# 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,	2016

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	☒				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	☒

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	☒				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	☒				No	☐

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	(§229.405	of	this	chapter)	is	not	contained	herein,	and	will	not	be contained,	to	the	best	of	registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment to	this	Form	10-K.		☐

Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	a	non-accelerated	filer,	or	a	smaller	reporting	company.	See	the	definitions of	"large	accelerated	filer,"	"accelerated	filer"	and	"smaller	reporting	company"	in	Rule	12b-2	of	the	Exchange	Act.

Large	accelerated	filer	☒

	 Non-accelerated	filer	☐

Smaller	reporting	company	☐

Indicate	by	check	mark	whether	the	registrant	is	a	shell	company	(as	defined	in	Rule	12b-2	of	the	Exchange	Act).	Yes	☐				No	☒

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	24,	2016,	was	approximately	$72.1	billion.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

Portions	of	Lockheed	Martin	Corporation's	2017	Definitive	Proxy	Statement	are	incorporated	by	reference	into	Part	III	of	this	Form	10-K.

| PART	I |  | Page |
| :--- | :--- | :--- |
| ITEM\t1. | Business | 3 |
| ITEM\t1A. | Risk\tFactors | 10 |
| ITEM\t1B. | Unresolved\tStaff\tComments | 19 |
| ITEM\t2. | Properties | 20 |
| ITEM\t3. | Legal\tProceedings | 20 |
| ITEM\t4. | Mine\tSafety\tDisclosures | 21 |
| ITEM\t4(a). | Executive\tOfficers\tof\tthe\tRegistrant | 22 |
| PART\tII |  |  |
| ITEM\t5. | Market\tfor\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 23 |
| ITEM\t6. | Selected\tFinancial\tData | 25 |
| ITEM\t7. | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 27 |
| ITEM\t7A. | Quantitative\tand\tQualitative\tDisclosures\tAbout\tMarket\tRisk | 59 |
| ITEM\t8. | Financial\tStatements\tand\tSupplementary\tData | 61 |
| ITEM\t9. | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 105 |
| ITEM\t9A. | Controls\tand\tProcedures | 105 |
| ITEM\t9B. | Other\tInformation | 108 |
| PART\tIII |  |  |
| ITEM\t10. | Directors,\tExecutive\tOfficers\tand\tCorporate\tGovernance | 108 |
| ITEM\t11. | Executive\tCompensation | 108 |
| ITEM\t12. |  | 109 |
|  | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters |  |
| ITEM\t13. | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | 109 |
| ITEM\t14. | Principal\tAccountant\tFees\tand\tServices | 109 |
| PART\tIV |  |  |
| ITEM\t15. | Exhibits\tand\tFinancial\tStatement\tSchedules | 110 |
| ITEM\t16. | Form\t10-K\tSummary | 113 |
| SIGNATURES |  | 114 |

# PART	I

# ITEM	1. Business.

# General

We	are	a	global	security	and	aerospace	company	principally	engaged	in	the	research,	design,	development,	manufacture,	integration	and	sustainment	of	advanced technology	 systems,	 products	 and	 services.	 We	 also	 provide	 a	 broad	 range	 of	 management,	 engineering,	 technical,	 scientific,	 logistics,	 system	 integration	 and cybersecurity	services.	We	serve	both	U.S.	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	2016,	71%	of	our	$47.2	billion	in	net	sales	were	from	the	U.S.	Government,	either	as	a	prime	contractor or	as	a	subcontractor	(including	59%	from	 the	Department	of	 Defense	 (DoD)),	 27%	 were	 from	 international	 customers	 (including	 foreign	 military	 sales	 (FMS) contracted	through	the	U.S.	Government)	and	2%	were	from	U.S.	commercial	and	other	customers.	Our	main	areas	of	focus	are	in	defense,	space,	intelligence,	and homeland	security.

We	operate	in	an	environment	characterized	by	increasing	complexity	in	global	security	and	continuing	economic	pressures	in	the	U.S.	and	globally.	A	significant component	of	our	strategy	in	this	environment	is	to	focus	on	program	execution,	improving	the	quality	and	predictability	of	the	delivery	of	our	products	and	services, and	placing	security	capability	quickly	 into	 the	hands	of	our	U.S.	and	 international	customers	at	affordable	prices.	Recognizing	 that	our	customers	are	resource constrained,	we	are	endeavoring	to	develop	and	extend	our	portfolio	domestically	in	a	disciplined	manner	with	a	focus	on	adjacent	markets	close	to	our	core	capabilities, as	well	as	growing	our	international	sales.	We	continue	to	focus	on	affordability	initiatives.	We	also	expect	to	continue	to	invest	in	technologies	to	fulfill	new	mission requirements	for	our	customers	and	invest	in	our	people	so	that	we	have	the	technical	skills	necessary	to	succeed	without	limiting	our	ability	to	return	cash	to	our investors	in	the	form	of	dividends	and	share	repurchases.

We	operate	in	four	business	segments:	Aeronautics,	Missiles	and	Fire	Control	(MFC),	Rotary	and	Mission	Systems	(RMS)	and	Space	Systems.	We	organize	our business	segments	based	on	the	nature	of	the	products	and	services	offered.

# Recent	Developments

# Divestiture	of	the	Information	Systems	&	Global	Solutions	Business

On	August	16,	2016,	we	completed	the	divestiture	of	our	Information	Systems	&	Global	Solutions	(IS&GS)	business,	which	merged	with	a	subsidiary	of	Leidos Holdings,	Inc.	(Leidos),	in	a	Reverse	Morris	Trust	transaction.	This	transaction	represents	the	culmination	of	the	strategic	review	of	our	government	information technology	(IT)	business	and	our	technical	services	business	performed	in	2015	to	explore	whether	the	IS&GS	business	could	achieve	greater	growth	and	create	more value	for	customers	and	stockholders	outside	of	Lockheed	Martin.	The	IS&GS	business	generated	annual	net	sales	of	$5.6	billion	in	2015	and	$3.4	billion	in	2016 through	the	August	16,	2016	divestiture	date.	As	part	of	the	transaction,	we	also	completed	an	exchange	offer	that	resulted	in	a	reduction	of	our	common	stock outstanding	by	approximately	9.4	million	shares	(approximately	3%).	Based	on	an	opinion	of	outside	tax	counsel,	subject	to	customary	qualifications	and	based	on factual	representations,	both	the	exchange	offer	and	merger	will	qualify	as	tax-free	transactions	to	us	and	our	stockholders,	except	to	the	extent	that	cash	was	paid	to	our stockholders	in	lieu	of	fractional	shares.	Additionally,	we	received	a	one-time	special	cash	payment	of	$1.8	billion	in	connection	with	the	divestiture	of	the	IS&GS business.	The	operating	results	of	the	IS&GS	business	have	been	classified	as	discontinued	operations	for	all	periods	presented.	See	"Note	3	–	Acquisitions	and Divestitures"	included	in	our	Notes	to	Consolidated	Financial	Statements	for	additional	information	about	the	divestiture	of	the	IS&GS	business.

# AWE	Management	Limited

On	August	24,	2016,	our	ownership	interest	in	the	AWE	Management	Limited	(AWE)	venture	increased	from	33%	to	51%	in	exchange	for	our	assuming	a	more significant	role	in	managing	the	operations	of	the	venture.	AWE	operates	the	United	Kingdom's	nuclear	deterrent	program	and	generated	net	sales	of	about	$1.5	billion and	net	earnings	of	about	$85	million	in	2015.	As	a	result	of	the	increase	in	ownership	interest,	we	now	hold	a	51%	controlling	interest	in	AWE.	Accordingly,	we	are required	to	consolidate	AWE.	AWE	continues	to	be	aligned	under	our	Space	Systems	business	segment.	Prior	to	August	24,	2016,	we	accounted	for	our	investment	in AWE	using	the	equity	method	of	accounting.	See	"Note	3	–Acquisitions	and	Divestitures"	included	in	our	Notes	to	Consolidated	Financial	Statements	for	additional information	about	the	consolidation	of	AWE.

# Aeronautics

In	2016,	our	Aeronautics	business	segment	generated	net	sales	of	$17.8	billion,	which	represented	38%	of	our	total	consolidated	net	sales.	Aeronautics'	customers include	the	military	services	and	various	other	government	agencies	of	the	U.S.	and	other	countries.	In	2016,	U.S.	Government	customers	accounted	for	66%	and international	customers	accounted	for	34%	of	Aeronautics'	net	sales.	Net	sales	from	Aeronautics'	combat	aircraft	products	and	services	represented	28%	of	our	total consolidated	net	sales	in	both	2016	and	2015,	and	26%	in	2014.

Aeronautics	is	engaged	in	the	research,	design,	development,	manufacture,	integration,	sustainment,	support	and	upgrade	of	advanced	military	aircraft,	including combat	and	air	mobility	aircraft,	unmanned	air	vehicles	and	related	technologies.	Aeronautics'	major	programs	include:

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

•	 C-130	Hercules	–	international	tactical	airlifter;

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

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

•	 C-5M	Super	Galaxy	–	strategic	airlifter.

The	F-35	program	is	our	largest	program,	generating	23%	of	our	total	consolidated	net	sales,	as	well	as	62%	of	Aeronautics'	net	sales	in	2016.	The	F-35	program consists	of	development	contracts,	multiple	production	contracts,	and	sustainment	activities.	The	development	contracts	are	being	performed	concurrently	with	the production	contracts.	Concurrent	performance	of	development	and	production	contracts	is	used	for	complex	programs	to	test	aircraft,	shorten	the	time	to	field	systems and	achieve	overall	cost	savings.	We	expect	the	System	Development	and	Demonstration	portion	of	the	development	contracts	will	be	substantially	complete	in	2017, with	less	significant	efforts	continuing	into	2019.	Production	of	the	aircraft	is	expected	to	continue	for	many	years	given	the	U.S.	Government's	current	inventory objective	of	2,443	aircraft	for	the	Air	Force,	Marine	Corps	and	Navy;	commitments	from	our	eight	international	partners	and	three	international	customers;	as	well	as expressions	of	interest	from	other	countries.	During	2016,	we	delivered	46	aircraft	to	our	U.S.	and	international	partners,	resulting	in	total	deliveries	of	200	production aircraft	 as	 of	 December	 31,	 2016.	We	 have	 173	 production	 aircraft	 in	 backlog	 as	 of	 December	 31,	 2016,	 including	 orders	 from	 our	 international	 partners.	 On November	2,	2016,	the	U.S.	Government	unilaterally	definitized	Low	Rate	Initial	Production	(LRIP)	9,	which	covers	57	aircraft.	For	additional	information	on	the	F-35 program,	including	a	discussion	of	the	unilateral	contract	action,	see	"Status	of	the	F-35	Program"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and Results	of	Operations.

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	24	C-130J	aircraft	in	2016,	including	five	to	international	customers.	We	have	88	aircraft	in	our	backlog	as	of	December	31, 2016	with	advanced	funding	from	customers	for	additional	C-130J	aircraft	not	currently	in	backlog.	Our	C-130J	backlog	extends	into	2020.

