides	outsourced	medical	evaluation services	to	the	U.S.	Government	and	has	been	included	in	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	has	been	included	in	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.

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,	Pacific	Architects	and	Engineers,	Inc.	(PAE)	in	2011,	and	Enterprise	Integration	Group	(EIG)	in	2010.	For	additional	information,	see	"Note	14	–	Acquisitions and	Divestitures"	of	our	consolidated	financial	statements.

# 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):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Operating\tresults |  |  |  |
| Net\tsales | \t$47,182 | \t$46,499 | \t$45,671 |
| Cost\tof\tsales\t^(a) | (42,986) | (42,755) | (41,827) |
| Other\tincome,\tnet | 238 | 276 | 261 |
| Operating\tprofit\t^(a) | 4,434 | 4,020 | 4,105 |
| Interest\texpense | (383) | (354) | (345) |
| Other\tnon-operating\tincome\t(expense),\tnet\t^(a) | 21 | (35) | 18 |
| Income\ttax\texpense | (1,327) | (964) | (1,164) |
| Net\tearnings\tfrom\tcontinuing\toperations | 2,745 | 2,667 | 2,614 |
| Net\t(loss)\tearnings\tfrom\tdiscontinued\toperations | — | (12) | 264 |
| Net\tearnings | \t$2,745 | \t$2,655 | \t$2,878 |
| Diluted\tearnings\t(loss)\tper\tcommon\tshare |  |  |  |
| Continuing\toperations | \t$8.36 | \t$7.85 | \t$7.10 |
| Discontinued\toperations | — | (.04) | .71 |
| Total | \t$8.36 | \t$7.81 | \t$7.81 |

In	the	fourth	quarter	of	2012,	gains	and	losses	on	investments	used	to	fund	our	deferred	compensation	plan	liabilities	were	reclassified	from	other	non-operating	income	(expense),	net	to	other	unallocated	costs within	cost	of	sales	for	all	years	presented	on	our	Statements	of	Earnings	in	order	to	align	the	classification	of	changes	in	the	market	value	of	investments	held	for	the	plan	with	changes	in	the	value	of	the corresponding	plan	liabilities.	The	amounts	in	the	above	table	and	all	prior	year	amounts	included	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	reflect,	as	appropriate, this	reclassification.	Net	gains	on	these	investments	in	2012,	2011,	and	2010	were	$67	million,	$40	million,	and	$56	million. (a)

The	following	provides	an	overview	of	our	consolidated	results	of	operations.	Product	sales	are	predominantly	generated	in	the	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):

# Net	Sales

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Net\tsales |  |  |  |
| Products | \t$37,817 | \t$36,925 | \t$36,380 |
| Services | 9,365 | 9,574 | 9,291 |
| Total | \t$47,182 | \t$46,499 | \t$45,671 |

Substantially	all	of	our	contracts	are	accounted	for	using	the	percentage-of-completion	(POC)	method	of	accounting.	Under	the	POC	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	POC	accounting,	changes	in	our	sales	are	typically	accompanied	by	a	corresponding	change	in	our cost	of	sales.

# Product	Sales

Our	product	sales	represent	about	80%	of	our	net	sales	for	both	2012	and	2011.	Product	sales	increased	$892	million,	or	2%	in	2012	compared	to	2011	due	to production	volume	and	deliveries,	as	well	as	higher	risk	retirements	on	certain	programs.	Product	sales	increased	about	$555	million	at	Aeronautics	(e.g.,	F-35	LRIP contracts,	F-16	deliveries);	about	$510	million	at	MST	(e.g.,	ship	and	aviation	system	programs);	about	$225	million	at	Space	Systems	(e.g.,	commercial	satellites, Orion	Multi-Purpose	Crew	Vehicle	(Orion)	program);	and	about	$100	million	at	MFC	(e.g.,	tactical	missile	programs	and	air	and	missile	defense	programs).	These increases	partially	were	offset	by	lower	product	sales	of	about	$495	million	at	IS&GS	(e.g.,	Joint	Tactical	Radio	System	(JTRS),	U.K.	Census).

Our	product	sales	represent	about	80%	of	our	net	sales	for	both	2011	and	2010.	Product	sales	increased	$545	million,	or	1%,	in	2011	compared	to	2010	due	to production	volume	and	deliveries,	as	well	as	higher	risk	retirements	on	certain	programs.	Product	sales	increased	about	$1.2	billion	at	Aeronautics	(e.g.,	F-35	LRIP contracts,	C-130	programs)	and	about	$320	million	at	MFC	(e.g.,	air	and	missile	defense	programs).	These	increases	partially	were	offset	by	lower	product	sales	of about	$700	million	at	IS&GS	(e.g.,	Decennial	Response	Integration	System	(DRIS)	program	that	supported	the	2010	U.S.	census,	JTRS);	about	$260	million	at	MST (e.g.,	ship	and	aviation	system	programs);	and	about	$60	million	at	Space	Systems	(e.g.,	Orion	program	and	the	National	Aeronautics	and	Space	Administration	(NASA) External	Tank	program).

# Services	Sales

Our	services	sales	represent	about	20%	of	our	net	sales	for	2012	and	2011.	Our	services	sales	decreased	$209	million,	or	2%,	during	2012	compared	to	2011. Services	sales	at	MFC	decreased	about	$105	million	primarily	due	to	lower	volume	and	risk	retirements	on	various	services	programs.	Services	sales	at	MST	decreased about	$60	million	primarily	due	to	lower	volume	on	various	training	services	programs.	Services	sales	at	IS&GS	decreased	about	$40	million	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.

Our	services	sales	represent	about	20%	of	our	net	sales	for	2011	and	2010.	Our	services	sales	increased	$283	million,	or	3%,	during	2011	compared	to	2010.	The increase	in	services	sales	was	attributable	to	higher	services	sales	at	both	our	MFC	and	IS&GS	business	segments.	Services	sales	at	MFC	increased	about	$215	million primarily	due	to	growth	on	the	Special	Operations	Forces	Contractor	Logistics	Support	Services	(SOF	CLSS)	program,	partially	offset	by	decreased	volume	on	various services	programs.	Services	sales	at	IS&GS	increased	about	$155	million	due	to	activities	on	a	number	of	smaller	contracts.

# 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 completion	of	the	contract.	Our	consolidated	cost	of	sales	were	as	follows	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Cost\tof\tsales |  |  |  |
| Cost\tof\tproduct\tsales | \t$33,495 | \t$32,968 | \t$32,539 |
| %\tof\tproduct\tsales | 88.6% | 89.3% | 89.4% |
| Cost\tof\tservices\tsales | 8,383 | 8,514 | 8,382 |
| %\tof\tservices\tsales | 89.5% | 88.9% | 90.2% |
| Severance\tand\tother\tcharges | 48 | 136 | 220 |
| Other\tunallocated\tcosts | 1,060 | 1,137 | 686 |
| Total | \t$42,986 | \t$42,755 | \t$41,827 |

Due	to	the	nature	of	POC	accounting,	changes	in	our	cost	of	product	and	services	sales	are	typically	accompanied	by	changes	in	our	net	sales.	The	following discussion	of	material	changes	in	our	consolidated	cost	of	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	sales	that	would	have	a	material	impact	on	our	future operations.

# Cost	of	Product	Sales

The	increase	of	$527	million,	or	2%,	in	cost	of	product	sales	during	2012	compared	to	2011	was	attributable	to	higher	cost	of	product	sales	at	our	Aeronautics,	MST, and	Space	Systems	business	segments,	partially	offset	by	lower	cost	of	product	sales	at	our	IS&GS	and	MFC	business	segments.	Cost	of	product	sales	at	Aeronautics increased	by	about	$520	million	primarily	due	to	increased	production	volume	on	various	programs,	including	F-35	LRIP	contracts,	and	the	impact	of	additional	aircraft deliveries.	Cost	of	product	sales	at	MST	increased	by	about	$485	million	primarily	due	to	increased	volume	on	ship	and	aviation	system	programs	partially	offset	by 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).	Cost	of	product	sales	at	Space	Systems	increased	by	about	$180	million	primarily	due	to	increased	volume	on	commercial	satellites	programs, Orion,	and	various	strategic	and	defensive	missile	programs.	Cost	of	product	sales	at	IS&GS	decreased	by	about	$530	million	primarily	due	to	the	substantial completion	of	various	programs	during	2011	as	well	as	lower	volume	on	numerous	other	programs.	Cost	of	product	sales	at	MFC	decreased	by	about	$70	million primarily	due	to	higher	risk	retirements	from	tactical	missile	programs	and	fire	control	systems	programs	as	well	as	the	favorable	resolution	of	contractual	matters, partially	offset	by	volume	on	air	and	missile	defense	programs.	The	0.7%	decrease	in	the	percentage	of	cost	of	product	sales	relative	to	product	sales	in	2012	compared	to 2011	primarily	was	due	to	higher	risk	retirements	(primarily	tactical	missile	programs)	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.

The	increase	of	$429	million,	or	1%,	in	cost	of	product	sales	during	2011	compared	to	2010	was	attributable	to	higher	cost	of	product	sales	at	our	Aeronautics	and MFC	business	segments,	partially	offset	by	lower	cost	of	product	sales	at	our	IS&GS,	MST,	and	Space	Systems	business	segments.	Cost	of	product	sales	at	Aeronautics increased	by	about	$1.1	billion	primarily	due	to	higher	production	volume	on	various	programs,	including	F-35	LRIP	contracts,	and	the	impact	of	additional	aircraft deliveries.	Cost	of	product	sales	at	MFC	increased	about	$260	million	primarily	due	to	production	on	air	and	missile	defense	programs.	Cost	of	product	sales	at	IS&GS decreased	about	$560	million	primarily	due	to	the	absence	of	the	DRIS	program	and	lower	volume	on	the	JTRS	program.	Cost	of	product	sales	at	MST	decreased	about $230	million	primarily	due	to	decreased	volume	on	certain	ship	and	aviation	system	programs	and	recording	of	reserves	on	certain	undersea	systems	programs	in	2010. Cost	of	product	sales	decreased	at	Space	Systems	by	about	$120	million	primarily	due	to	lower	volume	on	the	NASA	External	Tank	and	Orion	programs.

# Cost	of	Services	Sales

Our	cost	of	services	sales	decreased	$131	million,	or	2%,	during	2012	compared	to	2011.	Most	of	our	cost	of	services	sales	are	in	the	IS&GS	and	MFC	business segments.	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	at	MFC	decreased	approximately	$105	million	primarily	due	to	lower	volume	on various	services	programs.	Cost	of	services	sales	at	MST	decreased	approximately	$90	million	primarily	due	to	lower	volume	on	various	training	services	programs. Cost	of	services	sales	at	IS&GS	increased	approximately	$80	million	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	primarily	was	due	to	risk	retirements	on	the	ODIN	and	Hanford contracts	in	2011.

Our	cost	of	services	sales	increased	$132	million,	or	2%,	during	2011	compared	to	2010.	The	increase	in	cost	of	services	sales	primarily	was	attributable	to	higher cost	of	services	sales	at	our	MFC	business	segment,	partially	offset	by	lower	cost	of	services	sales	at	our	IS&GS	business	segment.	Cost	of	services	sales	at	MFC increased	approximately	$190	million	primarily	due	to	growth	on	the	SOF	CLSS	program.	Cost	of	services	sales	at	IS&GS	decreased	by	about	$55	million	primarily	due to	higher	margins	as	the	result	of	risk	retirements	on	various	programs	(including	ODIN)	during	2011	and	the	recording	of	reserves	on	various	programs	in	2010.	The 1.3%	decrease	in	the	percentage	of	cost	of	services	sales	relative	to	services	sales	in	2011	compared	to	2010	primarily	was	due	to	the	retirement	of	risks	and	other	factors on	numerous	programs	at	IS&GS,	partially	offset	by	volume	on	SOF	CLSS,	which	provides	a	lower	margin	relative	to	other	MFC	programs.

# Severance	and	Other	Charges

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	(Note	3).	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.	The severance	actions	at	our	Aeronautics	business	segment	resulted	from	cost	reduction	initiatives,	including	the	consolidation	of	selected	program	support	activities	among certain	Aeronautics	locations.

During	2011,	we	recorded	severance	charges	related	to	various	severance	actions	totaling	$136	million,	net	of	state	tax	benefits,	of	which	$49	million,	$48	million, and	$39	million	related	to	our	Aeronautics	business	segment,	Space	Systems	business	segment,	and	our	IS&GS	business	segment	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	to	better	align	our organization	and	cost	structure	with	changing	economic	conditions.	The	workforce	reductions	at	the	business	segments	also	reflect	changes	in	program	lifecycles,	where several	of	our	major	programs	are	either	transitioning	out	of	development	and	into	production	or	are	ending.

During	2010,	we	recorded	a	charge	of	$178	million,	net	of	state	tax	benefits,	related	to	the	Voluntary	Executive	Separation	Program	(VESP).	The	charge,	which included	lump-sum	special	payments	for	qualifying	executives,	reduced	our	net	earnings	by	$116	million	($.31	per	share).	The	amounts	of	the	VESP	attributable	to	our business	segments	were	$25	million	at	Aeronautics,	$42	million	at	IS&GS,	$17	million	at	MFC,	$21	million	at	MST,	and	$41	million	at	Space	Systems.	The	remaining $32	million	was	attributable	to	our	Corporate	Headquarters.	Also,	in	2010,	our	MST	business	segment	decided	to	consolidate	certain	of	its	operations,	including	the closure	of	a	facility	in	Eagan,	Minnesota.	Accordingly,	we	recorded	a	charge	to	cost	of	sales	of	$42	million,	net	of	state	tax	benefits,	which	reduced	our	net	earnings	by $27	million	($.07	per	share).	The	majority	of	the	charge	was	associated	with	the	accrual	of	severance	payments	to	employees,	with	the	remainder	associated	with impairment	of	assets.

We	expect	to	recover	a	substantial	amount	of	these	severance	charges,	including	the	charge	related	to	the	VESP,	in	future	periods	through	the	pricing	of	our products	and	services	to	the	U.S.	Government	and	other	customers.	While	the	VESP	is	expected	to	be	recovered	over	several	years,	the	other	severance	charges	are typically	expected	to	be	recovered	within	a	one-year	period	after	the	charge	has	been	incurred,	with	the	impact	included	in	the	respective	business	segment's	results	of operations.

# Other	Unallocated	Costs

Other	unallocated	costs	principally	include	the	non-cash	FAS/CAS	pension	adjustment,	stock-based	compensation,	and	other	corporate	costs.	These	costs	are	not allocated	to	the	business	segments	and,	therefore,	are	excluded	from	the	costs	of	product	and	services	sales	(see	"Note	3	–	Information	on	Business	Segments"	of	our consolidated	financial	statements	for	a	description	of	these	items).	The	$77	million	decrease	in	other	unallocated	costs	between	2012	and	2011	primarily	was	due	to	a decrease	in	the	non-cash	FAS/CAS	pension	adjustment	of	$92	million,	partially	offset	by	fluctuations	in	costs	associated	with	various	corporate	items,	none	of	which were	individually	significant.	Other	unallocated	costs	increased	$451	million	between	2011	and	2010,	primarily	attributable	to	an	increase	in	the	non-cash	FAS/CAS pension	adjustment	of	$468	million,	which	included	increased	FAS	pension	expense	in	2011	compared	to	2010	due	primarily	to	the	decrease	in	the	discount	rate	in	2011. For	more	information,	see	the	related	discussion	in	"Critical	Accounting	Policies	-	Postretirement	Benefit	Plans."

# Other	Income,	Net

Other	income,	net	for	2012	was	$238	million,	compared	to	$276	million	in	2011	and	$261	million	in	2010.	The	changes	between	years	primarily	were	due	to fluctuations	in	equity	earnings	in	investees	in	our	Space	Systems	business	segment.

# Interest	Expense

Interest	expense	for	2012	was	$383	million,	compared	to	$354	million	in	2011	and	$345	million	in	2010.	The	increase	between	the	years	primarily	was	due	to increased	interest	expense	from	the	$2.0	billion	issuance	of	long-term	debt	on	September	9,	2011,	partially	offset	by	the	redemption	of	$500	million	in	certain	long-term notes	in	the	fourth	quarter	of	2011.

# Other	Non-Operating	Income	(Expense),	Net

Other	non-operating	income	(expense),	net	was	$21	million	in	2012,	compared	to	$(35)	million	in	2011	and	$18	million	in	2010.	The	change	between	years primarily	was	due	to	premiums	of	$48	million	on	early	extinguishments	of	debt	that	occurred	in	2011	(Note	8).

# Income	Tax	Expense

Our	effective	income	tax	rate	from	continuing	operations	was	32.6%	for	2012,	26.5%	for	2011,	and	30.8%	for	2010.	The	rates	for	all	periods	benefited	from	tax deductions	for	dividends	related	to	certain	of	our	defined	contribution	plans	with	an	employee	stock	ownership	plan	feature	and	tax	deductions	for	U.S.	manufacturing activities.

The	effective	income	tax	rate	for	2012	included	a	reduction	in	the	income	tax	benefit	of	the	U.S.	manufacturing	deduction	primarily	caused	by	the	$2.5	billion discretionary	pension	contributions	in	the	fourth	quarter	of	2012,	which	increased	income	tax	expense	by	$59	million	($.18	per	share).	As	a	result	of	the	accelerated pension	contributions	in	2012,	we	expect	to	capture	most	of	the	reduced	manufacturing	deduction	over	the	next	two	years	through	higher	taxable	income.	The	effective income	tax	rate	for	2011	included	a	reduction	to	income	tax	expense	of	$89	million,	or	$.26	per	diluted	share,	through	the	elimination	of	liabilities	for	unrecognized	tax benefits	as	a	result	of	the	U.S.	Congressional	Joint	Committee	on	Taxation	completing	its	review	of	the	Internal	Revenue	Service	Appeals	Division's	resolution	of adjustments	related	to	tax	years	2003	through	2008.	The	effective	income	tax	rates	for	2011	and	2010	also	included	the	U.S.	research	and	development	(R&D)	tax	credit that	expired	on	December	31,	2011.

On	January	2,	2013,	the	President	signed	into	law	the	American	Taxpayer	Relief	Act	of	2012,	which	retroactively	reinstates	the	R&D	credit	for	two	years,	from January	1,	2012	through	December	31,	2013.	Since	tax	law	changes	are	recognized	in	the	period	in	which	new	legislation	is	enacted,	the	Corporation	did	not	recognize the	tax	benefit	of	the	R&D	tax	credit	in	2012.	The	effective	tax	rate	for	2010	was	affected	by	the	enactment	of	the	Patient	Protection	and	Affordable	Care	Act	and	the Health	Care	and	Education	Reconciliation	Act	of	2010,	which	eliminated	the	tax	deduction	for	company-paid	retiree	prescription	drug	expenses	to	the	extent	they	are reimbursed	under	Medicare	Part	D,	beginning	in	2013.	As	a	result,	we	recorded	additional	income	tax	expense	of	$96	million	in	2010.

# Net	Earnings	from	Continuing	Operations

We	reported	net	earnings	from	continuing	operations	of	$2.75	billion	($8.36	per	share)	in	2012,	$2.67	billion	($7.85	per	share)	in	2011,	and	$2.61	billion	($7.10 per	share)	in	2010.	Both	net	earnings	from	continuing	operations	and	earnings	per	share	were	affected	by	the	factors	discussed	above.	In	addition,	earnings	per	share	in 2011	and	2010	benefited	from	a	net	decrease	of	common	shares	outstanding	as	a	result	of	shares	repurchased,	which	were	partially	offset	by	share	issuances	under	our stock-based	awards	and	certain	defined	contribution	plans.	Net	decreases	of	25.1	million	and	27.0	million	in	2011	and	2010	represented	7%	and	7%	of	our	shares outstanding	at	the	beginning	of	each	year.

# Net	(Loss)	Earnings	from	Discontinued	Operations

Amounts	related	to	discontinued	operations	in	2012	were	not	significant	and,	accordingly,	were	included	in	operating	profit.	Discontinued	operations	for	2011 include	the	operating	results	and	other	adjustments	of	Savi,	a	logistics	business	that	was	in	our	former	Electronic	Systems	business	segment	sold	in	the	third	quarter	of 2012	,	and	PAE,	a	business	formerly	within	our	IS&GS	business	segment	sold	in	the	second	quarter	of	2011.	Discontinued	operations	for	2010	include	the	operating results	of	Savi,	PAE,	and	EIG	through	the	date	of	its	sale	in	the	fourth	quarter	of	2010.	Net	loss	from	discontinued	operations	were	$12	million	($.04	per	share)	in	2011, and	net	earnings	from	discontinued	operations	of	$264	million	($.71	per	share)	in	2010.

Net	earnings	from	discontinued	operations	for	2011	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.	Net	earnings	from	discontinued	operations	for	2010 included	a	gain,	net	of	income	taxes,	of	$184	million	($.50	per	share)	from	the	sale	of	EIG.	Additionally,	as	a	result	of	our	decision	to	sell	PAE	in	2010,	we	recorded	net adjustments	that	increased	2010	earnings	from	discontinued	operations	by	$73	million	($.20	per	share).	For	more	information,	see	"Note	14	–	Acquisitions	and Divestitures"	of	our	consolidated	financial	statements.

# Business	Segment	Results	of	Operations

We	organize	our	business	segments	based	on	the	nature	of	the	products	and	services	offered.	We	operate	in	five	business	segments:	Aeronautics,	IS&GS,	MFC, MST,	and	Space	Systems.

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	similar	to	our	third-party	contracts.

Operating	profit	of	our	business	segments	includes	equity	earnings	or	losses	from	investees	because	the	operating	activities	of	the	investees	are	closely	aligned	with the	operations	of	those	business	segments.	Operating	profit	of	our	business	segments	excludes	the	non-cash	FAS/CAS	pension	adjustment	described	below;	expense	for stock-based	compensation	programs;	the	effects	of	items	not	considered	part	of	management's	evaluation	of	segment	operating	performance,	such	as	charges	related	to significant	severance	actions	in	2012	and	2011	and	the	charges	in	2010	related	to	the	VESP	and	the	facilities	consolidation	within	MST	(Note	13);	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	non-cash	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	expense	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.

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):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Net\tsales |  |  |  |
| Aeronautics | \t$14,953 | \t$14,362 | \t$13,109 |
| Information\tSystems\t&\tGlobal\tSolutions | 8,846 | 9,381 | 9,921 |
| Missiles\tand\tFire\tControl | 7,457 | 7,463 | 6,930 |
| Mission\tSystems\tand\tTraining | 7,579 | 7,132 | 7,443 |
| Space\tSystems | 8,347 | 8,161 | 8,268 |
| Total\tnet\tsales | \t$47,182 | \t$46,499 | \t$45,671 |
| Operating\tprofit |  |  |  |
| Aeronautics | \t$1,699 | \t$1,630 | \t$1,498 |
| Information\tSystems\t&\tGlobal\tSolutions | 808 | 874 | 814 |
| Missiles\tand\tFire\tControl | 1,256 | 1,069 | 973 |
| Mission\tSystems\tand\tTraining | 737 | 645 | 713 |
| Space\tSystems | 1,083 | 1,063 | 1,030 |
| Total\tbusiness\tsegment\toperating\tprofit | 5,583 | 5,281 | 5,028 |
| Unallocated\texpenses,\tnet: |  |  |  |
| Non-cash\tFAS/CAS\tpension\tadjustment: |  |  |  |
| FAS\tpension\texpense | (1,941) | (1,821) | (1,442) |
| Less:\tCAS\texpense | 1,111 | 899 | 988 |
| Non-cash\tFAS/CAS\tpension\tadjustment^\t(a) | (830) | (922) | (454) |
| Severance\tand\tother\tcharges\t^(b) | (48) | (136) | (220) |
| Stock-based\tcompensation | (167) | (157) | (168) |
| Other,\tnet\t^(c) | (104) | (46) | (81) |
| Total\tunallocated\texpenses,\tnet | (1,149) | (1,261) | (923) |
| Total\tconsolidated\toperating\tprofit | \t$4,434 | \t$4,020 | \t$4,105 |
| (a) |  |  |  |

FAS	pension	expense	increased	in	2012	compared	to	2011,	and	in	2011	to	2010,	primarily	due	to	the	decrease	in	the	discount	rate	in	2012	and	2011.	The	segment	operating	profit	includes	pension	expense	only	as determined	and	funded	in	accordance	with	CAS.	The	non-cash	FAS/CAS	pension	adjustment	is	expected	to	be	about	$(485)	million	in	2013.	For	more	information,	see	the	related	discussion	in	"Critical	Accounting Policies	-	Postretirement	Benefit	Plans"). (a)

Severance	and	other	charges	include	the	severance	charges	recorded	in	2012	associated	with	our	Aeronautics	business	segment	and	the	reorganization	of	our	former	Electronic	Systems	business	segment;	for	2011, include	the	severance	charges	associated	with	our	Aeronautics,	IS&GS,	and	Space	Systems	business	segments,	and	Corporate	Headquarters;	and	for	2010,	include	the	charges	related	to	the	VESP	and	the	facilities consolidation	within	our	MST	business	segment	(Note	13).	Severance	charges	for	initiatives	that	are	not	significant	are	included	in	business	segment	operating	profit. (b)

The	change	between	years	primarily	was	due	to	fluctuations	in	expense	associated	with	various	corporate	items,	none	of	which	were	individually	significant. (c)

The	following	segment	discussions	also	include	information	relating	to	backlog	for	each	segment.	Backlog	was	approximately	$82.3	billion,	$80.7	billion,	and $78.4	billion	at	December	31,	2012,	2011,	and	2010.	These	amounts	included	both	funded	backlog	(unfilled	firm	orders	for	which	funding	has	been	both	authorized	and appropriated	by	the	customer	–	Congress	in	the	case	of	U.S.	Government	agencies)	and	unfunded	backlog	(firm	orders	for	which	funding	has	not	yet	been	appropriated). Backlog	does	not	include	unexercised	options	or	task	orders	to	be	issued	under	indefinite-delivery,	indefinite-quantity	contracts.	Funded	backlog	was	approximately $54.8	billion	at	December	31,	2012.

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)	or	for	services,	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.	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	costs	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	(for	example,	a	newly-developed	product	versus	a	mature	product),	the	schedule	and	associated	tasks	(for	example,	the number	and	type	of	milestone	events),	and	costs	(for	example,	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	costs	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	POC	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	POC	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	POC	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	segment	operating	profit	may	be	impacted	by	changes	in	estimated	profit	booking	rates	on	our	contracts	accounted	for	using	the POC	method	of	accounting.	Increases	in	the	estimated	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	estimated	profit	booking	rate.	Increases	or	decreases	in	estimated	profit	booking	rates	are	recognized	in	the	current period	and	reflect	the	inception-to-date	effect	of	such	changes.	Segment	operating	profit	may	also	be	impacted,	favorably	or	unfavorably,	by	other	matters	such	as	the resolution	of	contractual	matters,	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	rate	adjustments	and	other	matters,	increased	segment	operating	profit,	net	of	state income	taxes,	by	approximately	$1.9	billion,	$1.6	billion,	and	$1.4	billion	for	2012,	2011,	and	2010.	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	resolution	of	contractual	matters	at	our	MST	and	MFC	business	segments.	The consolidated	net	adjustments	for	2012	are	inclusive	of	approximately	$500	million	in	unfavorable	items,	about	$100	million	higher	than	2011.	The	variance	is	primarily due	to	an	adjustment	on	our	F-35	program	as	described	in	our

Aeronautics	business	segment's	results	of	operations	discussion.	The	increase	in	our	consolidated	net	adjustments	for	2011	as	compared	to	2010	primarily	was	due	to	an increase	in	profit	booking	rate	adjustments	at	our	IS&GS	and	Aeronautics	business	segments.

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,	F-22	Raptor,	F-16	Fighting	Falcon,	C-130	Hercules,	and	the	C-5M	Super	Galaxy.	Aeronautics'	operating	results	included	the	following	(in millions):

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	LRIP	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.

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	LRIP	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.

Aeronautics'	net	sales	for	2011	increased	$1.3	billion,	or	10%,	compared	to	2010.	The	growth	in	net	sales	primarily	was	due	to	higher	volume	of	about	$850	million for	work	performed	on	the	F-35	LRIP	contracts	as	production	increased;	higher	volume	of	about	$745	million	for	C-130	programs	due	to	an	increase	in	deliveries	(33	C- 130J	aircraft	delivered	in	2011	compared	to	25	during	2010)	and	support	activities;	about	$425	million	for	F-16	support	activities	and	an	increase	in	aircraft	deliveries (22	F-16	aircraft	delivered	in	2011	compared	to	20	during	2010);	and	approximately	$90	million	for	higher	volume	on	C-5	programs	(two	C-5M	aircraft	delivered	in 2011	compared	to	one	during	2010).	These	increases	partially	were	offset	by	a	decline	in	net	sales	of	approximately	$675	million	due	to	lower	volume	on	the	F-22 program	and	lower	net	sales	of	about	$155	million	for	the	F-35	development	contract	as	development	work	decreased.

Aeronautics'	operating	profit	for	2011	increased	$132	million,	or	9%,	compared	to	2010.	The	increase	primarily	was	attributable	to	approximately	$115	million	of higher	operating	profit	on	C-130	programs	due	to	increased	volume	and	the	retirement	of	risks;	increased	volume	and	risk	retirements	on	F-16	programs	of	about	$50 million	and	C-5	programs	of	approximately	$20	million;	and	about	$70	million	due	to	risk	retirements	on	other	Aeronautics	sustainment	activities	in	2011.	These increases	partially	were	offset	by	a	decline	in	operating	profit	of	approximately	$75	million	on	the	F-22	program	and	F-35	development	contract	primarily	due	to	lower volume	and	about	$55	million	on	other	programs,	including	F-35	LRIP,	primarily	due	to	lower	profit	rate	adjustments	in	2011	compared	to	2010.	Adjustments	not related	to	volume,	including	net	profit	rate	adjustments	described	above,	were	approximately	$90	million	higher	in	2011	compared	to	2010.

Backlog	decreased	in	2012	compared	to	2011	mainly	due	to	lower	orders	on	F-35	contracts	and	C-130	programs,	partially	offset	by	higher	orders	on	F-16	programs. Backlog	increased	in	2011	compared	to	2010	mainly	due	to	higher	orders	on	F-35	contracts,	which	partially	were	offset	by	higher	sales	volume	on	the	C-130	programs.

# Trends

We	expect	Aeronautics	will	experience	a	mid	single	digit	percentage	range	decline	in	net	sales	for	2013	as	compared	to	2012.	A	decrease	in	net	sales	from	a	decline in	F-16	and	C-130J	aircraft	deliveries	is	expected	to	be	partially	offset	by	an	increase	in	net	sales	volume	on	F-35	LRIP	contracts.	Operating	profit	is	projected	to decrease	at	a	high	single	digit	percentage	range	from	2012	levels	due	to	the	expected	decline	in	net	sales	as	well	as	changes	in	aircraft	mix,	resulting	in	a	slight	decline	in operating	margins	between	the	years.

Our	IS&GS	business	segment	provides	management	services,	integrated	information	technology	solutions,	and	advanced	technology	systems	and	expertise	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	continuing	downturn	in	the	federal	information	technology	budgets	and	the	impact	of	the	continuing resolution	that	was	effective	on	October	1,	2012,	the	start	of	the	U.S.	Government's	fiscal	year.	IS&GS'	operating	results	included	the	following	(in	millions):

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;	Warfighter	Information	Network-Tactical	(WIN-T);	Command,	Control,	Battle	Management	and	Communications	(C2BMC);	and Transportation	Worker	Identification	Credential	(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 Persistent	Threat	Detection	System	(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.

IS&GS'	net	sales	for	2011	decreased	$540	million,	or	5%,	compared	to	2010.	The	decrease	primarily	was	attributable	to	lower	volume	of	approximately	$665 million	due	to	the	absence	of	the	DRIS	program	that	supported	the	2010	U.S.	census	and	a	decline	in	activities	on	the	JTRS	program.	This	decrease	partially	was	offset by	increased	net	sales	on	numerous	programs.

IS&GS'	operating	profit	for	2011	increased	$60	million,	or	7%,	compared	to	2010.	Operating	profit	increased	approximately	$180	million	due	to	volume	and	the retirement	of	risks	in	2011	and	the	absence	of	reserves	recognized	in	2010	on	numerous	programs	(including	among	others,	ODIN	(about	$60	million)	and	TWIC	and Automated	Flight	Service	Station	programs).	The	increases	in	operating	profit	partially	were	offset	by	the	absence	of	the	DRIS	program	and	a	decline	in	activities	on	the JTRS	program	of	about	$120	million.	Adjustments	not	related	to	volume,	including	net	profit	rate	adjustments	described	above,	were	approximately	$130	million	higher in	2011	compared	to	2010.

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). The	decrease	in	backlog	during	2011	compared	to	2010	mainly	was	due	to	declining	activities	on	the	JTRS	program	and	several	other	smaller	programs.

We	expect	IS&GS'	net	sales	to	decline	in	2013	in	the	mid	single	digit	percentage	range	as	compared	to	2012	primarily	due	to	the	continued	downturn	in	federal information	technology	budgets.	Operating	profit	is	expected	to	decline	in	2013	in	the	mid	single	digit	percentage	range	consistent	with	the	expected	decline	in	net	sales, resulting	in	margins	that	are	comparable	with	2012	results.

Our	MFC	business	segment	provides	air	and	missile	defense	systems;	tactical	missiles	and	air-to-ground	precision	strike	weapon	systems;	fire	control	systems; mission	operations	support,	readiness,	engineering	support,	and	integration	services;	logistics	and	other	technical	services;	and	manned	and	unmanned	ground	vehicles. MFC's	major	programs	include	PAC-3,	THAAD,	Multiple	Launch	Rocket	System	(MLRS),	Hellfire,	Javelin,	Joint	Air-to-Surface	Standoff	Missile	(JASSM),	Apache Fire	Control	System	(Apache),	Sniper^® following	(in	millions): ®

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.

MFC's	net	sales	for	2011	increased	$533	million,	or	8%,	compared	to	2010.	The	increase	was	attributable	to	higher	volume	of	about	$420	million	on	air	and	missile defense	programs	(primarily	PAC-3	and	THAAD);	and	about	$245	million	from	fire	control	systems	programs	primarily	related	to	the	SOF	CLSS	program,	which began	late	in	the	third	quarter	of	2010.	Partially	offsetting	these	increases	were	lower	net	sales	due	to	decreased	volume	of	approximately	$75	million	primarily	from various	services	programs	and	approximately	$20	million	from	tactical	missile	programs	(primarily	MLRS	and	JASSM).

MFC's	operating	profit	for	2011	increased	$96	million,	or	10%,	compared	to	2010.	The	increase	was	attributable	to	higher	operating	profit	of	about	$60	million	for air	and	missile	defense	programs	(primarily	PAC-3	and	THAAD)	as	a	result	of	increased	volume	and	retirement	of	risks;	and	approximately	$25	million	for	various services	programs.	Adjustments	not	related	to	volume,	including	net	profit	rate	adjustments	described	above,	were	approximately	$35	million	higher	in	2011	compared to	2010.

and	on	various	services	programs,	partially	offset	by	lower	orders	and	higher	sales	volume	on	tactical	missiles	programs.	Backlog	increased	in	2011	compared	to	2010 primarily	due	to	increased	orders	on	air	and	missile	defense	programs	(primarily	THAAD).

We	expect	MFC's	net	sales	for	2013	will	be	comparable	with	2012.	We	expect	low	double	digit	percentage	growth	in	air	and	missile	defense	programs,	offset	by	an expected	decline	in	volume	on	logistics	services	programs.	Operating	profit	and	margin	are	expected	to	be	comparable	with	2012	results.

Our	MST	business	segment	provides	surface	ship	and	submarine	combat	systems;	sea	and	land-based	missile	defense	systems;	radar	systems;	mission	systems	and sensors	for	rotary	and	fixed-wing	aircraft;	littoral	combat	ships;	simulation	and	training	services;	unmanned	technologies	and	platforms;	ship	systems	integration;	and military	and	commercial	training	systems.	MST's	major	programs	include	Aegis,	MK-41	Vertical	Launching	System	(VLS),	TPQ-53	Radar	System,	MH-60,	LCS,	and PTDS.	MST's	operating	results	included	the	following	(in	millions):

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.

MST's	net	sales	for	2011	decreased	$311	million,	or	4%,	compared	to	2010.	The	decrease	was	attributable	to	decreased	volume	of	approximately	$390	million	for certain	ship	and	aviation	system	programs	(primarily	Maritime	Patrol	Aircraft	and	PTDS)	and	approximately	$75	million	for	training	and	logistics	solutions	programs. Partially	offsetting	these	decreases	was	higher	sales	of	about	$165	million	from	production	on	the	LCS	program.

MST's	operating	profit	for	2011	decreased	$68	million,	or	10%,	compared	to	2010.	The	decrease	was	attributable	to	decreased	operating	profit	of	approximately	$55 million	as	a	result	of	increased	reserves	for	contract	cost	matters	on	various	ship	and	aviation	system	programs	(including	the	terminated	presidential	helicopter	program) and	approximately	$40	million	due	to	lower	volume	and	increased	reserves	on	training	and	logistics	solutions.	Partially	offsetting	these	decreases	was	higher	operating profit	of	approximately	$30	million	in	2011	primarily	due	to	the	recognition	of	reserves	on	certain	undersea	systems	programs	in	2010.	Adjustments	not	related	to volume,	including	net	profit	rate	adjustments	described	above,	were	approximately	$55	million	lower	in	2011	compared	to	2010.

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 decreased	orders	and	higher	sales	volume	on	integrated	warfare	systems	and	sensors	programs	(primarily	Aegis).	Backlog	decreased	slightly	in	2011	compared	to	2010 primarily	due	to	higher	sales	volume	on	various	integrated	warfare	systems	and	sensors	programs.

We	expect	MST's	net	sales	to	decline	in	2013	in	the	low	single	digit	percentage	range	as	compared	to	2012	due	to	the	completion	of	PTDS	deliveries	in	2012	and expected	lower	volume	on	training	services	programs.	Operating	profit	and	margin	are	expected	to	increase	slightly	from	2012	levels	primarily	due	to	anticipated improved	contract	performance.

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	Space-Based	Infrared	System	(SBIRS),	Advanced	Extremely	High	Frequency	(AEHF)	system,	Mobile	User	Objective System	(MUOS),	Global	Positioning	Satellite	(GPS)	III	system,	Geostationary	Operational	Environmental	Satellite	R-Series	(GOES-R),	Trident	II	D5	Fleet	Ballistic Missile,	and	Orion.	Operating	results	for	our	Space	Systems	business	segment	include	our	equity	interests	in	United	Launch	Alliance	(ULA),	which	provides	expendable launch	services	for	the	U.S.	Government,	United	Space	Alliance	(USA),	which	provided	processing	activities	for	the	Space	Shuttle	program	and	is	winding	down following	the	completion	of	the	last	Space	Shuttle	mission	in	2011,	and	a	joint	venture	that	manages	the	U.K.'s	Atomic	Weapons	Establishment	program.	Space Systems'	operating	results	included	the	following	(in	millions):

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	USA.	Adjustments	not	related	to	volume, including	net	profit	booking	rate	adjustments	described	above,	were	approximately	$15	million	higher	for	2012	compared	to	2011.

Space	Systems'	net	sales	for	2011	decreased	$107	million,	or	1%,	compared	to	2010.	The	decrease	in	net	sales	was	attributable	to	a	decline	of	about	$90	million related	to	the	NASA	External	Tank	program,	which	ended	in	connection	with	the	completion	of	the	last	Space	Shuttle	mission	in	July	2011;	a	decline	in	volume	of	about $90	million	related	to	the	Orion	program;	and	lower	volume	of	approximately	$30	million	related	to	government	satellites.	These	decreases	partially	were	offset	by higher	volume	for	fleet	ballistic	and	defensive	missile	systems	of	about	$80	million	and	commercial	satellites	of	approximately	$45	million	(one	commercial	satellite delivery	in	both	2011	and	2010).

Space	Systems'	operating	profit	for	2011	increased	$33	million,	or	3%,	compared	to	2010.	The	increase	in	operating	profit	principally	was	attributable	to	retirement of	risks	on	government	satellite	programs	of	about	$60	million,	partially	offset	by	decreased	equity	earnings	of	about	$15	million	primarily	due	to	the	wind-down	of USA.	Adjustments	not	related	to	volume,	including	net	profit	rate	adjustments	described	above,	were	approximately	$15	million	higher	in	2011	compared	to	2010.

# Equity	earnings

Total	equity	earnings	recognized	by	the	Space	Systems	segment	from	ULA,	USA,	and	AWE	represented	approximately	$265	million,	or	24%	of	this	segment's operating	profit	during	2012.	During	2011	and	2010,	total	equity	earnings	recognized	by	the	Space	Systems	segment	from	ULA,	USA,	and	AWE	represented approximately	$285	million	and	$300	million,	or	27%	and	29%	of	this	segment's	operating	profit.

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. Backlog	decreased	in	2011	compared	to	2010	mainly	due	to	higher	sales	volume	associated	with	the	Orion	program	and	on	government	satellite	activities.

We	expect	Space	Systems'	net	sales	to	decline	in	2013	in	the	mid	single	digit	percentage	range	as	compared	to	2012	due	primarily	to	the	absence	of	any	commercial satellite	deliveries	in	2013.	Operating	profit	is	expected	to	decline	in	the	low	double	digit	percentage	range	in	2013	primarily	due	to	lower	equity	earnings	from	USA,	as no	further	significant	activity	is	expected	due	to	its	wind-down	in	2012,	and	lower	sales	volume,	resulting	in	a	decline	in	operating	margins	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,	share	repurchases,	dividends,	acquisitions,	and	postretirement	benefit	plan	funding.	We	have	accessed	the	capital	markets	on	limited	occasions,	as	needed or	when	opportunistic.	We	expect	our	cash	from	operations	will	continue	to	be	sufficient	to	support	our	operations	and	anticipated	capital	expenditures	for	the

foreseeable	future.	We	have	financing	resources	available	to	fund	potential	cash	outflows	that	are	less	predictable	or	more	discretionary,	as	discussed	in	the	"Capital Structure,	Resources,	and	Other"	section.	We	have	access	to	the	credit	markets,	if	needed,	for	liquidity	or	general	corporate	purposes,	including	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	2012,	as	we	are	authorized	to	bill	as	the	costs	are	incurred	or	work	is	performed.	By	way	of	contrast,	we generally	do	not	bill	our	fixed-price	contracts	until	milestones,	including	deliveries,	are	achieved.	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.	Such	payments	may	precede	our	incurrence	of	costs	related	to	our	contract	performance,	thereby	increasing	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	receivables.	The amount	of	withholds	increased	to	approximately	$200	million	as	of	December	31,	2012,	primarily	at	our	Aeronautics	business	segment	related	to	U.S.	Government audits	of	our	business	systems	and	certain	delivered	F-35	aircraft.	While	the	impact	of	withholding	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	2012	and	those	planned	for	2013	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. In	addition,	we	have	projects	underway	to	modernize	certain	of	our	facilities,	inclusive	of	our	efforts	to	consolidate	and	reduce	leased	facilities.	We	also	incur	capital expenditures	for	information	technology	to	support	programs	and	general	enterprise	information	technology	infrastructure	as	well	as	for	the	development	or	purchase	of internal-use	software.

The	following	table	provides	a	summary	of	our	cash	flow	information	(in	millions)	followed	by	a	discussion	of	the	key	elements:

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Operating\tactivities |  |  |  |
| Net\tearnings | \t$2,745 | \t$2,655 | \t$2,878 |
| Non-cash\tadjustments | 2,133 | 1,194 | 1,721 |
| Changes\tin\tworking\tcapital | (1,061) | 674 | 138 |
| Other,\tnet | (2,256) | (270) | (936) |
| Net\tcash\tprovided\tby\toperating\tactivities | \t$1,561 | \t$4,253 | \t$3,801 |
| Net\tcash\tused\tfor\tinvesting\tactivities | \t$(1,222) | \t$(813) | \t$(573) |
| Net\tcash\tused\tfor\tfinancing\tactivities | \t$(2,023) | \t$(2,119) | \t$(3,358) |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | \t$1,898 | \t$3,582 | \t$2,261 |

# Operating	Activities

Net	cash	provided	by	operating	activities	decreased	$2.7	billion	in	2012	as	compared	to	2011	primarily	due	to	changes	in	working	capital	of	$1.7	billion	and increased	pension	contributions	of	$1.1	billion,	net	of	CAS	recoveries.	The	decrease	of	$1.7	billion	in	cash	provided	by	working	capital	(defined	as	accounts	receivable and	inventories	less	accounts	payable	and	customer	advances	and	amounts	in	excess	of	costs	incurred)	was	driven	by	higher	payments	of	accounts	payable	due	to	timing as	well	as	the	timing	of	production	and	billing	cycles	affecting	customer	advances	and	progress	payments	applied	to

inventories.	Additionally,	growth	in	accounts	receivable,	primarily	due	to	the	timing	of	finalizing	contract	negotiations	on	the	F-35	LRIP	contracts	in	the	fourth	quarter of	2012,	which	delayed	our	billings,	as	well	as	the	impact	of	U.S.	Government	withholdings	on	the	F-35	program	reduced	the	cash	provided	by	operating	activities.

Net	cash	provided	by	operating	activities	increased	by	$452	million	in	2011	as	compared	to	2010	primarily	due	to	changes	in	working	capital.	Cash	provided	by working	capital	increased	by	$536	million	due	to	increases	in	accounts	payable	resulting	from	the	timing	of	payments	and	an	increase	in	customer	advances	due	to	the timing	of	production	and	billing	schedules.	This	improvement	in	cash	from	working	capital	partially	was	offset	by	an	increase	in	accounts	receivable	primarily	due	to the	timing	of	contract	negotiations	and	billing	activities	on	the	F-35	program.	Partially	offsetting	the	increase	in	cash	provided	by	working	capital	was	higher	pension contributions,	net	of	CAS	recoveries	of	$134	million.

# Investing	Activities

Acquisitions,	divestitures	and	other	activities	–	Acquisition	activities	include	both	the	acquisition	of	businesses	and	investments	in	affiliates.	We	paid	$304	million in	2012	for	acquisition	activities,	primarily	related	to	the	acquisitions	of	Chandler/May,	CDL,	and	Procerus	(Note	14).	In	2011,	we	paid	$649	million	for	acquisition activities,	primarily	related	to	the	acquisitions	of	QTC	and	Sim-Industries	(Note	14).	In	2010,	we	paid	$148	million	primarily	related	to	investments	in	affiliates.	In 2010,	we	received	proceeds	of	$798	million	from	the	sale	of	EIG	(Note	14).	During	2011,	we	decreased	our	short-term	investments	by	$510	million	compared	to	an increase	of	$171	million	in	2010.

# Financing	Activities

Dividends	and	share	activity	–	We	paid	dividends	totaling	$1.4	billion	($4.15	per	share)	in	2012,	$1.1	billion	($3.25	per	share)	in	2011,	and	$969	million	($2.64	per share)	in	2010.	We	have	increased	our	quarterly	dividend	rate	in	each	of	the	last	three	years,	including	a	15%	increase	in	the	quarterly	dividend	rate	in	the	fourth	quarter of	2012.	We	declared	quarterly	dividends	of	$1.00	per	share	during	each	of	the	first	three	quarters	of	2012	and	$1.15	per	share	for	the	last	quarter;	$.75	per	share	during each	of	the	first	three	quarters	of	2011	and	$1.00	per	share	for	the	last	quarter;	and	$.63	per	share	during	each	of	the	first	three	quarters	of	2010	and	$.75	per	share	for	the last	quarter.

We	paid	cash	totaling	$1.0	billion,	$2.5	billion,	and	$2.4	billion	for	share	repurchases	during	2012,	2011,	and	2010.	Pursuant	to	our	share	repurchase	program,	we are	authorized	to	repurchase	up	to	$6.5	billion	of	our	common	stock.	Under	the	program,	we	have	discretion	to	determine	the	dollar	amount	of	shares	to	be	repurchased and	the	timing	of	any	repurchases	in	compliance	with	applicable	law	and	regulation.	As	of	December	31,	2012,	we	had	repurchased	a	total	of	54.3	million	shares	of	our common	stock	under	the	program	for	$4.2	billion,	and	there	remained	$2.3	billion	authorized	for	additional	share	repurchases.

Cash	received	from	the	issuance	of	our	common	stock	in	connection	with	stock	option	exercises	during	2012,	2011,	and	2010	totaled	$440	million,	$116	million, and	$59	million.	Those	activities	resulted	in	the	issuance	of	6.7	million	shares,	2.3	million	shares,	and	1.4	million	shares	during	the	respective	periods.

Long-term	debt	–	In	2012,	we	paid	$225	million	to	complete	an	exchange	of	debt	(Note	8)	to	take	advantage	of	the	low	interest	rate	environment.	In	2011,	we issued	a	total	of	$2.0	billion	of	long-term	notes	with	fixed	coupon	rates	ranging	from	2.13%	to	4.85%.	We	used	a	portion	of	the	proceeds	from	the	long-term	notes	that were	issued	in	2011	to	redeem	all	of	our	$500	million	long-term	notes	due	in	2013	with	a	fixed	coupon	rate	of	4.12%.	In	2011,	we	also	repurchased	$84	million	of	our long-term	notes	through	open-market	purchases	and	paid	premiums	of	$48	million	in	connection	with	the	early	extinguishments	of	certain	long-term	notes.

# Capital	Structure,	Resources,	and	Other

At	December	31,	2012,	we	held	cash	and	cash	equivalents	of	$1.9	billion.	As	of	December	31,	2012,	approximately	$500	million	of	our	cash	and	cash	equivalents was	held	outside	of	the	U.S.	by	foreign	subsidiaries.	Although	those	balances	are	generally	available	to	fund	ordinary	business	operations	without	legal	or	other restrictions,	a	significant	portion	is	not	immediately	available	to	fund	U.S.	operations	unless	repatriated.	Our	intention	is	to	permanently	reinvest	earnings	from	our foreign	subsidiaries.	While	we	do	not	intend	to	do	so,	if	this	cash	was	repatriated	at	the	end	of	2012,	we	estimate	that	about	$45	million	of	U.S.	federal	income	tax	would have	been	due	after	considering	foreign	tax	credits.

Our	long-term	debt,	net	of	unamortized	discounts,	amounted	to	$6.2	billion,	and	mainly	is	in	the	form	of	publicly-issued	notes	that	bear	interest	at	fixed	rates.	As	of December	31,	2012,	we	were	in	compliance	with	all	covenants	contained	in	our	debt	and	credit	agreements.

In	August	2011,	we	entered	into	a	$1.5	billion	revolving	credit	facility	with	a	group	of	banks	and	terminated	our	existing	$1.5	billion	revolving	credit	facility	that was	to	expire	in	June	2012.	The	credit	facility	expires	August	2016,	and	we	may	request	and	the	banks	may	grant,	at	their	discretion,	an	increase	to	the	credit	facility	by an	additional	amount	up	to	$500	million.	There	were	no	borrowings	outstanding	under	either	facility	through	December	31,	2012.	Borrowings	under	the	credit	facility would	be	unsecured	and	bear	interest	at	rates	based,	at	our	option,	on	a	Eurodollar	rate	or	a	Base	Rate,	as	defined	in	the	credit	facility.	Each	bank's	obligation	to	make loans	under	the	credit	facility	is	subject	to,	among	other	things,	our	compliance	with	various	representations,	warranties	and	covenants,	including	covenants	limiting	our ability	and	certain	of	our	subsidiaries'	ability	to	encumber	assets	and	a	covenant	not	to	exceed	a	maximum	leverage	ratio,	as	defined	in	the	credit	facility.	The	leverage ratio	covenant	excludes	the	adjustments	recognized	in	stockholders'	equity	related	to	postretirement	benefit	plans.	As	of	December	31,	2012,	we	were	in	compliance with	all	covenants	contained	in	the	credit	facility,	as	well	as	in	our	debt	agreements.

We	have	agreements	in	place	with	banking	institutions	to	provide	for	the	issuance	of	commercial	paper.	There	were	no	commercial	paper	borrowings	outstanding during	the	year	ended	December	31,	2012.	If	we	were	to	issue	commercial	paper,	the	borrowings	would	be	supported	by	the	credit	facility.	We	also	have	an	effective shelf	registration	statement	on	Form	S-3	on	file	with	the	U.S.	Securities	and	Exchange	Commission	through	August	2014	to	provide	for	the	issuance	of	an	indeterminate amount	of	debt	securities.

We	actively	seek	to	finance	our	business	in	a	manner	that	preserves	financial	flexibility	while	minimizing	borrowing	costs	to	the	extent	practicable.	We	review changes	in	financial	market	and	economic	conditions	to	manage	the	types,	amounts,	and	maturities	of	our	indebtedness.	We	may	at	times	refinance	existing indebtedness,	vary	our	mix	of	variable-rate	and	fixed-rate	debt,	or	seek	alternative	financing	sources	for	our	cash	and	operational	needs.

Our	stockholders'	equity	was	$39	million	at	December	31,	2012,	a	decrease	of	$962	million	from	December	31,	2011.	The	decrease	was	due	to	the	annual December	31	re-measurement	adjustment	related	to	our	postretirement	benefit	plans	of	$3.2	billion,	which	was	partially	offset	by	the	amortization	of	net	actuarial	gains and	losses	of	$858	million	in	2012;	dividends	declared	of	$1.4	billion	during	the	year;	and	the	repurchase	of	11.3	million	common	shares	for	$1.0	billion.	These decreases	partially	were	offset	by	net	earnings	of	$2.7	billion	and	employee	stock	activity	of	$900	million.	As	we	repurchase	our	common	shares,	we	reduce	common stock	for	the	$1	of	par	value	of	the	shares	repurchased,	with	the	excess	purchase	price	over	par	value	recorded	as	a	reduction	of	additional	paid-in	capital.	Due	to	the volume	of	repurchases	made	under	our	share	repurchase	program,	additional	paid-in	capital	was	reduced	to	zero,	with	the	remainder	of	the	excess	of	purchase	price	over par	value	of	$108	million	recorded	as	a	reduction	of	retained	earnings.

If	in	the	future	we	were	to	have	a	deficit	in	stockholders'	equity	as	a	result	of	further	adjustments	associated	with	the	funded	status	of	postretirement	benefit	plans, the	deficit	would	not	affect	our	ability	to	comply	with	our	debt	covenants.	The	debt-related	financial	covenants	in	our	revolving	credit	facility	exclude	the	effect	of adjustments	to	stockholders'	equity	resulting	from	re-measuring	the	funded	status	of	postretirement	plans.	In	addition,	as	a	Maryland	corporation,	so	long	as	we	are	able to	pay	our	indebtedness	as	it	becomes	due	in	the	usual	course	of	business,	we	anticipate	that	we	would	be	able	to	pay	dividends	and	make	stock	repurchases	in	an amount	limited	to	our	net	earnings	in	either	the	current	or	the	preceding	fiscal	year	or	from	the	net	earnings	for	the	preceding	eight	quarters.

# Contractual	Commitments	and	Off-Balance	Sheet	Arrangements

At	December	31,	2012,	we	had	contractual	commitments	to	repay	debt,	make	payments	under	operating	leases,	settle	obligations	related	to	agreements	to	purchase goods	and	services,	and	settle	tax	and	other	liabilities.	Capital	lease	obligations	were	not	material.	Payments	due	under	these	obligations	and	commitments	are	as	follows (in	millions):

|  |  | Payments	Due	By	Period | Payments	Due	By	Period |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Less\tThan | Years | Years | After |
|  | Total | 1\tYear | 2\tand\t3 | 4\tand\t5 | 5\tYears |
| Long-term\tdebt\t^(a) | \t$7,165 | $150 | \t$— | \t$952 | \t$6,063 |
| Interest\tpayments | 6,243 | 355 | 698 | 633 | 4,557 |
| Other\tliabilities | 2,628 | 271 | 430 | 365 | 1,562 |
| Operating\tlease\tobligations | 859 | 229 | 279 | 151 | 200 |
| Purchase\tobligations: |  |  |  |  |  |
| Operating\tactivities | \t\t 24,837 | \t 14,859 | \t\t 8,127 | \t\t 1,697 | 154 |
| Capital\texpenditures | 216 | 102 | 78 | 36 | — |
| Total\tcontractual\tcash\tobligations | \t$41,948 | $15,966 | \t$9,612 | \t$3,834 | \t$12,536 |

Long-term	debt	includes	scheduled	principal	payments	only. (a)

Amounts	related	to	other	liabilities	represent	the	contractual	obligations	for	certain	long-term	liabilities	recorded	as	of	December	31,	2012.	Such	amounts	mainly include	expected	payments	under	non-qualified	pension	plans,	environmental	liabilities,	and	deferred	compensation	plans.

Purchase	obligations	related	to	operating	activities	include	agreements	and	contracts	that	give	the	supplier	recourse	to	us	for	cancellation	or	nonperformance	under the	contract	or	contain	terms	that	would	subject	us	to	liquidated	damages.	Such	agreements	and	contracts	may,	for	example,	be	related	to	direct	materials,	obligations	to subcontractors,	and	outsourcing	arrangements.	Total	purchase	obligations	for	operating	activities	in	the	preceding	table	include	approximately	$22.8	billion	related	to contractual	commitments	entered	into	as	a	result	of	contracts	we	have	with	our	U.S.	Government	customers.	The	U.S.	Government	generally	would	be	required	to	pay	us for	any	costs	we	incur	relative	to	these	commitments	if	they	were	to	terminate	the	related	contracts	"for	convenience"	under	the	FAR,	subject	to	available	funding.	This also	would	be	true	in	cases	where	we	perform	subcontract	work	for	a	prime	contractor	under	a	U.S.	Government	contract.	The	termination	for	convenience	language	also may	be	included	in	contracts	with	foreign,	state,	and	local	governments.	We	also	have	contracts	with	customers	that	do	not	include	termination	for	convenience provisions,	including	contracts	with	commercial	customers.

Purchase	obligations	in	the	preceding	table	for	capital	expenditures	generally	include	amounts	for	facilities	and	equipment	related	to	customer	contracts.

We	also	may	enter	into	industrial	cooperation	agreements,	sometimes	referred	to	as	offset	agreements,	as	a	condition	to	obtaining	orders	for	our	products	and services	from	certain	customers	in	foreign	countries.	These	agreements	are	designed	to	enhance	the	social	and	economic	environment	of	the	foreign	country	by	requiring the	contractor	to	promote	investment	in	the	country.	Offset	agreements	may	be	satisfied	through	activities	that	do	not	require	us	to	use	cash,	including	transferring technology,	providing	manufacturing	and	other	consulting	support	to	in-country	projects,	and	the	purchase	by	third	parties	(e.g.,	our	vendors)	of	supplies	from	in- country	vendors.	These	agreements	also	may	be	satisfied	through	our	use	of	cash	for	such	activities	as	purchasing	supplies	from	in-country	vendors,	providing	financial support	for	in-country	projects,	establishment	of	joint	ventures	with	local	companies,	and	building	or	leasing	facilities	for	in-country	operations.	We	typically	do	not commit	to	offset	agreements	until	orders	for	our	products	or	services	are	definitive.	The	amounts	ultimately	applied	against	our	offset	agreements	are	based	on negotiations	with	the	customer	and	typically	require	cash	outlays	that	represent	only	a	fraction	of	the	original	amount	in	the	offset	agreement.	At	December	31,	2012,	the remaining	obligations	under	our	outstanding	offset	agreements	totaled	$9.3	billion,	which	primarily	relate	to	our	Aeronautics,	MFC,	and	MST	business	segments,	some of	which	extend	through	2026.	To	the	extent	we	have	entered	into	purchase	obligations	at	December	31,	2012	that	also	satisfy	offset	agreements,	those	amounts	are included	in	the	preceding	table.	Offset	programs	usually	extend	over	several	years	and	may	provide	for	penalties	in	the	event	we	fail	to	perform	in	accordance	with	offset requirements.	While	historically	we	have	not	been	required	to	pay	material	penalties,	resolution	of	offset	requirements	are	often	the	result	of	negotiations	and	subjective judgments.

In	connection	with	our	50%	ownership	interest	of	ULA,	we	and	The	Boeing	Company	(Boeing)	have	each	received	distributions	totaling	$494	million	(since	ULA's formation	in	December	2006)	which	are	subject	to	agreements	between	us,	Boeing,	and	ULA,	whereby,	if	ULA	does	not	have	sufficient	cash	resources	or	credit	capacity to	make	payments	under	the

inventory	supply	agreement	it	has	with	Boeing,	both	we	and	Boeing	would	provide	to	ULA,	in	the	form	of	an	additional	capital	contribution,	the	level	of	funding required	for	ULA	to	make	those	payments.	Any	such	capital	contributions	would	not	exceed	the	amount	of	the	distributions	subject	to	the	agreements.	We	currently believe	that	ULA	will	have	sufficient	operating	cash	flows	and	credit	capacity,	including	access	to	its	$560	million	revolving	credit	agreement	from	third-party	financial institutions,	to	meet	its	obligations	such	that	we	would	not	be	required	to	make	a	contribution	under	these	agreements.

In	addition,	both	we	and	Boeing	have	cross-indemnified	each	other	for	guarantees	by	us	and	Boeing	of	the	performance	and	financial	obligations	of	ULA	under certain	launch	service	contracts.	We	believe	ULA	will	be	able	to	fully	perform	its	obligations,	as	it	has	done	through	December	31,	2012,	and	that	it	will	not	be necessary	to	make	payments	under	the	cross-indemnities	or	guarantees.

We	have	entered	into	standby	letters	of	credit,	surety	bonds,	and	third-party	guarantees	with	financial	institutions	and	other	third	parties	primarily	relating	to advances	received	from	customers	and	the	guarantee	of	future	performance	on	certain	contracts.	Letters	of	credit	and	surety	bonds	generally	are	available	for	draw	down in	the	event	we	do	not	perform.	In	some	cases,	we	may	guarantee	the	contractual	performance	of	third	parties	such	as	joint	venture	partners.	At	December	31,	2012,	we had	the	following	outstanding	letters	of	credit,	surety	bonds,	and	guarantees	(in	millions):

|  |  |  | Commitment	Expiration	By	Period |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Total\nCommitment | Less\tThan\n1\tYear\t^(a) | Years\n2\tand\t3\t^(a) | Years\n4\tand\t5\t^(a) | After\n5\tYears |
| Standby\tletters\tof\tcredit | $1,074 | $759 | $236 | $79 | $ — |
| Surety\tbonds | 357 | 357 | — | — | — |
| Guarantees | 816 | 2 | 98 | \t 170 | \t 546 |
| Total\tcommitments | $2,247 | $1,118 | $334 | $249 | $546 |

Approximately	$609	million,	$23	million,	and	$3	million	of	standby	letters	of	credit	in	the	"Less	Than	1	Year,"	"Years	2	and	3,"	and	"Years	4	and	5,"	periods,	and	approximately	$34	million	of	surety	bonds,	are expected	to	renew	for	additional	periods	until	completion	of	the	contractual	obligation. (a)

At	December	31,	2012,	third-party	guarantees	totaled	$816	million,	of	which	approximately	85%	related	to	guarantees	of	the	contractual	performance	of	joint ventures	to	which	we	currently	are	or	previously	were	a	party.	This	amount	represents	our	estimate	of	the	maximum	amount	we	would	expect	to	incur	upon	the contractual	non-performance	of	the	joint	venture	partners.	In	addition,	we	generally	have	cross-indemnities	in	place	that	may	enable	us	to	recover	amounts	that	may	be paid	on	behalf	of	a	joint	venture	partner.	We	believe	our	current	and	former	joint	venture	partners	will	be	able	to	perform	their	obligations,	as	they	have	done	through December	31,	2012,	and	that	it	will	not	be	necessary	to	make	payments	under	the	guarantees.	In	determining	our	exposures,	we	evaluate	the	reputation,	technical capabilities,	and	credit	quality	of	our	current	and	former	joint	venture	partners.

# Critical	Accounting	Policies

# Contract	Accounting	/	Sales	Recognition

Substantially	all	of	our	net	sales	are	accounted	for	using	the	POC	method,	which	requires	that	significant	estimates	and	assumptions	be	made	in	accounting	for	the contracts.	Our	remaining	net	sales	are	derived	from	contracts	to	provide	services	to	non-U.S.	Government	customers,	which	we	account	for	under	the	services	accounting model.

We	evaluate	new	or	significantly	modified	contracts	with	customers	other	than	the	U.S.	Government,	to	the	extent	the	contracts	include	multiple	elements,	to determine	if	the	individual	deliverables	should	be	accounted	for	as	separate	units	of	accounting.	When	we	determine	that	accounting	for	the	deliverables	as	separate units	is	appropriate,	we	allocate	the	contract	value	to	the	deliverables	based	on	their	relative	estimated	selling	prices.	The	contracts	or	contract	modifications	we	evaluate for	multiple	elements	typically	are	long	term	in	nature	and	include	the	provision	of	both	products	and	services.	Based	on	the	nature	of	our	business,	we	generally	account for	components	of	such	contracts	using	the	POC	accounting	model	or	the	services	accounting	model,	as	appropriate.

We	classify	net	sales	as	products	or	services	on	our	Statements	of	Earnings	based	on	the	predominant	attributes	of	the	underlying	contract.	Most	of	our	long-term contracts	are	denominated	in	U.S.	dollars,	including	contracts	for	sales	of	military	products	and	services	to	other	governments	conducted	through	the	U.S.	Government. We	record	sales	for	both	products	and	services	under	cost-reimbursable,	fixed-price,	and	time-and-materials	contracts.

# Contract	Types

# Cost-reimbursable	contracts

Cost-reimbursable	contracts,	which	accounted	for	about	45%,	50%,	and	60%	of	our	total	net	sales	in	2012,	2011,	and	2010,	provide	for	the	payment	of	allowable costs	incurred	during	performance	of	the	contract	plus	a	fee,	up	to	a	ceiling	based	on	the	amount	that	has	been	funded.	We	generate	revenue	under	two	general	types	of cost-reimbursable	contracts:	cost-plus-award-fee/incentive	fee	which	represent	a	substantial	majority	of	our	cost-reimbursable	contracts;	and	cost-plus-fixed-fee contracts.