Aeronautics	currently	produces	F-16	aircraft	for	international	customers	with	deliveries	of	new	aircraft	planned	through	2017.	Aeronautics	also	provides	service- life	extension,	modernization	and	other	upgrade	programs	for	our	customers'	F-16	aircraft.	We	delivered	12	F-16	aircraft	in	2016.	As	of	December	31,	2016,	we	have eight	F-16	aircraft	in	backlog	with	all	deliveries	expected	in	2017.	Although	existing	production	contracts	provide	for	deliveries	of	F-16	aircraft	through	late	2017,	we continue	to	seek	international	opportunities	to	deliver	additional	aircraft	beyond	2017.	Aeronautics	also	provides	service-life	extension,	modernization	and	other	upgrade programs	for	our	customers'	F-16	aircraft,	with	existing	contracts	continuing	for	several	years.

While	production	and	deliveries	of	F-22	aircraft	were	completed	in	2012,	Aeronautics	continues	to	provide	modernization	and	sustainment	activities	for	the	U.S. Air	 Force's	F-22	 aircraft	 fleet.	 The	 modernization	 program	 comprises	 upgrading	 existing	 systems	 requirements,	 developing	 new	 systems	 requirements,	 adding capabilities	and	enhancing	the	performance	of	the	weapon	systems.	The	sustainment	program	consists	of	sustaining	the	weapon	systems	of	the	F-22	fleet,	providing training	systems,	customer	support,	integrated	support	planning,	supply	chain	management,	aircraft	modifications	and	heavy	maintenance,	systems	engineering	and support	products.

Aeronautics	provides	sustainment	services	for	the	existing	U.S.	Air	Force	C-5	Galaxy	fleet	and	modernization	activities	to	convert	52	C-5	Galaxy	aircraft	to	the C-5M	Super	Galaxy	configuration.	These	modernization	activities	include	the	installation	of	new	engines,	landing	gear	and	systems	and	other	improvements	that	enable a	shorter	takeoff,	a	higher	climb	rate,	an	increased	cargo	load	and	longer	flight	range.	As	of	December	31,	2016,	we	had	delivered	41	C-5M	aircraft	under	these modernization	activities,	including	nine	C-5M	aircraft	delivered	in	2016.	As	of	December	31,	2016,	we	have	11	C-5	aircraft	in	backlog	with	backlog	extending	into 2018.

In	addition	 to	 the	above	aircraft	programs,	Aeronautics	 is	 involved	 in	advanced	development	programs	 incorporating	 innovative	design	and	rapid	prototype applications.	Our	Advanced	Development	Programs	(ADP)	organization,	also	known	as	Skunk	Works®,	is	focused	on	future	systems,	including	unmanned	aerial systems	and	next	generation	capabilities	for	advanced	strike,	intelligence,	surveillance,	reconnaissance,	situational	awareness	and	air	mobility.	We	continue	to	explore technology	advancement	and	insertion	in	our	existing	aircraft.	We	also	are	involved	in	numerous	network-enabled	activities	that	allow	separate	systems	to	work	together to	increase	effectiveness	and	we	continue	to	invest	in	new	technologies	to	maintain	and	enhance	competitiveness	in	military	aircraft	design,	development	and	production.

# Missiles	and	Fire	Control

In	2016,	our	MFC	business	segment	generated	net	sales	of	$6.6	billion,	which	represented	14%	of	our	total	consolidated	net	sales.	MFC's	customers	include	the military	services,	principally	the	U.S.	Army,	and	various	government	agencies	of	the	U.S.	and	other	countries,	as	well	as	commercial	and	other	customers.	In	2016,	U.S. Government	customers	accounted	for	61%,	international	customers	accounted	for	37%	and	U.S.	commercial	and	other	customers	accounted	for	2%	of	MFC's	net	sales.

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

•	 The	Patriot	Advanced	Capability-3	(PAC-3)	and	Terminal	High	Altitude	Area	Defense	(THAAD)	air	and	missile	defense	programs.	PAC-3	is	an	advanced	defensive missile	for	the	U.S.	Army	and	international	customers	designed	to	intercept	and	eliminate	incoming	airborne	threats	using	kinetic	energy.	THAAD	is	a	transportable defensive	missile	system	for	the	U.S.	Government	and	international	customers	designed	to	engage	targets	both	within	and	outside	of	the	Earth's	atmosphere. •	 The	Multiple	Launch	Rocket	System	(MLRS),	Hellfire,	Joint	Air-to-Surface	Standoff	Missile	(JASSM)	and	Javelin	tactical	missile	programs.	MLRS	is	a	highly mobile,	automatic	system	that	fires	surface-to-surface	rockets	and	missiles	from	the	M270	and	High	Mobility	Artillery	Rocket	System	platforms	produced	for	the U.S.	Army	and	international	customers.	Hellfire	is	an	air-to-ground	missile	used	on	rotary	and	fixed-wing	aircraft,	which	is	produced	for	the	U.S.	Army,	Navy, Marine	Corps	and	international	customers.	JASSM	is	an	air-to-ground	missile	launched	from	fixed-wing	aircraft,	which	is	produced	for	the	U.S.	Air	Force	and international	customers.	Javelin	is	a	shoulder-fired	anti-armor	rocket	system,	which	is	produced	for	the	U.S.	Army,	Marine	Corps	and	international	customers. •	 The	Apache,	Sniper®	and	Low	Altitude	Navigation	and	Targeting	Infrared	for	Night	(LANTIRN®)	fire	control	systems	programs.	The	Apache	fire	control	system provides	weapons	targeting	capability	for	the	Apache	helicopter	for	the	U.S.	Army	and	international	customers.	Sniper	is	a	targeting	system	for	several	fixed-wing aircraft	and	LANTIRN	is	a	combined	navigation	and	targeting	system	for	several	fixed-wing	aircraft.	Both	Sniper	and	LANTIRN	are	produced	for	the	U.S.	Air	Force and	international	customers.

•	 The	Special	Operations	Forces	Contractor	Logistics	Support	Services	(SOF	CLSS)	program	provides	logistics	support	services	to	the	special	operations	forces	of	the U.S.	military.	In	2016	we	submitted	a	bid	for	the	Special	Operations	Forces	Global	Logistics	Support	Services	(SOF	GLSS)	contract,	which	is	a	competitive follow-on	contract	to	SOF	CLSS.	We	anticipate	an	award	decision	on	the	follow-on	contract	in	mid-2017.

# Rotary	and	Mission	Systems

In	2016,	our	RMS	business	segment,	previously	known	as	Mission	Systems	and	Training	(MST),	generated	net	sales	of	$13.5	billion,	which	represented	28%	of our	total	consolidated	net	sales.	RMS'	customers	include	the	military	services,	principally	the	U.S.	Army	and	Navy,	and	various	government	agencies	of	the	U.S.	and other	countries,	as	well	as	commercial	and	other	customers.	In	2016,	U.S.	Government	customers	accounted	for	68%,	international	customers	accounted	for	28%	and U.S.	commercial	and	other	customers	accounted	for	4%	of	RMS'	net	sales.

RMS	provides	design,	manufacture,	service	and	support	for	a	variety	of	military	and	commercial	helicopters;	ship	and	submarine	mission	and	combat	systems; mission	systems	and	sensors	for	rotary	and	fixed-wing	aircraft;	sea	and	land-based	missile	defense	systems;	radar	systems;	the	Littoral	Combat	Ship	(LCS);	simulation and	 training	 services;	 and	 unmanned	 systems	 and	 technologies.	 In	 addition,	 RMS	 supports	 the	 needs	 of	 government	 customers	 in	 cybersecurity	 and	 delivers communications	and	command	and	control	capabilities	through	complex	mission	solutions	for	defense	applications.

On	November	6,	2015,	we	acquired	Sikorsky	Aircraft	Corporation	(Sikorsky)	and	aligned	it	under	our	RMS	business	segment.	Sikorsky	is	one	of	the	world's largest	 helicopter	 companies	 and	 designs,	 manufactures,	 services	 and	 supports	 military	 and	 commercial	 helicopters.	Additionally,	 Sikorsky	 offers	 full-spectrum aftermarket	service	and	support	solutions	to	commercial	and	military	customers	worldwide.

RMS'	major	programs	include:

•	 The	Black	Hawk	and	Seahawk	helicopters	manufactured	for	U.S.	and	foreign	governments.

•	 The	Aegis	Combat	System	serves	as	a	fleet	ballistic	missile	defense	system	for	the	U.S.	Navy	and	international	customers	and	is	also	a	sea	and	land-based	element	of the	U.S.	missile	defense	system.

•	 The	LCS,	a	surface	combatant	ship	for	the	U.S.	Navy	designed	to	operate	in	shallow	waters	and	the	open	ocean.

•	 The	Advanced	 Hawkeye	 Radar	 System,	 an	 airborne	 early	 warning	 radar,	 which	 RMS	 provides	 for the	E2-C/E2-D	 aircraft	 produced for the	 U.S.	 Navy	 and international	customers.

•	 The	Space	Fence	system,	an	advanced	ground-based	radar	system	for	the	U.S.	Air	Force	designed	to	enhance	the	way	objects	in	space	are	tracked	and	increase	the ability	to	prevent	collisions	between	such	objects.

•	 The	CH-53K	development	helicopter	delivering	the	next	generation	heavy	lift	helicopter	for	the	U.S.	Marine	Corps.

•	 The	VH-92A	helicopter	manufactured	for	the	U.S.	Marine	One	transport	mission.

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

# Space	Systems

In	2016,	our	Space	Systems	business	segment	generated	net	sales	of	$9.4	billion,	which	represented	20%	of	our	total	consolidated	net	sales.	Space	Systems' customers	include	various	U.S.	government	agencies	and	commercial	customers.	In	2016,	U.S.	Government	customers	accounted	for	91%,	international	customers accounted	for	5%	and	U.S.	commercial	and	other	customers	accounted	for	4%	of	Space	Systems'	net	sales.	Net	sales	from	Space	Systems'	satellite	products	and services	represented	13%,	15%	and	16%	of	our	total	consolidated	net	sales	in	2016,	2015	and	2014.

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	provides	network-enabled	situational	awareness	and	integrates	complex	space	and	ground	global	systems	to	help	our	customers gather,	analyze	and	securely	distribute	critical	intelligence	data.	Space	Systems	is	also	responsible	for	various	classified	systems	and	services	in	support	of	vital	national security	systems.	Space	Systems'	other	major	programs	include:

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

•	 The	Orion	Multi-Purpose	Crew	Vehicle	(Orion),	a	spacecraft	for	the	National	Aeronautics	and	Space	Administration	(NASA)	utilizing	new	technology	for	human exploration	missions	beyond	low	earth	orbit.

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

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

•	 AWE	venture,	which	operates	the	United	Kingdom's	nuclear	deterrent	program.

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

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

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

On	August	24,	2016,	we	obtained	a	controlling	interest	in	the	AWE	venture,	and	as	a	result,	we	are	required	to	consolidate	AWE.	Previously,	we	accounted	for	our investment	in	AWE	using	the	equity	method	of	accounting.	See	"Note	3	–	Acquisitions	and	Divestitures"	included	in	our	Notes	to	Consolidated	Financial	Statements	for additional	information	about	the	consolidation	of	AWE.	Operating	profit	for	our	Space	Systems	business	segment	also	includes	our	share	of	earnings	for	our	50% ownership	interest	in	United	Launch	Alliance	(ULA).