Cost-plus-award-fee	contracts	provide	for	an	award	fee	that	varies	within	specified	limits	based	on	the	customer's	assessment	of	our	performance	against	a predetermined	set	of	criteria,	such	as	targets	based	on	cost,	quality,	technical,	and	schedule	criteria.	Cost-plus-incentive-fee	contracts	provide	for	reimbursement	of	costs plus	a	fee	which	is	adjusted	by	a	formula	based	on	the	relationship	of	total	allowable	costs	to	total	target	costs	(incentive	based	on	cost)	or	reimbursement	of	costs	plus an	incentive	to	exceed	stated	performance	targets	(incentive	based	on	performance).	The	fixed	fee	in	a	cost-plus-fixed-fee	contract	is	negotiated	at	the	inception	of	the contract	and	that	fixed	fee	does	not	vary	with	actual	costs.

# Fixed-price	and	other	contracts

Under	fixed-price	contracts,	which	accounted	for	about	50%,	45%,	and	35%	of	our	total	net	sales	in	2012,	2011,	and	2010,	we	agree	to	perform	the	specified	work for	a	pre-determined	price.	To	the	extent	our	actual	costs	vary	from	the	estimates	upon	which	the	price	was	negotiated,	we	will	generate	more	or	less	profit,	or	could incur	a	loss.	Some	fixed-price	contracts	have	a	performance-based	component	under	which	we	may	earn	incentive	payments	or	incur	financial	penalties	based	on	our performance.

Under	time-and-materials	contracts,	which	accounted	for	about	5%	of	our	total	net	sales	in	each	of	2012,	2011,	and	2010,	we	are	paid	a	fixed	hourly	rate	for	each direct	labor	hour	expended,	and	we	are	reimbursed	for	allowable	material	costs	and	allowable	out-of-pocket	expenses.	To	the	extent	our	actual	direct	labor	and associated	costs	vary	in	relation	to	the	fixed	hourly	billing	rates	provided	in	the	contract,	we	will	generate	more	or	less	profit,	or	could	incur	a	loss.

# POC	Method	of	Accounting

We	record	net	sales	and	an	estimated	profit	on	a	POC	basis	for	cost-reimbursable	and	fixed-price	contracts	for	product	and	services	contracts	with	the	U.S. Government.

The	POC	method	for	product	contracts	depends	on	the	nature	of	the	products	provided	under	the	contract.	For	example,	for	contracts	that	require	us	to	perform	a significant	level	of	development	effort	in	comparison	to	the	total	value	of	the	contract	and/or	to	deliver	minimal	quantities,	sales	are	recorded	using	the	cost-to-cost method	to	measure	progress	toward	completion.	Under	the	cost-to-cost	method	of	accounting,	we	recognize	sales	and	an	estimated	profit	as	costs	are	incurred	based	on the	proportion	that	the	incurred	costs	bear	to	total	estimated	costs.	For	contracts	that	require	us	to	provide	a	substantial	number	of	similar	items	without	a	significant level	of	development,	we	record	sales	and	an	estimated	profit	on	a	POC	basis	using	units-of-delivery	as	the	basis	to	measure	progress	toward	completing	the	contract. For	contracts	to	provide	services	to	the	U.S.	Government,	sales	are	generally	recorded	using	the	cost-to-cost	method.

Award	and	incentive	fees,	as	well	as	penalties	related	to	contract	performance,	are	considered	in	estimating	sales	and	profit	rates	on	contracts	accounted	for	under the	POC	method.	Estimates	of	award	fees	are	based	on	past	experience	and	anticipated	performance.	We	record	incentives	or	penalties	when	there	is	sufficient information	to	assess	anticipated	contract	performance.	Incentive	provisions	that	increase	or	decrease	earnings	based	solely	on	a	single	significant	event	are	not recognized	until	the	event	occurs.

Accounting	for	contracts	under	the	POC	method	requires	judgment	relative	to	assessing	risks,	estimating	contract	sales	and	costs	(including	estimating	award	and incentive	fees	and	penalties	related	to	performance),	and	making	assumptions	for	schedule	and	technical	issues.	Due	to	the	number	of	years	it	may	take	to	complete many	of	our	contracts	and	the	scope	and	nature	of	the	work	required	to	be	performed	on	those	contracts,	the	estimation	of	total	sales	and	cost	at	completion	is complicated	and	subject	to	many	variables.

Contract	costs	include	material,	labor,	and	subcontracting	costs,	as	well	as	an	allocation	of	indirect	costs.	Our	estimates	of	costs	at	completion	of	the	contract	are based	on	assumptions	we	make	for	variables	such	as	labor	productivity	and

availability,	the	complexity	of	the	work	to	be	performed,	the	availability	of	materials,	the	length	of	time	to	complete	the	contract	(to	estimate	increases	in	wages	and prices	for	materials),	performance	by	our	subcontractors,	and	the	availability	and	timing	of	funding	from	our	customer,	among	other	variables.	When	estimates	of	total costs	to	be	incurred	on	a	contract	exceed	total	estimates	of	revenue	to	be	earned,	a	provision	for	the	entire	loss	on	the	contract	is	recorded	in	the	period	in	which	the	loss is	determined.

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	(for	example,	a	newly-developed	product	versus	a	mature	product),	the	schedule	and	associated	tasks	(for	example,	the number	and	type	of	milestone	events),	and	costs	(for	example,	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	costs	aspects	of	the	contract.	Alternatively,	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.

In	addition,	comparability	of	our	segment	operating	profit	may	be	impacted	by	changes	in	estimated	profit	booking	rates	on	our	contracts	accounted	for	using	the POC	method	of	accounting.	Increases	in	the	estimated	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	total estimated	costs	at	completion	and	a	reduction	of	the	estimated	profit	booking	rate.	Increases	or	decreases	in	estimated	profit	booking	rates	are	recognized	in	the	current period	and	reflect	the	inception-to-date	effect	of	such	changes.	Segment	operating	profit	may	also	be	impacted,	favorably	or	unfavorably,	by	other	matters	such	as	the resolution	of	contractual	matters,	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.

# Services	Method	of	Accounting

Under	a	fixed-price	service	contract,	we	are	paid	a	predetermined	fixed	amount	for	a	specified	scope	of	work	and	generally	have	full	responsibility	for	the	costs associated	with	the	contract	and	the	resulting	profit	or	loss.	We	record	net	sales	under	fixed-price	service	contracts	to	non-U.S.	Government	customers	on	a	straight-line basis	over	the	period	of	contract	performance,	unless	evidence	suggests	that	net	sales	are	earned	or	the	obligations	are	fulfilled	in	a	different	pattern.	For	cost- reimbursable	contracts	for	services	to	non-U.S.	Government	customers	that	provide	for	award	and	incentive	fees,	we	record	net	sales	as	services	are	performed,	exclusive of	award	and	incentive	fees.	Award	and	incentive	fees	are	recorded	when	they	are	fixed	or	determinable,	generally	at	the	date	the	amount	is	communicated	to	us	by	the customer.	This	approach	results	in	the	recognition	of	such	fees	at	contractual	intervals	(typically	every	six	months)	throughout	the	contract	and	is	dependent	on	the customer's	processes	for	notification	of	awards	and	issuance	of	formal	notifications.	Costs	for	all	service	contracts	are	expensed	as	incurred.

# Other	Contract	Accounting	Considerations

The	majority	of	our	sales	are	driven	by	pricing	based	on	costs	incurred	to	produce	products	or	perform	services	under	contracts	with	the	U.S.	Government.	Cost- based	pricing	is	determined	under	the	FAR.	The	FAR	provides	guidance	on	the	types	of	costs	that	are	allowable	in	establishing	prices	for	goods	and	services	under	U.S. Government	contracts.	For	example,	costs	such	as	those	related	to	charitable	contributions,	interest	expense,	and	certain	advertising	and	public	relations	activities	are unallowable	and,	therefore,	not	recoverable	through	sales.	In	addition,	we	may	enter	into	advance	agreements	with	the	U.S.	Government	that	address	the	subjects	of allowability	and	allocability	of	costs	to	contracts	for	specific	matters.	For	example,	most	of	the	environmental	costs	we	incur	for	environmental	remediation	related	to sites	operated	in	prior	years	are	allocated	to	our	current	operations	as	general	and	administrative	costs	under	FAR	provisions	and	supporting	advance	agreements	reached with	the	U.S.	Government.

We	closely	monitor	compliance	with,	and	the	consistent	application	of,	our	critical	accounting	policies	related	to	contract	accounting.	Costs	incurred	and	allocated to	contracts	are	reviewed	for	compliance	with	U.S.	Government	regulations	by	our	personnel,	and	are	subject	to	audit	by	the	Defense	Contract	Audit	Agency.

# Postretirement	Benefit	Plans

# Overview

Many	of	our	employees	are	covered	by	defined	benefit	pension	plans,	and	we	provide	certain	health	care	and	life	insurance	benefits	to	eligible	retirees	(collectively, postretirement	benefit	plans	–	see	Note	9).	In	recent	years,	we	have	taken	certain	actions	to	mitigate	the	effect	of	our	defined	benefit	pension	plans	on	our	financial results,	including	no	longer	offering	a	defined	benefit	pension	plan	to	new,	non-represented	employees	starting	in	January	2006.	Over	the	last	few	years,	we	have negotiated	similar	changes	with	our	union	represented	population	and	as	a	result	substantially	all	represented	employees	hired	after	June	2012	do	not	participate	in	a defined	benefit	pension	plan.	We	have	also	made	substantial	cash	contributions	over	the	years	to	our	defined	benefit	pension	plans	including	$3.6	billion	in	2012. Additionally,	during	2012	lump	settlement	payments	of	$310	million	were	made	from	the	defined	benefit	pension	trust	to	certain	former	employees	who	had	not commenced	receiving	their	vested	benefit	payments,	and	the	corresponding	benefit	obligation	that	was	released	was	$375	million.	Notwithstanding	these	actions,	the impact	of	these	plans	and	benefits	on	our	GAAP	earnings	may	be	volatile	in	that	the	amount	of	expense	we	record	and	funded	status	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	expected	rates	of	increase	in	future	compensation	levels,	employee	turnover	and mortality,	as	well	as	the	timing	of	funding.

We	recognize	on	a	plan-by-plan	basis	the	funded	status	of	our	postretirement	benefit	plans	under	GAAP	as	either	an	asset	or	a	liability	on	our	Balance	Sheets. There	is	a	corresponding	non-cash	adjustment	to	accumulated	other	comprehensive	loss,	net	of	tax	benefits	recorded	as	deferred	tax	assets,	in	stockholders'	equity.	The GAAP	funded	status	is	measured	as	the	difference	between	the	fair	value	of	the	plan's	assets	and	the	benefit	obligation	of	the	plan.	The	GAAP	benefit	obligation represents	the	present	value	of	the	future	benefits	to	be	paid	to	plan	participants.	The	present	value	is	calculated	using	a	discount	rate	that	is	determined	at	the	end	of each	year.	Historically	low	interest	rates	over	the	last	few	years	have	significantly	increased	our	benefit	obligation.	This	has	contributed	to	a	lower	funded	status	of	our defined	benefit	pension	plans	as	determined	by	GAAP.

The	funding	of	our	pension	plans	is	determined	in	accordance	with	the	Employee	Retirement	Income	Security	Act	of	1974	(ERISA),	as	amended	by	the	Pension Protection	Act	of	2006	(PPA).	Our	goal	has	been	to	fund	the	pension	plans	to	a	level	of	at	least	80%,	as	determined	by	the	PPA.	This	ERISA	funded	status	is	calculated on	a	different	basis	than	under	GAAP.	The	ERISA	liability	does	not	reflect	anticipated	future	pay	increases	for	plan	participants	as	required	under	GAAP	and	is currently	measured	using	a	higher	discount	rate	than	for	GAAP,	primarily	due	to	The	Moving	Ahead	for	Progress	in	the	21st	Century	Act	of	2012	(MAP-21)	which provides	temporary	funding	relief	due	to	the	historically	low	interest	rate	environment.	By	way	of	contrast,	under	ERISA	our	plans	are	about	90%	funded	at December	31,	2012	and	2011,	while	for	GAAP	our	defined	benefit	pension	plans	are	about	67%	funded	at	December	31,	2012	and	2011.	The	U.S.	Government	Cost Accounting	Standards	(CAS)	governs	the	extent	to	which	our	pension	costs	are	allocable	to	and	recoverable	under	contracts	with	the	U.S.	Government,	including	FMS.

# Actuarial	Assumptions

GAAP	requires	that	the	amounts	we	record	related	to	our	plans	be	computed	using	actuarial	valuations.	The	primary	year-end	assumptions	used	to	determine	the funded	status	and	estimate	postretirement	benefit	plan	expense	for	the	following	calendar	year	are	the	discount	rate,	the	expected	long-term	rate	of	return	on	plan	assets, and	employee	turnover	and	mortality	for	all	postretirement	benefit	plans;	funding	levels;	the	expected	rates	of	increase	in	future	compensation	levels	for	the	participants in	our	defined	benefit	pension	plans;	and	the	health	care	cost	trend	rates	for	our	retiree	medical	plans.	These	assumptions	we	make	impact	both	the	calculation	of	the benefit	obligation	at	the	end	of	the	year	and	the	calculation	of	net	postretirement	benefit	plan	cost	in	the	subsequent	year.	The	difference	between	the	long-term	rate	of return	on	plan	assets	assumption	we	select	and	the	actual	return	on	plan	assets	as	well	as	funding	levels	in	any	given	year	affects	both	the	funded	status	of	our	benefit plans	and	the	calculation	of	net	postretirement	benefit	plan	cost	in	subsequent	years.	When	reassessing	these	assumptions	each	year	we	consider	past	and	current	market conditions	and	make	judgments	about	future	market	trends.	We	also	have	to	consider	factors	such	as	the	timing	and	amounts	of	expected	contributions	to	the	plans	and benefit	payments	to	plan	participants.

We	selected	4.00%	as	the	discount	rate	for	calculating	our	benefit	obligations	at	December	31,	2012	related	to	our	defined	benefit	pension	plans,	compared	to 4.75%	at	the	end	of	2011	and	5.50%	at	the	end	of	2010.	We	selected	3.75%	as	the	discount	rate	for	calculating	our	benefit	obligations	at	December	31,	2012	related	to our	retiree	medical	plans,	compared	to	4.50%	at	the	end	of	2011	and	5.50%	at	the	end	of	2010.	We	evaluate	several	data	points	in	order	to	arrive	at	an	appropriate

discount	rate,	including	results	from	cash	flow	models,	quoted	rates	from	long-term	bond	indices,	and	changes	in	long-term	bond	rates	over	the	past	year.	As	part	of	our evaluation,	we	calculate	the	approximate	average	yields	on	corporate	bonds	rated	AA	or	better	that	were	selected	to	match	our	projected	postretirement	benefit	plan	cash flows.

We	concluded	that	8.00%	was	a	reasonable	estimate	for	the	expected	long-term	rate	of	return	on	plan	assets	assumption	at	December	31,	2012,	consistent	with	the rate	used	at	December	31,	2011,	and	we	used	8.50%	at	December	31,	2010.	The	long-term	rate	of	return	assumption	represents	the	expected	average	rate	of	earnings	on the	funds	invested,	or	to	be	invested,	to	provide	for	the	benefits	included	in	the	plan	obligation.	This	assumption	is	based	on	several	factors	including	historical	market index	returns,	the	anticipated	long-term	allocation	of	plan	assets,	the	historical	return	data	for	the	trust	funds,	plan	expenses,	and	the	potential	to	outperform	market	index returns.	The	actual	return	in	any	specific	year	likely	will	differ	from	the	assumption,	but	the	average	expected	return	over	a	long-term	future	horizon	should	be approximately	equal	to	the	assumption.	As	a	result,	changes	in	this	assumption	are	less	frequent	than	changes	in	the	discount	rate.

Our	stockholders'	equity	has	been	reduced	cumulatively	by	$13.5	billion	from	the	annual	year-end	measurements	of	the	funded	status	of	postretirement	benefit plans,	inclusive	of	the	December	31,	2012	adjustment	of	$3.2	billion.	These	non-cash,	after-tax	amounts	primarily	represent	net	actuarial	losses	resulting	from	declines in	discount	rates	and	differences	between	actual	experience	and	our	actuarial	assumptions,	which	will	be	amortized	to	expense	over	the	average	future	service	period	of employees	expected	to	receive	benefits	under	the	plans	of	approximately	10	years.	During	2012,	$858	million	of	these	amounts	was	recognized	as	a	component	of postretirement	benefit	plans	expense	and	$1.0	billion	is	expected	to	be	recognized	as	expense	in	2013.	If	in	the	future	we	were	to	have	a	deficit	in	stockholders'	equity	as a	result	of	further	adjustments	associated	with	the	funded	status	of	postretirement	benefit	plans,	the	deficit	would	not	affect	our	ability	to	comply	with	our	debt	covenants nor	do	we	anticipate	the	deficit	to	hinder	our	ability	to	pay	dividends	and	make	stock	repurchases	as	further	described	in	the	"Capital	Structure,	Resources,	and	Other" section	above.

We	expect	that	our	2013	pension	expense	will	be	$1.9	billion,	which	is	comparable	to	our	2012	pension	expense.	An	increase	in	the	amortization	of	net	actuarial gains	and	losses	caused	by	the	decrease	in	the	discount	rate	mentioned	above	was	offset	by	an	increase	in	the	expected	dollar	amount	of	return	on	plan	assets	primarily due	to	the	$2.5	billion	of	discretionary	contributions	to	the	qualified	defined	benefit	plans	in	the	fourth	quarter	of	2012.

The	discount	rate	and	long-term	rate	of	return	on	plan	assets	assumptions	we	select	at	the	end	of	each	year	are	based	on	our	best	estimates	and	judgment.	A	change of	plus	or	minus	25	basis	points	in	the	4.00%	discount	rate	assumption	at	December	31,	2012,	with	all	other	assumptions	held	constant,	would	have	decreased	or increased	the	amount	of	the	qualified	pension	benefit	obligation	we	recorded	at	the	end	of	2012	by	approximately	$1.5	billion,	which	would	result	in	an	after-tax	increase or	decrease	in	stockholders'	equity	at	the	end	of	the	year	of	approximately	$1.0	billion.	If	the	4.00%	discount	rate	at	December	31,	2012	that	was	used	to	compute	the expected	2013	expense	for	our	qualified	defined	benefit	pension	plans	had	been	25	basis	points	higher	or	lower,	with	all	other	assumptions	held	constant,	the	amount	of expense	projected	for	2013	would	be	lower	or	higher	by	approximately	$145	million.	If	the	8.00%	expected	long-term	rate	of	return	on	plan	assets	assumption	at December	31,	2012	that	was	used	to	compute	the	expected	2013	expense	for	our	qualified	defined	benefit	pension	plans	had	been	25	basis	points	higher	or	lower,	with	all other	assumptions	held	constant,	the	amount	of	expense	projected	for	2013	would	be	lower	or	higher	by	approximately	$80	million.

# Funding	Considerations

The	PPA	became	applicable	to	us	and	other	large	U.S.	defense	contractors	beginning	in	2011	and	had	the	effect	of	accelerating	the	required	amount	of	annual pension	plan	contributions.	We	made	contributions	related	to	our	qualified	defined	benefit	pension	plans	of	$3.6	billion	in	2012,	$2.3	billion	in	2011,	and	$2.2	billion	in 2010,	inclusive	of	amounts	in	excess	of	our	required	contributions.	We	recovered	$1.1	billion	in	2012,	$899	million	in	2011	and	$988	million	in	2010	as	CAS	costs. Amounts	funded	under	CAS	are	recovered	over	time	through	the	pricing	of	our	products	and	services	on	U.S.	Government	contracts,	including	FMS,	and	are	recognized in	our	cost	of	sales	and	net	sales.	Amounts	contributed	in	excess	of	the	CAS	funding	requirements,	over	$8.0	billion	inclusive	of	interest	as	of	December	31,	2012,	are considered	to	be	prepayment	credits	under	the	CAS	rules.

We	would	expect	our	required	contributions	to	be	temporarily	lowered	beginning	in	2013	through	2015	as	a	result	of	MAP-21.	We	expect	to	make	contributions	of $1.5	billion	related	to	our	qualified	defined	benefit	pension	plans	in	2013	and	anticipate	recovering	$1.5	billion	as	CAS	cost	on	our	contracts	in	2013.

The	CAS	Board	published	its	revised	pension	accounting	rules	(CAS	Harmonization)	with	an	effective	date	of	February	27,	2012	to	better	align	the	recovery	of pension	contributions,	including	prepayment	credits,	on	U.S.	Government

contracts	with	the	accelerated	funding	requirements	of	the	PPA.	The	CAS	Harmonization	rules	increase	our	CAS	cost	beginning	in	2013.	There	is	a	transition	period during	which	the	cost	impact	of	the	new	rules	is	phased	in,	with	the	full	impact	occurring	in	2017.	The	incremental	impact	of	CAS	Harmonization	in	2013	is	a	very modest	CAS	cost	increase,	and	we	expect	much	larger	increases	will	occur	successively	in	years	2014	through	2017.

Based	upon	current	assumptions	which	may	change,	we	expect	that	the	increase	in	CAS	costs	caused	by	CAS	Harmonization	should	result	in	increased	earnings	a few	years	from	now,	as	our	CAS	costs	would	be	in	excess	of	the	pension	expense	we	record	under	GAAP.	Accordingly,	we	expect	our	non-cash	FAS/CAS	pension adjustment,	discussed	further	in	the	"Business	Segment	Results	of	Operations"	section	above,	will	soon	increase	earnings	rather	than	decrease	earnings	as	it	has	the	past few	years.	In	addition,	we	expect	that	our	future	CAS	pension	recoveries	will	soon	be	equal	to	or	greater	than	our	required	pension	contributions,	which	should	increase our	cash	flow	from	operations.

# Environmental	Matters

We	are	a	party	to	various	agreements,	proceedings,	and	potential	proceedings	for	environmental	cleanup	issues,	including	matters	at	various	sites	where	we	have been	designated	a	potentially	responsible	party	(PRP)	by	the	EPA	or	by	a	state	agency.	At	December	31,	2012	and	2011,	the	total	amount	of	liabilities	recorded	on	our Balance	Sheet	for	environmental	matters	was	$950	million	and	$932	million.	We	have	recorded	receivables	totaling	$821	million	and	$808	million	at	December	31, 2012	and	2011	for	the	portion	of	environmental	costs	that	are	probable	of	future	recovery	in	pricing	of	our	products	and	services	for	agencies	of	the	U.S.	Government,	as discussed	below.	The	amount	that	is	expected	to	be	allocated	to	our	non-U.S.	Government	contracts	or	that	is	determined	to	be	unallowable	for	pricing	under U.S.	Government	contracts	has	been	expensed	through	cost	of	sales.	We	project	costs	and	recovery	of	costs	over	approximately	20	years.

We	enter	into	agreements	(e.g.,	administrative	orders,	consent	decrees)	that	document	the	extent	and	timing	of	our	environmental	remediation	obligation.	We	also are	involved	in	remediation	activities	at	environmental	sites	where	formal	agreements	either	do	not	exist	or	do	not	quantify	the	extent	and	timing	of	our	obligation. Environmental	cleanup	activities	usually	span	many	years,	which	makes	estimating	the	costs	more	judgmental	due	to,	for	example,	changing	remediation	technologies. To	determine	the	costs	related	to	cleanup	sites,	we	have	to	assess	the	extent	of	contamination,	effects	on	natural	resources,	the	appropriate	technology	to	be	used	to accomplish	the	remediation,	and	evolving	regulatory	environmental	standards.

We	perform	quarterly	reviews	of	environmental	remediation	sites	and	record	liabilities	and	receivables	in	the	period	it	becomes	probable	that	a	liability	has	been incurred	and	the	amounts	can	be	reasonably	estimated	(see	the	discussion	under	"Environmental	Matters"	in	"Note	1	–	Significant	Accounting	Policies"	and	"Note	12	– Legal	Proceedings,	Commitments,	and	Contingencies"	to	our	consolidated	financial	statements).	We	consider	the	above	factors	in	our	quarterly	estimates	of	the	timing and	amount	of	any	future	costs	that	may	be	required	for	remediation	activities,	which	results	in	the	calculation	of	a	range	of	estimates	for	a	particular	environmental	site. We	do	not	discount	the	recorded	liabilities,	as	the	amount	and	timing	of	future	cash	payments	are	not	fixed	or	cannot	be	reliably	determined.	Given	the	required	level	of judgment	and	estimation,	it	is	likely	that	materially	different	amounts	could	be	recorded	if	different	assumptions	were	used	or	if	circumstances	were	to	change	(e.g.,	a change	in	environmental	standards	or	a	change	in	our	estimate	of	the	extent	of	contamination).

Both	the	EPA	and	the	California	Office	of	Environmental	Health	Hazard	Assessment	announced	plans	in	January	2011	to	regulate	two	chemicals,	perchlorate	and hexavalent	chromium,	to	levels	in	drinking	water	that	are	expected	to	be	substantially	lower	than	the	existing	public	health	goals	or	standards	established	in	California. The	rulemaking	processes	are	lengthy	and	may	take	years	to	complete.	If	substantially	lower	standards	are	adopted,	we	would	expect	a	material	increase	in	our	estimates for	remediation	at	several	existing	sites.

Under	agreements	reached	with	the	U.S.	Government,	most	of	the	amounts	we	spend	for	environmental	remediation	are	allocated	to	our	operations	as	general	and administrative	costs.	Under	existing	government	regulations,	these	and	other	environmental	expenditures	relating	to	our	U.S.	Government	business,	after	deducting	any recoveries	received	from	insurance	or	other	PRPs,	are	allowable	in	establishing	prices	of	our	products	and	services.	As	a	result,	most	of	the	expenditures	we	incur	are included	in	our	net	sales	and	cost	of	sales	according	to	U.S.	Government	agreement	or	regulation,	regardless	of	the	contract	form	(e.g.	cost-reimbursable,	fixed-price). We	continually	evaluate	the	recoverability	of	our	environmental	receivables	by	assessing,	among	other	factors,	U.S.	Government	regulations,	our	U.S.	Government business	base	and	contract	mix,	and	our	history	of	receiving	reimbursement	of	such	costs.

As	disclosed	above,	we	may	record	changes	in	the	amount	of	environmental	remediation	liabilities	as	a	result	of	our	quarterly	reviews	of	the	status	of	our environmental	remediation	sites,	which	would	result	in	a	change	to	the	corresponding

environmental	receivable	and	a	charge	to	earnings.	For	example,	if	we	were	to	determine	that	the	liabilities	should	be	increased	by	$100	million,	the	corresponding receivables	would	be	increased	by	approximately	$87	million,	with	the	remainder	recorded	as	a	charge	to	earnings.	This	allocation	is	determined	annually,	based	upon our	existing	and	projected	business	activities	with	the	U.S.	Government.

We	reasonably	cannot	determine	the	extent	of	our	financial	exposure	at	all	environmental	sites	with	which	we	are	involved.	There	are	a	number	of	former	operating facilities	we	are	monitoring	or	investigating	for	potential	future	remediation.	In	some	cases,	although	a	loss	may	be	probable,	it	is	not	possible	at	this	time	to	reasonably estimate	the	amount	of	any	obligation	for	remediation	activities	because	of	uncertainties	(e.g.,	assessing	the	extent	of	the	contamination).	During	any	particular	quarter, such	uncertainties	may	be	resolved,	allowing	us	to	estimate	and	recognize	the	initial	liability	to	remediate	a	particular	former	operating	site.	The	amount	of	the	liability could	be	material.	Upon	recognition	of	the	liability,	a	portion	will	be	recognized	as	a	receivable	with	the	remainder	charged	to	earnings.

If	we	are	ultimately	found	to	have	liability	at	those	sites	where	we	have	been	designated	a	PRP,	we	expect	that	the	actual	costs	of	remediation	will	be	shared	with other	liable	PRPs.	Generally,	PRPs	that	are	ultimately	determined	to	be	responsible	parties	are	strictly	liable	for	site	cleanup	and	usually	agree	among	themselves	to share,	on	an	allocated	basis,	the	costs	and	expenses	for	investigation	and	remediation.	Under	existing	environmental	laws,	responsible	parties	are	jointly	and	severally liable	and,	therefore,	we	are	potentially	liable	for	the	full	cost	of	funding	such	remediation.	In	the	unlikely	event	that	we	were	required	to	fund	the	entire	cost	of	such remediation,	the	statutory	framework	provides	that	we	may	pursue	rights	of	cost	recovery	or	contribution	from	the	other	PRPs.	The	amounts	we	record	do	not	reflect	the fact	that	we	may	recover	some	of	the	environmental	costs	we	have	incurred	through	insurance	or	from	other	PRPs,	which	we	are	required	to	pursue	by	agreement	and U.S.	Government	regulation.

# Goodwill

Our	goodwill	balances	were	$10.4	billion	and	$10.1	billion	at	December	31,	2012	and	2011.	We	test	goodwill	for	impairment	at	least	annually	in	the	fourth	quarter or	more	frequently	upon	the	occurrence	of	certain	events	or	significant	changes	in	circumstances	that	indicate	the	carrying	value	of	goodwill	may	not	be	recoverable. Such	events	or	changes	in	circumstances	may	include	a	significant	deterioration	in	overall	economic	conditions,	changes	in	the	business	climate	of	our	industry,	a decline	in	our	market	capitalization,	operating	performance	indicators,	competition,	reorganizations	of	our	business,	or	the	disposal	of	all	or	a	portion	of	a	reporting	unit. Our	goodwill	has	been	allocated	to	and	is	tested	for	impairment	at	a	level	referred	to	as	the	reporting	unit,	which	is	our	business	segment	level	or	a	level	below	the business	segment.	The	level	at	which	we	test	goodwill	for	impairment	requires	judgment	to	determine	whether	the	operations	below	the	business	segment	constitute	a self-sustaining	business	for	which	discrete	financial	information	is	available	and	segment	management	regularly	reviews	the	operating	results.

We	initially	test	goodwill	for	impairment	by	comparing	the	fair	value	of	each	reporting	unit	with	its	carrying	value,	including	goodwill.	If	the	fair	value	of	a reporting	unit	exceeds	its	carrying	value,	goodwill	of	the	reporting	unit	is	considered	not	impaired.	If	the	carrying	value	of	a	reporting	unit	exceeds	its	fair	value,	we compare	the	implied	fair	value	of	the	reporting	unit's	goodwill	with	the	carrying	value	of	its	goodwill.	If	the	carrying	value	of	the	reporting	unit's	goodwill	exceeds	the implied	fair	value	of	that	goodwill,	an	impairment	loss	is	recognized	in	an	amount	equal	to	that	excess.

The	carrying	value	of	each	reporting	unit	includes	the	assets	and	liabilities	employed	in	its	operations,	allocations	of	amounts	held	at	the	business	segment	and corporate	levels	as	well	as	goodwill.	The	corporate	allocations	include	our	postretirement	benefit	plans	liabilities	as	determined	in	accordance	with	CAS	in	order	to	align the	basis	of	the	carrying	values	with	the	fair	values	of	our	reporting	units.	CAS	expense	is	recovered	through	the	pricing	of	our	products	and	services	on	U.S. Government	contracts	and,	therefore,	is	allocated	to	and	recognized	in	the	estimated	fair	value	of	each	reporting	unit.	The	discount	rate	used	for	CAS	is	currently	higher than	the	discount	rate	used	for	GAAP,	but	is	expected	to	trend	downward	over	the	next	few	years	and	would	increase	the	amount	of	CAS	liabilities	allocated	to	each reporting	unit,	contributing	to	a	decline	in	the	carrying	value	of	each	reporting	unit.

We	estimate	the	fair	value	of	each	reporting	unit	using	a	combination	of	a	discounted	cash	flow	(DCF)	analysis	and	market-based	valuation	methodologies	such	as comparable	public	trading	values	and	values	observed	in	market	transactions.	Determining	fair	value	requires	the	exercise	of	significant	judgments,	including	judgments about	the	amount	and	timing	of	expected	future	cash	flows,	discount	rates,	perpetual	growth	rates,	and	relevant	comparable	company	earnings	multiples	and	transaction multiples.	The	cash	flows	employed	in	the	DCF	analyses	are	based	on	our	best	estimate	of	future	sales	and	operating	costs,	based	primarily	on	existing	firm	orders, expected	future	orders,	contracts	with	suppliers,	labor	agreements,	and	general	market	conditions;	changes	in	working	capital;	long-term	business	plans;	and	recent operating	performance.	The

discount	rates	utilized	in	the	DCF	analysis	are	based	on	our	weighted	average	cost	of	capital	(WACC),	which	takes	into	account	the	relative	weights	of	each	component of	capital	structure	(equity	and	debt)	and	represents	the	expected	cost	of	new	capital	adjusted	as	appropriate	to	consider	the	risk	inherent	in	future	cash	flows	of	the respective	reporting	unit.

In	the	fourth	quarter	of	2012	we	tested	goodwill	for	impairment	for	each	of	our	reporting	units,	including	the	reporting	units	of	our	former	Electronic	Systems business	segment	and	the	reporting	units	of	our	new	MFC	and	MST	business	segments.	The	results	of	our	2012	annual	impairment	tests	of	goodwill	indicated	that	the estimated	fair	values	of	our	reporting	units	exceeded	their	carrying	values	and,	as	such,	no	impairment	existed.	The	fair	value	of	each	reporting	unit	was	premised	on	the assumption	that	sequestration	does	not	occur	as	it	remains	difficult	to	determine	when	and	how	sequestration	would	be	implemented;	that	the	U.S.	Government continues	to	support	and	fund	our	programs,	which	is	consistent	with	the	continuing	resolution	funding	measure	through	March	27,	2013;	and	that	Congress	approves defense	budget	legislation	for	the	U.S.	Government's	fiscal	year	2013	at	a	level	consistent	with	the	President's	proposed	defense	budget	for	the	second	half	of	the	U.S. Government's	fiscal	year	2013.	While	the	specific	effects	of	sequestration	cannot	be	determined,	we	expect	that	across-the-board	reductions	would	cause	our	sales, profits,	and	cash	flows	to	be	lower	than	our	current	projections.	Such	circumstances	could	eventually	result	in	an	impairment	of	our	goodwill.	Certain	of	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.	However,	we	currently	do	not	believe	that	any	of	our	reporting	units	are	at	risk	of	failing	a	goodwill	impairment	test	in	the near-term,	as	their	fair	values	are	significantly	greater	than	their	carrying	values.

Impairment	assessments	inherently	involve	management	judgments	regarding	assumptions	about	expected	future	sales,	profits,	and	cash	flows	and	the	impact	of market	conditions	on	those	assumptions.	Due	to	the	many	variables	inherent	in	the	estimation	of	a	reporting	unit's	fair	value	and	the	relative	size	of	our	recorded goodwill,	differences	in	assumptions	may	have	a	material	effect	on	the	estimated	fair	value	of	one	or	more	of	our	reporting	units	and	could	result	in	a	goodwill impairment	charge	in	a	future	period.

# Income	Taxes

We	calculate	our	provision	for	income	taxes	using	the	asset	and	liability	method,	under	which	deferred	tax	assets	and	liabilities	are	recognized	based	on	the	future tax	consequences	attributable	to	temporary	differences	that	exist	between	the	financial	statement	carrying	value	of	assets	and	liabilities	and	their	respective	tax	bases,	as well	as	from	operating	loss	and	tax	credit	carry-forwards.	We	measure	deferred	tax	assets	and	liabilities	using	enacted	tax	rates	that	will	apply	in	the	years	in	which	we expect	the	temporary	differences	to	be	recovered	or	paid.

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	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,	2012	and	2011	were	$6.1	billion	and	$5.7	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,	2012,	our	net	deferred	tax	assets	would	have	been reduced	by	$1.7	billion,	and	we	would	have	recorded	a	corresponding,	one	time	increase	in	income	tax	expense	of	$1.7	billion.	The	amount	of	net	deferred	tax	assets	will change	periodically	based	on	several	factors,	including	the	annual	re-measurement	of	our	postretirement	benefit	plan	obligations	and	actual	cash	contributions	to	our postretirement	benefit	plans.

# Recent	Accounting	Pronouncements

We	adopted	a	new	accounting	standard	during	2012,	which	resulted	only	in	a	change	in	how	we	present	other	comprehensive	loss	in	our	consolidated	financial statements	and	did	not	have	any	impact	on	our	results	of	operations,	financial	position,	or	cash	flows.	For	more	information,	see	the	"Recent	accounting pronouncements"	section	within	"Note	1	–	Significant	Accounting	Policies"	of	our	consolidated	financial	statements.

# ITEM	7A. QUANTITATIVE	AND	QUALITATIVE	DISCLOSURES	ABOUT	MARKET	RISK

We	maintain	active	relationships	with	a	broad	and	diverse	group	of	domestic	and	international	financial	institutions.	We	believe	that	they	provide	us	with	sufficient access	to	the	general	and	trade	credit	we	require	to	conduct	our	business.	We	continue	to	closely	monitor	the	financial	market	environment	and	actively	manage counterparty	exposure	to	minimize	the	potential	impact	from	adverse	developments	with	any	single	credit	provider	while	ensuring	availability	of,	and	access	to, sufficient	credit	resources.

Our	main	exposure	to	market	risk	relates	to	interest	rates,	foreign	currency	exchange	rates,	and	market	prices	on	certain	equity	securities.	Our	financial	instruments that	are	subject	to	interest	rate	risk	principally	include	fixed-rate	long-term	debt.	As	bond	yields	are	at	historical	lows	and	move	inversely	to	bond	prices,	the	estimated fair	value	of	our	outstanding	debt	was	$8.2	billion	at	December	31,	2012,	and	the	outstanding	principal	amount	was	$7.2	billion,	excluding	unamortized	discounts	of $892	million.	A	10%	change	in	the	level	of	interest	rates	would	not	have	a	material	impact	on	the	fair	value	of	our	outstanding	debt	at	December	31,	2012.

We	use	derivative	instruments	principally	to	reduce	our	exposure	to	market	risks	from	changes	in	foreign	exchange	rates	and	interest	rates.	We	do	not	enter	into	or hold	derivative	instruments	for	speculative	trading	purposes.	We	transact	business	globally	and	are	subject	to	risks	associated	with	changing	foreign	currency	exchange rates.	We	enter	into	foreign	currency	hedges	such	as	forward	and	option	contracts	that	change	in	value	as	foreign	currency	exchange	rates	change.	Our	most	significant foreign	currency	exposures	relate	to	the	British	Pound	Sterling	and	the	Canadian	Dollar.	These	contracts	hedge	forecasted	foreign	currency	transactions	in	order	to mitigate	fluctuations	in	our	earnings	and	cash	flows	associated	with	changes	in	foreign	currency	exchange	rates.	We	designate	foreign	currency	hedges	as	cash	flow hedges.	We	also	are	exposed	to	the	impact	of	interest	rate	changes	primarily	through	our	borrowing	activities.	For	fixed	rate	borrowings,	we	may	use	variable	interest rate	swaps,	effectively	converting	fixed	rate	borrowings	to	variable	rate	borrowings	indexed	to	LIBOR	in	order	to	reduce	the	amount	of	interest	paid.	These	swaps	are designated	as	fair	value	hedges.	For	variable	rate	borrowings,	we	may	use	fixed	interest	rate	swaps,	effectively	converting	variable	rate	borrowings	to	fixed	rate borrowings	in	order	to	mitigate	the	impact	of	interest	rate	changes	on	earnings.	These	swaps	are	designated	as	cash	flow	hedges.	We	may	also	enter	into	derivative instruments	that	are	not	designated	as	hedges	and	do	not	qualify	for	hedge	accounting,	which	are	intended	to	mitigate	economic	exposures.

The	classification	of	gains	and	losses	resulting	from	changes	in	the	fair	values	of	derivatives	is	dependent	on	our	intended	use	of	the	derivative	and	its	resulting designation.	Adjustments	to	reflect	changes	in	fair	values	of	derivatives	attributable	to	the	effective	portion	of	hedges	are	either	reflected	in	earnings	and	largely	offset	by corresponding	adjustments	to	the	hedged	items,	or	reflected	net	of	income	taxes	in	accumulated	other	comprehensive	loss	until	the	hedged	transaction	is	recognized	in earnings.	Changes	in	the	fair	value	of	the	derivatives	that	are	attributable	to	the	ineffective	portion	of	the	hedges,	or	of	derivatives	that	are	not	considered	to	be	highly effective	hedges,	if	any,	are	immediately	recognized	in	earnings.	The	aggregate	notional	amount	of	our	outstanding	foreign	currency	exchange	contracts	at	December	31, 2012	and	2011	was	$1.3	billion	and	$1.7	billion.	The	aggregate	notional	amount	of	our	interest	rate	swap	contracts	at	December	31,	2012	and	2011	was	$503	million	and $450	million.	At	December	31,	2012	and	2011,	the	net	fair	value	of	our	derivative	instruments	was	not	material	(Note	15).	A	10%	appreciation	or	devaluation	of	the hedged	currency	as	compared	to	the	level	of	foreign	exchange	rates	for	currencies	under	contract	at	December	31,	2012	would	not	have	a	material	impact	on	the aggregate	net	fair	value	of	such	contracts	or	our	cash	flows.

We	evaluate	the	credit	quality	of	potential	counterparties	to	derivative	transactions	and	only	enter	into	agreements	with	those	deemed	to	have	acceptable	credit	risk at	the	time	the	agreements	are	executed.	Our	foreign	currency	exchange	hedge	portfolio	is	diversified	across	several	banks.	We	periodically	monitor	changes	to counterparty	credit	quality	as	well	as	our	concentration	of	credit	exposure	to	individual	counterparties.	We	do	not	hold	or	issue	derivative	financial	instruments	for trading	or	speculative	purposes.

We	maintain	a	separate	trust	that	includes	investments	to	fund	certain	of	our	non-qualified	deferred	compensation	plans.	As	of	December	31,	2012,	investments	in the	trust	totaled	$874	million	and	are	reflected	at	fair	value	on	our	Balance	Sheet	in	other	noncurrent	assets.	The	trust	holds	investments	in	marketable	equity	securities and	fixed-income	securities	that	are	exposed	to	price	changes	and	changes	in	interest	rates.	A	portion	of	the	liabilities	associated	with	the	deferred	compensation	plans supported	by	the	trust	is	also	impacted	by	changes	in	the	market	price	of	our	common	stock	and	certain	market	indices.	Changes	in	the	value	of	the	liabilities	have	the effect	of	partially	offsetting	the	impact	of	changes	in	the	value	of	the	trust.	Both	the	change	in	the	fair	value	of	the	trust	and	the	change	in	the	value	of	the	liabilities	are recognized	on	our	Statements	of	Earnings	in	other	unallocated	costs,	and	were	not	material	for	the	year	ended	December	31,	2012.

# ITEM	8. FINANCIAL	STATEMENTS	AND	SUPPLEMENTARY	DATA

# Report	of	Ernst	&	Young	LLP,

# Independent	Registered	Public	Accounting	Firm,

# on	the	Audited	Consolidated	Financial	Statements

# Board	of	Directors	and	Stockholders

We	have	audited	the	accompanying	consolidated	balance	sheets	of	Lockheed	Martin	Corporation	as	of	December	31,	2012	and	2011,	and	the	related	consolidated statements	of	earnings,	comprehensive	income,	stockholders'	equity,	and	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2012.	These	financial statements	are	the	responsibility	of	the	Corporation's	management.	Our	responsibility	is	to	express	an	opinion	on	these	financial	statements	based	on	our	audits.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement.	An	audit	includes	examining,	on	a test	basis,	evidence	supporting	the	amounts	and	disclosures	in	the	financial	statements.	An	audit	also	includes	assessing	the	accounting	principles	used	and	significant estimates	made	by	management,	as	well	as	evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinion.

In	our	opinion,	the	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	consolidated	financial	position	of	Lockheed	Martin	Corporation at	December	31,	2012	and	2011,	and	the	consolidated	results	of	its	operations	and	its	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2012,	in conformity	with	U.S.	generally	accepted	accounting	principles.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	Lockheed	Martin	Corporation's internal	control	over	financial	reporting	as	of	December	31,	2012,	based	on	criteria	established	in	Internal	Control–Integrated	Framework	issued	by	the	Committee	of Sponsoring	Organizations	of	the	Treadway	Commission	and	our	report	dated	February	28,	2013	expressed	an	unqualified	opinion	thereon.

/s/	Ernst	&	Young	LLP

McLean,	Virginia

# Consolidated	Statements	of	Earnings

# (in	millions,	except	per	share	data)

|  | 2012 | Years	Ended	December	31,<br>2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Net\tsales |  |  |  |
| Products | \t$37,817 | \t$36,925 | \t$36,380 |
| Services | 9,365 | 9,574 | 9,291 |
| Total\tnet\tsales | 47,182 | 46,499 | 45,671 |
| Cost\tof\tsales |  |  |  |
| Products | (33,495) | (32,968) | (32,539) |
| Services | (8,383) | (8,514) | (8,382) |
| Severance\tand\tother\tcharges | (48) | (136) | (220) |
| Other\tunallocated\tcosts | (1,060) | (1,137) | (686) |
| Total\tcost\tof\tsales | (42,986) | (42,755) | (41,827) |
| Gross\tprofit | 4,196 | 3,744 | 3,844 |
| Other\tincome,\tnet | 238 | 276 | 261 |
| Operating\tprofit | 4,434 | 4,020 | 4,105 |
| Interest\texpense | (383) | (354) | (345) |
| Other\tnon-operating\tincome\t(expense),\tnet | 21 | (35) | 18 |
| Earnings\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes | 4,072 | 3,631 | 3,778 |
| Income\ttax\texpense | (1,327) | (964) | (1,164) |
| Net\tearnings\tfrom\tcontinuing\toperations | 2,745 | 2,667 | 2,614 |
| Net\t(loss)\tearnings\tfrom\tdiscontinued\toperations | — | (12) | 264 |
| Net\tearnings | \t$2,745 | \t$2,655 | \t$2,878 |
| Earnings\t(loss)\tper\tcommon\tshare |  |  |  |
| Basic |  |  |  |
| Continuing\toperations | \t$8.48 | \t$7.94 | \t$7.18 |
| Discontinued\toperations | — | (.04) | .72 |
| Basic\tearnings\tper\tcommon\tshare | \t$8.48 | \t$7.90 | \t$7.90 |
| Diluted |  |  |  |
| Continuing\toperations | \t$8.36 | \t$7.85 | \t$7.10 |
| Discontinued\toperations | — | (.04) | .71 |
| Diluted\tearnings\tper\tcommon\tshare | \t$8.36 | \t$7.81 | \t$7.81 |

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

# Consolidated	Statements	of	Comprehensive	Income

# (in	millions)

|  | Years	Ended	December	31, | Years	Ended	December	31, |  |
| :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2010 |
| Net\tearnings | \t$2,745 | \t$2,655 | \t$2,878 |
| Other\tcomprehensive\t(loss)\tincome,\tnet\tof\ttax |  |  |  |
| Postretirement\tbenefit\tplans: |  |  |  |
| million | (3,204) | (2,858) | (983) |
| Recognition\tof\tpreviously\tdeferred\tamounts\tin\t2012,\t2011,\tand\t2010,\tnet\tof\ttax\texpense\tof\t$469\tmillion, |  |  |  |
| $364\tmillion,\tand\t$304\tmillion | 858 | 666 | 553 |
| Other,\tnet | 110 | (55) | 15 |
| Other\tcomprehensive\tloss,\tnet\tof\ttax | (2,236) | (2,247) | (415) |
| Comprehensive\tincome | \t$509 | \t$408 | \t$2,463 |

# Consolidated	Balance	Sheets

# (in	millions,	except	par	value)

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| Assets |  |  |
| Current\tassets |  |  |
| Cash\tand\tcash\tequivalents | \t$1,898 | \t$3,582 |
| Receivables,\tnet | 6,563 | 6,064 |
| Inventories,\tnet | 2,937 | 2,481 |
| Deferred\tincome\ttaxes | 1,269 | 1,339 |
| Other\tcurrent\tassets | 1,188 | 628 |
| Total\tcurrent\tassets | 13,855 | 14,094 |
| Property,\tplant,\tand\tequipment,\tnet | 4,675 | 4,611 |
| Goodwill | 10,370 | 10,148 |
| Deferred\tincome\ttaxes | 4,809 | 4,388 |
| Other\tnoncurrent\tassets | 4,948 | 4,667 |
| Total\tassets | \t$38,657 | \t$37,908 |
| Liabilities\tand\tstockholders'\tequity |  |  |
| Current\tliabilities |  |  |
| Accounts\tpayable | \t$2,038 | \t$2,269 |
| Customer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred | 6,503 | 6,399 |
| Salaries,\tbenefits,\tand\tpayroll\ttaxes | 1,649 | 1,664 |
| Current\tportion\tof\tlong-term\tdebt | 150 | — |
| Other\tcurrent\tliabilities | 1,815 | 1,798 |
| Total\tcurrent\tliabilities | 12,155 | 12,130 |
| Long-term\tdebt,\tnet | 6,158 | 6,460 |
| Accrued\tpension\tliabilities | 15,278 | 13,502 |
| Other\tpostretirement\tbenefit\tliabilities | 1,220 | 1,274 |
| Other\tnoncurrent\tliabilities | 3,807 | 3,541 |
| Total\tliabilities | 38,618 | 36,907 |
| Stockholders'\tequity |  |  |
| Common\tstock,\t$1\tpar\tvalue\tper\tshare | 321 | 321 |
| Additional\tpaid-in\tcapital | — | — |
| Retained\tearnings | 13,211 | 11,937 |
| Accumulated\tother\tcomprehensive\tloss | (13,493) | (11,257) |
| Total\tstockholders'\tequity | 39 | 1,001 |
| Total\tliabilities\tand\tstockholders'\tequity | \t$38,657 | \t$37,908 |

# Consolidated	Statements	of	Cash	Flows

|  | 2012 | Years	Ended<br>December	31,<br>2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Operating\tactivities |  |  |  |
| Net\tearnings | $2,745 | $2,655 | $2,878 |
| Adjustments\tto\treconcile\tnet\tearnings\tto\tnet\tcash\tprovided\tby\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 988 | 1,008 | 1,052 |
| Stock-based\tcompensation | 167 | 157 | 168 |
| Deferred\tincome\ttaxes | 930 | (2) | 452 |
| Severance\tand\tother\tcharges | 48 | 136 | 220 |
| Reduction\tin\ttax\texpense\tfrom\tresolution\tof\tcertain\ttax\tmatters | — | (89) | (10) |
| Tax\texpense\trelated\tto\tMedicare\tPart\tD\treimbursement | — | — | 96 |
| Net\tadjustments\trelated\tto\tdiscontinued\toperations | — | (16) | (257) |
| Changes\tin\toperating\tassets\tand\tliabilities: |  |  |  |
| Receivables,\tnet | (460) | (363) | 3 |
| Inventories,\tnet | (422) | (74) | (207) |
| Accounts\tpayable | (236) | 609 | (364) |
| Customer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred | 57 | 502 | 706 |
| Postretirement\tbenefit\tplans | (1,883) | (393) | (1,027) |
| Income\ttaxes | (535) | 304 | 70 |
| Other,\tnet | 162 | (181) | 21 |
| Net\tcash\tprovided\tby\toperating\tactivities | 1,561 | 4,253 | 3,801 |
| Investing\tactivities |  |  |  |
| Capital\texpenditures | (942) | (987) | (1,074) |
| Acquisitions\tof\tbusinesses\t/\tinvestments\tin\taffiliates | (304) | (649) | (148) |
| Net\tproceeds\tfrom\tsale\tof\tEIG | — | — | 798 |
| Net\tcash\tprovided\tby\t(used\tfor)\tshort-term\tinvestment\ttransactions | — | 510 | (171) |
| Other,\tnet | 24 | 313 | 22 |
| Net\tcash\tused\tfor\tinvesting\tactivities | (1,222) | (813) | (573) |
| Financing\tactivities |  |  |  |
| Repurchases\tof\tcommon\tstock | (990) | (2,465) | (2,420) |
| Proceeds\tfrom\tstock\toption\texercises | 440 | 116 | 59 |
| Dividends\tpaid | (1,352) | (1,095) | (969) |
| Premium\tpaid\ton\tdebt\texchange | (225) | — | — |
| Issuance\tof\tlong-term\tdebt,\tnet\tof\trelated\tcosts | — | 1,980 | — |
| Repayments\tof\tlong-term\tdebt | — | (632) | — |
| Other,\tnet | 104 | (23) | (28) |
| Net\tcash\tused\tfor\tfinancing\tactivities | (2,023) | (2,119) | (3,358) |
| Net\tchange\tin\tcash\tand\tcash\tequivalents | (1,684) | 1,321 | (130) |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 3,582 | 2,261 | 2,391 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $1,898 | $3,582 | $2,261 |

# Consolidated	Statements	of	Stockholders'	Equity

|  |  |  |  | Accumulated |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Additional |  | Other | Total |
|  | Common | Paid-In | Retained | Comprehensive | Stockholders' |
|  | Stock | Capital | Earnings | Loss | Equity |
| Balance\tat\tDecember\t31,\t2009 | $373 | $— | \t$12,188 | $(8,595) | $3,966 |
| Net\tearnings | — | — | 2,878 | — | 2,878 |
| Other\tcomprehensive\tloss,\tnet\tof\ttax | — | — | — | (415) | (415) |
| Repurchases\tof\tcommon\tstock | (33) | (514) | (1,936) | — | (2,483) |
| Dividends\tdeclared\t($2.64\tper\tshare) | — | — | (969) | — | (969) |
| Stock-based\tawards\tand\tESOP\tactivity | 6 | 514 | — | — | 520 |
| Balance\tat\tDecember\t31,\t2010 | \t 346 | — | \t\t 12,161 | (9,010) | 3,497 |
| Net\tearnings | — | — | 2,655 | — | 2,655 |
| Other\tcomprehensive\tloss,\tnet\tof\ttax | — | — | — | (2,247) | (2,247) |
| Repurchases\tof\tcommon\tstock | (32) | (589) | (1,781) | — | (2,402) |
| Dividends\tdeclared\t($3.25\tper\tshare) | — | — | (1,098) | — | (1,098) |
| Stock-based\tawards\tand\tESOP\tactivity | 7 | 589 | — | — | 596 |
| Balance\tat\tDecember\t31,\t2011 | \t 321 | — | \t\t 11,937 | (11,257) | 1,001 |
| Net\tearnings | — | — | 2,745 | — | 2,745 |
| Other\tcomprehensive\tloss,\tnet\tof\ttax | — | — | — | (2,236) | (2,236) |
| Repurchases\tof\tcommon\tstock | (11) | (889) | (108) | — | (1,008) |
| Dividends\tdeclared\t($4.15\tper\tshare) | — | — | (1,363) | — | (1,363) |
| Stock-based\tawards\tand\tESOP\tactivity | 11 | 889 | — | — | 900 |
| Balance\tat\tDecember\t31,\t2012 | $321 | $— | \t$13,211 | $(13,493) | $39 |

# Notes	to	Consolidated	Financial	Statements

# Note	1	–	Significant	Accounting	Policies

Organization	–	We	are	a	global	security	and	aerospace	company	principally	engaged	in	the	research,	design,	development,	manufacture,	integration,	and sustainment	of	advanced	technology	systems	and	products.	We	also	provide	a	broad	range	of	management,	engineering,	technical,	scientific,	logistic,	and	information services.	We	serve	both	domestic	and	international	customers	with	products	and	services	that	have	defense,	civil,	and	commercial	applications,	with	our	principal customers	being	agencies	of	the	U.S.	Government.

Basis	of	presentation	–	Our	consolidated	financial	statements	include	the	accounts	of	subsidiaries	we	control,	and	we	consolidate	all	variable	interest	entities	for which	we	are	the	primary	beneficiary.	We	eliminate	intercompany	balances	and	transactions	in	consolidation.	Our	receivables,	inventories,	customer	advances	and amounts	in	excess	of	costs	incurred,	and	certain	amounts	in	other	current	liabilities	primarily	are	attributable	to	long-term	contracts	or	programs	in	progress	for	which	the related	operating	cycles	are	longer	than	one	year.	In	accordance	with	industry	practice,	we	include	these	items	in	current	assets	and	current	liabilities.	Certain	prior	year amounts	have	been	reclassified	to	conform	to	the	current	year's	presentation,	which	are	discussed	elsewhere	in	our	footnotes.	Unless	otherwise	noted,	we	present	all	per share	amounts	cited	in	these	consolidated	financial	statements	on	a	"per	diluted	share"	basis	from	continuing	operations.

Use	of	estimates	–	We	prepare	our	consolidated	financial	statements	in	conformity	with	U.S.	generally	accepted	accounting	principles	(GAAP).	In	doing	so,	we	are required	to	make	estimates	and	assumptions	that	affect	the	reported	amounts	in	the	financial	statements	and	accompanying	notes.	We	base	these	estimates	on	historical experience	and	on	various	other	assumptions	that	are	believed	to	be	reasonable	under	the	circumstances,	the	results	of	which	form	the	basis	for	making	judgments	about the	carrying	values	of	assets	and	liabilities	that	are	not	readily	apparent	from	other	sources.	Our	actual	results	may	differ	from	these	estimates.	Significant	estimates inherent	in	the	preparation	of	our	consolidated	financial	statements	include,	but	are	not	limited	to,	sales	and	cost	recognition,	postretirement	benefit	plans,	environmental receivables	and	liabilities,	evaluation	of	goodwill	and	other	assets	for	impairment,	income	taxes	including	deferred	tax	assets,	fair	value	measurements,	and contingencies.

Cash	and	cash	equivalents	–	Cash	equivalents	include	highly	liquid	instruments	with	original	maturities	of	90	days	or	less.

Receivables	–	Receivables	include	amounts	billed	and	currently	due	from	customers,	and	unbilled	costs	and	accrued	profits	primarily	related	to	sales	on	long-term contracts	that	have	been	recognized	but	not	yet	billed	to	customers.	Pursuant	to	contract	provisions,	agencies	of	the	U.S.	Government	and	certain	other	customers	have title	to,	or	a	security	interest	in,	assets	related	to	such	contracts	as	a	result	of	advances,	performance-based	payments,	and	progress	payments.	We	reflect	those	advances and	payments	as	an	offset	to	the	related	receivables	balance	for	contracts	that	we	account	for	on	a	percentage-of-completion	(POC)	basis	using	the	cost-to-cost	method	to measure	progress	towards	completion.

Inventories	–	We	record	inventories	at	the	lower	of	cost	or	estimated	net	realizable	value.	Costs	on	long-term	contracts	and	programs	in	progress	represent recoverable	costs	incurred	for	production	or	contract-specific	facilities	and	equipment,	allocable	operating	overhead,	advances	to	suppliers	and,	in	the	case	of	contracts with	the	U.S.	Government,	research	and	development	and	general	and	administrative	expenses.	Pursuant	to	contract	provisions,	agencies	of	the	U.S.	Government	and certain	other	customers	have	title	to,	or	a	security	interest	in,	inventories	related	to	such	contracts	as	a	result	of	advances,	performance-based	payments,	and	progress payments.	We	reflect	those	advances	and	payments	as	an	offset	against	the	related	inventory	balances	for	contracts	that	we	account	for	on	a	POC	basis	using	units-of- delivery	as	the	basis	to	measure	progress	toward	completing	the	contract.	We	determine	the	costs	of	other	product	and	supply	inventories	by	the	first-in	first-out	or average	cost	methods.

Property,	plant,	and	equipment	–	We	record	property,	plant,	and	equipment	at	cost.	We	provide	for	depreciation	and	amortization	on	plant	and	equipment generally	using	accelerated	methods	during	the	first	half	of	the	estimated	useful	lives	of	the	assets,	and	the	straight-line	method	thereafter.	The	estimated	useful	lives	of our	plant	and	equipment	generally	range	from	10	to	40	years	for	buildings	and	five	to	15	years	for	machinery	and	equipment.	No	depreciation	expense	is	recorded	on construction	in	progress	until	such	assets	are	placed	into	operation.	Depreciation	expense	related	to	plant	and	equipment	was	$715	million	in	2012,	$712	million	in	2011, and	$749	million	in	2010.

We	review	the	carrying	values	of	long-lived	assets	for	impairment	if	events	or	changes	in	the	facts	and	circumstances	indicate	that	their	carrying	values	may	not	be recoverable.	We	assess	impairment	by	comparing	the	estimated	undiscounted	future	cash	flows	of	the	related	asset	to	its	carrying	value.	If	an	asset	is	determined	to	be impaired,	we	recognize	an	impairment	charge	in	the	current	period	for	the	difference	between	the	fair	value	of	the	asset	and	its	carrying	value.

Capitalized	software	–	We	capitalize	certain	costs	associated	with	the	development	or	purchase	of	internal-use	software.	The	amounts	capitalized	are	included	in other	noncurrent	assets	on	our	Balance	Sheets	and	are	amortized	on	a	straight-line	basis	over	the	estimated	useful	life	of	the	resulting	software,	which	ranges	from	two	to six	years.	As	of	December	31,	2012	and	2011,	capitalized	software	totaled	$809	million	and	$864	million,	net	of	accumulated	amortization	of	$1.5	billion	and	$1.3 billion.	No	amortization	expense	is	recorded	until	the	software	is	ready	for	its	intended	use.	Amortization	expense	related	to	capitalized	software	was	$217	million	in 2012,	$211	million	in	2011,	and	$211	million	in	2010.

Goodwill	–	We	test	goodwill	for	impairment	at	least	annually	in	the	fourth	quarter	or	more	frequently	upon	the	occurrence	of	certain	events	or	significant	changes in	circumstances	that	indicate	the	carrying	value	of	goodwill	may	not	be	recoverable.	Such	events	or	changes	in	circumstances	may	include	a	significant	deterioration	in overall	economic	conditions,	changes	in	the	business	climate	of	our	industry,	a	decline	in	our	market	capitalization,	operating	performance	indicators,	competition, reorganizations	of	our	business,	or	the	disposal	of	all	or	a	portion	of	a	reporting	unit.	Our	goodwill	has	been	allocated	to	and	is	tested	for	impairment	at	a	level	referred to	as	the	reporting	unit,	which	is	our	business	segment	level	or	a	level	below	the	business	segment.

We	initially	test	goodwill	for	impairment	by	comparing	the	fair	value	of	each	reporting	unit	with	its	carrying	value,	including	goodwill.	If	the	fair	value	of	a reporting	unit	exceeds	its	carrying	value,	goodwill	of	the	reporting	unit	is	considered	not	impaired.	If	the	carrying	value	of	a	reporting	unit	exceeds	its	fair	value,	we compare	the	implied	fair	value	of	the	reporting	unit's	goodwill	with	the	carrying	value	of	its	goodwill.	If	the	carrying	value	of	the	reporting	unit's	goodwill	exceeds	the implied	fair	value	of	that	goodwill,	an	impairment	loss	is	recognized	in	an	amount	equal	to	that	excess.	We	estimate	the	fair	value	of	each	reporting	unit	using	a combination	of	a	discounted	cash	flow	analysis	and	market-based	valuation	methodologies	such	as	comparable	public	trading	values	and	values	observed	in	market transactions.	We	completed	our	assessment	of	goodwill	in	the	fourth	quarter	of	each	year	presented	and	did	not	identify	any	impairment.

Customer	advances	and	amounts	in	excess	of	cost	incurred	–	We	receive	advances,	performance-based	payments,	and	progress	payments	from	customers	that may	exceed	costs	incurred	on	certain	contracts,	including	contracts	with	agencies	of	the	U.S.	Government.	We	classify	such	advances,	other	than	those	reflected	as	a reduction	of	receivables	or	inventories	as	discussed	above,	as	current	liabilities.

Postretirement	benefit	plans	–	Many	of	our	employees	are	covered	by	defined	benefit	pension	plans,	and	we	provide	certain	health	care	and	life	insurance benefits	to	eligible	retirees	(collectively,	postretirement	benefit	plans).	GAAP	requires	that	the	amounts	we	record	related	to	our	postretirement	benefit	plans	be computed	using	actuarial	valuations	that	are	based	in	part	on	certain	key	assumptions	we	make,	including	the	discount	rate,	the	expected	long-term	rate	of	return	on	plan assets,	the	rates	of	increase	in	future	compensation	levels,	health	care	cost	trend	rates,	and	employee	turnover	and	mortality,	each	as	appropriate	based	on	the	nature	of the	plans.	We	recognize	on	a	plan-by-plan	basis	the	funded	status	of	our	postretirement	benefit	plans	under	GAAP	as	either	an	asset	recorded	within	other	noncurrent assets	or	a	liability	recorded	within	noncurrent	liabilities	on	our	Balance	Sheets.	There	is	a	corresponding	non-cash	adjustment	to	accumulated	other	comprehensive	loss, net	of	tax	benefits	recorded	as	deferred	tax	assets,	in	stockholders'	equity.	The	GAAP	funded	status	is	measured	as	the	difference	between	the	fair	value	of	the	plan's assets	and	the	benefit	obligation	of	the	plan.	The	funded	status	under	the	Employee	Retirement	Income	Security	Act	of	1974	(ERISA),	as	amended	by	the	Pension Protection	Act	of	2006	(PPA),	is	calculated	on	a	different	basis	than	under	GAAP.