# Financial	and	Other	Business	Segment	Information

For	additional	information	regarding	our	business	segments,	including	comparative	segment	net	sales,	operating	profit	and	related	financial	information	for	2016, 2015,	and	2014,	see	"Business	Segment	Results	of	Operations"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	and	"Note 5	–	Information	on	Business	Segments"	included	in	our	Notes	to	Consolidated	Financial	Statements.

# Competition

Our	broad	portfolio	of	products	and	services	competes	both	domestically	and	internationally	against	products	and	services	of	other	large	aerospace	and	defense companies,	as	well	as	numerous	smaller	competitors.	We	often	form	teams	with	our	competitors	in	efforts	to	provide	our	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	and	increasingly	what	would	have previously	been	competed	as	a	single	large	procurement	is	being	broken	into	multiple	smaller	procurements.	Principal	factors	of	competition	include	the	value	of	our products	and	services	to	the	customer;	technical	and	management	capability;	the	ability	to	develop	and	implement	complex,	integrated	system	architectures;	total	cost	of ownership;	our	demonstrated	ability	to	execute	and	perform	against	contract	requirements;	and	our	ability	to	provide	timely	solutions.	Technological	advances	in	such areas	as:	additive	manufacturing,	cloud	computing,	advanced	materials,	autonomy,	robotics,	and	big	data	and	new	business	models	such	as	commercial	access	to	space are	enabling	new	factors	of	competition	for	both	traditional	and	non-traditional	competitors.

The	competition	for	international	sales	is	generally	subject	to	U.S.	Government	stipulations	(e.g.,	export	restrictions,	market	access,	technology	transfer,	industrial cooperation	 and	 contracting	 practices).	 We	 may	 compete	 against	 U.S.	 and	non-U.S.	 companies	 (or	 teams)	 for	 contract	 awards	 by	 international	 governments. International	competitions	also	may	be	subject	to	different	laws	or	contracting	practices	of	international	governments	that	may	affect	how	we	structure	our	bid	for	the procurement.	In	many	international	procurements,	the	purchasing	government's	relationship	with	the	U.S.	and	its	industrial	cooperation	programs	are	also	important factors	 in	determining	 the	outcome	of	a	competition.	It	 is	common	for	 international	customers	 to	require	contractors	 to	comply	with	 their	 industrial	cooperation regulations,	sometimes	referred	to	as	offset	requirements,	and	we	have	entered	into	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	these	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

Some	of	our	products	require	relatively	scarce	raw	materials.	Historically,	we	have	been	successful	in	obtaining	the	raw	materials	and	other	supplies	needed	in	our manufacturing	processes.	We	seek	to	manage	raw	materials	supply	risk	through	long-term	contracts	and	by	maintaining	an	acceptable	level	of	the	key	materials	in inventories.

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	composite	materials	used	in	our	Aeronautics	programs,	such	as	the	F-35	aircraft. 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	the	price	and	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	operating	profits.

No	material	portion	of	our	business	is	considered	to	be	seasonal.	Various	factors	can	affect	the	distribution	of	our	sales	between	accounting	periods,	including	the timing	of	government	awards,	the	availability	of	government	funding,	product	deliveries	and	customer	acceptance.

# Government	Contracts	and	Regulations

Our	business	is	heavily	regulated.	We	contract	with	numerous	U.S.	Government	agencies	and	entities,	principally	all	branches	of	the	U.S.	military	and	NASA.	We also	contract	with	similar	government	authorities	in	other	countries	and	they

regulate	our	international	efforts.	Additionally,	our	commercial	aircraft	products	are	required	to	comply	with	U.S.	and	international	regulations	governing	production and	quality	systems,	airworthiness	and	installation	approvals,	repair	procedures	and	continuing	operational	safety.

We	 must	 comply	 with,	 and	 are	 affected	 by,	 laws	 and	 regulations	 relating to the	 formation,	 administration	 and	 performance	 of	 U.S.	 Government	 and	 other governments'	contracts.	These	laws	and	regulations,	among	other	things:

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

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

•impose	acquisition	regulations,	which	may	change	or	be	replaced	over	time,	that	define	allowable	and	unallowable	costs,	the	allocability	of	costs,	and	otherwise govern	our	right	to	reimbursement	under	certain	U.S.	Government	and	foreign	contracts;

•require	specific	security	controls	to	protect	U.S.	Government	controlled	unclassified	information	and	restrict	the	use	and	dissemination	of	information	classified	for national	security	purposes	and	the	export	of	certain	products,	services	and	technical	data;	and

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

The	U.S.	Government	and	other	governments	may	terminate	any	of	our	government	contracts	and	subcontracts	either	at	its	convenience	or	for	default	based	on	our performance.	If	a	contract	is	terminated	for	convenience,	we	generally	are	protected	by	provisions	covering	reimbursement	for	costs	incurred	on	the	contract	and	profit on	those	costs.	If	a	contract	is	terminated	for	default,	we	generally	are	entitled	to	payments	for	our	work	that	has	been	accepted	by	the	U.S.	Government	or	other governments;	however,	the	U.S.	Government	and	other	governments	could	make	claims	to	reduce	the	contract	value	or	recover	its	procurement	costs	and	could	assess other	special	penalties.	For	more	information	regarding	the	U.S.	Government's	and	other	governments'	right	to	terminate	our	contracts,	see	Item	1A	–	Risk	Factors.	For more	information	regarding	government	contracting	laws	and	regulations,	see	Item	1A	–	Risk	Factors	as	well	as	"Critical	Accounting	Policies	–	Contract	Accounting	/ Sales	Recognition"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations.	For	more	information	on	the	risks	of	doing	work internationally,	 see	 Item	 1A	 –	 Risk	 Factors.	Additionally,	 the	 U.S.	 Government	 may	 also	 enter	 into	 unilateral	 contract	 actions,	 which	 they	 recently	 did	 on	 the F-35	program.	This	can	affect	our	ability	to	negotiate	mutually	agreeable	contract	terms.

A	portion	of	our	business	is	classified	by	the	U.S.	Government	and	cannot	be	specifically	described.	The	operating	results	of	these	classified	contracts	are	included in	our	consolidated	financial	statements.	The	business	risks	associated	with	classified	contracts	historically	have	not	differed	materially	from	those	of	our	other	U.S. Government	contracts.	Our	internal	controls	addressing	the	financial	reporting	of	classified	contracts	are	consistent	with	our	internal	controls	for	our	non-classified contracts.

Our	operations	are	subject	to	and	affected	by	various	federal,	state,	local	and	foreign	environmental	protection	laws	and	regulations	regarding	the	discharge	of materials	into	the	environment	or	otherwise	regulating	the	protection	of	the	environment.	While	the	extent	of	our	financial	exposure	cannot	in	all	cases	be	reasonably estimated,	the	costs	of	environmental	compliance	have	not	had,	and	we	do	not	expect	that	these	costs	will	have,	a	material	adverse	effect	on	our	earnings,	financial position	and	cash	flow,	primarily	because	most	of	our	environmental	costs	are	allowable	in	establishing	the	price	of	our	products	and	services	under	our	contracts	with the	U.S.	Government.	For	information	regarding	these	matters,	including	current	estimates	of	the	amounts	that	we	believe	are	required	for	remediation	or	cleanup	to	the extent	 that	 they	are	probable	and	estimable,	see	"Critical	Accounting	Policies	–	Environmental	Matters"	 in	Management's	Discussion	and	Analysis	of	Financial Condition	and	Results	of	Operations	and	"Note	14	–	Legal	Proceedings,	Commitments	and	Contingencies"	included	in	our	Notes	to	Consolidated	Financial	Statements. See	also	the	discussion	of	environmental	matters	within	Item	1A	–	Risk	Factors.

# Backlog

At	December	31,	2016,	our	backlog	was	$96.2	billion	compared	with	$94.8	billion	at	December	31,	2015.	Backlog	at	December	31,	2015	excludes	$4.8	billion related	to	the	IS&GS	business,	which	we	divested	in	2016.	Backlog	is	converted	into	sales	in	future	periods	as	work	is	performed	or	deliveries	are	made.	Approximately $34	billion,	or	35%,	of	our	backlog	at	December	31,	2016	is	expected	to	be	converted	into	sales	in	2017.

Our	backlog	includes	both	funded	(firm	orders	for	our	products	and	services	for	which	funding	has	been	both	authorized	and	appropriated	by	the	customer)	and unfunded	(firm	orders	for	which	funding	has	not	been	appropriated)	amounts.	We	do	not	include	unexercised	options	or	potential	orders	under	indefinite-delivery, indefinite-quantity	agreements	in	our	backlog.	If	any	of	our	contracts	with	firm	orders	were	to	be	terminated,	our	backlog	would	be	reduced	by	the	expected	value	of	the unfilled	orders	of	such	contracts.	Funded	backlog	was	$66.0	billion	at	December	31,	2016,	as	compared	to	$67.6	billion	at	December	31,	2015.	Funded	backlog	at December	31,	2015	excludes	$3.1	billion	related	to	the	IS&GS	business,	which	we	divested	in	2016.	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	(R&D)	activities	under	customer-sponsored	contracts	and	with	our	own	independent	R&D	funds.	Our	independent	R&D 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	R&D	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	R&D	costs	charged	to	cost	of	sales	were	$988	million	in	2016,	$817	million	in	2015,	and	$733	million	in	2014.	See	"Research	and development	and	similar	costs"	in	"Note	1	–	Significant	Accounting	Policies"	included	in	our	Notes	to	Consolidated	Financial	Statements.

# Employees

At	December	31,	2016,	we	had	approximately	97,000	employees,	about	92%	of	whom	were	located	in	the	U.S.	Approximately	21%	of	our	employees	are	covered by	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	negotiating	renewals	to	expiring	agreements	without	any	material	disruption	of	operating	activities.	Management	considers	employee	relations	to	be good.

# Available	Information

We	are	a	Maryland	corporation	formed	in	1995	by	combining	the	businesses	of	Lockheed	Corporation	and	Martin	Marietta	Corporation.	Our	principal	executive offices	 are	 located	 at 6801 Rockledge	 Drive,	 Bethesda,	 Maryland 20817.	 Our telephone	 number	 is	(301) 897-6000 and	 our	 website	 home	 page	 is	 at www.lockheedmartin.com.	We	make	our	website	content	available	for	information	purposes	only.	It	should	not	be	relied	upon	for	investment	purposes,	nor	is	it incorporated	by	reference	into	this	Annual	Report	on	Form	10-K	(Form	10-K).

Throughout	this	Form	10-K,	we	incorporate	by	reference	information	from	parts	of	other	documents	filed	with	the	U.S.	Securities	and	Exchange	Commission (SEC).	The	SEC	allows	us	to	disclose	important	information	by	referring	to	it	in	this	manner.

Our	annual	reports	on	Form	10-K,	quarterly	reports	on	Form	10-Q,	current	reports	on	Form	8-K,	proxy	statements	for	our	annual	stockholders'	meetings	and amendments	to	those	reports	are	available	free	of	charge	on	our	website,	www.lockheedmartin.com/investor,	as	soon	as	reasonably	practical	after	we	electronically	file the	material	with,	or	furnish	it	to,	the	SEC.	In	addition,	copies	of	our	annual	report	will	be	made	available,	free	of	charge,	upon	written	request.	The	SEC	also	maintains	a website	at	www.sec.gov	that	contains	reports,	proxy	statements	and	other	information	regarding	SEC	registrants,	including	Lockheed	Martin	Corporation.

# Forward-Looking	Statements

This	Form	10-K	contains	statements	that,	to	the	extent	they	are	not	recitations	of	historical	fact,	constitute	forward-looking	statements	within	the	meaning	of	the federal	securities	laws	and	are	based	on	our	current	expectations	and	assumptions.	The	words	"believe,"	"estimate,"	"anticipate,"	"project,"	"intend,"	"expect,"	"plan," "outlook,"	 "scheduled,"	 "forecast"	 and	 similar	 expressions	 are	 intended	 to	 identify	 forward-looking	 statements.	 These	 statements	 are	 not	 guarantees	 of	 future performance	and	are	subject	to	risks	and	uncertainties.

Statements	and	assumptions	with	respect	to	future	sales,	income	and	cash	flows,	program	performance,	the	outcome	of	litigation,	anticipated	pension	cost	and funding,	environmental	remediation	cost	estimates,	planned	acquisitions	or	dispositions	of	assets,	or	the	anticipated	consequences	are	examples	of	forward-looking statements.	Numerous	factors,	including	the	risk	factors	described	in	the	following	section,	could	affect	our	forward-looking	statements	and	actual	performance.

Our	actual	financial	results	likely	will	be	different	from	those	projected	due	to	the	inherent	nature	of	projections.	Given	these	uncertainties,	forward-looking statements	should	not	be	relied	on	in	making	investment	decisions.	The	forward-looking	statements	contained	in	this	Form	10-K	speak	only	as	of	the	date	of	its	filing. Except	where	required	by	applicable	law,	we	expressly	disclaim	a	duty	to	provide	updates	to	forward-looking	statements	after	the	date	of	this	Form	10-K	to	reflect subsequent	events,	changed	circumstances,	changes	in	expectations,	or	the	estimates	and	assumptions	associated	with	them.	The	forward-looking	statements	in	this	Form 10-K	are	intended	to	be	subject	to	the	safe	harbor	protection	provided	by	the	federal	securities	laws.

# ITEM	1A. Risk	Factors.

An	investment	in	our	common	stock	or	debt	securities	involves	risks	and	uncertainties.	We	seek	to	identify,	manage	and	mitigate	risks	to	our	business,	but	risk	and uncertainty	cannot	be	eliminated	or	necessarily	predicted.	The	outcome	of	one	or	more	of	these	risks	could	have	a	material	effect	on	our	operating	results,	financial position,	or	cash	flows.	You	should	carefully	consider	the	following	factors,	in	addition	to	the	other	information	contained	in	this	Annual	Report	on	Form	10-K,	before deciding	to	purchase	our	common	stock	or	debt	securities.

# We	depend	heavily	on	contracts	with	the	U.S.	Government	for	a	substantial	portion	of	our	business.

We	derived	71%	of	our	total	net	sales	from	the	U.S.	Government	in	2016,	including	59%	from	the	Department	of	Defense	(DoD).	We	expect	to	continue	to	derive most	 of	 our	 sales	 from	 work	 performed	 under	 U.S.	 Government	 contracts.	 Those	 contracts	 are	 conditioned	 upon	 the	 continuing	 availability	 of	 Congressional appropriations.	Congress	usually	appropriates	funds	on	a	fiscal-year	basis	even	though	contract	performance	may	extend	over	many	years.	Consequently,	contracts	are often	partially	funded	initially	and	additional	funds	are	committed	only	as	Congress	makes	further	appropriations.	If	we	incur	costs	in	excess	of	funds	obligated	on	a contract,	we	may	be	at	risk	for	reimbursement	of	those	costs	unless	and	until	additional	funds	are	obligated	to	the	contract.

As	 discussed	 within	 the	 "Industry	 Considerations"	 in	 Management's	 Discussion	 and	Analysis	 of	 Financial	 Condition	 and	 Results	 of	 Operations,	 the	 U.S. Government	continues	to	face	significant	deficit	reduction	pressures	and	it	is	likely	that	discretionary	spending	by	the	U.S.	Government	will	remain	constrained	for	a number	of	years.	Under	such	conditions,	large	or	complex	programs,	which	consist	of	multiple	contracts	and	phases,	are	potentially	subject	to	increased	scrutiny.

There	is	also	uncertainty	regarding	actions	that	may	be	taken	by	the	new	Presidential	Administration	in	light	of	recent	criticisms	of	the	F-35	program	and	other large	defense	programs.	President	Trump	has	publicly	expressed	concerns	over	past	cost	overruns	and	delays	in	the	program	as	well	as	overall	program	cost	and	has publicly	requested	that	a	competitor	price	out	an	alternative.	Defense	Secretary	Mattis	recently	ordered	a	review	of	the	program,	including	a	comparison	review	of	the F-35C	carrier	variant	with	a	fourth	generation	alternative.	Our	Chairman,	President	and	Chief	Executive	Officer	has	had	discussions	with	President	Trump	on	the importance	of	the	F-35	program	and	our	commitment	to	cut	costs.	However,	we	may	continue	to	face	pressure	to	reduce	costs	from	the	new	Presidential	Administration relating	to	the	F-35	program	and	ongoing	contract	negotiations.

The	F-35	is	our	largest	program	and	represented	23%	of	our	total	net	sales	in	2016	and	is	expected	to	represent	a	higher	percentage	of	our	sales	in	future	years.	A decision	to	cut	spending	or	reduce	planned	orders	would	have	an	adverse	impact	on	our	results	of	operations.	Given	the	size	and	complexity	of	the	F-35	program,	we anticipate	 that	 there	will	be	continual	reviews	related	 to	aircraft	performance,	program	schedule,	cost,	and	requirements	as	part	of	 the	DoD,	Congressional,	and international	partners'	oversight	and	budgeting	processes.	Current	program	challenges	 include,	but	are	not	 limited	 to,	supplier	and	partner	performance,	software development,	level	of	cost	associated	with	life	cycle	operations	and	sustainment	and	warranties,	successfully	negotiating	and	receiving	funding	for	production	contracts on	a	timely	basis,	executing	future	flight	tests	and	findings	resulting	from	testing	and	operating	the	aircraft.	Additionally,	the	U.S.	Government	may	also	enter	into unilateral	contract	actions,	which	they	recently	did	on	the	F-35	program.	This	unilateral	contract	action	obligates	us	to	perform	under	terms	and	conditions	imposed	by the	U.S.	Government.	Unilateral	contract	actions	could	negatively	affect	profit	and	cash	flows,	and	establish	a	precedent	for	future	contracts.

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.	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.

# 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,	by	us,	our	employees,	others	working	on	our	behalf,	a	supplier	or	a	venture	partner,	could	harm	our	reputation	and	result	in	the	imposition	of	fines	and penalties,	the	termination	of	our	contracts,	suspension	or	debarment	from	bidding	on	or	being	awarded	contracts,	loss	of	our	ability	to	export	products	or	services	and civil	or	criminal	investigations	or	proceedings.

In	some	instances,	these	laws	and	regulations	impose	terms	or	rights	that	are	different	from	those	typically	found	in	commercial	transactions.	For	example,	the	U.S. Government	may	terminate	any	of	our	government	contracts	and	subcontracts	either	at	its	convenience	or	for	default	based	on	our	performance.	Upon	termination	for convenience	 of	 a	 fixed-price	 type	 contract,	 we	 normally	 are	 entitled	 to	 receive	 the	 purchase	 price	 for	 delivered	 items,	 reimbursement	 for	 allowable	 costs	 for work-in-process	and	an	allowance	for	profit	on	the	contract	or	adjustment	for	loss	if	completion	of	performance	would	have	resulted	in	a	loss.

Upon	termination	for	convenience	of	a	cost-reimbursable	contract,	we	normally	are	entitled	to	reimbursement	of	allowable	costs	plus	a	portion	of	the	fee.	Allowable costs	would	include	our	cost	to	terminate	agreements	with	our	suppliers	and	subcontractors.	The	amount	of	the	fee	recovered,	if	any,	is	related	to	the	portion	of	the	work accomplished	prior	to	termination	and	is	determined	by	negotiation.	We	attempt	to	ensure	that	adequate	funds	are	available	by	notifying	the	customer	when	its	estimated costs,	 including	 those	associated	with	a	possible	 termination	for	convenience,	approach	 levels	specified	as	being	allotted	 to	 its	programs.	As	funds	are	 typically appropriated	on	a	fiscal-year	basis	and	as	the	costs	of	a	termination	for	convenience	may	exceed	the	costs	of	continuing	a	program	in	a	given	fiscal	year,	occasionally programs	do	not	have	sufficient	funds	appropriated	to	cover	the	termination	costs	were	the	government	to	terminate	them	for	convenience.	Under	such	circumstances,	the U.S.	Government	could	assert	that	it	is	not	required	to	appropriate	additional	funding.

A	termination	arising	out	of	our	default	may	expose	us	to	liability	and	have	a	material	adverse	effect	on	our	ability	to	compete	for	future	contracts	and	orders.	In addition,	on	those	contracts	for	which	we	are	teamed	with	others	and	are	not	the	prime	contractor,	the	U.S.	Government	could	terminate	a	prime	contract	under	which	we are	a	subcontractor,	notwithstanding	the	quality	of	our	services	as	a	subcontractor.	In	the	case	of	termination	for	default,	the	U.S.	Government	could	make	claims	to reduce	the	contract	value	or	recover	its	procurement	costs	and	could	assess	other	special	penalties.	However,	under	such	circumstances	we	have	rights	and	remedial actions	under	laws	and	the	Federal	Acquisition	Regulation	(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	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.	The	U.S.	Government	has	the	ability	to	decrease	or	withhold	certain	payments	when	it	deems	systems subject	to	its	review	to	be	inadequate.	Additionally,	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.

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

# Our	profitability	and	cash	flow	may	vary	based	on	the	mix	of	our	contracts	and	programs,	our	performance,	our	ability	to	control	costs	and	evolving	U.S. Government	procurement	policies.

Our	profitability	and	cash	flow	may	vary	materially	depending	on	the	types	of	government	contracts	undertaken,	the	nature	of	products	produced	or	services performed	under	those	contracts,	the	costs	incurred	in	performing	the	work,	the	achievement	of	other	performance	objectives	and	the	stage	of	performance	at	which	the right	to	receive	fees	is	determined,	particularly	under	award	and	incentive-fee	contracts.