Environmental	matters	–	We	record	a	liability	for	environmental	matters	when	it	is	probable	that	a	liability	has	been	incurred	and	the	amount	can	be	reasonably estimated.	The	amount	of	liability	recorded	is	based	on	our	estimate	of	the	costs	to	be	incurred	for	remediation	at	a	particular	site.	We	do	not	discount	the	recorded liabilities,	as	the	amount	and	timing	of	future	cash	payments	are	not	fixed	or	cannot	be	reliably	determined.	Our	environmental	liabilities	are	recorded	on	our	Balance Sheets	within	other	liabilities,	both	current	and	non-current.	We	expect	to	include	a	substantial	portion	of	environmental	costs	in	net	sales	and	cost	of	sales	in	future periods	pursuant	to	U.S.	Government	agreement	or	regulation.	At	the	time	a	liability	is	recorded	for	future	environmental	costs,	we	record	a	receivable	for	estimated future	recovery	considered	probable	through	the	pricing	of	products	and	services	to	agencies	of	the	U.S.	Government,	regardless	of	the	contract	form	(e.g.,	cost- reimbursable,	fixed-price).	We	continuously	evaluate	the	recoverability	of	our	environmental	receivables	by	assessing,	among	other	factors,	U.S.	Government regulations,	our	U.S.	Government	business	base	and	contract	mix,	and	our	history	of	receiving	reimbursement	of	such	costs.	We	include	the	portion	of	those	costs expected	to	be	allocated	to	our	non-U.S.	Government	contracts	or	that	is	determined	to	be	unallowable	for	pricing	under	U.S.	Government	contracts	in	cost	of	sales	at	the time	the	liability	is	established.	Our	environmental	receivables	are	recorded	on	our	Balance	Sheets	within	other	assets,	both	current	and	non-current.	We	project	costs and	recovery	of	costs	over	approximately	20	years.

Sales	and	earnings	–	We	record	net	sales	and	estimated	profits	for	substantially	all	of	our	contracts	using	the	POC	method	for	cost-reimbursable	and	fixed-price contracts	for	products	and	services	with	the	U.S.	Government.	Sales	are	recorded	on	all	time-and-materials	contracts	as	the	work	is	performed	based	on	agreed-upon hourly	rates	and	allowable	costs.	We	account	for	our	services	contracts	with	non-U.S.	Government	customers	using	the	services	method	of	accounting.	We	classify	net sales	as	products	or	services	on	our	Statements	of	Earnings	based	on	the	attributes	of	the	underlying	contracts.

POC	Method	of	Accounting	–	The	POC	method	for	product	contracts	depends	on	the	nature	of	the	products	provided	under	the	contract.	For	example,	for	contracts that	require	us	to	perform	a	significant	level	of	development	effort	in	comparison	to	the	total	value	of	the	contract	and/or	to	deliver	minimal	quantities,	sales	are	recorded using	the	cost-to-cost	method	to	measure	progress	toward	completion.	Under	the	cost-to-cost	method	of	accounting,	we	recognize	sales	and	an	estimated	profit	as	costs are	incurred	based	on	the	proportion	that	the	incurred	costs	bear	to	total	estimated	costs.	For	contracts	that	require	us	to	provide	a	substantial	number	of	similar	items without	a	significant	level	of	development,	we	record	sales	and	an	estimated	profit	on	a	POC	basis	using	units-of-delivery	as	the	basis	to	measure	progress	toward completing	the	contract.	For	contracts	to	provide	services	to	the	U.S.	Government,	sales	are	generally	recorded	using	the	cost-to-cost	method.

Accounting	for	contracts	using	the	POC	method	requires	judgment	relative	to	assessing	risks,	estimating	contract	sales	and	costs	(including	estimating	award	and incentive	fees	and	penalties	related	to	performance),	and	making	assumptions	for	schedule	and	technical	issues.	Due	to	the	scope	and	nature	of	the	work	required	to	be performed	on	many	of	our	contracts,	the	estimation	of	total	sales	and	cost	at	completion	is	complicated	and	subject	to	many	variables	and,	accordingly,	is	subject	to change.	When	adjustments	in	estimated	contract	sales	or	estimated	costs	at	completion	are	required,	any	changes	from	prior	estimates	are	recognized	in	the	current period	for	the	inception-to-date	effect	of	such	changes.	When	estimates	of	total	costs	to	be	incurred	on	a	contract	exceed	total	estimates	of	sales	to	be	earned,	a	provision for	the	entire	loss	on	the	contract	is	recorded	in	the	period	in	which	the	loss	is	determined.

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	costs	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	(for	example,	a	newly-developed	product	versus	a	mature	product),	the	schedule	and	associated	tasks	(for	example,	the number	and	type	of	milestone	events),	and	costs	(for	example,	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	costs	aspects	of	the	contract.	Alternatively,	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.

Our	consolidated	net	adjustments	not	related	to	volume,	including	net	profit	rate	adjustments	and	other	matters,	increased	segment	operating	profit,	net	of	state income	taxes,	by	approximately	$1.9	billion	in	2012,	$1.6	billion	in	2011,	and	$1.4	billion	in	2010.	These	adjustments	increased	net	earnings	by	approximately	$1.2 billion	($3.70	per	share)	in	2012,	$1.0	billion	($3.00	per	share)	in	2011,	and	$890	million	($2.40	per	share)	in	2010.

Services	Method	of	Accounting	–	For	cost-reimbursable	contracts	for	services	to	non-U.S.	Government	customers,	we	record	net	sales	as	services	are	performed, except	for	award	and	incentive	fees.	Award	and	incentive	fees	are	recorded	when	they	are	fixed	or	determinable,	generally	at	the	date	the	amount	is	communicated	to	us by	the	customer.	This	approach	results	in	the	recognition	of	such	fees	at	contractual	intervals	(typically	every	six	months)	throughout	the	contract	and	is	dependent	on	the customer's	processes	for	notification	of	awards	and	issuance	of	formal	notifications.	Under	fixed-price	service	contracts,	we	are	paid	a	predetermined	fixed	amount	for	a specified	scope	of	work	and	generally	have	full	responsibility	for	the	costs	associated	with	the	contract	and	the	resulting	profit	or	loss.	We	record	net	sales	under	fixed- price	service	contracts	with	non-U.S.	Government	customers	on	a	straight-line	basis	over	the	period	of	contract	performance,	unless	evidence	suggests	that	net	sales	are earned	or	the	obligations	are	fulfilled	in	a	different	pattern.	Costs	for	all	service	contracts	are	expensed	as	incurred.

Research	and	development	and	similar	costs	–	Except	for	certain	arrangements	described	below,	we	account	for	independent	research	and	development	costs	as part	of	the	general	and	administrative	costs	that	are	allocated	among	all	of	our	contracts	and	programs	in	progress	under	U.S.	Government	contractual	arrangements	and charged	to	cost	of	sales.	Under	some	arrangements	in	which	a	customer	shares	in	product	development	costs,	our	portion	of	unreimbursed	costs	is	expensed	as	incurred in	cost	of	sales.	Independent	research	and	development	costs	charged	to	cost	of	sales	totaled	$616	million	in	2012,	$585	million	in	2011,	and	$639	million	in	2010.	Costs we	incur	under	customer-sponsored	research	and	development	programs	pursuant	to	contracts	are	included	in	net	sales	and	cost	of	sales.

Investments	in	marketable	securities	–	Investments	in	marketable	securities	consist	of	debt	and	equity	securities	and	are	classified	as	trading	securities.	As	of December	31,	2012	and	2011,	the	fair	value	of	our	trading	securities	totaled	$874	million	and	$781	million	and	was	included	in	other	noncurrent	assets	on	the	Balance Sheets.	Our	trading	securities	are	held	in	a	separate	trust,	which	includes	investments	to	fund	our	deferred	compensation	plan	liabilities.	Net	gains	on	trading	securities	in 2012,	2011,	and	2010	were	$67	million,	$40	million,	and	$56	million.	In	2012,	gains	and	losses	on	these	investments	were	reclassified	from	other	non-operating	income (expense),	net	to	other	unallocated	costs	within	cost	of	sales	for	all	years	presented	on	our	Statements	of	Earnings	in	order	to	align	the	classification	of	changes	in	the market	value	of	investments	held	for	the	plan	with	changes	in	the	value	of	the	corresponding	plan	liabilities.

Equity	method	investments	–	Investments	where	we	have	the	ability	to	exercise	significant	influence,	but	do	not	control,	are	accounted	for	under	the	equity method	of	accounting	and	are	included	in	other	noncurrent	assets	on	the	Balance	Sheets.	Significant	influence	typically	exists	if	we	have	a	20%	to	50%	ownership interest	in	the	investee.	Under	this	method	of	accounting,	our	share	of	the	net	earnings	or	losses	of	the	investee	is	included	in	operating	profit	in	other	income,	net	on	the Statements	of	Earnings	since	the	activities	of	the	investee	are	closely	aligned	with	the	operations	of	the	business	segment	holding	the	investment.	We	evaluate	our	equity method	investments	for	impairment	whenever	events	or	changes	in	circumstances	indicate	that	the	carrying	amounts	of	such	investments	may	be	impaired.	If	a	decline	in the	value	of	an	equity	method	investment	is	determined	to	be	other	than	temporary,	a	loss	is	recorded	in	earnings	in	the	current	period.	As	of	December	31,	2012	and 2011,	our	equity	method	investments	totaled	$749	million	and	$697	million.	Our	share	of	net	earnings	related	to	these	investments	was	$277	million	in	2012,	$332 million	in	2011,	and	$312	million	in	2010,	of	which	approximately	$265	million,	$285	million,	and	$300	million	related	to	our	Space	Systems	business	segment.

Derivative	financial	instruments	–	We	use	derivative	instruments	principally	to	reduce	our	exposure	to	market	risks	from	changes	in	foreign	exchange	rates	and interest	rates.	We	do	not	enter	into	or	hold	derivative	instruments	for	speculative	trading	purposes.	We	transact	business	globally	and	are	subject	to	risks	associated	with changing	foreign	currency	exchange	rates.	We	enter	into	foreign	currency	hedges	such	as	forward	and	option	contracts	that	change	in	value	as	foreign	currency	exchange rates	change.	These	contracts	hedge	forecasted	foreign	currency	transactions	in	order	to	mitigate	fluctuations	in	our	earnings	and	cash	flows	associated	with	changes	in foreign	currency	exchange	rates.	We	designate	foreign	currency	hedges	as	cash	flow	hedges.	We	also	are	exposed	to	the	impact	of	interest	rate	changes	primarily through	our	borrowing	activities.	For	fixed	rate	borrowings,	we	may	use	variable	interest	rate	swaps,	effectively	converting	fixed	rate	borrowings	to	variable	rate borrowings	in	order	to	reduce	the	amount	of	interest	paid.	These	swaps	are	designated	as	fair	value	hedges.	For	variable	rate	borrowings,	we	may	use	fixed	interest	rate swaps,	effectively	converting	variable	rate	borrowings	to	fixed	rate	borrowings	in	order	to	mitigate	the	impact	of	interest	rate	changes	on	earnings.	These	swaps	are designated	as	cash	flow	hedges.	We	may	also	enter	into	derivative	instruments	that	are	not	designated	as	hedges	and	do	not	qualify	for	hedge	accounting,	which	are intended	to	mitigate	economic	exposures.

We	record	derivatives	at	their	fair	value.	The	classification	of	gains	and	losses	resulting	from	changes	in	the	fair	values	of	derivatives	is	dependent	on	our	intended use	of	the	derivative	and	its	resulting	designation.	Adjustments	to	reflect	changes	in	fair	values	of	derivatives	attributable	to	the	effective	portion	of	hedges	are	either reflected	in	earnings	and	largely	offset	by	corresponding	adjustments	to	the	hedged	items,	or	reflected	net	of	income	taxes	in	accumulated	other	comprehensive	loss

until	the	hedged	transaction	is	recognized	in	earnings.	Changes	in	the	fair	value	of	the	derivatives	that	are	attributable	to	the	ineffective	portion	of	the	hedges,	or	of derivatives	that	are	not	considered	to	be	highly	effective	hedges,	if	any,	are	immediately	recognized	in	earnings.	The	aggregate	notional	amount	of	our	outstanding foreign	currency	hedges	at	December	31,	2012	and	2011	was	$1.3	billion	and	$1.7	billion.	The	aggregate	notional	amount	of	our	outstanding	interest	rate	swaps	at December	31,	2012	and	2011	was	$503	million	and	$450	million.	Derivative	instruments	did	not	have	a	material	impact	on	net	earnings	and	comprehensive	income during	2012,	2011,	and	2010.	Substantially	all	of	our	derivatives	are	designated	for	hedge	accounting.	See	Note	15	for	more	information	on	the	fair	value	measurements related	to	our	derivative	instruments.

Stock-based	compensation	–	Compensation	cost	related	to	all	share-based	payments	including	stock	options	and	restricted	stock	units	is	measured	at	the	grant date	based	on	the	estimated	fair	value	of	the	award.	We	generally	recognize	the	compensation	cost	ratably	over	a	three-year	vesting	period.

Income	taxes	–	We	periodically	assess	our	tax	filing	exposures	related	to	periods	that	are	open	to	examination.	Based	on	the	latest	available	information,	we evaluate	our	tax	positions	to	determine	whether	the	position	will	more	likely	than	not	be	sustained	upon	examination	by	the	Internal	Revenue	Service	(IRS).	If	we	cannot reach	a	more-likely-than-not	determination,	no	benefit	is	recorded.	If	we	determine	that	the	tax	position	is	more	likely	than	not	to	be	sustained,	we	record	the	largest amount	of	benefit	that	is	more	likely	than	not	to	be	realized	when	the	tax	position	is	settled.	We	record	interest	and	penalties	related	to	income	taxes	as	a	component	of income	tax	expense	on	our	Statements	of	Earnings.	Interest	and	penalties	are	not	material.

Accumulated	other	comprehensive	loss	–	Changes	in	the	balance	of	accumulated	other	comprehensive	loss,	net	of	income	taxes,	consisted	of	the	following	(in millions):

|  |  |  | Accumulated |
| :--- | :--- | :--- | :--- |
|  | Postretirement |  | Other |
|  | Benefit\tPlan |  | Comprehensive |
|  | Adjustments | Other,\tnet | Loss |
| Balance\tat\tJanuary\t1,\t2010 | $(8,564) | $ (31) | $(8,595) |
| Other\tcomprehensive\t(loss)\tincome | (430) | 15 | (415) |
| Balance\tat\tDecember\t31,\t2010 | (8,994) | (16) | (9,010) |
| Other\tcomprehensive\tloss | (2,192) | (55) | (2,247) |
| Balance\tat\tDecember\t31,\t2011 | (11,186) | (71) | (11,257) |
| Other\tcomprehensive\t(loss)\tincome | (2,346) | \t 110 | (2,236) |
| Balance\tat\tDecember\t31,\t2012 | $(13,532) | $39 | $(13,493) |

The	postretirement	benefit	plan	adjustments	are	shown	net	of	tax	benefits	at	December	31,	2012,	2011,	and	2010	of	$7.4	billion,	$6.1	billion,	and	$4.9	billion.	These tax	benefits	include	amounts	recognized	on	our	income	tax	returns	as	current	deductions	and	deferred	income	taxes,	which	will	be	recognized	on	our	tax	returns	in	future years.	See	Note	7	and	Note	9	for	more	information	on	our	income	taxes	and	postretirement	plans.

Recent	accounting	pronouncements	–	Effective	January	1,	2012,	we	retrospectively	adopted	new	guidance	issued	by	the	Financial	Accounting	Standards	Board by	presenting	total	comprehensive	income	and	the	components	of	net	income	and	other	comprehensive	loss	in	two	separate	but	consecutive	statements.	The	adoption	of this	guidance	resulted	only	in	a	change	in	how	we	present	other	comprehensive	loss	in	our	consolidated	financial	statements	and	did	not	have	any	impact	on	our	results of	operations,	financial	position,	or	cash	flows.

# Note	2	–	Earnings	Per	Share

The	weighted	average	number	of	shares	outstanding	used	to	compute	earnings	per	common	share	were	as	follows	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Weighted\taverage\tcommon\tshares\toutstanding\tfor\tbasic\tcomputations | \t\t323.7 | \t\t335.9 | \t\t364.2 |
| Weighted\taverage\tdilutive\teffect\tof\tstock\toptions\tand\trestricted\tstock\tunits | 4.7 | 4.0 | 4.1 |
| Weighted\taverage\tcommon\tshares\toutstanding\tfor\tdiluted\tcomputations | \t\t328.4 | \t\t339.9 | \t\t368.3 |

We	compute	basic	and	diluted	earnings	per	common	share	by	dividing	net	earnings	by	the	respective	weighted	average	number	of	common	shares	outstanding	for the	periods	presented.	Our	calculation	of	diluted	earnings	per	common	share	includes	the	dilutive	effects	for	the	assumed	exercise	of	stock	options	and	vesting	of restricted	stock	units	based	on	the	treasury	stock	method.

The	computation	of	diluted	earnings	per	common	share	excluded	8.0	million,	13.4	million,	and	14.7	million	stock	options	for	the	years	ended	December	31,	2012, 2011,	and	2010	because	their	inclusion	would	have	been	anti-dilutive,	primarily	due	to	their	exercise	prices	exceeding	the	average	market	price	of	our	common	stock during	each	respective	reporting	period.

# Note	3	–	Information	on	Business	Segments

We	organize	our	business	segments	based	on	the	nature	of	the	products	and	services	offered.	Effective	December	31,	2012,	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.	This structure	reflects	the	reorganization	of	our	former	Electronic	Systems	business	segment	into	the	new	MFC	and	MST	business	segments	in	order	to	streamline	our operations	and	enhance	customer	alignment.	In	connection	with	this	reorganization,	management	layers	at	our	former	Electronic	Systems	business	segment	and	our former	Global	Training	and	Logistics	(GTL)	business	were	eliminated,	and	the	former	GTL	business	was	split	between	the	two	new	business	segments.	In	addition, operating	results	for	Sandia	Corporation,	which	manages	the	Sandia	National	Laboratories	for	the	U.S.	Department	of	Energy,	and	our	equity	interest	in	the	U.K.	Atomic Weapons	Establishment	joint	venture	were	transferred	from	our	former	Electronic	Systems	business	segment	to	our	Space	Systems	business	segment.	The	amounts, discussion,	and	presentation	of	our	business	segments	reflect	this	reorganization	for	all	years	presented	in	this	Annual	Report	on	Form	10-K.	The	following	is	a	brief description	of	the	activities	of	our	business	segments:

Ÿ	 Aeronautics	–	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.

Ÿ Information	Systems	&	Global	Solutions	–	Provides	management	services,	integrated	information	technology	solutions,	and	advanced	technology	systems	and expertise	across	a	broad	spectrum	of	applications	for	civil,	defense,	intelligence,	and	other	government	customers.

Ÿ	 Missiles	and	Fire	Control	–	Provides	air	and	missile	defense	systems;	tactical	missiles	and	air-to-ground	precision	strike	weapon	systems;	fire	control	systems; mission	operations	support,	readiness,	engineering	support,	and	integration	services;	logistics	and	other	technical	services;	and	manned	and	unmanned	ground vehicles.

Ÿ	 Mission	Systems	and	Training	–	Provides	surface	ship	and	submarine	combat	systems;	sea	and	land-based	missile	defense	systems;	radar	systems;	mission	systems and	sensors	for	rotary	and	fixed-wing	aircraft;	littoral	combat	ships;	simulation	and	training	services;	unmanned	technologies	and	platforms;	ship	systems	integration; and	military	and	commercial	training	systems.

Ÿ Space	Systems	–	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.	Operating	results for	our	Space	Systems	business	segment	include	our	equity	interests	in	United	Launch	Alliance,	which	provides	expendable	launch	services	for	the	U.S. Government,	United	Space	Alliance,	which	provided	processing	activities	for	the	Space	Shuttle	program	and	is	winding	down	following	the	completion	of	the	last Space	Shuttle	mission	in	2011,	and	a	joint	venture	that	manages	the	U.K.'s	Atomic	Weapons	Establishment	program.

The	financial	information	in	the	following	tables	includes	the	results	of	Chandler/May,	Inc.	(Chandler/May);	CDL	Systems	Ltd.	(CDL);	and	Procerus Technologies,	L.C.	(Procerus)	in	the	MST	business	segment	information	from	their	respective	dates	of	acquisition	in	2012	(Note	14)	and	QTC	Holdings	Inc.	(QTC)	in the	IS&GS	business	segment	information	and	Sim-Industries	B.V.	(Sim	Industries)	in	the	MST	business	segment	information	from	their	respective	dates	of	acquisition in	2011	(Note	14).	Also,	the	2011	and	2010	financial	information	in	the	tables	below	excludes	businesses	included	in	discontinued	operations	(Note	14).	Amounts related	to	discontinued	operations	in	2012	were	not	significant	and,	accordingly,	are	included	in	"Other	unallocated	expenses,	net"	in	the	table	below.

Operating	profit	of	our	business	segments	includes	equity	earnings	and	losses	from	investees	because	the	operating	activities	of	the	investees	are	closely	aligned with	the	operations	of	those	business	segments.	Operating	profit	of	our	business	segments	excludes	the	non-cash	FAS/CAS	pension	adjustment	described	below; expense	for	stock-based	compensation	programs;	the	effects	of	items	not	considered	part	of	management's	evaluation	of	segment	operating	performance,	such	as	charges related	to	significant	severance	actions	in	2012	and	2011	and	the	charges	in	2010	related	to	the	Voluntary	Executive	Separation	Program	(VESP)	and	facilities consolidation	within	MST	(Note	13);	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.

# Selected	Financial	Data	by	Business	Segment

Summary	operating	results	for	each	of	our	business	segments	were	as	follows	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Net\tsales |  |  |  |
| Aeronautics | \t$14,953 | \t$14,362 | \t$13,109 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 8,846 | 9,381 | 9,921 |
| Missiles\tand\tFire\tControl | 7,457 | 7,463 | 6,930 |
| Mission\tSystems\tand\tTraining | 7,579 | 7,132 | 7,443 |
| Space\tSystems | 8,347 | 8,161 | 8,268 |
| Total\tnet\tsales | \t$47,182 | \t$46,499 | \t$45,671 |
| Operating\tprofit |  |  |  |
| Aeronautics | \t$1,699 | \t$1,630 | \t$1,498 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 808 | 874 | 814 |
| Missiles\tand\tFire\tControl | 1,256 | 1,069 | 973 |
| Mission\tSystems\tand\tTraining | 737 | 645 | 713 |
| Space\tSystems | 1,083 | 1,063 | 1,030 |
| Total\tbusiness\tsegment\toperating\tprofit | 5,583 | 5,281 | 5,028 |
| Unallocated\texpenses,\tnet |  |  |  |
| Severance\tand\tother\tcharges\t^(a) | (48) | (136) | (220) |
| Other\tunallocated\texpenses,\tnet\t^(b) | (1,101) | (1,125) | (703) |
| Total\tconsolidated\toperating\tprofit | \t$4,434 | \t$4,020 | \t$4,105 |
| Intersegment\tsales |  |  |  |
| Aeronautics | \t$197 | \t$193 | \t$128 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 838 | 864 | 912 |
| Missiles\tand\tFire\tControl | 298 | 304 | 295 |
| Mission\tSystems\tand\tTraining | 908 | 958 | 857 |
| Space\tSystems | 107 | 113 | 124 |
| Total\tintersegment\tsales | \t$\t\t2,348 | \t$2,432 | \t$2,316 |
| Depreciation\tand\tamortization |  |  |  |
| Aeronautics | \t$311 | \t$345 | \t$334 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 92 | 83 | 106 |
| Missiles\tand\tFire\tControl | 104 | 102 | 103 |
| Mission\tSystems\tand\tTraining | 179 | 174 | 183 |
| Space\tSystems | 191 | 199 | 212 |
| Total\tbusiness\tsegment\tdepreciation\tand\tamortization | 877 | 903 | 938 |
| Corporate\tactivities | 111 | 105 | 114 |
| Total\tdepreciation\tand\tamortization | $988 | $\t\t1,008 | $\t\t1,052 |
| Capital\texpenditures |  |  |  |
| Aeronautics | \t$271 | \t$361 | \t$422 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 78 | 71 | 67 |
| Missiles\tand\tFire\tControl | 128 | 119 | 112 |
| Mission\tSystems\tand\tTraining | 158 | 161 | 176 |
| Space\tSystems | 167 | 192 | 205 |
| Total\tbusiness\tsegment\tcapital\texpenditures | 802 | 904 | 982 |
| Corporate\tactivities | 140 | 83 | 92 |
| Total\tcapital\texpenditures | \t$942 | \t$987 | \t$1,074 |
| (a)\nSeverance\tand\tother\tcharges\tinclude\tthe\tseverance\tcharges\trecorded\tin\t2012\tassociated\twith\tour\tAeronautics\tbusiness\tsegment\tand\tthe\treorganization\tof\tour\tformer\tElectronic\tSystems\tbusiness\tsegment;\tfor\t2011, |  |  |  |

Severance	and	other	charges	include	the	severance	charges	recorded	in	2012	associated	with	our	Aeronautics	business	segment	and	the	reorganization	of	our	former	Electronic	Systems	business	segment;	for	2011, include	the	severance	charges	associated	with	our	Aeronautics,	IS&GS,	and	Space	Systems	business	segments,	and	Corporate	Headquarters;	and	for	2010,	include	the	charges	related	to	the	VESP	and	the	facilities consolidation	within	our	MST	business	segment	(Note	13).	Severance	charges	for	initiatives	that	are	not	significant	are	included	in	business	segment	operating	profit. (a)

Other	unallocated	expenses,	net	included	the	following	(in	millions): (b)

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Non-cash\tFAS/CAS\tpension\tadjustment | \t$(830) | \t$(922) | \t$(454) |
| Stock-based\tcompensation | (167) | (157) | (168) |
| Other,\tnet | (104) | (46) | (81) |
| Total | \t$(1,101) | \t$(1,125) | \t$(703) |

# Selected	Financial	Data	by	Business	Segment	(continued)

# Net	Sales	by	Customer	Category

Net	sales	by	customer	category	were	as	follows	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| U.S.\tGovernment |  |  |  |
| Aeronautics | \t$11,587 | \t$10,749 | \t$10,623 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 8,340 | 8,769 | 9,488 |
| Missiles\tand\tFire\tControl | 5,224 | 5,455 | 5,422 |
| Mission\tSystems\tand\tTraining | 5,685 | 5,180 | 5,301 |
| Space\tSystems | 7,952 | 7,848 | 8,026 |
| Total\tU.S.\tGovernment\tnet\tsales | \t$38,788 | \t$38,001 | \t$38,860 |
| International\t^(a) |  |  |  |
| Aeronautics | \t$3,323 | \t$3,577 | \t$2,458 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 380 | 464 | 320 |
| Missiles\tand\tFire\tControl | 2,208 | 1,977 | 1,480 |
| Mission\tSystems\tand\tTraining | 1,826 | 1,906 | 2,082 |
| Space\tSystems | 319 | 144 | 97 |
| Total\tinternational\tnet\tsales | \t$8,056 | \t$8,068 | \t$6,437 |
| U.S.\tCommercial\tand\tOther |  |  |  |
| Aeronautics | \t$43 | \t$36 | \t$28 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 126 | 148 | 113 |
| Missiles\tand\tFire\tControl | 25 | 31 | 28 |
| Mission\tSystems\tand\tTraining | 68 | 46 | 60 |
| Space\tSystems | 76 | 169 | 145 |
| Total\tU.S.\tcommercial\tand\tother\tnet\tsales | \t$338 | \t$430 | \t$374 |
| Total\tnet\tsales | \t$47,182 | \t$46,499 | \t$45,671 |

Sales	made	to	other	governments	through	the	U.S.	Government	(i.e.,	foreign	military	sales)	are	included	in	the	"International"	category. (a)

Our	Aeronautics	business	segment	includes	our	largest	program,	the	F-35	Lightning	II	Joint	Strike	Fighter,	an	international	multi-role,	stealth	fighter.	Net	sales	for the	F-35	program	represented	approximately	14%,	13%,	and	12%	of	our	total	net	sales	during	2012,	2011,	and	2010.

Total	assets,	goodwill,	and	customer	advances	and	amounts	in	excess	of	costs	incurred	for	each	of	our	business	segments	were	as	follows	(in	millions):

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| Assets\t^(a) |  |  |
| Aeronautics | \t$6,525 | \t$5,752 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 5,664 | 5,838 |
| Missiles\tand\tFire\tControl | 4,186 | 4,096 |
| Mission\tSystems\tand\tTraining | 6,589 | 6,159 |
| Space\tSystems | 3,478 | 3,346 |
| Total\tbusiness\tsegment\tassets | \t\t 26,442 | \t\t 25,191 |
| Corporate\tassets\t^(b) | \t\t 12,215 | \t\t 12,717 |
| Total\tassets | \t$38,657 | \t$37,908 |
| Goodwill |  |  |
| Aeronautics | \t$146 | \t$146 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 3,767 | 3,749 |
| Missiles\tand\tFire\tControl | 2,485 | 2,481 |
| Mission\tSystems\tand\tTraining | 3,264 | 3,065 |
| Space\tSystems | 708 | 707 |
| Total\tgoodwill\t^(c) | \t$10,370 | \t$10,148 |
| Customer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred |  |  |
| Aeronautics | \t$2,382 | \t$2,443 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 323 | 350 |
| Missiles\tand\tFire\tControl | 1,988 | 1,888 |
| Mission\tSystems\tand\tTraining | 1,335 | 1,326 |
| Space\tSystems | 475 | 392 |
| Total\tcustomer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred | \t$6,503 | \t$6,399 |

We	have	no	significant	long-lived	assets	located	in	foreign	countries. (a)

Corporate	assets	primarily	include	cash	and	cash	equivalents,	deferred	income	taxes,	environmental	receivables,	and	investments	held	in	a	separate	trust. (b)

During	2012,	the	increase	in	goodwill	primarily	was	due	to	the	acquisitions	of	Chandler/May,	CDL,	and	Procerus	at	our	MST	business	segment	(Note	14).	During	2011,	goodwill	increased	$543	million primarily	due	to	the	acquisitions	of	QTC	at	our	IS&GS	business	segment	and	Sim-Industries	at	our	MST	business	segment	(Note	14).	As	a	result	of	the	previously	discussed	reorganization,	the	goodwill related	to	the	former	Electronic	Systems	business	segment	was	reassigned	on	a	relative	fair	value	basis	to	the	MFC,	MST,	and	Space	Systems	business	segments. (c)

# Note	4	–	Receivables,	net

Receivables	consisted	of	the	following	(in	millions):

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| U.S.\tGovernment |  |  |
| Amounts\tbilled | \t$1,088 | \t$1,273 |
| Unbilled\tcosts\tand\taccrued\tprofits | 5,630 | 4,961 |
| Less:\tcustomer\tadvances\tand\tprogress\tpayments | (1,048) | (1,086) |
| Total\tU.S.\tGovernment\treceivables,\tnet | 5,670 | 5,148 |
| Other\tgovernments\tand\tcommercial |  |  |
| Amounts\tbilled | 376 | 396 |
| Unbilled\tcosts\tand\taccrued\tprofits | 789 | 774 |
| Less:\tcustomer\tadvances | (272) | (254) |
| Total\tother\tgovernments\tand\tcommercial\treceivables,\tnet | 893 | 916 |
| Total\treceivables,\tnet | \t$6,563 | \t$6,064 |

We	expect	to	bill	substantially	all	of	the	December	31,	2012	unbilled	costs	and	accrued	profits	during	2013.

# Note	5	–	Inventories,	net

     Inventories	consisted	of	the	following	(in	millions):

| Inventories	consisted	of	the	following	(in	millions): |  |  |
| :--- | :--- | :--- |
|  | 2012 | 2011 |
| Work-in-process,\tprimarily\trelated\tto\tlong-term\tcontracts\tand\tprograms\tin\tprogress | \t$7,000 | \t$7,129 |
| Less:\tcustomer\tadvances\tand\tprogress\tpayments | (4,932) | (5,425) |
|  | 2,068 | 1,704 |
| Other\tinventories | 869 | 777 |
| Total\tinventories,\tnet | \t$2,937 | \t$2,481 |

Work-in-process	inventories	at	December	31,	2012	and	2011	included	general	and	administrative	costs	of	$623	million	and	$592	million.	During	2012,	2011,	and 2010,	general	and	administrative	costs	incurred	and	recorded	in	inventories	totaled	$2.4	billion,	$2.3	billion,	and	$2.3	billion,	and	general	and	administrative	costs charged	to	cost	of	sales	from	inventories	totaled	$2.4	billion,	$2.2	billion,	and	$2.4	billion.