Our	backlog	includes	a	variety	of	contract	types	that	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.,	LRIP	contracts),	which	includes	the	challenge	of	starting	and	stabilizing	a manufacturing	production	and	test	line	while	the	final	design	is	being	validated.	These	generally	are	cost-reimbursable	or	fixed-price	incentive-fee	contracts.	Under	a fixed-price	incentive-fee	contract,	the	allowable	costs	incurred	are	eligible	for	reimbursement	but	are	subject	to	a	cost-share	arrangement,	which	affects	profitability. Generally,	if	our	costs	exceed	the	contract	target	cost	or	are	not	allowable	under	the	applicable	regulations,	we	may	not	be	able	to	obtain	reimbursement	for	all	costs	and may	have	our	fees	reduced	or	eliminated.

There	are	also	contracts	for	production,	as	well	as	operations	and	maintenance	of	the	delivered	products,	that	have	the	challenge	of	achieving	a	stable	production and	delivery	rate,	while	maintaining	operability	of	the	product	after	delivery.	These	contracts	are	mainly	fixed-price,	although	some	operations	and	maintenance contracts	are	time-and-materials	type.	Under	fixed-price	contracts,	we	receive	a	fixed	price	regardless	of	the	actual	costs	we	incur.	We	have	to	absorb	any	costs	in	excess of	the	fixed	price.	Under	time-and-materials	contracts,	we	are	paid	for	labor	at	negotiated	hourly	billing	rates	and	for	certain	expenses.

The	failure	to	perform	to	customer	expectations	and	contract	requirements	may	result	in	reduced	fees	or	losses	and	affect	our	financial	performance	in	that	period. Under	each	type	of	contract,	if	we	are	unable	to	control	costs,	our	operating	results	could	be	adversely	affected,	particularly	if	we	are	unable	to	justify	an	increase	in contract	value	to	our	customers.	Cost	overruns	or	the	failure	to	perform	on	existing	programs	also	may	adversely	affect	our	ability	to	retain	existing	programs	and	win future	contract	awards.

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	based	upon	the	customer's	view	of	what	our	costs	should	be	(as compared	to	our	actual	costs)	may	affect	the	predictability	of	our	profit	rates.	The	U.S.	Government's	unilateral	contract	action	definitizing	the	LRIP	9	F-35	contract reflected	differing	U.S.	Government	and	Lockheed	Martin	views	as	to	costs,	entitlement	to	performance-based	payments	and	profitability	and	could	negatively	impact the	profitability	and	cash	flows	of	LRIP	9,	LRIP	10	(which	remains	an	undefinitized	contract)	and	future	production	contracts.	Our	customers	are	subject	to	pressures that	may	result	in	a	change	in	contract	types	referenced	above	earlier	in	a	program's	maturity	than	is	traditional.	An	example	of	this	is	the	use	of	fixed-price	incentive-fee contracts	for	recent	LRIP	contracts	on	the	F-35	program	while	the	development	contract	is	being	performed	concurrently.	Our	customers	also	may	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	(including	the	LRIP	contracts),	a	concept	referred	to	as	concurrency,	which	may	require	us	to	pay	for	a	portion	of	the	concurrency	costs.	An	example	of customer	budget	pressures	includes	the	U.S.	Government	requiring	that	bid	and	proposal	costs	be	included	in	general	and	administrative	costs,	rather	than	charged directly	to	contracts	in	certain	circumstances.

Other	policies	could	negatively	impact	our	working	capital	and	cash	flow.	For	example,	the	government	has	expressed	a	preference	for	requiring	progress	payments rather	than	performance	based	payments	on	new	fixed-price	contracts,	which	if	implemented,	delays	our	ability	to	recover	a	significant	amount	of	costs	incurred	on	a contract	and	thus	affects	the	timing	of	our	cash	flows.

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

We	are	experiencing	increased	competition	while,	at	the	same	time,	our	customers	are	facing	budget	constraints,	trying	to	do	more	with	less	by	cutting	costs, identifying	more	affordable	solutions,	performing	certain	work	internally	rather	than	hiring	a	contractor,	and	reducing	product	development	cycles.	It	is	critical	we maintain	strong	customer	relationships	and	seek	to	understand	the	priorities	of	their	requirements	in	this	price	competitive	environment.

In	international	sales,	we	face	substantial	competition	from	both	U.S.	manufacturers	and	international	manufacturers	whose	governments	sometimes	provide research	and	development	assistance,	marketing	subsidies	and	other	assistance	for	their	products.	Additionally,	our	competitors	are	also	focusing	on	increasing	their international	sales	to	partially	mitigate	the

effect	of	reduced	U.S.	Government	budgets.	To	remain	competitive,	we	consistently	must	maintain	strong	customer	relationships	and	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.

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	and	other	multi-award	contracts,	which	have	the	potential	to	create	pricing	pressure	and	increase	our	cost	by	requiring that	we	submit	multiple	bids	and	proposals.	In	addition,	multi-award	contracts	require	that	we	make	sustained	efforts	to	obtain	task	orders	under	the	contract.	The competitive	bidding	process	entails	substantial	costs	and	managerial	time	to	prepare	bids	and	proposals	for	contracts	that	may	not	be	awarded	to	us	or	may	be	split among	competitors.	Additionally,	the	former	IS&GS	programs	we	moved	to	RMS	and	Space	Systems	in	the	fourth	quarter	of	2015	and	retained	could	experience increased	pricing	pressures	which	could	have	a	negative	impact	on	our	ability	to	win	future	follow-on	contracts.	Following	award,	we	may	encounter	significant expenses,	delays,	contract	modifications	or	bid	protests	from	unsuccessful	bidders	on	new	program	awards.	Unsuccessful	bidders	are	more	frequently	protesting	in	the hope	of	being	awarded	a	subcontract	for	a	portion	of	the	work	in	return	for	withdrawing	the	protest.	Bid	protests	could	result	in	significant	expenses	to	us,	contract modifications	or	even	loss	of	the	contract	award.	Even	where	a	bid	protest	does	not	result	in	the	loss	of	a	contract	award,	the	resolution	can	extend	the	time	until	the contract	activity	can	begin	and,	as	a	result,	delay	our	recognizing	sales.	We	also	may	not	be	successful	in	our	efforts	to	protest	or	challenge	any	bids	for	contracts	that were	not	awarded	to	us	and	we	could	incur	significant	time	and	expense	in	such	efforts.

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

For	most	of	our	contracts	we	rely	on	other	companies	to	provide	materials,	major	components	and	products,	and	to	perform	a	portion	of	the	services	that	we	provide to	our	customers.	Such	arrangements	may	involve	subcontracts,	teaming	arrangements,	ventures	or	supply	agreements	with	other	companies	upon	which	we	rely (contracting	parties).	There	is	a	risk	that	we	may	have	disputes	with	our	contracting	parties,	including	disputes	regarding	the	quality	and	timeliness	of	work	performed, the	workshare	provided	to	that	party,	customer	concerns	about	the	other	party's	performance,	our	failure	to	extend	existing	task	orders	or	issue	new	task	orders,	or	our hiring	the	personnel	of	a	subcontractor,	teammate	or	venture	partner	or	vice	versa.	In	addition,	changes	in	the	economic	environment,	including	defense	budgets	and constraints	on	available	financing,	may	adversely	affect	the	financial	stability	of	our	contracting	parties	and	their	ability	to	meet	their	performance	requirements	or	to provide	needed	supplies	on	a	timely	basis	as	might	their	inability	to	perform	profitably	in	the	current	highly	competitive	and	budget	constrained	environment.	A	failure, for	whatever	reason,	by	one	or	more	of	our	contracting	parties	to	provide	the	agreed-upon	supplies	or	perform	the	agreed-upon	services	on	a	timely	basis,	according	to specifications,	or	at	all	may	affect	our	ability	to	perform	our	obligations	and	require	that	we	transition	the	work	to	other	companies.	Contracting	party	performance deficiencies	may	result	in	additional	costs	or	delays	in	product	deliveries	and	affect	our	operating	results	and	could	result	in	a	customer	terminating	our	contract	for default	or	convenience.	A	default	termination	could	expose	us	to	liability	and	affect	our	ability	to	compete	for	future	contracts	and	orders.	Additionally,	our	efforts	to increase	the	efficiency	of	our	operations	and	improve	the	affordability	of	our	products	and	services	could	negatively	impact	our	ability	to	attract	and	retain	suppliers.

# International	sales	may	pose	different	risks.

In	2016,	27%	of	our	total	net	sales	were	from	international	customers.	We	have	a	strategy	to	grow	international	sales	over	the	next	several	years,	inclusive	of	sales of	F-35	aircraft	to	our	international	partners	and	other	countries.	International	sales	are	subject	to	numerous	political	and	economic	factors,	regulatory	requirements, significant	competition,	taxation,	and	other	risks	associated	with	doing	business	in	foreign	countries.	Our	exposure	to	such	risks	increased	as	a	result	of	our	acquisition	of Sikorsky	and	our	increased	ownership	interest	in	AWE	and	may	further	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	by	direct	commercial	sales	(DCS)	with international	customers.	In	2016,	approximately	66%	of	our	sales	to	international	customers	were	FMS	and	about	34%	were	DCS.	These	transaction	types	differ	as	FMS transactions	represent	sales	by	the	U.S.	Government	to	international	governments	and	our	contract	with	the	U.S.	Government	is	subject	to	FAR.	By	contrast,	DCS transactions	represent	sales	directly	to	another	international	government	or	commercial	customer.	All	sales	to	international	customers	are	subject	to	U.S.	and	foreign	laws and	regulations,	including,	without	limitation,	regulations	relating	to	anti-corruption,	import-export	control,	technology	transfer	restrictions,	taxation,	repatriation	of earnings,	exchange

controls,	the	Foreign	Corrupt	Practices	Act	and	other	anti-corruption	laws,	and	the	anti-boycott	provisions	of	the	U.S.	Export	Administration	Act.	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,	debarment	from	bidding	for	or	performing	government	contracts,	or suspension	of	our	export	privileges,	which	could	have	a	material	adverse	effect	on	us.	We	frequently	team	with	international	subcontractors	and	suppliers	who	are	also exposed	to	similar	risks.

While	international	sales,	whether	contracted	as	FMS	or	DCS,	present	risks	that	are	different	and	potentially	greater	than	those	encountered	in	our	U.S.	business, DCS	with	international	customers	may	impose	even	greater	risks.	DCS	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.	and	are	less	familiar	to	us.	International	regulations	may	be	interpreted	by	foreign	courts	less	bound	by	precedent	and	with	more discretion;	these	interpretations	frequently	have	terms	less	favorable	to	us	than	the	FAR.	Export	and	import,	tax	and	currency	risk	also	may	be	increased	for	DCS	with international	customers.	While	these	risks	are	potentially	greater	than	those	encountered	in	our	U.S.	business,	we	seek	to	price	our	products	and	services	commensurate with	the	risk	profile	on	DCS	with	international	customers.

Our	international	business	is	highly	sensitive	to	changes	in	regulations,	political	environments	or	security	risks	that	may	affect	our	ability	to	conduct	business outside	of	the	U.S.,	including	those	regarding	investment,	procurement,	taxation	and	repatriation	of	earnings.	Our	international	business	also	may	be	impacted	by changes	in	foreign	national	priorities,	foreign	government	budgets,	global	economic	conditions,	and	fluctuations	in	foreign	currency	exchange	rates.	Sales	of	military products	are	also	affected	by	defense	budgets	and	U.S.	foreign	policy.	Additionally,	the	timing	of	orders	from	our	international	customers	can	be	less	predictable	than for	our	U.S.	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	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,	investments	in	foreign	joint	ventures	and	financial	support	projects	as	an	incentive	or	as	a	condition	to	a	contract	award.	In	some	countries,	these offset	agreements	may	require	the	establishment	of	a	venture	with	a	local	company,	which	must	control	the	venture.	The	costs	to	satisfy	our	offset	obligations	are included	in	the	estimates	of	our	total	costs	to	complete	the	contract	and	may	impact	our	profitability	and	cash	flows.	The	ability	to	recover	investments	that	we	make	is generally	dependent	upon	the	successful	operation	of	ventures	that	we	do	not	control	and	may	involve	products	and	services	that	are	dissimilar	to	our	business	activities. In	these	and	other	situations,	we	could	be	liable	for	violations	of	law	for	actions	taken	by	these	entities	such	as	laws	related	to	anti-corruption,	import	and	export, taxation,	and	anti-boycott	restrictions.	Offset	agreements	generally	extend	over	several	years	and	may	provide	for	penalties	in	the	event	we	fail	to	perform	in	accordance with	the	offset	requirements	which	are	typically	subjective	and	can	be	outside	our	control.

# Our	business	could	be	negatively	affected	by	cyber	or	other	security	threats	or	other	disruptions.

We	routinely	experience	various	cybersecurity	threats,	threats	to	our	information	technology	infrastructure,	unauthorized	attempts	to	gain	access	to	our	company sensitive	information,	denial-of-service	attacks,	threats	to	the	security	of	our	facilities	and	employees,	and	threats	from	terrorist	acts,	as	do	our	customers,	suppliers, subcontractors	and	venture	partners.	We	may	experience	similar	security	threats	at	customer	sites	that	we	operate	and	manage.

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,	the	impact	of	any	future	incident	cannot	be	predicted.

Although	we	work	cooperatively	with	our	customers,	suppliers,	subcontractors,	venture	partners	and	acquisitions	to	seek	to	minimize	the	impact	of	cyber	threats, other	security	threats,	or	business	disruptions,	we	must	rely	on	the	safeguards	put	in	place	by	these	entities,	which	may	affect	the	security	of	our	information.	These entities	have	varying	levels	of	cybersecurity	expertise	and	safeguards,	and	their	relationships	with	government	contractors,	such	as	Lockheed	Martin,	may	increase	the likelihood	that	they	are	targeted	by	the	same	cyber	threats	we	face.

The	costs	related	to	cyber	or	other	security	threats	or	disruptions	may	not	be	fully	insured	or	indemnified	by	other	means.	Additionally,	some	cyber	technologies	we develop	under	contract	for	our	customers,	particularly	those	related	to

homeland	security,	may	raise	potential	liabilities	related	to	intellectual	property	and	civil	liberties,	including	privacy	concerns,	which	may	not	be	fully	insured	or indemnified	by	other	means.	Occurrence	of	any	of	these	events	could	adversely	affect	our	internal	operations,	the	services	we	provide	to	our	customers,	our	future financial	 results,	 our	 reputation,	 or	 our	 stock	 price.	Additionally,	 such	 events	 could	 result	 in	 the	 loss	 of	 competitive	 advantages	 derived	 from	 our	 research	 and development	efforts	or	other	intellectual	property;	early	obsolescence	of	our	products	and	services;	or	contractual	penalties.

# If	we	fail	to	manage	acquisitions,	divestitures,	equity	investments	and	other	transactions	successfully	or	if	acquired	entities	or	equity	investments	fail	to perform	as	expected,	our	financial	results,	business	and	future	prospects	could	be	harmed.

In	pursuing	our	business	strategy,	we	routinely	conduct	discussions,	evaluate	companies,	and	enter	into	agreements	regarding	possible	acquisitions,	divestitures, ventures	and	equity	investments.	We	seek	to	identify	acquisition	or	investment	opportunities	that	will	expand	or	complement	our	existing	products	and	services	or customer	base,	at	attractive	valuations.	We	often	compete	with	others	for	the	same	opportunities.	To	be	successful,	we	must	conduct	due	diligence	to	identify	valuation issues	and	potential	loss	contingencies;	negotiate	transaction	terms;	complete	and	close	complex	transactions;	integrate	acquired	companies	and	employees;	and	realize anticipated	operating	synergies	efficiently	and	effectively.	Acquisition,	divestiture,	venture	and	investment	transactions	often	require	substantial	management	resources and	have	the	potential	to	divert	our	attention	from	our	existing	business.	Unidentified	or	identified	but	un-indemnified	pre-closing	liabilities	could	affect	our	future financial	results,	particularly	successor	liability	under	procurement	laws	and	regulations	such	as	the	False	Claims	Act	or	Truth	in	Negotiations	Act,	anti-corruption,	tax, import-export	and	technology	transfer	laws	which	provide	for	civil	and	criminal	penalties	and	the	potential	for	debarment.	We	also	may	incur	unanticipated	costs	or expenses,	including	post-closing	asset	impairment	charges,	expenses	associated	with	eliminating	duplicate	facilities,	employee	retention,	transaction-related	or	other litigation,	and	other	liabilities.	Any	of	the	foregoing	could	adversely	affect	our	business	and	results	of	operations.

Ventures,	or	noncontrolling	equity	investments,	operate	under	shared	control	with	other	parties.	Under	the	equity	method	of	accounting	for	nonconsolidated ventures	and	investments,	we	recognize	our	share	of	the	operating	profit	of	these	ventures	in	our	results	of	operations.	Our	operating	results	may	be	affected	by	the performance	of	businesses	over	which	we	do	not	exercise	control,	which	includes	the	inability	to	influence	strategic	decisions	that	may	adversely	affect	our	business, financial	condition	and	results	of	operations.	Our	joint	ventures	face	many	of	the	same	risks	and	uncertainties	as	we	do.	The	most	significant	impact	of	our	equity investments	is	in	our	Space	Systems	business	segment	where	approximately	25%	of	its	2016	operating	profit	was	derived	from	its	share	of	earnings	from	equity	method investees,	particularly	that	in	United	Launch	Alliance	(ULA).	Approximately	3%	and	7%	of	our	Aeronautics	and	RMS	business	segments'	operating	profit	was	derived from	 their	shares	of	earnings	from	equity	method	 investees,	 including	 their	share	 in	Advanced	Military	Maintenance,	Repair	and	Overhaul	Center	LLC	venture (AMMROC).

# The	acquired	Sikorsky	business	may	underperform	relative	to	our	expectations,	the	transaction	may	cause	our	financial	results	to	differ	from	our	expectations or	the	expectations	of	the	investment	community	and	we	may	not	be	able	to	achieve	anticipated	cost	savings	or	other	anticipated	synergies.

On	November	6,	2015,	we	completed	the	acquisition	of	Sikorsky.	We	believe	that	we	will	benefit	from	the	integration	of	our	products	and	technologies	with	those of	the	Sikorsky	business	and	realize	synergies	and	potential	for	long-term	growth,	as	well	as	expanded	capabilities	and	customer	relationships	as	a	result	of	the acquisition.	However,	we	may	not	be	able	to	capture	anticipated	synergies,	tax	benefits,	cost	savings,	and	business	opportunities	in	the	time	frame	anticipated,	or	at	all. Changes	to	the	Federal	statutory	tax	rate	could	have	an	impact	on	the	tax	benefits	we	expect	in	connection	with	the	acquisition.	Due	to	the	recent	acquisition	and valuation,	the	carrying	value	and	fair	value	of	our	Sikorsky	reporting	unit	are	currently	closely	aligned.	Therefore,	any	business	deterioration,	contract	cancelations	or terminations,	or	market	pressures	could	cause	our	sales,	earnings	and	cash	flows	 to	decline	below	current	projections	and	could	cause	goodwill	 to	be	 impaired. Additionally,	Sikorsky	may	not	perform	as	expected,	or	demand	for	its	products	may	be	adversely	affected	by	global	economic	conditions,	including	oil	and	gas	trends that	are	outside	of	their	control.

# If	we	fail	to	maintain	an	effective	system	of	internal	controls	over	financial	reporting	there	is	a	reasonable	possibility	that	a	material	misstatement	of	our annual	or	interim	financial	statements	will	not	be	prevented	or	detected	on	a	timely	basis.

Effective	internal	controls	are	necessary	for	us	to	provide	reliable	and	accurate	financial	statements	and	to	effectively	prevent	fraud.	As	further	described,	in	Part	II Item	9A	"Controls	and	Procedures"	management	has	concluded	that,	because	of	a	material	weakness	in	internal	controls	within	Sikorsky's	processes	(specifically, Sikorsky	did	not	adequately	identify,

design	and	implement	appropriate	process-level	controls	for	its	processes	and	appropriate	information	technology	controls	for	its	information	technology	systems), which	we	acquired	on	November	6,	2015	and	which	operates	as	a	business	unit	of	our	RMS	business	segment,	our	disclosure	controls	and	procedures	were	not	effective as	of	December	31,	2016.	We	have	and	we	will	continue	to	enhance	our	controls	at	our	Sikorsky	business	unit	and	we	expect	that	the	remediation	of	this	material weakness	will	be	completed	prior	to	the	end	of	fiscal	year	2017.	However,	we	cannot	be	certain	that	these	measures	will	be	successful	or	that	we	will	be	able	to	prevent future	significant	deficiencies	or	material	weaknesses.	Material	inaccuracies	in	our	financial	statements	would	impair	their	value	to	management	and	our	Board	of Directors	 in	 making	 decisions	 as	 to	 the	 operation	 of	 our	 business,	 could	 impair	 our	 reputation	 and	 cause	 investors	 to	 lose	 confidence	 in	 our	 reported	 financial information,	which	could	have	a	negative	effect	on	investor	confidence	in	our	financial	statements,	the	trading	price	of	our	stock	and	our	access	to	capital.

# The	divestiture	of	our	Information	Systems	&	Global	Solutions	business	may	not	achieve	the	intended	benefits	and	may	expose	us	to	potential	risks	and liabilities.

We	completed	the	divestiture	of	our	IS&GS	business	on	August	16,	2016,	which	merged	with	a	subsidiary	of	Leidos	Holdings	Inc.	(Leidos),	in	a	Reverse	Morris Trust	transaction.	As	part	of	the	transaction,	we	also	completed	an	exchange	offer	that	resulted	in	a	reduction	of	our	outstanding	common	stock.	We	undertook	the divestiture	because	we	believed	that	this	business	could	achieve	greater	growth	and	create	more	value	for	customers	and	stockholders	outside	of	Lockheed	Martin	and that	we	could	benefit	from	greater	strategic	focus	of	our	resources	and	management	efforts.	We	may	not	benefit	as	expected	from	the	increased	focus	on	our	core business,	strategic	programs	and	objectives	made	possible	by	the	split-off	or	from	the	reduced	exposure	to	a	shorter	product	cycle	services	business.	Additionally,	the value	of	the	transaction	may	also	be	reduced	by	potential	liabilities	related	to	post-closing	adjustments	and	indemnities,	which	could	adversely	affect	our	results	of operations.