# Note	6	–	Property,	Plant,	and	Equipment,	net

Property,	plant,	and	equipment	consisted	of	the	following	(in	millions):

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| Land | \t$101 | \t$98 |
| Buildings | 5,388 | 5,159 |
| Machinery\tand\tequipment | 6,728 | 6,408 |
| Construction\tin\tprogress | 768 | 805 |
|  | \t\t 12,985 | \t\t 12,470 |
| Less:\taccumulated\tdepreciation\tand\tamortization | (8,310) | (7,859) |
| Total\tproperty,\tplant,\tand\tequipment,\tnet | \t$4,675 | \t$4,611 |

# Note	7	–	Income	Taxes

Our	provision	for	federal	and	foreign	income	tax	expense	for	continuing	operations	consisted	of	the	following	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Federal\tincome\ttaxes: |  |  |  |
| Current | \t$387 | \t$912 | \t$600 |
| Deferred | 925 | 9 | 561 |
| Total\tfederal\tincome\ttaxes | \t\t 1,312 | 921 | \t\t 1,161 |
| Foreign\tincome\ttaxes: |  |  |  |
| Current | 14 | 38 | 8 |
| Deferred | 1 | 5 | (5) |
| Total\tforeign\tincome\ttaxes | 15 | 43 | 3 |
| Income\ttax\texpense | \t$1,327 | \t$\t\t\t\t964 | \t$1,164 |

State	income	taxes	are	included	in	our	operations	as	general	and	administrative	costs	and,	under	U.S.	Government	regulations,	are	allowable	costs	in	establishing prices	for	the	products	and	services	we	sell	to	the	U.S.	Government.	Therefore,	a	substantial	portion	of	state	income	taxes	is	included	in	our	net	sales	and	cost	of	sales. As	a	result,	the	impact	of	certain	transactions	on	our	operating	profit	and	of	other	matters	presented	in	these	financial	statements	is	disclosed	net	of	state	income	taxes. Our	total	net	state	income	tax	expense	was	$183	million	for	2012,	$149	million	for	2011,	and	$168	million	for	2010	(including	state	income	taxes	related	to	the	sale	of Enterprise	Integration	Group	(EIG)	(Note	14)).

Our	reconciliation	of	the	35%	U.S.	federal	statutory	income	tax	rate	to	actual	income	tax	expense	for	continuing	operations	is	as	follows	(in	millions):

|  | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- |
| Income\ttax\texpense\tat\tthe\tU.S.\tfederal\tstatutory\ttax\trate | \t$1,425 | \t$1,271 | \t$1,322 |
| Increase\t(decrease)\tin\ttax\texpense: |  |  |  |
| U.S.\tmanufacturing\tactivity\tbenefit | (29) | (106) | (110) |
| Tax\tdeductible\tdividends | (73) | (62) | (56) |
| Research\tand\tdevelopment\ttax\tcredit | — | (35) | (43) |
| IRS\tappeals\tand\taudit\tresolution | — | (89) | (10) |
| Medicare\tPart\tD\tlaw\tchange | — | — | 96 |
| Other,\tnet | 4 | (15) | (35) |
| Income\ttax\texpense | \t$1,327 | \t$964 | \t$1,164 |

Our	U.S.	manufacturing	activity	benefit	is	based	on	income	derived	from	qualified	production	activity	(QPA)	in	the	U.S.	The	deduction	rate,	which	was	9%	for 2012,	2011,	and	2010,	is	applied	against	QPA	income	to	arrive	at	the	deduction.	Our	tax-deductible	pension	contributions	were	significantly	higher	in	2012	than	in	prior years	and,	accordingly,	our	U.S.	manufacturing	deduction	for	2012	was	significantly	reduced.

We	receive	a	tax	deduction	for	dividends	paid	on	shares	of	our	common	stock	held	by	certain	of	our	defined	contribution	plans	with	an	employee	stock	ownership plan	(ESOP)	feature.	The	amount	of	the	tax	deduction	has	increased	as	we	increased	our	dividend	over	the	last	three	years.

We	recognized	tax	benefits	of	$35	million	in	2011	and	$43	million	in	2010	related	to	the	impact	of	the	research	and	development	(R&D)	tax	credit.	On	January	2, 2013,	the	President	signed	into	law	the	American	Taxpayer	Relief	Act	of	2012,	which	retroactively	reinstates	the	R&D	tax	credit	for	two	years,	from	January	1,	2012 through	December	31,	2013.	The	financial	impacts	of	tax	law	changes	are	recognized	in	the	period	in	which	new	legislation	is	enacted,	and	accordingly	we	will recognize	the	benefit	of	the	R&D	tax	credit	for	both	2012	and	2013	in	2013.

In	April	2011,	the	U.S.	Congressional	Joint	Committee	on	Taxation	(JCT)	completed	its	review	of	the	IRS	Appeals	Division's	resolution	of	certain	adjustments related	to	our	tax	years	2003-2008.	As	a	result,	we	recognized	additional	tax	benefits	and	reduced	our	income	tax	expense	for	2011	by	$89	million	($.26	per	share).

In	March	2010,	the	President	signed	into	law	the	Patient	Protection	and	Affordable	Care	Act	and	the	Health	Care	and	Education	Reconciliation	Act	of	2010. Beginning	January	1,	2013,	these	laws	change	the	tax	treatment	for	retiree	prescription	drug	expenses	by	eliminating	the	tax	deduction	available	to	the	extent	that	those expenses	are	reimbursed	under	Medicare	Part	D.	Because	the	tax	benefits	associated	with	these	future	deductions	were	reflected	as	deferred	tax	assets	as	of December	31,	2009,	the	elimination	of	the	tax	deductions	resulted	in	a	reduction	in	deferred	tax	assets	and	an	increase	in	income	tax	expense	of	$96	million	($.26	per share)	in	2010.

We	participate	in	the	IRS	Compliance	Assurance	Process	program.	The	IRS	examinations	of	the	years	2011,	2010,	and	2009	were	completed	in	the	fourth	quarter	of 2012,	2011,	and	2010.	We	also	resolved	certain	issues	in	our	2009	tax	return	with	the	IRS	Appeals	Division	in	2012.	The	resolution	of	these	examinations	and	issues	did not	have	a	material	impact	on	our	effective	tax	rates.

The	primary	components	of	our	federal	and	foreign	deferred	income	tax	assets	and	liabilities	at	December	31	were	as	follows	(in	millions):

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets\trelated\tto: |  |  |
| Accrued\tcompensation\tand\tbenefits | $909 | $843 |
| Pensions | 5,117 | 4,578 |
| Other\tpostretirement\tbenefit\tobligations | 433 | 487 |
| Contract\taccounting\tmethods | 853 | 806 |
| Sale\tof\tdiscontinued\toperations | — | 69 |
| Foreign\tcompany\toperating\tlosses\tand\tcredits | 34 | 31 |
| Other | 284 | 305 |
| Valuation\tallowance\t^(a) | (8) | (14) |
| Deferred\ttax\tassets,\tnet | 7,622 | 7,105 |
| Deferred\ttax\tliabilities\trelated\tto: |  |  |
| Goodwill\tand\tpurchased\tintangibles | 402 | 369 |
| Property,\tplant,\tand\tequipment | 604 | 638 |
| Exchanged\tdebt\tsecurities\tand\tother\t^(b) | 544 | 379 |
| Deferred\ttax\tliabilities | 1,550 | 1,386 |
| Net\tdeferred\ttax\tassets\t^(c) | $6,072 | $5,719 |

A	valuation	allowance	has	been	provided	against	certain	foreign	company	deferred	tax	assets	arising	from	carryforwards	of	unused	tax	benefits. (a)

Includes	deferred	taxes	associated	with	the	exchange	of	debt	securities	in	2012	(Note	8)	and	prior	years. (b)

Includes	net	foreign	current	deferred	tax	liabilities,	which	are	included	on	the	Balance	Sheets	in	other	current	liabilities. (c)

We	had	recorded	liabilities	for	unrecognized	tax	benefits	related	to	permanent	and	temporary	tax	adjustments,	exclusive	of	interest,	that	totaled	$160	million	at January	1,	2011.	In	2011,	we	eliminated	most	of	these	liabilities	due	to	the	completion	of	the	JCT's	review	of	the	IRS	Appeals	Division's	resolution	of	certain adjustments	related	to	our	tax	years	2003-2008	as	mentioned	above.	Our	unrecognized	tax	benefits	as	of	December	31,	2012	and	2011	are	not	material.

We	and	our	subsidiaries	file	income	tax	returns	in	the	U.S.	federal	jurisdiction	and	various	foreign	jurisdictions.	With	few	exceptions,	the	statute	of	limitations	is	no longer	open	for	U.S.	federal	or	non-U.S.	income	tax	examinations	for	the	years	before	2009,	other	than	with	respect	to	refunds.

U.S.	income	taxes	and	foreign	withholding	taxes	have	not	been	provided	on	earnings	of	$211	million,	$193	million,	and	$108	million	that	have	not	been	distributed by	our	non-U.S.	companies	as	of	December	31,	2012,	2011,	and	2010.	Our	intention	is	to	permanently	reinvest	these	earnings,	thereby	indefinitely	postponing	their remittance	to	the	U.S.	If	these	earnings	were	remitted,	we	estimate	that	the	additional	income	taxes	after	foreign	tax	credits	would	have	been	approximately	$45	million in	2012,	$41	million	in	2011,	and	$17	million	in	2010.

Our	federal	and	foreign	income	tax	payments,	net	of	refunds	received,	were	$890	million	in	2012,	$722	million	in	2011,	and	$806	million	in	2010.	Our	2012	net payments	reflect	a	$153	million	refund	received	from	the	IRS	in	2012	related	to	a	2011	capital	loss	carryback	claim;	our	2011	net	payments	reflect	a	$250	million	refund received	from	the	IRS	in	2011	related	to	estimated	taxes	paid	for	2010;	and	our	2010	net	payments	reflect	a	$325	million	refund	received	from	the	IRS	in	2010	related	to estimated	taxes	paid	for	2009,	a	payment	of	$260	million	associated	with	the	divestiture	of	EIG,	and	an	$85	million	advance	payment	related	to	matters	subsequently resolved	with	the	IRS	Appeals	Division.	As	of	December	31,	2012,	we	had	federal	and	foreign	taxes	receivable	of	$662	million	recorded	within	other	current	assets	on our	Balance	Sheet,	primarily	attributable	to	our	tax-deductible	pension	contributions	and	debt	exchange	transaction	in	the	fourth	quarter	of	2012.

Our	long-term	debt	consisted	of	the	following	(in	millions):

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| Notes\twith\trates\tfrom\t2.13%\tto\t6.15%,\tdue\t2016\tto\t2042 | \t\t $5,642 | $5,308 |
| Notes\twith\trates\tfrom\t7.00%\tto\t7.75%,\tdue\t2013\tto\t2036 | 1,080 | 1,239 |
| Other\tdebt | 478 | 19 |
| Total\tlong-term\tdebt | 7,200 | 6,966 |
| Less:\tunamortized\tdiscounts | (892) | (506) |
| Total\tlong-term\tdebt,\tnet\tof\tunamortized\tdiscounts | 6,308 | 6,460 |
| Less:\tcurrent\tmaturities\tof\tlong-term\tdebt | (150) | — |
| Total\tlong-term\tdebt,\tnet | \t\t $6,158 | $6,460 |

In	December	2012,	we	issued	notes	totaling	$1.3	billion	with	a	fixed	interest	rate	of	4.07%	maturing	in	December	2042	(the	New	Notes)	in	exchange	for outstanding	notes	totaling	$1.2	billion	with	interest	rates	ranging	from	5.50%	to	8.50%	maturing	in	2023	to	2040	(the	Old	Notes).	In	connection	with	the	exchange,	we paid	a	premium	of	$393	million,	of	which	$225	million	was	paid	in	cash	and	$168	million	was	in	the	form	of	New	Notes.	This	premium,	in	addition	to	$194	million	in remaining	unamortized	discounts	related	to	the	Old	Notes,	will	be	amortized	as	additional	interest	expense	over	the	term	of	the	New	Notes	using	the	effective	interest method.	We	may,	at	our	option,	redeem	some	or	all	of	the	New	Notes	at	any	time	by	paying	the	principal	amount	of	notes	being	redeemed	plus	a	make-whole	premium and	accrued	and	unpaid	interest.	Interest	on	the	New	Notes	is	payable	on	June	15	and	December	15	of	each	year,	beginning	on	June	15,	2013.	The	New	Notes	are unsecured	senior	obligations	and	rank	equally	in	right	of	payment	with	all	of	our	existing	and	future	unsecured	and	unsubordinated	indebtedness.

On	September	9,	2011,	we	issued	$2.0	billion	of	long-term	notes	in	a	registered	public	offering	consisting	of	$500	million	maturing	in	2016	with	a	fixed	interest rate	of	2.13%,	$900	million	maturing	in	2021	with	a	fixed	interest	rate	of	3.35%,	and	$600	million	maturing	in	2041	with	a	fixed	interest	rate	of	4.85%.	We	may,	at	our option,	redeem	some	or	all	of	the	notes	at	any	time	by	paying	the	principal	amount	of	notes	being	redeemed	plus	a	make-whole	premium	and	accrued	and	unpaid interest.	Interest	on	the	notes	is	payable	on	March	15	and	September	15	of	each	year,	beginning	on	March	15,	2012.	In	October	2011,	we	used	a	portion	of	the	proceeds to	redeem	all	of	our	$500	million	long-term	notes	maturing	in	2013.	In	2011,	we	repurchased	$84	million	of	our	long-term	notes	through	open-market	purchases.	We paid	premiums	of	$48	million	in	connection	with	the	early	extinguishments	of	debt,	which	were	recognized	in	other	non-operating	income	(expense),	net.

We	have	agreements	in	place	with	banking	institutions	to	provide	for	the	issuance	of	commercial	paper.	There	were	no	commercial	paper	borrowings	outstanding during	2012	or	2011.	If	we	were	to	issue	commercial	paper,	the	borrowings	would	be	supported	by	the	credit	facility.

# Note	9	–	Postretirement	Plans

# Defined	Benefit	Pension	Plans	and	Retiree	Medical	and	Life	Insurance	Plans

Many	of	our	employees	are	covered	by	qualified	defined	benefit	pension	plans,	and	we	provide	certain	health	care	and	life	insurance	benefits	to	eligible	retirees (collectively,	postretirement	benefit	plans).	We	also	sponsor	nonqualified	defined	benefit	pension	plans	to	provide	for	benefits	in	excess	of	qualified	plan	limits.	Non- union	represented	employees	hired	after	December	2005	do	not	participate	in	our	qualified	defined	benefit	pension	plans,	but	are	eligible	to	participate	in	a	qualified defined	contribution	plan	in	addition	to	our	other	retirement	savings	plans.	They	also	have	the	ability	to	participate	in	our	retiree	medical	plans,	but	we	do	not	subsidize the	cost	of	their	participation	in	those	plans	as	we	do	with	employees	hired	before	January	1,	2006.	Over	the	last	few	years,	we	have	negotiated	similar	changes	with	our union	represented	population.	Substantially	all	represented	employees	hired	after	June	2012	do	not	participate	in	a	defined	benefit	pension	plan.	We	have	made contributions	to	trusts	established	to	pay	future	benefits	to	eligible	retirees	and	dependents,	including	Voluntary	Employees'	Beneficiary	Association	trusts	and	401(h) accounts,	the	assets	of	which	will	be	used	to	pay	expenses	of	certain	retiree	medical	plans.	We	use	December	31	as	the	measurement	date.	Benefit	obligations	as	of	the end	of	each	year	reflect	assumptions	in	effect	as	of	those	dates.	Net	periodic	benefit	cost	is	based	on	assumptions	in	effect	at	the	end	of	the	respective	preceding	year.

The	rules	related	to	accounting	for	postretirement	benefit	plans	under	GAAP	require	us	to	recognize	on	a	plan-by-plan	basis	the	funded	status	of	our	postretirement benefit	plans	as	either	an	asset	or	a	liability	on	our	Balance	Sheets.	There	is	a	corresponding	non-cash	adjustment	to	accumulated	other	comprehensive	loss,	net	of	tax benefits	recorded	as	deferred	tax	assets,	in	stockholders'	equity.	The	funded	status	is	measured	as	the	difference	between	the	fair	value	of	the	plan's	assets	and	the benefit	obligation	of	the	plan.

The	net	periodic	benefit	cost	recognized	each	year	included	the	following	(in	millions):

|  | Qualified	Defined	Benefit | Pension	Plans	^(a) |  | Retiree	Medical	and<br>Life	Insurance	Plans | Retiree	Medical	and<br>Life	Insurance	Plans | Retiree	Medical	and<br>Life	Insurance	Plans |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2010 | \t 2012 | \t\t2011 | \t\t2010 |
| Service\tcost | \t$1,055\t\t\t$ | 974 | $903 | \t$28\t\t\t\t$ | 32\t\t\t\t$ | 36 |
| Interest\tcost | 1,884 | 1,918 | 1,876 | 131 | 162 | 166 |
| Expected\treturn\ton\tplan\tassets | (2,187) | (2,033) | (2,027) | (131) | (140) | (129) |
| Recognized\tnet\tactuarial\tlosses | 1,116 | 880 | 595 | 32 | 34 | 25 |
| Amortization\tof\tprior\tservice\tcost\t(credit)\tand\tother | 73 | 82 | 95 | (12) | (16) | (16) |
| Total\tnet\tperiodic\tbenefit\tcost | \t$1,941\t\t\t$ | 1,821 | $1,442 | \t$48\t\t\t\t$ | 72\t\t\t\t$ | 82 |

Total	net	periodic	benefit	cost	associated	with	our	qualified	defined	benefit	plans	represents	pension	expense	calculated	in	accordance	with	GAAP	(FAS	expense).	We	are	required	to	calculate	pension	expense	in accordance	with	both	GAAP	and	CAS	rules,	each	of	which	results	in	a	different	calculated	amount	of	pension	expense.	The	CAS	expense	is	recovered	through	the	pricing	of	our	products	and	services	on	U.S. Government	contracts	and,	therefore,	is	recognized	in	net	sales	and	cost	of	sales	for	products	and	services.	We	include	the	difference	between	FAS	expense	and	CAS	expense,	referred	to	as	the	non-cash	FAS/CAS pension	adjustment	($(830)	million	in	2012,	$(922)	million	in	2011,	and	$(454)	million	in	2010),	as	a	component	of	other	unallocated	costs	on	our	Statements	of	Earnings.	The	non-cash	FAS/CAS	pension adjustment	effectively	adjusts	the	amount	of	CAS	pension	expense	in	the	business	segment	operating	profit	so	that	pension	expense	recorded	on	our	Statements	of	Earnings	is	equal	to	FAS	expense. (a)

The	following	table	provides	a	reconciliation	of	benefit	obligations,	plan	assets,	and	unfunded	status	related	to	our	qualified	defined	benefit	pension	plans	and	our retiree	medical	and	life	insurance	plans	(in	millions):

|  | Qualified	Defined	Benefit<br>Pension	Plans | Qualified	Defined	Benefit<br>Pension	Plans | Retiree	Medical	and<br>Life	Insurance	Plans | Retiree	Medical	and<br>Life	Insurance	Plans |
| :--- | :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2012 | 2011 |
| Change\tin\tbenefit\tobligation |  |  |  |  |
| Beginning\tbalance | \t$40,616 | \t$35,773 | \t$3,023 | \t$3,046 |
| Service\tcost | 1,055 | 974 | 28 | 32 |
| Interest\tcost | 1,884 | 1,918 | 131 | 162 |
| Benefits\tpaid\t^(a) | (2,094) | (1,685) | (364) | (363) |
| Actuarial\tlosses\t(gains) | 4,442 | 3,632 | 169 | (28) |
| Plan\tamendments | 114 | 4 | (6) | 11 |
| Medicare\tPart\tD\tsubsidy | — | — | 48 | 2 |
| Participants'\tcontributions | — | — | 155 | 161 |
| Ending\tbalance | \t$46,017 | \t$40,616 | \t$3,184 | \t$3,023 |
| Change\tin\tplan\tassets |  |  |  |  |
| Beginning\tbalance\tat\tfair\tvalue | \t$27,292 | \t$25,345 | \t$1,749 | \t$1,833 |
| Actual\treturn\ton\tplan\tassets | 2,089 | 1,347 | 141 | 116 |
| Benefits\tpaid\t^(a) | (2,094) | (1,685) | (364) | (363) |
| Company\tcontributions | 3,637 | 2,285 | 235 | — |
| Medicare\tPart\tD\tsubsidy | — | — | 48 | 2 |
| Participants'\tcontributions | — | — | 155 | 161 |
| Ending\tbalance\tat\tfair\tvalue | \t$30,924 | \t$27,292 | \t$1,964 | \t$1,749 |
| Unfunded\tstatus\tof\tthe\tplans | \t$(15,093) | \t$(13,324) | \t$(1,220) | \t$(1,274) |
| (a)\nBenefits\tpaid\tin\t2012\tfor\tqualified\tdefined\tbenefit\tpension\tplans\tinclude\t$310\tmillion\tin\tthe\tform\tof\tlump-sum\tsettlement\tpayments\tto\tformer\temployees\twho\thad\tnot\tcommenced\treceiving\ttheir\tvested\tbenefit |  |  |  |  |

Benefits	paid	in	2012	for	qualified	defined	benefit	pension	plans	include	$310	million	in	the	form	of	lump-sum	settlement	payments	to	former	employees	who	had	not	commenced	receiving	their	vested	benefit payments.	The	corresponding	benefit	obligation	that	was	released	was	$375	million.	The	settlement	payments	had	no	impact	on	our	2012	FAS	pension	expense	and	CAS	pension	cost. (a)

The	following	table	provides	amounts	recognized	on	our	Balance	Sheets	related	to	our	qualified	defined	benefit	pension	plans	and	our	retiree	medical	and	life insurance	plans	(in	millions):

|  | Qualified	Defined	Benefit<br>Pension	Plans | Qualified	Defined	Benefit<br>Pension	Plans | Retiree	Medical	and<br>Life	Insurance	Plans | Retiree	Medical	and<br>Life	Insurance	Plans |
| :--- | :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | \t\t2012 | \t\t2011 |
| Prepaid\tpension\tasset | \t$185 | \t$178 | \t$— | \t$— |
| Accrued\tpostretirement\tbenefit\tliabilities | (15,278) | (13,502) | (1,220) | (1,274) |
| Accumulated\tother\tcomprehensive\tloss\t(pre-tax)\trelated\tto: |  |  |  |  |
| Net\tactuarial\tlosses | 19,121 | 15,698 | 777 | 648 |
| Prior\tservice\tcost\t(credit) | 418 | 377 | (3) | (10) |
| Total^(a) | \t$19,539 | \t$16,075 | \t$774 | \t$638 |
| (a) |  |  |  |  |

Accumulated	other	comprehensive	loss	for	postretirement	benefit	plan	adjustments,	after	tax,	of	$13.5	billion	and	$11.2	billion	at	December	31,	2012	and	2011	(Note	1)	includes	$19.5	billion	($12.6	billion	after tax)	and	$16.1	billion	($10.4	billion	after	tax)	for	qualified	defined	benefit	pension	plans,	$774	million	($500	million	after	tax)	and	$638	million	($413	million	after	tax)	for	retiree	medical	and	life	insurance	plans, and	$626	million	($406	million	after	tax)	and	$596	million	($385	million	after	tax)	for	other	plans. (a)

The	accumulated	benefit	obligation	(ABO)	for	all	qualified	defined	benefit	pension	plans	was	$40.4	billion	and	$35.7	billion	at	December	31,	2012	and	2011,	of which	$40.2	billion	and	$35.5	billion	related	to	plans	where	the	ABO	was	in	excess	of	plan	assets.	The	ABO	represents	benefits	accrued	without	assuming	future compensation	increases	to	plan	participants.	Certain	key	information	related	to	our	qualified	defined	benefit	pension	plans	as	of	December	31,	2012	and	2011	is	as follows	(in	millions):

|  | 2012 | 2011 |
| :--- | :--- | :--- |
| Plans\twhere\tABO\twas\tin\texcess\tof\tplan\tassets |  |  |
| Projected\tbenefit\tobligation | \t$45,875 | \t$40,478 |
| Less:\tfair\tvalue\tof\tplan\tassets | 30,597 | 26,976 |
| Unfunded\tstatus\tof\tplans\t^(a) | (15,278) | (13,502) |
| Plans\twhere\tABO\twas\tless\tthan\tplan\tassets |  |  |
| Projected\tbenefit\tobligation | 142 | 138 |
| Less:\tfair\tvalue\tof\tplan\tassets | 327 | 316 |
| Funded\tstatus\tof\tplans\t^(b) | \t$185 | \t$178 |

Represent	accrued	pension	liabilities,	which	are	included	on	our	Balance	Sheets. (a)

Represent	prepaid	pension	assets,	which	are	included	on	our	Balance	Sheets	in	other	noncurrent	assets. (b)

We	also	sponsor	nonqualified	defined	benefit	plans	to	provide	benefits	in	excess	of	qualified	plan	limits.	The	aggregate	liabilities	for	these	plans	at	December	31, 2012	and	2011	were	$1.0	billion	and	$907	million,	which	also	represent	the	plans'	unfunded	status.	We	have	set	aside	certain	assets	totaling	$270	million	and	$283 million	as	of	December	31,	2012	and	2011	in	a	separate	trust	which	we	expect	to	be	used	to	pay	obligations	under	our	nonqualified	defined	benefit	plans.	In	accordance with	GAAP,	those	assets	may	not	be	used	to	offset	the	amount	of	the	benefit	obligation	similar	to	the	postretirement	benefit	plans	in	the	table	above.	The	unrecognized net	actuarial	losses	at	December	31,	2012	and	2011	were	$544	million	and	$476	million,	and	the	unrecognized	prior	service	costs	were	not	material.	The	expense associated	with	these	plans	totaled	$107	million	in	2012,	$104	million	in	2011,	and	$85	million	in	2010.	We	also	sponsor	a	small	number	of	other	postemployment	plans and	foreign	benefit	plans.	The	aggregate	liability	for	the	other	postemployment	plans	was	$109	million	and	$107	million	as	of	December	31,	2012	and	2011.	The expense	for	the	other	postemployment	plans,	as	well	as	the	liability	and	expense	associated	with	the	foreign	benefit	plans,	was	not	material	to	our	results	of	operations, financial	position,	or	cash	flows.	The	actuarial	assumptions	used	to	determine	the	benefit	obligations	and	expense	associated	with	our	nonqualified	defined	benefit	plans and	postemployment	plans	are	similar	to	those	assumptions	used	to	determine	the	benefit	obligations	and	expense	related	to	our	qualified	defined	benefit	pension	plans and	retiree	medical	and	life	insurance	plans	as	described	below.

The	following	table	provides	the	amounts	recognized	in	other	comprehensive	loss	related	to	postretirement	benefit	plans,	net	of	tax,	for	the	years	ended December	31,	2012,	2011,	and	2010	(in	millions):

|  | Incurred	but	Not	Yet<br>Recognized	in	Net<br>Periodic	Benefit	Cost | Incurred	but	Not	Yet<br>Recognized	in	Net<br>Periodic	Benefit	Cost | Incurred	but	Not	Yet<br>Recognized	in	Net<br>Periodic	Benefit	Cost | Recognition	of<br>Previously<br>Deferred	Amounts | Recognition	of<br>Previously<br>Deferred	Amounts | Recognition	of<br>Previously<br>Deferred	Amounts |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 |
|  |  | Gains\t(losses) |  |  | (Gains)\tlosses |  |
| Actuarial\tgains\tand\tlosses |  |  |  |  |  |  |
| Qualified\tdefined\tbenefit\tpension\tplans | \t$(2,933) | \t$(2,793) | \t$(763) | \t$721 | \t$568 | \t$464 |
| Retiree\tmedical\tand\tlife\tinsurance\tplans | (104) | 1 | (95) | 21 | 22 | 17 |
| Other\tplans | (98) | (56) | (63) | 77 | 34 | 20 |
|  | (3,135) | (2,848) | (921) | \t\t 819 | \t\t 624 | \t\t 501 |
|  |  | Credit\t(cost) |  |  | (Credit)\tcost |  |
| Prior\tservice\tcredit\tand\tcost |  |  |  |  |  |  |
| Qualified\tdefined\tbenefit\tpension\tplans | (73) | (3) | (61) | 47 | 53 | 62 |
| Retiree\tmedical\tand\tlife\tinsurance\tplans | 4 | (7) | — | (8) | (11) | (10) |
| Other\tplans | — | — | (1) | — | — | — |
|  | (69) | (10) | (62) | 39 | 42 | 52 |
|  | \t$(3,204) | \t$(2,858) | \t$(983) | \t$858 | \t$666 | \t$553 |

We	expect	that	approximately	$1.6	billion,	or	$1.0	billion	net	of	tax,	of	actuarial	losses	and	prior	service	cost	related	to	postretirement	benefit	plans	included	in accumulated	other	comprehensive	loss	at	the	end	of	2012	to	be	recognized	in	net	periodic	benefit	cost	during	2013.	Of	this	amount,	$1.5	billion,	or	$963	million	net	of tax,	primarily	relates	to	actuarial	losses	associated	with	our	qualified	defined	benefit	plans	and	is	included	in	our	expected	2013	pension	expense	of	$1.9	billion.

The	actuarial	assumptions	used	to	determine	the	benefit	obligations	at	December	31	of	each	year,	and	to	determine	the	net	periodic	benefit	cost	for	each	subsequent year,	were	as	follows:

| Qualified	Defined	Benefit<br>Pension	Plans | Qualified	Defined	Benefit<br>Pension	Plans | Qualified	Defined	Benefit<br>Pension	Plans | Retiree	Medical	and<br>Life	Insurance	Plans | Retiree	Medical	and<br>Life	Insurance	Plans |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 2012 | 2011 | 2010 | 2012 | 2011 | 2010 |
| \t\t4.00% | \t\t4.75% | \t\t5.50% | \t\t3.75% | \t\t4.50% | 5.50% |
| \t\t8.00% | \t\t8.00% | \t\t8.50% | \t\t8.00% | \t\t8.00% | 8.50% |
| \t\t4.30% | \t\t4.30% | \t\t4.40% |  |  |  |
|  |  |  | \t\t9.00% | \t\t9.50% | \t\t10.00% |
|  |  |  | \t\t5.00% | \t\t5.00% | 5.50% |
|  |  |  | \t\t2029 | \t\t2021 | 2021 |

The	decrease	in	the	discount	rate	from	December	31,	2011	to	December	31,	2012	and	from	December	31,	2010	to	December	31,	2011	resulted	in	an	increase	in	the projected	benefit	obligations	of	our	qualified	defined	benefit	pension	plans	of	approximately	$4.5	billion	and	$3.8	billion	at	December	31,	2012	and	2011.

The	long-term	rate	of	return	assumption	represents	the	expected	average	rate	of	earnings	on	the	funds	invested	or	to	be	invested	to	provide	for	the	benefits	included in	the	benefit	obligations.	That	assumption	is	based	on	several	factors	including	historical	market	index	returns,	the	anticipated	long-term	asset	allocation	of	plan	assets, the	historical	return	data,	plan	expenses,	and	the	potential	to	outperform	market	index	returns.

# Plan	Assets

Investment	policies	and	strategies	–	Lockheed	Martin	Investment	Management	Company	(LMIMCo),	our	wholly-owned	subsidiary,	has	the	fiduciary responsibility	for	making	investment	decisions	related	to	the	assets	of	our	postretirement	benefit	plans.	LMIMCo's	investment	objectives	for	the	assets	of	these	plans	are (1)	to	minimize	the	net	present	value	of	expected	funding	contributions;	(2)	to	ensure	there	is	a	high	probability	that	each	plan	meets	or	exceeds	our	actuarial	long-term rate	of	return	assumptions;	and	(3)	to	diversify	assets	to	minimize	the	risk	of	large	losses.	The	nature	and	duration	of	benefit	obligations,	along	with	assumptions concerning	asset	class	returns	and	return	correlations,	are	considered	when	determining	an	appropriate	asset	allocation	to	achieve	the	investment	objectives.

Investment	policies	and	strategies	governing	the	assets	of	the	plans	are	designed	to	achieve	investment	objectives	within	prudent	risk	parameters.	Risk	management practices	include	the	use	of	external	investment	managers;	the	maintenance	of	a	portfolio	diversified	by	asset	class,	investment	approach,	and	security	holdings;	and	the maintenance	of	sufficient	liquidity	to	meet	benefit	obligations	as	they	come	due.