# If	the	divestiture	of	our	Information	Systems	&	Global	Solutions	business	or	certain	internal	transactions	undertaken	in	anticipation	of	the	divestiture	are determined	to	be	taxable	in	whole	or	in	part,	we	and	our	stockholders	may	incur	significant	tax	liabilities.

In	connection	with	the	divestiture	of	our	IS&GS	business,	we	obtained	opinions	of	outside	tax	counsel	that	the	merger	and	exchange	offer	will	qualify	as	tax-free transactions	to	us	and	our	stockholders,	except	to	the	extent	that	cash	was	paid	to	Lockheed	Martin	stockholders	in	lieu	of	fractional	shares.	We	have	not	sought	or obtained	a	ruling	from	the	Internal	Revenue	Service	(IRS)	on	each	of	the	tax	consequences	of	the	transaction.	An	opinion	of	counsel	is	not	binding	on	the	IRS	or	the courts,	which	may	disagree	with	the	opinion.	In	addition,	the	tax	opinions	are	subject	to	customary	qualifications	and	based	on	factual	representations.	Even	if	the merger	and	exchange	offer	otherwise	qualified	as	tax-free	transactions,	they	may	become	taxable	to	us	if	certain	events	occur	that	affect	either	Lockheed	Martin	or Leidos.	While	Leidos	has	agreed	not	to	take	certain	actions	that	could	cause	the	transactions	not	to	qualify	as	tax-free	 transactions	and	 is	generally	obligated	 to indemnify	us	against	any	tax	consequences	if	it	breaches	this	agreement,	the	potential	tax	liabilities	could	have	a	material	adverse	effect	on	us	if	we	were	not	entitled	to indemnification	or	if	the	indemnification	obligations	were	not	fulfilled.	If	the	merger	or	exchange	offer	were	determined	to	be	taxable,	we	could	be	subject	to	a substantial	tax	liability,	and	each	U.S.	holder	of	our	common	stock	who	participated	in	the	exchange	offer	could	be	treated	as	exchanging	the	Lockheed	Martin	shares surrendered	for	Abacus	shares	in	a	taxable	transaction.

# There	can	be	no	assurance	that	we	will	continue	to	increase	our	dividend	or	to	repurchase	shares	of	our	common	stock	at	current	levels.

The	payment	of	cash	dividends	and	share	repurchases	is	subject	to	limitations	under	applicable	law	and	the	discretion	of	our	Board	of	Directors	and	is	determined in	light	of	then	current	conditions,	including	earnings,	other	operating	results	and	capital	requirements.	Decreases	in	asset	values	or	increases	in	liabilities,	including liabilities	associated	with	benefit	plans	and	assets	and	liabilities	associated	with	taxes,	can	reduce	stockholders'	equity.	A	deficit	in	stockholders'	equity	could	limit	our ability	to	pay	dividends	and	make	share	repurchases	under	Maryland	Law	in	the	future.	In	addition,	the	timing	and	amount	of	share	repurchases	under	board	approved share	repurchase	plans	is	within	the	discretion	of	management	and	will	depend	on	many	factors,	 including	results	of	operations,	capital	requirements	as	well	as applicable	law.

# Our	business	involves	significant	risks	and	uncertainties	that	may	not	be	covered	by	indemnity	or	insurance.

A	significant	portion	of	our	business	relates	to	designing,	developing	and	manufacturing	advanced	defense	and	technology	products	and	systems.	New	technologies may	be	untested	or	unproven.	Failure	of	some	of	these	products	and	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,	cybersecurity,	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	or	the	Price-Anderson	Act,	qualification	of	our	products	and	services	by the	Department	of	Homeland	Security	under	the	SAFETY	Act	provisions	of	the	Homeland	Security	Act	of	2002,	contractual	provisions	or	otherwise.	We	endeavor	to obtain	insurance	coverage	from	established	insurance	carriers	to	cover	these	risks	and	liabilities.	The	amount	of	insurance	coverage	that	we	maintain	may	not	be adequate	to	cover	all	claims	or	liabilities.	Existing	coverage	may	be	cancelled	while	we	remain	exposed	to	the	risk,	and	it	is	not	possible	to	obtain	insurance	to	protect against	all	operational	risks	and	liabilities.	For	example,	we	are	limited	in	the	amount	of	insurance	we	can	obtain	to	cover	certain	natural	hazards,	such	as	earthquakes. We	have	significant	operations	in	geographic	areas	prone	to	this	risk,	such	as	Sunnyvale,	California.	Even	if	insurance	coverage	is	available,	we	may	not	be	able	to obtain	it	at	a	price	or	on	terms	acceptable	to	us.	Additionally,	disputes	with	insurance	carriers	over	coverage	terms	or	the	insolvency	of	one	or	more	of	our	insurance carriers	may	significantly	affect	the	amount	or	timing	of	our	cash	flows.

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

# Pension	funding	and	costs	are	dependent	on	several	economic	assumptions	which if	changed	may	cause	our	future	earnings	and	cash	flow	to	fluctuate significantly	as	well	as	affect	the	affordability	of	our	products	and	services.

Many	of	our	employees	are	covered	by	defined	benefit	pension	plans,	and	we	provide	certain	health	care	and	life	insurance	benefits	to	eligible	retirees.	The	impact of	these	plans	on	our	U.S.	generally	accepted	accounting	principles	(GAAP)	earnings	may	be	volatile	in	that	the	amount	of	expense	we	record	for	our	postretirement benefit	 plans	 may	 materially	 change	 from	 year	 to	 year	 because	 those	 calculations	 are	 sensitive	 to	 funding	 levels	 as	 well	 as	 changes	 in	 several	 key	 economic assumptions,	including	interest	rates,	rates	of	return	on	plan	assets,	and	other	actuarial	assumptions	including	participant	longevity	(also	known	as	mortality),	employee turnover,	as	well	as	the	timing	of	cash	funding.	Changes	in	these	factors,	including	actual	returns	on	plan	assets,	may	also	affect	our	plan	funding,	cash	flow	and stockholders'	equity.	In	addition,	the	funding	of	our	plans	and	recovery	of	costs	on	our	contracts,	as	described	below,	also	may	be	subject	to	changes	caused	by legislative	or	regulatory	actions.	We	have	taken	certain	actions	over	the	last	few	years	to	mitigate	the	impact	the	plans	may	have	on	our	cash	flows	and	earnings, including	amendments	made	in	June	2014	to	a	significant	portion	of	our	qualified	and	nonqualified	defined	benefit	pension	plans	for	non-union	employees	to	freeze future	retirement	benefits.	However,	the	impact	of	these	actions	on	our	cash	flow	and	earnings	may	be	less	than	anticipated	or	may	be	offset	by	other	factors	such	as changes	in	actuarial	assumptions	and	plan	asset	investment	returns.

With	regard	to	cash	flow,	we	have	made	substantial	cash	contributions	to	our	plans	as	required	by	the	Employee	Retirement	Income	Security	Act	of	1974	(ERISA), as	amended	by	the	Pension	Protection	Act	of	2006	(PPA).	We	generally	are	able	to	recover	these	contributions	related	to	our	plans	as	allowable	costs	on	our	U.S. Government	contracts,	 including	FMS,	but	 there	 is	a	 lag	between	when	we	contribute	cash	 to	our	plans	under	pension	funding	rules	and	recover	 it	under	U.S. Government	Cost	Accounting	Standards	(CAS).	Effective	February	2012,	the	CAS	rules	were	revised	to	harmonize	the	measurement	and	period	assignment	of	the pension	cost	allocable	to	government	contracts	with	the	PPA	(CAS	Harmonization).	In	2013,	the	cost	impact	of	CAS	Harmonization	started	being	phased	in	with	the goal	of	better	aligning	the	CAS	pension	cost	and	ERISA	funding	requirements	being	fully	achieved	in	2017.	The	enactment	of	the	Highway	and	Transportation	Funding Act	of	2014	and	Bipartisan	Budget	Act	of	2015	increased	the	interest	rate	assumption	used	to	determine	our	CAS	pension	costs,	which	has	the	effect	of	lowering	the recovery	of	pension	contributions	during	the	affected	periods	as	it	decreases	our	CAS	pension	costs.

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	11	–	Postretirement Plans"	included	in	our	Notes	to	Consolidated	Financial	Statements.

# 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	remediation	at	some	of	our	facilities,	some	of	our	former	facilities,	and	at

third-party-owned	sites	where	we	have	been	designated	a	potentially	responsible	party.	In	addition,	we	could	be	affected	by	future	regulations	imposed	or	claims	asserted in	response	to	concerns	over	climate	change,	other	aspects	of	the	environment	or	natural	resources.	We	have	an	ongoing	comprehensive	sustainability	program	to	reduce the	effects	of	our	operations	on	the	environment.

We	manage	and	have	managed	various	U.S.	Government-owned	facilities,	and	portions	of	U.S.	Government-owned	facilities,	on	behalf	of	the	U.S.	Government.	At such	facilities,	environmental	compliance	and	remediation	costs	historically	have	been	the	responsibility	of	the	U.S.	Government.	We	have	relied,	and	continue	to	rely with	respect	 to	past	practices,	upon	U.S.	Government	funding	 to	pay	such	costs,	notwithstanding	efforts	by	some	U.S.	Government	representatives	 to	 limit	 this responsibility.	Although	the	U.S.	Government	remains	responsible	for	capital	and	operating	costs	associated	with	environmental	compliance,	responsibility	for	fines	and penalties	associated	with	environmental	noncompliance	typically	is	borne	by	either	the	U.S.	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,	continually	evolving	governmental	environmental	standards	and	cost	allowability	issues,	including	varying	efforts by	the	U.S.	Government	to	limit	allowability	of	our	costs	in	resolving	liability	at	third	party-owned	sites.	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	 14	 –	 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	14	–	Legal	Proceedings,	Commitments	and	Contingencies"	included	in	our	Notes	to	Consolidated	Financial	Statements.

# Our	success	depends,	in	part,	on	our	ability	to	develop	new	products	and	technologies	and	maintain	a	qualified	workforce.

Many	of	the	products	and	services	we	provide	are	highly	engineered	and	involve	sophisticated	technologies,	with	related	complex	manufacturing	and	system integration	processes.	Our	customers'	requirements	change	and	evolve	regularly.	Accordingly,	our	future	performance	depends,	in	part,	on	our	ability	to	identify emerging	technological	trends,	develop	and	manufacture	innovative	products	and	service	and	bring	those	offerings	to	market	quickly	at	cost-effective	prices.