LMIMCo's	investment	policies	require	that	asset	allocations	of	postretirement	benefit	plans	be	maintained	within	the	following	approximate	ranges:

|  | Asset	Allocation |
| :--- | :--- |
| Asset\tClass | Ranges |
| Cash\tand\tcash\tequivalents | 0\t-\t30% |
| Equity | 10\t-\t55% |
| Fixed\tincome | 10\t-\t60% |
| Alternative\tinvestments: |  |
| Private\tequity\tfunds | 0\t-\t15% |
| Real\testate\tfunds | 0\t-\t10% |
| Hedge\tfunds | 0\t-\t20% |
| Commodities | 0\t-\t25% |

Fair	value	measurements	–	The	rules	related	to	accounting	for	postretirement	benefit	plans	under	GAAP	require	certain	fair	value	disclosures	related	to postretirement	benefit	plan	assets,	even	though	those	assets	are	not	included	on	our	Balance	Sheets.	The	following	table	presents	the	fair	value	of	the	assets	(in	millions) of	our	qualified	defined	benefit	pension	plans	and	retiree	medical	and	life	insurance	plans	by	asset	category	and	their	level	within	the	fair	value	hierarchy,	which	has three	levels	based	on	the	reliability	of	the	inputs	used	to	determine	fair	value.	Level	1	refers	to	fair	values	determined	based	on	quoted	prices	in	active	markets	for identical	assets,	Level	2	refers	to	fair	values	estimated	using	significant	other	observable	inputs,	and	Level	3	includes	fair	values	estimated	using	significant unobservable	inputs.

|  |  | December	31,	2012 | December	31,	2012 |  |  | December	31,	2011 | December	31,	2011 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Level\t1 | Level\t2 | Level\t3 | Total | Level\t1 | Level\t2 | Level\t3 | Total |
| Cash\tand\tcash\tequivalents | \t$3,563 | \t$— | \t$— | \t$3,563 | \t$2,886 | \t$— | \t$— | \t$2,886 |
| Equity^\t(a) : |  |  |  |  |  |  |  |  |
| U.S.\tequity\tsecurities | 3,871 | 50 | 10 | 3,931 | 3,834 | 37 | 7 | 3,878 |
| International\tequity\tsecurities | 3,363 | 15 | 11 | 3,389 | 3,750 | 11 | 15 | 3,776 |
| Commingled\tequity\tfunds | 980 | 2,845 | — | 3,825 | 1,016 | 1,127 |  | 2,143 |
| Fixed\tincome^\t(a) : |  |  |  |  |  |  |  |  |
| Corporate\tdebt\tsecurities | — | 1,045 | 61 | 1,106 | — | 946 | 98 | 1,044 |
| U.S.\tGovernment\tsecurities | — | \t\t 12,013 | — | \t\t 12,013 | — | \t\t 10,040 | — | \t\t 10,040 |
| Other\tfixed\tincome\tsecurities | — | 435 | 49 | 484 | — | 508 | 45 | 553 |
| Alternative\tinvestments: |  |  |  |  |  |  |  |  |
| Private\tequity\tfunds | — | — | \t\t 2,461 | 2,461 | — | — | \t\t 2,286 | 2,286 |
| Real\testate\tfunds | — | 25 | 504 | 529 | — | — | 278 | 278 |
| Hedge\tfunds | — | — | 806 | 806 | — | — | 825 | 825 |
| Commodities^\t(a) | 735 | 1 | — | 736 | 992 | 277 | — | 1,269 |
| Total | \t$12,512 | \t$16,429 | \t$3,902 | \t$32,843 | \t$12,478 | \t$12,946 | \t$3,554 | \t$28,978 |
| Receivables,\tnet |  |  |  | 45 |  |  |  | 63 |
| Total |  |  |  | \t$32,888 |  |  |  | \t$29,041 |
| (a) |  |  |  |  |  |  |  |  |

Equity	securities,	fixed	income	securities,	and	commodities	included	derivative	assets	and	liabilities	whose	fair	values	were	not	material	as	of	December	31,	2012	and	2011.	LMIMCo's	investment	policies	restrict the	use	of	derivatives	to	either	establish	long	exposures	for	purposes	of	expediency	or	capital	efficiency,	or	to	hedge	risks	to	the	extent	of	a	plan's	current	exposure	to	such	risks.	Most	derivative	transactions	are settled	on	a	daily	basis. (a)

As	of	December	31,	2012	and	2011,	the	assets	associated	with	our	foreign	defined	benefit	pension	plans	were	not	material	and	have	not	been	included	in	the	table above.

The	following	table	presents	the	changes	during	2012	and	2011	in	the	fair	value	of	plan	assets	categorized	as	Level	3	in	the	preceding	table	(in	millions):

|  | Private | Real |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Equity | Estate | Hedge |  |  |
|  | Funds | Funds | Funds | Other | Total |
| Balance\tat\tJanuary\t1,\t2011 | \t$2,085 | \t$164 | \t$1,025 | \t$126 | \t$3,400 |
| Actual\treturn\ton\tplan\tassets: |  |  |  |  |  |
| Realized\tgains\t(losses),\tnet | 171 | 25 | (4) | 2 | 194 |
| Unrealized\tgains\t(losses),\tnet | 7 | 22 | (11) | (9) | 9 |
| Purchases,\tsales,\tand\tsettlements,\tnet | 23 | 67 | (183) | 21 | (72) |
| Transfers\tinto\t(out\tof)\tLevel\t3,\tnet | — | — | (2) | 25 | 23 |
| Balance\tat\tDecember\t31,\t2011 | \t$2,286 | \t$278 | \t$825 | \t$165 | \t$3,554 |
| Actual\treturn\ton\tplan\tassets: |  |  |  |  |  |
| Realized\tgains\t(losses),\tnet | 142 | 11 | 16 | 1 | 170 |
| Unrealized\tgains\t(losses),\tnet | 22 | 20 | 31 | 2 | 75 |
| Purchases,\tsales,\tand\tsettlements,\tnet | 92 | \t 113 | (65) | (9) | 131 |
| Transfers\tinto\t(out\tof)\tLevel\t3,\tnet | (81) | 82 | (1) | (28) | (28) |
| Balance\tat\tDecember\t31,\t2012 | \t$2,461 | \t$504 | \t$806 | \t$131 | \t$3,902 |

Valuation	techniques	–	Cash	equivalents	are	mostly	comprised	of	short-term	money-market	instruments	and	are	valued	at	cost,	which	approximates	fair	value.

U.S.	equity	securities	and	international	equity	securities	categorized	as	Level	1	are	traded	on	active	national	and	international	exchanges	and	are	valued	at	their closing	prices	on	the	last	trading	day	of	the	year.	For	U.S.	equity	securities	and	international	equity	securities	not	traded	on	an	active	exchange,	or	if	the	closing	price	is not	available,	the	trustee	obtains	indicative	quotes	from	a	pricing	vendor,	broker,	or	investment	manager.	These	securities	are	categorized	as	Level	2	if	the	custodian obtains	corroborated	quotes	from	a	pricing	vendor	or	categorized	as	Level	3	if	the	custodian	obtains	uncorroborated	quotes	from	a	broker	or	investment	manager.

Commingled	equity	funds	are	public	investment	vehicles	valued	using	the	Net	Asset	Value	(NAV)	provided	by	the	fund	manager.	The	NAV	is	the	total	value	of	the fund	divided	by	the	number	of	shares	outstanding.	Commingled	equity	funds	are	categorized	as	Level	1	if	traded	at	their	NAV	on	a	nationally	recognized	securities exchange	or	categorized	as	Level	2	if	the	NAV	is	corroborated	by	observable	market	data	(e.g.,	purchases	or	sales	activity).

Fixed	income	securities	categorized	as	Level	2	are	valued	by	the	trustee	using	pricing	models	that	use	verifiable	observable	market	data	(e.g.	interest	rates	and	yield curves	observable	at	commonly	quoted	intervals),	bids	provided	by	brokers	or	dealers,	or	quoted	prices	of	securities	with	similar	characteristics.

Private	equity	funds,	real	estate	funds,	hedge	funds,	and	fixed	income	securities	categorized	as	Level	3	are	valued	based	on	valuation	models	that	include significant	unobservable	inputs	and	cannot	be	corroborated	using	verifiable	observable	market	data.	Valuations	for	private	equity	funds	and	real	estate	funds	are determined	by	the	general	partners,	while	hedge	funds	are	valued	by	independent	administrators.	Depending	on	the	nature	of	the	assets,	the	general	partners	or independent	administrators	use	both	the	income	and	market	approaches	in	their	models.	The	market	approach	consists	of	analyzing	market	transactions	for	comparable assets	while	the	income	approach	uses	earnings	or	the	net	present	value	of	estimated	future	cash	flows	adjusted	for	liquidity	and	other	risk	factors.

Commodities	categorized	as	Level	1	are	traded	on	an	active	commodity	exchange	and	are	valued	at	their	closing	prices	on	the	last	trading	day	of	the	year. Commodities	categorized	as	Level	2	represent	shares	in	a	commingled	commodity	fund	valued	using	the	NAV,	which	is	corroborated	by	observable	market	data.

# Contributions	and	Expected	Benefit	Payments

We	generally	determine	funding	requirements	for	our	defined	benefit	pension	plans	in	a	manner	consistent	with	CAS	and	Internal	Revenue	Code	rules.	In	2012,	we made	contributions	of	$3.6	billion	related	to	our	qualified	defined	benefit	pension	plans.	We	plan	to	make	contributions	of	approximately	$1.5	billion	related	to	the qualified	defined	benefit	pension	plans	in	2013.	In	2012,	we	made	contributions	of	$235	million	related	to	our	retiree	medical	and	life	insurance	plans.	We	expect	no required	contributions	related	to	the	retiree	medical	and	life	insurance	plans	in	2013.

The	following	table	presents	estimated	future	benefit	payments,	which	reflect	expected	future	employee	service,	as	of	December	31,	2012	(in	millions):

|  | 2013 | 2014 | 2015 | 2016 | 2017 | 2018	-	2022 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Qualified\tdefined\tbenefit\tpension\tplans | \t$1,900 | \t$1,970 | \t$2,050 | \t$2,130 | \t$2,220 | $12,880 |
| Retiree\tmedical\tand\tlife\tinsurance\tplans | 200 | 210 | 220 | 220 | 220 | 1,080 |

# Defined	Contribution	Plans

We	maintain	a	number	of	defined	contribution	plans,	most	with	401(k)	features,	that	cover	substantially	all	of	our	employees.	Under	the	provisions	of	our	401(k) plans,	we	match	most	employees'	eligible	contributions	at	rates	specified	in	the	plan	documents.	Our	contributions	were	$380	million	in	2012,	$378	million	in	2011,	and $379	million	in	2010,	the	majority	of	which	were	funded	in	our	common	stock.	Our	defined	contribution	plans	held	approximately	48.6	million	and	52.1	million	shares of	our	common	stock	as	of	December	31,	2012	and	2011.

# Note	10	–	Stockholders'	Equity

At	December	31,	2012,	our	authorized	capital	was	composed	of	1.5	billion	shares	of	common	stock	and	50	million	shares	of	series	preferred	stock.	Of	the 323	million	shares	of	common	stock	issued	and	outstanding,	321	million	shares	were	considered	outstanding	for	Balance	Sheet	presentation	purposes;	the	remaining shares	were	held	in	a	separate	trust.	No	preferred	stock	shares	were	issued	and	outstanding	at	December	31,	2012.

During	2012,	2011,	and	2010,	we	repurchased	11.3	million,	31.8	million,	and	33.0	million	shares	of	our	common	stock	for	$1.0	billion,	$2.4	billion,	and	$2.5 billion.	We	paid	cash	totaling	$990	million	for	share	repurchases	during	2012,	of	which	0.2	million	shares	purchased	for	$18	million	were	settled	and	paid	for	in	January 2013.	We	paid	cash	totaling	$2.5	billion	for	share	repurchases	during	2011,	which	included	$63	million	for	shares	we	repurchased	in	December	2010	but	were	settled and	paid	for	in	January	2011.	Our	share	repurchase	program	provides	for	the	repurchase	of	our	common	stock	from	time-to-time,	up	to	a	total	authorized	amount	of	$6.5 billion.	Under	the	program,	we	have	discretion	to	determine	the	dollar	amount	of	shares	to	be	repurchased	and	the	timing	of	any	repurchases	in	compliance	with applicable	law	and	regulation.	As	of	December	31,	2012,	we	had	repurchased	a	total	of	54.3	million	shares	of	our	common	stock	under	the	program	for	$4.2	billion,	and had	remaining	authorization	of	$2.3	billion	for	future	share	repurchases.

As	we	repurchase	our	common	shares,	we	reduce	common	stock	for	the	$1	of	par	value	of	the	shares	repurchased,	with	the	excess	purchase	price	over	par	value recorded	as	a	reduction	of	additional	paid-in	capital.	Due	to	the	volume	of	repurchases	made	under	our	share	repurchase	program,	additional	paid-in	capital	was	reduced to	zero,	with	the	remainder	of	the	excess	of	purchase	price	over	par	value	of	$108	million	and	$1.8	billion	recorded	as	a	reduction	of	retained	earnings	in	2012	and	2011.

# Note	11	–	Stock-Based	Compensation

During	2012,	2011,	and	2010,	we	recorded	non-cash	compensation	cost	related	to	stock	options	and	restricted	stock	units	totaling	$167	million,	$157	million,	and $168	million,	which	is	included	on	our	Statements	of	Earnings	in	other	unallocated	costs	within	cost	of	sales.	The	net	impact	to	earnings	for	the	respective	years	was $108	million,	$101	million,	and	$109	million.

# Stock-Based	Compensation	Plans

We	had	two	stock-based	compensation	plans	in	place	at	December	31,	2012:	the	Lockheed	Martin	2011	Incentive	Performance	Award	Plan	(the	Award	Plan)	and the	Lockheed	Martin	Directors	Equity	Plan	(the	Directors	Plan).	Under	the	Award	Plan,	we	have	the	right	to	grant	key	employees	stock-based	incentive	awards, including	options	to	purchase	common	stock,	stock	appreciation	rights,	restricted	stock	units	(RSUs),	performance	stock	units	(PSUs),	or	other	stock	units.	Employees also	may	receive	cash-based	incentive	awards.	We	evaluate	the	types	and	mix	of	stock-based	incentive	awards	on	an	ongoing	basis	and	may	vary	the	mix	based	on	our overall	strategy	regarding	compensation.	The	Award	Plan	was	approved	by	our	stockholders	at	our	April	28,	2011	annual	meeting.	Prior	to	stockholder	approval	of	the Award	Plan,	equity	awards	were	made	to	employees	under	the	Amended	and	Restated	2003	Incentive	Performance	Award	Plan	(the	Prior	Plan).	Awards	made	under	the Prior	Plan	remain	outstanding	but	no	new	awards	may	be	made	under	the	Prior	Plan	after	April	28,	2011.

Under	the	Award	Plan	and	the	Prior	Plan,	the	exercise	price	of	options	to	purchase	common	stock	may	not	be	less	than	the	fair	market	value	of	our	stock	on	the date	of	grant.	No	award	of	stock	options	may	become	fully	vested	prior	to	the	third	anniversary	of	the	grant,	and	no	portion	of	a	stock	option	grant	may	become	vested in	less	than	one	year.	The	minimum	vesting	period	for	restricted	stock	or	stock	units	payable	in	stock	is	three	years.	Award	agreements	may	provide	for	shorter	or	pro- rated	vesting	periods	or	vesting	following	termination	of	employment	in	the	case	of	death,	disability,	divestiture,	retirement,	change	of	control,	or	layoff.	Neither	the Award	Plan	nor	the	Prior	Plan	imposes	any	minimum	vesting	periods	on	other	types	of	awards.	The	maximum	term	of	a	stock	option	or	any	other	award	is	10	years.

We	generally	recognize	compensation	cost	for	stock	options	ratably	over	the	three-year	vesting	period.	For	stock	options	granted	prior	to	2011	to	active	employees that	are	retirement	eligible	on	the	date	of	grant	or	become	retirement	eligible	during	the	first	year	after	grant,	we	recognize	compensation	expense	ratably	over	a	period	of one	year.	For	stock	options	granted	prior	to	2011	to	active	employees	that	become	retirement	eligible	after	the	one-year	anniversary	of	the	grant	but	prior	to	the	three- year	anniversary	of	the	grant,	we	recognize	compensation	expense	ratably	from	the	date	of	grant	to	the	date	on	which	the	employee	becomes	retirement	eligible. Beginning	in	2011,	stock	option	grants	do	not	provide	for	vesting	upon	reaching	retirement	eligibility.	We	use	the	Black-Scholes	option	pricing	model	to	estimate	the fair	value	of	stock	options.

RSUs	granted	under	both	the	Award	Plan	and	the	Prior	Plan	are	based	on	the	fair	market	value	of	our	common	stock	on	the	date	of	the	award.	We	recognize	the related	compensation	expense	over	the	three-year	vesting	period.	Employees	who	are	granted	RSUs	receive	the	right	to	receive	shares	of	stock	after	completion	of	the vesting	period,	however,	the	shares	are	not	issued,	and	the	employees	cannot	sell	or	transfer	shares	prior	to	vesting	and	have	no	voting	rights	until	the	RSUs	vest, generally	three	years	from	the	date	of	the	award.	Dividend	equivalents	are	paid	in	cash	during	the	vesting	period	for	RSUs	granted	prior	to	April	2010.	Employees	who are	granted	RSUs	subsequent	to	April	2010,	receive	dividend-equivalent	cash	payments	only	upon	vesting.	For	these	RSU	awards,	the	grant	date	fair	value	of	our common	stock	is	reduced	to	reflect	the	delay	in	payment	of	dividends.	Most	PSU	awards	are	accounted	for	in	a	manner	similar	to	RSUs,	and	PSU	awards	vest	relative	to the	achievement	of	certain	performance	metrics.	In	2013,	we	granted	mostly	RSUs	as	well	as	PSUs	to	our	employees	and	did	not	grant	stock	options.

Under	the	Directors	Plan,	directors	receive	a	portion	of	their	annual	compensation	in	the	form	of	equity-based	compensation.	Each	director	may	elect	to	receive	his or	her	equity-based	compensation	in	the	form	of	stock	units	that	track	investment	returns	to	changes	in	value	of	our	common	stock	with	dividends	reinvested,	options	to purchase	common	stock,	or	a	combination	of	the	two.	Under	the	Directors	Plan,	options	to	purchase	common	stock	have	an	exercise	price	of	100%	of	the	market	value of	the	underlying	stock	on	the	date	of	grant.	Stock	options	and	stock	units	issued	under	the	Directors	Plan	vest	half	on	June	30	following	the	date	of	grant	and	half	on December	31	following	the	date	of	grant,	except	in	certain	circumstances.	The	maximum	term	of	a	stock	option	is	10	years.

Our	stockholders	have	approved	the	Award	Plan,	the	Prior	Plan	and	the	Directors	Plan,	as	well	as	the	number	of	shares	of	our	common	stock	authorized	for issuance	under	these	plans.	At	December	31,	2012,	inclusive	of	the	shares	reserved	for	outstanding	stock	options	and	RSUs,	we	had	32	million	shares	reserved	for issuance	under	our	stock	option	and	award	plans.	At	December	31,	2012,	6.2	million	of	the	shares	reserved	for	issuance	remained	available	for	grant	under	the	plans.	We issue	new	shares	upon	the	exercise	of	stock	options	or	when	restrictions	on	RSUs	have	been	satisfied.

# Summary	of	2012	Activity

As	of	December	31,	2012,	we	had	$186	million	of	unrecognized	compensation	cost	related	to	nonvested	stock	options	and	RSUs.	We	expect	that	cost	to	be recognized	over	a	weighted	average	period	of	1.6	years.	We	received	cash	from	the	exercise	of	stock	options	totaling	$440	million,	$116	million,	and	$59	million	during 2012,	2011,	and	2010.	In	addition,	our	income	tax	liabilities	for	2012,	2011,	and	2010	were	reduced	by	$96	million,	$56	million,	and	$47	million	due	to	recognized	tax benefits	on	stock-based	compensation	arrangements.

# Stock	Options

Stock	options	vest	over	three	years	and	have	10-year	terms.	Exercise	prices	of	stock	options	awarded	for	all	periods	were	equal	to	the	market	price	of	the	stock	on the	date	of	grant.	The	following	table	summarizes	stock	option	activity	during	2012:

|  |  |  | Weighted |  |
| :--- | :--- | :--- | :--- | :--- |
|  |  |  | Average |  |
|  | Number\tof\nStock\nOptions\n(In\tthousands) | Weighted\nAverage\nExercise\nPrice | Remaining\nContractual\nLife\n(In\tyears) | Aggregate\nIntrinsic\nValue\n(In\tmillions) |
| Outstanding\tat\tDecember\t31,\t2011 | \t24,559 | $78.45 |  |  |
| Granted | 3,401 | \t 82.01 |  |  |
| Exercised | \t(6,743) | \t 65.22 |  |  |
| Forfeited/expired | (592) | \t 85.85 |  |  |
| Outstanding\tat\tDecember\t31,\t2012 | \t20,625 | \t 83.15 | \t5.7 | $248.9 |
| Vested\tand\texpected-to-vest\tat\tDecember\t31,\t2012 | \t20,517 | \t 83.16 | \t5.7 | \t 247.8 |
| Vested\tat\tDecember\t31,\t2012 | \t14,873 | \t 84.35 | \t4.7 | \t 178.4 |

The	following	table	pertains	to	stock	options	that	were	granted,	vested,	and	exercised	in	2012,	2011,	and	2010	(in	millions,	except	for	weighted	average	grant-date fair	value	of	stock	options	granted):

We	estimate	the	fair	value	for	stock	options	at	the	date	of	grant	using	the	Black-Scholes	option	pricing	model,	which	requires	us	to	make	certain	assumptions.	We base	the	risk-free	interest	rate	on	U.S.	Treasury	zero-coupon	issues	with	a	remaining	term	equal	to	the	expected	life	assumed	at	the	date	of	grant.	The	dividend	yield	is determined	based	on	estimated	dividend	payments	and	changes	to	our	stock	price	during	the	expected	option	life.	We	estimate	volatility	based	on	the	historical	volatility of	our	daily	stock	price	over	the	past	five	years,	which	is	commensurate	with	the	expected	life	of	the	options.	We	base	the	average	expected	life	on	the	contractual	term of	the	stock	option,	historical	trends	in	employee	exercise	activity,	and	post-vesting	employment	termination	trends.	While	not	material,	we	estimate	forfeitures	at	the date	of	grant	based	on	historical	experience.

We	used	the	following	weighted	average	assumptions	in	the	Black-Scholes	option	pricing	model	to	determine	the	fair	values	of	stock-based	compensation	awards during	2012,	2011,	and	2010:

     The	following	table	summarizes	activity	related	to	nonvested	RSUs	during	2012:

# Note	12	–	Legal	Proceedings,	Commitments,	and	Contingencies

We	are	a	party	to	or	have	property	subject	to	litigation	and	other	proceedings,	including	matters	arising	under	provisions	relating	to	the	protection	of	the environment,	and	are	subject	to	contingencies	related	to	certain	businesses	we	previously	owned.	We	believe	the	probability	is	remote	that	the	outcome	of	each	of	these matters,	including	the	legal	proceedings	discussed	below,	will	have	a	material	adverse	effect	on	the	Corporation	as	a	whole,	notwithstanding	that	the	unfavorable resolution	of	any	matter	may	have	a	material	effect	on	our	net	earnings	in	any	particular	interim	reporting	period.	Among	the	factors	that	we	consider	in	this	assessment are	the	nature	of	existing	legal	proceedings	and	claims,	the	asserted	or	possible	damages	or	loss	contingency	(if	estimable),	the	progress	of	the	case,	existing	law	and precedent,	the	opinions	or	views	of	legal	counsel	and	other	advisers,	our	experience	in	similar	cases	and	the	experience	of	other	companies,	the	facts	available	to	us	at the	time	of	assessment,	and	how	we	intend	to	respond	to	the	proceeding	or	claim.	Our	assessment	of	these	factors	may	change	over	time	as	individual	proceedings	or claims	progress.	Unless	otherwise	indicated,	a	range	of	loss	associated	with	any	individual	legal	proceeding	set	forth	below	reasonably	cannot	be	estimated.	We	cannot predict	the	outcome	of	legal	proceedings	with	certainty.	These	matters	include	the	following	items.

# Legal	Proceedings

We	have	reached	an	agreement	in	principle	to	settle	without	a	material	effect	on	the	Corporation's	financial	statements	the	previously	disclosed	class	action	lawsuit filed	by	the	City	of	Pontiac	General	Employees'	Retirement	System	against	the	Corporation	and	three	of	our	executives.

On	April	24,	2009,	we	filed	a	declaratory	judgment	action	against	the	New	York	Metropolitan	Transportation	Authority	and	its	Capital	Construction	Company (collectively,	the	MTA)	asking	the	U.S.	District	Court	for	the	Southern	District	of	New	York	to	find	that	the	MTA	is	in	material	breach	of	our	agreement	based	on	the MTA's	failure	to	provide	access	to	sites	where	work	must	be	performed	and	customer-furnished	equipment	necessary	to	complete	the	contract.	The	MTA	filed	an	answer and	counterclaim	alleging	that	we	breached	the	contract,	and	subsequently	terminated	the	contract	for	alleged	default.	The	MTA	is	seeking	monetary	damages	and	other relief	under	the	contract,	including	the	cost	to	complete	the	contract	and	potential	re-procurement	costs.	The	contract	had	a	total	value	of	$323	million,	of	which	$241 million	was	paid	to	us.	We	dispute	the	MTA's	allegations	and	are	defending	against	them.

On	September	11,	2006,	we	and	LMIMCo,	a	subsidiary,	were	named	as	defendants	in	a	lawsuit	filed	in	the	U.S.	District	Court	for	the	Southern	District	of	Illinois, seeking	to	represent	a	putative	class	of	participants	and	beneficiaries	in	two	of	our	401(k)	plans.	Plaintiffs	have	alleged	that	we	or	LMIMCo	caused	our	plans	to	pay certain	expenses	that	were	higher	than	reasonable	and	breached	our	fiduciary	duties	under	ERISA	by	offering	certain	allegedly	imprudent	investment	options	and providing	inadequate	disclosures	to	our	participants.	On	March	31,	2009,	the	Court	dismissed	a	number	of	plaintiffs'	claims,	leaving	three	claims	for	trial,	specifically plaintiffs'	claims	involving	the	company	stock	funds,	the	Stable	Value	Fund,	and	overall	administrative	fees.	On	September	24,	2012,	following	plaintiffs'	amended motion	for	class	certification	on	these	remaining	claims,	the	Court	denied	class	certification	of	the	Stable	Value	Fund	claims,	granted	class	certification	of	the administrative	fees	claims,	and	partially	granted	class	certification	of	the	company	stock	funds	claims.	The	U.S.	Court	of	Appeals	for	the	Seventh	Circuit	has	granted plaintiffs'	petition	seeking	discretionary	review	of	the	class	certification	of	the	Stable	Value	Fund	claim.	The	complaint	does	not	allege	a	specific	calculation	of damages,	and	we	reasonably	cannot	estimate	the	possible	loss,	or	range	of	loss,	which	could	be	incurred	if	plaintiffs	were	to	prevail	in	the	allegations,	but	believe	that we	have	substantial	defenses.	We	dispute	the	allegations	and	are	defending	against	them.

On	August	28,	2003,	the	U.S.	Department	of	Justice	(DOJ)	filed	complaints	in	partial	intervention	in	two	lawsuits	filed	under	the	qui	tam	provisions	of	the	Civil False	Claims	Act	in	the	U.S.	District	Court	for	the	Western	District	of	Kentucky,	United	States	ex	rel.	Natural	Resources	Defense	Council,	et	al.,	v.	Lockheed	Martin Corporation,	et	al.,	and	United	States	ex	rel.	John	D.	Tillson	v.	Lockheed	Martin	Energy	Systems,	Inc.,	et	al.	DOJ	alleges	that	we	committed	violations	of	the	Resource Conservation	and	Recovery	Act	at	the	Paducah	Gaseous	Diffusion	Plant	by	not	properly	handling,	storing,	and	transporting	hazardous	waste	and	that	we	violated	the False	Claims	Act	by	misleading	Department	of	Energy	officials	and	state	regulators	about	the	nature	and	extent	of	environmental	noncompliance	at	the	plant.	The complaint	does	not	allege	a	specific	calculation	of	damages,	and	we	reasonably	cannot	estimate	the	possible	loss,	or	range	of	loss,	which	could	be	incurred	if	the plaintiff	were	to	prevail	in	the	allegations,	but	believe	that	we	have	substantial	defenses.	We	dispute	the	allegations	and	are	defending	against	them.

We	are	involved	in	environmental	proceedings	and	potential	proceedings	relating	to	soil	and	groundwater	contamination,	disposal	of	hazardous	waste,	and	other environmental	matters	at	several	of	our	current	or	former	facilities,	or	at	third-party	sites	where	we	have	been	designated	as	a	potentially	responsible	party	(PRP).	A substantial	portion	of	environmental	costs	will	be	included	in	our	net	sales	and	cost	of	sales	in	future	periods	pursuant	to	U.S.	Government	regulations.	At	the	time	a liability	is	recorded	for	future	environmental	costs,	we	record	a	receivable	for	estimated	future	recovery	considered	probable	through	the	pricing	of	products	and	services to	agencies	of	the	U.S.	Government,	regardless	of	the	contract	form	(e.g.,	cost-reimbursable,	fixed-price).	We	continuously	evaluate	the	recoverability	of	our environmental	receivables	by	assessing,	among	other	factors,	U.S.	Government	regulations,	our	U.S.	Government	business	base	and	contract	mix,	and	our	history	of receiving	reimbursement	of	such	costs.	We	include	the	portion	of	those	environmental	costs	expected	to	be	allocated	to	our	non-U.S.	Government	contracts,	or	that	is determined	to	be	unallowable	for	pricing	under	U.S.	Government	contracts,	in	our	cost	of	sales	at	the	time	the	liability	is	established.

At	December	31,	2012	and	2011,	the	aggregate	amount	of	liabilities	recorded	relative	to	environmental	matters	was	$950	million	and	$932	million,	of	which	$844 million	and	$814	million	is	recorded	in	other	noncurrent	liabilities	on	the	Balance	Sheets	at	December	31,	2012	and	2011,	with	the	remainder	recorded	in	other	current liabilities.	We	have	recorded	receivables	totaling	$821	million	and	$808	million	at	December	31,	2012	and	2011,	for	the	estimated	future	recovery	of	these	costs,	as	we consider	the	recovery	probable	based	on	the	factors	previously	mentioned.	Of	those	amounts,	$730	million	and	$706	million	are	recorded	in	other	noncurrent	assets	on the	Balance	Sheets	at	December	31,	2012	and	2011,	with	the	remainder	recorded	in	other	current	assets.	We	project	costs	and	recovery	of	costs	over	approximately	20 years.

Environmental	cleanup	activities	usually	span	several	years,	which	make	estimating	liabilities	a	matter	of	judgment	because	of	such	factors	as	changing	remediation technologies,	assessments	of	the	extent	of	contamination,	and	continually	evolving	regulatory	environmental	standards.	We	consider	these	and	other	factors	in	estimates of	the	timing	and	amount	of	any	future	costs	that	may	be	required	for	remediation	activities,	which	results	in	the	calculation	of	a	range	of	estimates	for	a	particular environmental	remediation	site.

We	perform	quarterly	reviews	of	the	status	of	our	environmental	remediation	sites	and	the	related	liabilities	and	receivables.	We	record	a	liability	when	it	is probable	that	a	liability	has	been	incurred	and	the	amount	can	be	reasonably	estimated.	The	amount	of	liability	recorded	is	based	on	our	estimate	of	the	costs	to	be incurred	for	remediation	at	a	particular	site.	We	do	not	discount	the	recorded	liabilities,	as	the	amount	and	timing	of	future	cash	payments	are	not	fixed	or	cannot	be reliably	determined.

We	reasonably	cannot	determine	the	extent	of	our	financial	exposure	in	all	cases	at	this	time.	There	are	a	number	of	former	operating	facilities	that	we	are monitoring	or	investigating	for	potential	future	remediation.	In	some	cases,	although	a	loss	may	be	probable,	it	is	not	possible	at	this	time	to	reasonably	estimate	the amount	of	any	obligation	for	remediation	activities	because	of	uncertainties	with	respect	to	assessing	the	extent	of	the	contamination	or	the	applicable	regulatory standard.	We	also	are	pursuing	claims	for	cost	recovery	contribution	to	site	cleanup	costs	against	other	PRPs,	including	the	U.S.	Government.

Both	the	U.S.	Environmental	Protection	Agency	and	the	California	Office	of	Environmental	Health	Hazard	Assessment	announced	plans	in	January	2011	to regulate	two	chemicals,	perchlorate	and	hexavalent	chromium,	to	levels	in	drinking	water	that	are	expected	to	be	substantially	lower	than	the	existing	public	health	goals or	standards	established	in	California.	The	rulemaking	processes	are	lengthy	and	may	take	years	to	complete.	If	substantially	lower	standards	are	adopted,	we	would expect	a	material	increase	in	our	estimates	for	environmental	liabilities	and	the	related	assets	for	the	portion	of	the	increased	costs	that	are	probable	of	future	recovery	in the	pricing	of	our	products	and	services	for	the	U.S.	Government.	The	amount	that	would	be	allocable	to	our	non-U.S.	Government	contracts	or	that	is	determined	to	be unallowable	for	pricing	under	U.S.	Government	contracts	would	be	expensed,	which	may	have	a	material	effect	on	our	earnings	in	any	particular	interim	reporting period.

We	are	conducting	remediation	activities,	including	under	various	consent	decrees	and	orders,	relating	to	soil,	groundwater,	sediment,	or	surface	water contamination	at	certain	sites	of	former	or	current	operations.	Under	an	agreement	related	to	our	Burbank	and	Glendale,	California,	sites,	the	U.S.	Government reimburses	us	an	amount	equal	to	approximately	50%	of	expenditures	for	certain	remediation	activities	in	its	capacity	as	a	PRP	under	the	Comprehensive	Environmental Response,	Compensation	and	Liability	Act	(CERCLA).

# Operating	Leases

We	rent	certain	equipment	and	facilities	under	operating	leases.	Certain	major	plant	facilities	and	equipment	are	furnished	by	the	U.S.	Government	under	short-term or	cancelable	arrangements.	Our	total	rental	expense	under	operating	leases	was	$302	million,	$347	million,	and	$399	million	for	2012,	2011,	and	2010.	Future minimum	lease	commitments	at	December	31,	2012	for	all	operating	leases	that	have	a	remaining	term	of	more	than	one	year	were	$859	million	($229	million	in	2013, $161	million	in	2014,	$118	million	in	2015,	$91	million	in	2016,	$60	million	in	2017,	and	$200	million	in	later	years).

# Letters	of	Credit,	Surety	Bonds,	and	Third-Party	Guarantees

We	have	entered	into	standby	letters	of	credit,	surety	bonds,	and	third-party	guarantees	with	financial	institutions	and	other	third	parties	primarily	relating	to advances	received	from	customers	and	the	guarantee	of	future	performance	on	certain	contracts.	Letters	of	credit	and	surety	bonds	generally	are	available	for	draw	down in	the	event	we	do	not	perform.	In	some	cases,	we	may	guarantee	the	contractual	performance	of	third	parties	such	as	joint	venture	partners.	We	had	total	outstanding letters	of	credit,	surety	bonds,	and	third-party	guarantees	aggregating	$2.2	billion	and	$3.9	billion	at	December	31,	2012	and	2011.	The	decrease	in	2012	primarily	was due	to	scheduled	reductions	in	a	letter	of	credit	issued	to	secure	advance	payments	received	under	an	F-16	contract	from	an	international	customer.	The	letter	of	credit was	reduced	as	certain	events	occurred	during	the	period	of	performance	in	accordance	with	the	contract	terms.

At	December	31,	2012	and	2011,	third-party	guarantees	totaled	$816	million	and	$907	million,	of	which	approximately	85%	related	to	guarantees	of	the	contractual performance	of	joint	ventures	to	which	we	currently	are	or	previously	were	a	party.	This	amount	represents	our	estimate	of	the	maximum	amount	we	would	expect	to incur	upon	the	contractual	non-performance	of	the	joint	venture	partners.	In	addition,	we	generally	have	cross-indemnities	in	place	that	may	enable	us	to	recover amounts	that	may	be	paid	on	behalf	of	a	joint	venture	partner.	We	believe	our	current	and	former	joint	venture	partners	will	be	able	to	perform	their	obligations,	as	they have	done	through	December	31,	2012,	and	that	it	will	not	be	necessary	to	make	payments	under	the	guarantees.	In	determining	our	exposures,	we	evaluate	the reputation,	technical	capabilities,	and	credit	quality	of	our	current	and	former	joint	venture	partners.

# United	Launch	Alliance

In	connection	with	our	50%	ownership	interest	of	United	Launch	Alliance,	L.L.C.	(ULA),	we	and	The	Boeing	Company	(Boeing)	have	each	received	distributions totaling	$494	million	(since	ULA's	formation	in	December	2006)	which	are	subject	to	agreements	between	us,	Boeing,	and	ULA,	whereby,	if	ULA	does	not	have sufficient	cash	resources	or	credit	capacity	to	make	payments	under	the	inventory	supply	agreement	it	has	with	Boeing,	both	we	and	Boeing	would	provide	to	ULA,	in the	form	of	an	additional	capital	contribution,	the	level	of	funding	required	for	ULA	to	make	those	payments.	Any	such	capital	contributions	would	not	exceed	the amount	of	the	distributions	subject	to	the	agreements.	We	currently	believe	that	ULA	will	have	sufficient	operating	cash	flows	and	credit	capacity,	including	access	to	its $560	million	revolving	credit	agreement	from	third-party	financial	institutions,	to	meet	its	obligations	such	that	we	would	not	be	required	to	make	a	contribution	under these	agreements.

Our	50%	ownership	share	of	ULA's	net	assets	exceeded	the	book	value	of	our	investment	by	approximately	$395	million,	which	we	are	recognizing	as	income ratably	over	10	years	through	2016.	This	yearly	amortization	and	our	share	of	ULA's	net	earnings	are	reported	as	equity	in	net	earnings	(losses)	of	equity	investees	in other	income,	net	on	our	Statements	of	Earnings.	Our	investment	in	ULA	totaled	$572	million	and	$574	million	at	December	31,	2012	and	2011.

# Note	13	–	Severance	and	Other	Charges

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	(Note	3).	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.	The severance	actions	at	our	Aeronautics	business	segment	resulted	from	cost	reduction	initiatives,	including	the	consolidation	of	selected	program	support	activities	among certain	Aeronautics	locations.	Upon	separation,	terminated	employees	will	receive	lump-sum	severance	payments	primarily	based	on	years	of	service,	the	majority	of which	are	expected	to	be	paid	through	the	first	half	of	2013.

During	2011,	we	recorded	severance	charges	related	to	various	severance	actions	totaling	$136	million,	net	of	state	tax	benefits,	of	which	$49	million,	$48	million, and	$39	million	related	to	our	Aeronautics	business	segment,	Space	Systems	business	segment,	and	our	IS&GS	business	segment	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	to	better	align	our organization	and	cost	structure	with	changing	economic	conditions.	The	workforce	reductions	at	the	business	segments	also	reflect	changes	in	program	lifecycles,	where several	of	our	major	programs	are	either	transitioning	out	of	development	and	into	production	or	are	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.

During	2010,	we	recorded	a	charge	of	$178	million,	net	of	state	tax	benefits,	related	to	the	VESP.	The	charge,	which	included	lump-sum	special	payments	for qualifying	executives,	reduced	our	net	earnings	by	$116	million	($.31	per	share).	The	amounts	of	the	VESP	attributable	to	our	business	segments	were	$25	million at	Aeronautics,	$42	million	at	IS&GS,	$17	million	at	MFC,	$21	million	at	MST,	and	$41	million	at	Space	Systems.	The	remaining	$32	million	was	attributable	to	our Corporate	Headquarters.	Upon	separation,	lump-sum	special	payments	were	made.

In	2010,	our	MST	business	segment	decided	to	consolidate	certain	of	its	operations,	including	the	closure	of	a	facility	in	Eagan,	Minnesota.	Accordingly,	we recorded	a	charge	to	cost	of	sales	of	$42	million,	net	of	state	tax	benefits,	which	reduced	our	net	earnings	by	$27	million	($.07	per	share).	The	majority	of	the	charge	was associated	with	the	accrual	of	severance	payments	to	employees,	with	the	remainder	associated	with	impairment	of	assets.

# Note	14	–	Acquisitions	and	Divestitures

# Acquisitions

We	used	$304	million	in	2012	for	acquisition	activities	including	the	acquisitions	of	Chandler/May	and	CDL	both	in	the	fourth	quarter	of	2012,	and	Procerus	in	the first	quarter	of	2012,	and	each	has	been	included	within	our	MST	business	segment.	These	companies	specialize	in	the	design,	development,	manufacturing,	and	support of	advanced	unmanned	systems.	We	used	$649	million	in	2011	for	acquisition	activities	including	the	acquisitions	of	QTC,	which	provides	outsourced	medical evaluation	services	to	the	U.S.	Government,	and	Sim-Industries,	a	commercial	aviation	simulation	company,	both	in	the	fourth	quarter	of	2011.	QTC	has	been	included within	our	IS&GS	business	segment,	and	Sim-Industries	has	been	included	within	our	MST	business	segment.	Acquisition	activities	in	2010	were	not	material.

We	have	accounted	for	the	acquisitions	of	businesses	under	the	acquisition	method,	which	required	us	to	measure	all	of	the	assets	acquired	and	liabilities	assumed at	their	acquisition-date	fair	values.	Purchase	allocations	related	to	the	2012	and	2011	acquisitions	above	resulted	in	recording	goodwill	aggregating	$197	million	and $547	million,	including	$69	million	and	$113	million	that	will	be	amortized	for	tax	purposes.	Additionally,	purchase	allocations	related	to	the	2011	acquisitions	above resulted	in	recording	$133	million	of	other	intangible	assets,	primarily	relating	to	the	value	of	customer	relationships	and	trade	names	we	acquired.

# Divestitures

Amounts	related	to	discontinued	operations	in	2012	were	not	significant	and,	accordingly,	were	included	in	operating	profit.	Discontinued	operations	for	2011 include	the	operating	results	and	other	adjustments	of	Savi	Technology,	Inc.	(Savi),	a	logistics	business	that	was	in	our	former	Electronic	Systems	business	segment	sold in	the	third	quarter	of	2012,	and	Pacific	Architects	and	Engineers,	Inc.	(PAE),	a	business	formerly	within	our	IS&GS	business	segment	sold	in	the	second	quarter	of 2011.	Discontinued	operations	for	2010	include	the	operating	results	of	Savi,	PAE,	and	EIG,	a	business	formerly	within	our	IS&GS	business	segment,	through	the	date of	its	sale	in	the	fourth	quarter	of	2010.

As	a	result	of	our	decisions	to	sell	Savi	and	PAE,	we	recorded	deferred	tax	assets	to	reflect	the	tax	benefit	that	we	expected	to	realize	on	the	sale	of	those	businesses because	our	tax	bases	were	higher	than	our	book	bases.	Accordingly,	we	recorded	a	$66	million	deferred	tax	asset	in	2011	related	to	Savi	and	a	$182	million	deferred	tax asset	in	2010	related	to	PAE.	These	amounts	are	included	in	"Other	adjustments"	in	the	table	below,	which	also	includes	charges	associated	with	Savi	and	PAE	that	were incurred	in	2011	and	a	$109	million	impairment	charge	related	to	PAE	in	2010.	The	impairment	charge,	which	was	determined	using	a	Level	3	valuation	that	was	based on	inputs	and	analysis	used	to	estimate	the	expected	net	proceeds	from	the	sale	transaction,	reduced	the	carrying	value	of	PAE	to	equal	the	expected	net	proceeds	from the	transaction.

We	sold	EIG	for	$815	million	and	recognized	a	gain,	net	of	tax,	of	$184	million	($.50	per	share)	in	2010,	which	is	included	in	discontinued	operations.	We	received net	proceeds	of	$798	million	related	to	the	sale,	which	are	included	in	investing	activities	on	our	2010	Statement	of	Cash	Flows.	We	made	a	$260	million	tax	payment related	to	the	sale	which	is	included	in	operating	activities	on	our	2010	Statement	of	Cash	Flows.

In	the	following	table,	we	have	combined	the	results	of	operations	of	Savi,	PAE,	and	EIG,	as	the	amounts	for	the	individual	businesses	were	not	material.	Summary financial	information	related	to	discontinued	operations	is	as	follows	(in	millions):

|  | 2011 | 2010 |
| :--- | :--- | :--- |
| Net\tsales | \t$193 | \t$1,177 |
| (Loss)\tearnings\tbefore\tincome\ttaxes | (40) | 17 |
| (Loss)\tearnings\tafter\tincome\ttaxes | (28) | 7 |
| Gain\ton\tsale\tof\tEIG,\tafter\tincome\ttaxes | — | 184 |
| Other\tadjustments | 16 | 73 |
| Net\t(loss)\tearnings\tfrom\tdiscontinued\toperations | \t$ (12) | \t$264 |

The	assets	and	liabilities	of	Savi	have	not	been	classified	as	held	for	sale	on	our	2011	Balance	Sheet	as	the	amounts	are	not	material.

# Note	15	–	Fair	Value	Measurements

Assets	and	liabilities	measured	and	recorded	at	fair	value	on	a	recurring	basis	consisted	of	the	following	(in	millions):

| Total | December	31,	2012<br>Level	1 | Level	2 | Total | December	31,	2011<br>Level	1 | Level	2 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| \t$75 | $75 | $ — | \t$91 | $91 | $ — |
| \t\t 418 | \t 418 | — | \t\t 380 | \t 380 | — |
| \t\t 213 | — | \t 213 | \t\t 211 | — | \t 211 |
| \t\t 141 | — | \t 141 | \t\t 102 | — | \t 102 |
| 39 | — | 39 | 43 | — | 43 |
| 25 | — | 25 | 26 | — | 26 |

Substantially	all	assets	measured	at	fair	value,	other	than	derivatives,	represent	investments	held	in	a	separate	trust	to	fund	certain	of	our	non-qualified	deferred compensation	plans.	The	fair	values	of	equity	securities	and	mutual	funds	are	determined	by	reference	to	the	quoted	market	price	per	unit	in	active	markets	multiplied	by the	number	of	units	held	without	consideration	of	transaction	costs.	The	fair	values	of	U.S.	Government	and	other	securities	are	determined	using	model-derived valuations	in	which	all	significant	inputs	and	significant	value	drivers	are	observable	in	active	markets.	The	fair	values	of	derivative	instruments,	which	consist	of	foreign currency	exchange	forward	and	interest	rate	swap	contracts,	primarily	are	determined	based	on	the	present	value	of	future	cash	flows	using	model-derived	valuations	that use	observable	inputs	such	as	interest	rates,	credit	spreads,	and	foreign	currency	exchange	rates.	We	did	not	have	any	transfers	of	assets	or	liabilities	between	levels	of the	fair	value	hierarchy	during	2012.

In	addition	to	the	financial	instruments	listed	in	the	table	above,	we	hold	other	financial	instruments,	including	cash	and	cash	equivalents,	accounts	receivable, accounts	payable,	and	debt.	The	carrying	values	for	cash	and	cash	equivalents,	accounts	receivable,	and	accounts	payable	approximated	their	fair	values.	The	estimated fair	value	of	our	outstanding	debt	was	$8.2	billion	and	$7.8	billion	at	December	31,	2012	and	2011,	and	the	outstanding	principal	amount	was	$7.2	billion	and	$7.0 billion	at	December	31,	2012	and	2011,	excluding	unamortized	discounts	of	$892	million	and	$506	million.	The	estimated	fair	value	was	determined	based	on	quoted prices	for	similar	instruments	in	active	markets	(Level	2).

# Note	16	–	Summary	of	Quarterly	Information	(Unaudited)

A	summary	of	quarterly	information	is	as	follows	(in	millions,	except	per	share	data):

|  | 2012	Quarters |  |  |
| :--- | :--- | :--- | :--- |
| First\t^(a) | Second\t^(a) | Third\t^(a) | Fourth |
| \t$11,293 | $11,921 | \t$11,869 | \t$12,099 |
| 1,044 | 1,192 | 1,137 | 1,061 |
| 668 | 781 | 727 | 569 |
| 2.06 | 2.41 | 2.25 | 1.76 |
| 2.03 | 2.38 | 2.21 | 1.73 |

|  |  | 2011	Quarters |  |  |
| :--- | :--- | :--- | :--- | :--- |
|  | First\t^(a) | Second\t^(a) | Third\t^(a) | Fourth\t^(a) |
| Net\tsales | \t$10,626 | $11,543 | \t$12,119 | \t$12,211 |
| Operating\tprofit | 880 | 999 | 1,035 | 1,106 |
| Net\tearnings\tfrom\tcontinuing\toperations\t^(d) | 556 | 748 | 665 | 698 |
| Net\t(loss)\tearnings\tfrom\tdiscontinued\toperations\t^(e) | (26) | (6) | 35 | (15) |
| Net\tearnings | 530 | 742 | 700 | 683 |
| Basic\tearnings\tper\tshare\t^(c) | 1.52 | 2.16 | 2.12 | 2.12 |
| Diluted\tearnings\tper\tshare\t^(c) | 1.50 | 2.14 | 2.10 | 2.09 |

Operating	profit	varies	from	the	amounts	previously	reported	on	Forms	10-Q	as	a	result	of	the	reclassification	of	net	gains	from	securities	held	in	a	separate	trust	from	other	non-operating	income	(expense),	net	to cost	of	sales	in	the	fourth	quarter	of	2012	(Note	1). (a)

The	fourth	quarter	of	2012	included	a	reduction	in	the	income	tax	benefit	of	the	U.S.	manufacturing	deduction	primarily	caused	by	$2.5	billion	of	discretionary	pension	contributions	in	the	fourth	quarter	of	2012, which	increased	income	tax	expense	by	$59	million	($.18	per	share). (b)

The	sum	of	the	quarterly	earnings	per	share	amounts	do	not	equal	the	earnings	per	share	amount	included	on	our	Statements	of	Earnings,	primarily	due	to	the	timing	of	our	share	repurchases	during	2012	and 2011. (c)

The	second	quarter	of	2011	included	a	reduction	in	income	tax	expense	of	$89	million	due	to	the	resolution	of	certain	tax	matters	(Note	7),	and	the	second	quarter	and	third	quarter	of	2011	included	charges	of	$97 million	($63	million	after	tax)	and	$39	million	($25	million	after	tax)	related	to	certain	severance	actions	(Note	13). (d)

The	third	quarter	of	2011	included	a	tax	benefit	of	$66	million	related	to	Savi	which	was	recorded	when	the	decision	was	made	to	dispose	of	the	business	(Note	14). (e)

# ITEM	9. CHANGES	IN	AND	DISAGREEMENTS	WITH	ACCOUNTANTS	ON	ACCOUNTING	AND	FINANCIAL	DISCLOSURE

# ITEM	9A. CONTROLS	AND	PROCEDURES

# (a)	Evaluation	of	Disclosure	Controls	and	Procedures

We	performed	an	evaluation	of	the	effectiveness	of	our	disclosure	controls	and	procedures	as	of	December	31,	2012.	The	evaluation	was	performed	with	the participation	of	senior	management	of	each	business	segment	and	key	Corporate	functions,	under	the	supervision	of	the	Chief	Executive	Officer	(CEO)	and	Chief Financial	Officer	(CFO).	Based	on	this	evaluation,	the	CEO	and	CFO	concluded	that	our	disclosure	controls	and	procedures	were	operating	and	effective	as	of December	31,	2012.

# (b)	Management's	Report	on	Internal	Control	Over	Financial	Reporting

Our	management	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting.	Our	internal	control	system	was	designed	to provide	reasonable	assurance	to	our	management	and	board	of	directors	regarding	the	reliability	of	financial	reporting	and	the	preparation	of	financial	statements	for external	purposes.

Our	management	conducted	an	assessment	of	the	effectiveness	of	our	internal	control	over	financial	reporting	as	of	December	31,	2012.	This	assessment	was	based on	the	criteria	set	forth	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	in	Internal	Control—Integrated	Framework.	Based	on	this assessment,	management	has	concluded	that,	as	of	December	31,	2012,	our	internal	control	over	financial	reporting	was	effective.

Our	independent	registered	public	accounting	firm	has	issued	a	report	on	the	effectiveness	of	our	internal	control	over	financial	reporting,	which	is	below.

(c)	Report	of	Ernst	&	Young	LLP,	Independent	Registered	Public	Accounting	Firm,	Regarding	Internal	Control	Over	Financial	Reporting

We	have	audited	Lockheed	Martin	Corporation's	internal	control	over	financial	reporting	as	of	December	31,	2012,	based	on	criteria	established	in	Internal Control–Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(the	COSO	criteria).	Lockheed	Martin Corporation's	management	is	responsible	for	maintaining	effective	internal	control	over	financial	reporting,	and	for	its	assessment	of	the	effectiveness	of	internal	control over	financial	reporting	included	in	the	accompanying	Management's	Report	on	Internal	Control	Over	Financial	Reporting.	Our	responsibility	is	to	express	an	opinion on	the	Corporation's	internal	control	over	financial	reporting	based	on	our	audit.

We	conducted	our	audit	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we	plan and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our	audit included	obtaining	an	understanding	of	internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	testing	and	evaluating	the	design	and operating	effectiveness	of	internal	control	based	on	the	assessed	risk,	and	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We	believe that	our	audit	provides	a	reasonable	basis	for	our	opinion.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	A	company's	internal	control	over	financial reporting	includes	those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and dispositions	of	the	assets	of	the	company;	(2)	provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the	company	are	being	made	only	in	accordance	with	authorizations	of management	and	directors	of	the	company;	and	(3)	provide	reasonable	assurance	regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the policies	or	procedures	may	deteriorate.

In	our	opinion,	Lockheed	Martin	Corporation	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	December	31,	2012,	based on	the	COSO	criteria.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	balance	sheets	of Lockheed	Martin	Corporation	as	of	December	31,	2012	and	2011,	and	the	related	consolidated	statements	of	earnings,	comprehensive	income,	stockholders'	equity,	and cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2012	of	Lockheed	Martin	Corporation	and	our	report	dated	February	28,	2013	expressed	an unqualified	opinion	thereon.

# (d)	Changes	in	Internal	Control	Over	Financial	Reporting

There	were	no	changes	in	our	internal	control	over	financial	reporting	during	the	most	recently	completed	fiscal	quarter	that	materially	affected,	or	are	reasonably likely	to	materially	affect,	our	internal	control	over	financial	reporting.

# ITEM	9B. OTHER	INFORMATION

# PART	III

# ITEM	10. DIRECTORS,	EXECUTIVE	OFFICERS	AND	CORPORATE	GOVERNANCE

The	information	concerning	directors	required	by	Item	401	of	Regulation	S-K	is	included	under	the	caption	"Proposal	1	-	Election	of	Directors"	in	our	definitive Proxy	Statement	to	be	filed	pursuant	to	Regulation	14A	(the	2013	Proxy	Statement),	and	that	information	is	incorporated	by	reference	in	this	Form	10-K.	Information concerning	executive	officers	required	by	Item	401	of	Regulation	S-K	is	located	under	Part	I,	Item	4(a)	of	this	Form	10-K.	The	information	required	by	Item	405	of Regulation	S-K	is	included	under	the	caption	"Section	16(a)	Beneficial	Ownership	Reporting	Compliance"	in	the	2013	Proxy	Statement,	and	that	information	is incorporated	by	reference	in	this	Form	10-K.	The	information	required	by	Items	407(c)(3),	(d)(4)	and	(d)(5)	of	Regulation	S-K	is	included	under	the	captions "Committees	of	the	Board	of	Directors	—	Committees"	and	"Committees	of	the	Board	of	Directors	—	Audit	Committee	Report"	in	the	2013	Proxy	Statement,	and	that information	is	incorporated	by	reference	in	this	Form	10-K.

We	have	had	a	written	code	of	ethics	in	place	since	our	formation	in	1995.	Setting	the	Standard,	our	Code	of	Ethics	and	Business	Conduct,	applies	to	all	our employees,	including	our	principal	executive	officer,	principal	financial	officer,	and	principal	accounting	officer	and	controller,	and	to	members	of	our	Board	of Directors.	A	copy	of	our	Code	of	Ethics	and	Business	Conduct	is	available	on	our	investor	relations	website:	www.lockheedmartin.com/investor.	Printed	copies	of	our Code	of	Ethics	and	Business	Conduct	may	be	obtained,	without	charge,	by	contacting	Investor	Relations,	Lockheed	Martin	Corporation,	6801	Rockledge	Drive, Bethesda,	Maryland	20817.	We	are	required	to	disclose	any	change	to,	or	waiver	from,	our	Code	of	Ethics	and	Business	Conduct	for	our	Chief	Executive	Officer	and senior	financial	officers.	We	use	our	website	to	disseminate	this	disclosure	as	permitted	by	applicable	SEC	rules.

# ITEM	11. EXECUTIVE	COMPENSATION

The	information	required	by	Item	402	of	Regulation	S-K	is	included	in	the	text	and	tables	under	the	captions	"Executive	Compensation"	and	"Director Compensation"	in	the	2013	Proxy	Statement	and	that	information	is	incorporated	by	reference	in	this	Form	10-K.	The	information	required	by	Items	407(e)(4)	and	(e)(5) of	Regulation	S-K	is	included	under	the	captions	"Executive	Compensation	–	Compensation	Committee	Interlocks	and	Insider	Participation"	and	"Executive Compensation	–	Compensation	Committee	Report"	in	the	2013	Proxy	Statement,	and	that	information	is	furnished	by	incorporation	by	reference	in	this	Form	10-K.

# ITEM	12. SECURITY	OWNERSHIP	OF	CERTAIN	BENEFICIAL	OWNERS	AND	MANAGEMENT	AND	RELATED	STOCKHOLDER	MATTERS

The	information	required	by	this	Item	12	is	included	under	the	heading	"Security	Ownership	of	Management	and	Certain	Beneficial	Owners"	in	the	2013	Proxy Statement,	and	that	information	is	incorporated	by	reference	in	this	Form	10-K.

# Equity	Compensation	Plan	Information

The	following	table	provides	information	about	our	equity	compensation	plans	that	authorize	the	issuance	of	shares	of	Lockheed	Martin	common	stock	to employees	and	directors.	The	information	is	provided	as	of	December	31,	2012.

|  |  |  | Number	of	securities	remaining |
| :--- | :--- | :--- | :--- |
|  | Number\tof\tsecurities\tto | Weighted\taverage\texercise | available\tfor\tfuture\tissuance |
|  | be\tissued\tupon\texercise | price\tof\toutstanding | under\tequity\tcompensation |
|  | of\toutstanding\toptions, | options, | plans\t(excluding\tsecurities |
|  | warrants,\tand\trights | warrants,\tand\trights | reflected\tin\tcolumn\t(a)) |
| Plan\tcategory | (a) | (b) | (c) |
| Equity\tcompensation\tplans |  |  |  |
| approved\tby\tsecurity\tholders\t^(1)\t(2) | \t25,944,276 | $83.15 | \t6,150,121 |
| Equity\tcompensation\tplans\tnot |  |  |  |
| approved\tby\tsecurity\tholders\t^(3) | 1,512,786 | — | \t2,520,926 |
| Total\t^(1)\t(2)\t(3) | \t27,457,062 | $83.15 | \t8,671,047 |

Column	(a)	includes,	as	of	December	31,	2012,	5,319,047	shares	that	have	been	granted	as	Restricted	Stock	Units	(RSUs)	and	20,537,942	shares	granted	as	options under	the	Lockheed	Martin	Corporation	2011	Incentive	Performance	Award	Plan	(IPA	Plan)	or	predecessor	plans	and	87,287	stock	units	payable	in	shares	of	stock that	have	been	granted	under	the	Directors	Equity	Plan	or	predecessor	plans	for	members	(or	former	members)	of	the	Board	of	Directors.	Column	(c)	includes,	as	of December	31,	2012,	5,591,758	shares	available	for	future	issuance	under	the	IPA	Plan	as	options,	stock	appreciation	rights	(SARs),	Restricted	Stock	Awards (RSAs),	or	RSUs	(including	Performance	Stock	Units	(PSUs))	and	558,363	shares	available	for	future	issuance	under	the	Lockheed	Martin	Corporation	2009 Directors	Equity	Plan	(Directors	Equity	Plan)	as	stock	options	and	stock	units.	Of	the	5,591,758	shares	available	for	grant	under	the	IPA	Plan	on	December	31, 2012,	1,328,337	and	687,738	shares	are	issuable	pursuant	to	grants	on	January	28,	2013,	of	RSUs	and	PSUs	(assuming	the	maximum	number	of	PSUs	are	earned and	payable	at	the	end	of	the	three-year	performance	period),	respectively.

At	December	31,	2012,	a	total	of	1,461	shares	of	Lockheed	Martin	common	stock	were	issuable	upon	the	exercise	of	the	options	assumed	by	the	Corporation	in connection	with	the	COMSAT	Corporation	acquisition.	The	weighted	average	exercise	price	of	those	outstanding	options	was	$30.88	per	share. (2)

The	shares	represent	Management	Incentive	Compensation	Plan	(MICP)	bonuses	and	Long-Term	Incentive	Performance	(LTIP)	payments	earned	and	voluntarily deferred	by	employees.	The	deferred	amounts	are	payable	to	them	under	the	Deferred	Management	Incentive	Compensation	Plan	(DMICP).	Deferred	amounts	are credited	as	phantom	stock	units	at	the	closing	price	of	our	stock	on	the	date	the	deferral	is	effective.	Amounts	equal	to	our	dividend	are	credited	as	stock	units	at the	time	we	pay	a	dividend.	Following	termination	of	employment,	a	number	of	shares	of	stock	equal	to	the	number	of	stock	units	credited	to	the	employee's DMICP	account	are	distributed	to	the	employee.	There	is	no	discount	or	value	transfer	on	the	stock	distributed.	Distributions	may	be	made	from	newly	issued shares	or	shares	purchased	on	the	open	market.	Historically,	all	distributions	have	come	from	shares	held	in	a	separate	trust	and,	therefore,	do	not	further	dilute	our common	shares	outstanding.	As	a	result,	the	phantom	stock	units	also	were	not	considered	in	calculating	the	total	weighted	average	exercise	price	in	the	table. (3)

# ITEM	13. CERTAIN	RELATIONSHIPS	AND	RELATED	TRANSACTIONS,	AND	DIRECTOR	INDEPENDENCE

The	information	required	by	this	Item	13	is	included	under	the	captions	"Corporate	Governance	–	Related	Person	Transaction	Policy,"	"Corporate	Governance	– Certain	Relationships	and	Related	Person	Transactions	of	Directors,	Executive	Officers,	and	5	Percent	Stockholders,"	and	"Corporate	Governance	–	Director Independence"	in	the	2013	Proxy	Statement,	and	that	information	is	incorporated	by	reference	in	this	Form	10-K.

# ITEM	14. PRINCIPAL	ACCOUNTING	FEES	AND	SERVICES

The	information	required	by	this	Item	14	is	included	under	the	caption	"Proposal	2	—	Ratification	of	Appointment	of	Independent	Auditors"	in	the	2013	Proxy Statement,	and	that	information	is	incorporated	by	reference	in	this	Form	10-K.

# PART	IV

# ITEM	15. EXHIBITS	AND	FINANCIAL	STATEMENT	SCHEDULES

(a)	(1)	List	of	financial	statements	filed	as	part	of	this	Form	10-K.

The	following	financial	statements	of	Lockheed	Martin	Corporation	and	consolidated	subsidiaries	are	included	in	Item	8	of	this	Form	10-K	at	the	page	numbers referenced	below:

| referenced	below: |  |
| :--- | :--- |
|  | \t\t\t\t\t\tPage |
| Consolidated\tStatements\tof\tEarnings\t–\tYears\tended\tDecember\t31,\t2012,\t2011,\tand\t2010 | 55 |
| Consolidated\tStatements\tof\tComprehensive\tIncome\t–\tYears\tended\tDecember\t31,\t2012,\t2011,\tand\t2010 | 56 |
| Consolidated\tBalance\tSheets\t–\tAt\tDecember\t31,\t2012\tand\t2011 | 57 |
| Consolidated\tStatements\tof\tCash\tFlows\t–\tYears\tended\tDecember\t31,\t2012,\t2011,\tand\t2010 | 58 |
| Consolidated\tStatements\tof\tStockholders'\tEquity\t–\tYears\tended\tDecember\t\t31,\t2012,\t2011,\tand\t2010 | 59 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 60 |

The	report	of	Lockheed	Martin	Corporation's	independent	registered	public	accounting	firm	with	respect	to	the	above-referenced	financial	statements	and	their report	on	internal	control	over	financial	reporting	appear	on	pages	54	and	89	of	this	Form	10-K.	Their	consent	appears	as	Exhibit	23	of	this	Form	10-K.

(2)	List	of	financial	statement	schedules	filed	as	part	of	this	Form	10-K.

All	schedules	have	been	omitted	because	they	are	not	applicable,	not	required,	or	the	information	has	been	otherwise	supplied	in	the	financial	statements	or	notes	to the	financial	statements.

3.1 Charter	of	Lockheed	Martin	Corporation,	as	amended	by	Articles	of	Amendment	dated	April	23,	2009	(incorporated	by	reference	to	Exhibit	3.1	to Lockheed	Martin	Corporation's	Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2010).

4.6 Indenture,	dated	as	of	December	14,	2012,	between	Lockheed	Martin	Corporation	and	U.S.	Bank	National	Association	(incorporated	by	reference	to Exhibit	99.1	to	Lockheed	Martin	Corporation's	Current	Report	on	Form	8-K	filed	with	the	SEC	on	December	17,	2012).

No	instruments	defining	the	rights	of	holders	of	long-term	debt	that	is	not	registered	are	filed	because	the	total	amount	of	securities	authorized	under	any such	instrument	does	not	exceed	10%	of	the	total	assets	of	Lockheed	Martin	Corporation	on	a	consolidated	basis.	Lockheed	Martin	Corporation	agrees	to furnish	a	copy	of	such	instruments	to	the	SEC	upon	request.

10.34 Form	of	Restricted	Stock	Unit	Award	Agreement	under	the	Lockheed	Martin	Corporation	2003	Incentive	Performance	Award	Plan	(incorporated	by reference	to	Exhibit	99.3	of	Lockheed	Martin	Corporation's	Current	Report	on	Form	8-K	filed	with	the	SEC	on	February	3,	2011).

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	the	registrant	has	duly	caused	this	Form	10-K	to	be	signed	on	its	behalf	by the	undersigned,	thereunto	duly	authorized.

/s/	Christopher	J.	Gregoire

Christopher	J.	Gregoire

Vice	President	and	Controller

(Chief	Accounting	Officer)

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	Form	10-K	has	been	signed	below	by	the	following	persons	on	behalf	of	the	registrant	and	in the	capacities	and	on	the	dates	indicated.

**	By	authority	of	Powers	of	Attorney	filed	with	this	Annual	Report	on	Form	10-K.



Question: what was the ratio of the shares in 2012 to 2011 that were excluded in the calculation of the diluted earnings due to the anti-dilute nature
Calculation:   excluded_shares = 13.4
 included_shares = 14.7
 ratio = excluded_shares / included_shares
 answer = ratio
Answer: 0.91