Additionally,	due	to	the	specialized	nature	of	our	business,	our	future	performance	is	highly	dependent	upon	our	ability	to	maintain	a	workforce	with	the	requisite skills	in	multiple	areas	including:	engineering,	science,	manufacturing,	information	technology,	cybersecurity,	business	development	and	strategy	and	management.	Our operating	performance	is	also	dependent	upon	personnel	who	hold	security	clearances	and	receive	substantial	training	in	order	to	work	on	certain	programs	or	tasks. Additionally,	as	we	expand	our	operations	internationally,	it	is	increasingly	important	to	hire	and	retain	personnel	with	relevant	experience	in	local	laws,	regulations, customs,	traditions	and	business	practices.

We	face	a	number	of	challenges	that	may	affect	personnel	retention	such	as	our	endeavors	to	increase	the	efficiency	of	our	operations	and	improve	the	affordability of	our	products	and	services	such	as	workforce	reductions	and	consolidating	and	relocating	certain	operations.	Additionally	as	our	workforce	ages,	our	demographic continues	to	shift	toward	a	higher	proportion	of	employees	nearing	retirement.	In	June	2014,	we	amended	certain	of	our	defined	benefit	pension	plans	for	non-union employees	to	freeze	future	retirement	benefits,	which	may	encourage	retirement-eligible	personnel	to	elect	to	retire	earlier	than	anticipated.	The	freeze	takes	place	in two	stages	and	will	be	completed	January	1,	2020.

To	the	extent	that	we	lose	experienced	personnel,	it	is	critical	that	we	develop	other	employees,	hire	new	qualified	personnel,	and	successfully	manage	the	transfer of	critical	knowledge.	Competition	for	personnel	is	intense,	and	we	may	not	be	successful	in	hiring	or	retaining	personnel	with	the	requisite	skills	or	clearances.	We increasingly	compete	with	commercial	technology	companies	outside	of	the	aerospace	and	defense	industry	for	qualified	technical,	cyber	and	scientific	positions	as	the number	of	qualified	domestic	engineers	is	decreasing	and	the	number	of	cyber	professionals	is	not	keeping	up	with	demand.	To	the	extent	that	these	companies	grow	at a	faster	rate	or	face	fewer	cost	and	product	pricing	constraints,	they	may	be	able	to	offer	more	attractive	compensation	and	other	benefits	to	candidates	or	our	existing employees.	To	the	extent	that	the	demand	for	skilled	personnel	exceeds	supply,	we	could	experience	higher	labor,	recruiting	or	training	costs	in	order	to	attract	and	retain such	employees;	we	could	experience	difficulty	in	performing	our	contracts	if	we	were	unable	to	do	so.	We	also	must	manage	leadership	development	and	succession planning	throughout	our	business.	While	we	have	processes	in	place	for	management	transition	and	the	transfer	of	knowledge,	the	loss	of	key	personnel,	coupled	with	an inability	to	adequately	train	other	personnel,	hire	new	personnel	or	transfer	knowledge,	could	significantly	impact	our	ability	to	perform	under	our	contracts.

Approximately	 21%	 of	 our	 employees	 are	 covered	 by	 collective	 bargaining	 agreements	 with	 various	 unions.	 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	in	the future.	If	we	encounter	difficulties	with	renegotiations	or	renewals	of	collective	bargaining	arrangements	or	are	unsuccessful	in	those	efforts,	we	could	incur	additional costs	and	experience	work	stoppages.	Union	actions	at	suppliers	can	also	affect	us.	Any	delays	or	work	stoppages	could	adversely	affect	our	ability	to	perform	under	our contracts,	which	could	negatively	impact	our	results	of	operations,	cash	flows,	and	financial	condition.

# 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.	Additionally,	we	initially	allocate	the	purchase	price	of	acquired	businesses	based on	a	preliminary	assessment	of	the	fair	value	of	identifiable	assets	acquired	and	liabilities	assumed.	For	significant	acquisitions	we	may	use	a	one-year	measurement period	to	analyze	and	assess	a	number	of	factors	used	in	establishing	the	asset	and	liability	fair	values	as	of	the	acquisition	date	and	could	result	in	adjustments	to	asset and	liability	balances.	Another	example	is	the	$10.8	billion	of	goodwill	assets	recorded	on	our	consolidated	balance	sheet	as	of	December	31,	2016	from	previous acquisitions,	which	represents	approximately	23%	of	our	total	assets.	These	goodwill	assets	are	subject	to	annual	impairment	testing	and	more	frequent	testing	upon	the occurrence	of	certain	events	or	significant	changes	in	circumstances	that	indicate	goodwill	may	be	impaired.	If	we	experience	changes	or	factors	arise	that	negatively affect	the	expected	cash	flows	of	a	reporting	unit,	we	may	be	required	to	write	off	all	or	a	portion	of	the	reporting	unit's	related	goodwill	assets.

Future	changes	in	U.S.	or	foreign	tax	laws,	including	those	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	new	tax	legislation,	with	a	corresponding	material,	one-time,	non-cash	increase	in	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,	2016	and	2015	were	$6.6	billion	and	$6.1	billion,	based	on	a 35%	Federal	statutory	income	tax	rate,	and	primarily	relate	to	our	postretirement	benefit	plans.	If	legislation	reducing	the	Federal	statutory	income	tax	rate	to	15%	had been	enacted	at	December	31,	2016,	our	net	deferred	tax	assets	would	have	been	reduced	by	$3.8	billion	and	we	would	have	recorded	a	corresponding	one-time, non-cash	increase	in	income	tax	expense	of	$3.8	billion.	This	additional	expense	would	be	less	if	the	legislation	phased	in	the	tax	rate	reduction	or	if	the	final	rate	was higher	than	15%.	The	amount	of	net	deferred	tax	assets	will	change	periodically	based	on	several	factors,	including	the	measurement	of	our	postretirement	benefit	plan obligations	and	actual	cash	contributions	to	our	postretirement	benefit	plans.

Actual	financial	results	could	differ	from	our	judgments	and	estimates.	See	"Critical	Accounting	Policies"	in	Management's	Discussion	and	Analysis	of	Financial Condition	and	Results	of	Operations	and	"Note	1	–	Significant	Accounting	Policies"	included	in	our	Notes	to	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,	2016,	we	owned	or	leased	building	space	(including	offices,	manufacturing	plants,	warehouses,	service	centers,	laboratories	and	other	facilities) at	approximately	400	locations	primarily	in	the	U.S.	Additionally,	we	manage	or	occupy	various	Government-owned	facilities	under	lease	and	other	arrangements.

At	December	31,	2016,	we	had	significant	operations	in	the	following	locations:

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

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

•	 Rotary	and	Mission	Systems	–	Colorado	Springs,	Colorado;	Stratford,	Connecticut;	Orlando,	Florida;	Moorestown/Mt.	Laurel,	New	Jersey;	Owego	and	Syracuse,

New	York;	Akron,	Ohio;	Manassas,	Virginia;	and	Mielec,	Poland.

•Space	Systems	–	Sunnyvale,	California;	Denver,	Colorado;	Albuquerque,	New	Mexico;	Valley	Forge,	Pennsylvania;	and	Reading,	England.

•	 Corporate	activities	–	Bethesda,	Maryland.

In	connection	with	the	increase	in	ownership	interest	of	AWE	Management	Limited,	we	assumed	5.8	million	square	feet	of	Government-owned	floor	space.	As	a result	of	our	divestiture	of	the	IS&GS	business,	we	reduced	our	owned	and	leased	floor	space	by	3.4	million	square	feet.

The	following	is	a	summary	of	our	square	feet	of	floor	space	by	business	segment	at	December	31,	2016	(in	millions):

|  |  |  | Government- |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Owned | Leased | Owned | Total |
| \t\t\t\tAeronautics | \t\t5.8 | \t\t2.4 | 14.5 | 22.7 |
| \t\t\t\tMissiles\tand\tFire\tControl | \t\t6.2 | \t\t2.9 | \t\t1.8 | 10.9 |
| \t\t\t\tRotary\tand\tMission\tSystems | 11.2 | \t\t7.6 | \t\t0.4 | 19.2 |
| \t\t\t\tSpace\tSystems | \t\t8.4 | \t\t2.4 | 13.6 | 24.4 |
| \t\t\t\tCorporate\tactivities | \t\t2.7 | \t\t1.0 | \t\t\t— | \t\t3.7 |
| Total | 34.3 | 16.3 | 30.3 | 80.9 |

We	believe	our	facilities	are	in	good	condition	and	adequate	for	their	current	use.	We	may	improve,	replace	or	reduce	facilities	as	considered	appropriate	to	meet the	needs	of	our	operations.

# ITEM	3. Legal	Proceedings.

We	are	a	party	to	or	have	property	subject	to	litigation	and	other	proceedings	that	arise	in	the	ordinary	course	of	our	business,	including	matters	arising	under provisions	relating	to	the	protection	of	the	environment,	and	are	subject	to	contingencies	related	to	certain	businesses	we	previously	owned.	These	types	of	matters	could result	in	fines,	penalties,	compensatory	or	treble	damages	or	non-monetary	sanctions	or	relief.	We	believe	the	probability	is	remote	that	the	outcome	of	these	matters	will have	a	material	adverse	effect	on	the	Corporation	as	a	whole,	notwithstanding	that	the	unfavorable	resolution	of	any	matter	may	have	a	material	effect	on	our	net earnings	in	any	particular	interim	reporting	period.	We	cannot	predict	the	outcome	of	legal	or	other	proceedings	with	certainty.	These	matters	include	the	proceedings summarized	in	"Note	14	–	Legal	Proceedings,	Commitments	and	Contingencies"	included	in	our	Notes	to	Consolidated	Financial	Statements.

We	are	subject	 to	federal,	state,	 local	and	foreign	requirements	for	protection	of	 the	environment,	 including	 those	for	discharge	of	hazardous	materials	and remediation	of	contaminated	sites.	As	a	result,	we	are	a	party	to	or	have	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	14	–	Legal	Proceedings,	Commitments	and	Contingencies" included	in	our	Notes	to	Consolidated	Financial	Statements.

As	a	U.S.	Government	contractor,	we	are	subject	to	various	audits	and	investigations	by	the	U.S.	Government	to	determine	whether	our	operations	are	being conducted	in	accordance	with	applicable	regulatory	requirements.	U.S.

Government	investigations	of	us,	whether	relating	to	government	contracts	or	conducted	for	other	reasons,	could	result	in	administrative,	civil,	or	criminal	liabilities, including	repayments,	fines	or	penalties	being	imposed	upon	us,	suspension,	proposed	debarment,	debarment	from	eligibility	for	future	U.S.	Government	contracting,	or suspension	of	export	privileges.	Suspension	or	debarment	could	have	a	material	adverse	effect	on	us	because	of	our	dependence	on	contracts	with	the	U.S.	Government. U.S.	Government	investigations	often	take	years	to	complete	and	many	result	in	no	adverse	action	against	us.	We	also	provide	products	and	services	to	customers	outside of	the	U.S.,	which	are	subject	to	U.S.	and	foreign	laws	and	regulations	and	foreign	procurement	policies	and	practices.	Our	compliance	with	local	regulations	or applicable	U.S.	Government	regulations	also	may	be	audited	or	investigated.

# ITEM	4. Mine	Safety	Disclosures.

Not	applicable.

# ITEM	4(a). Executive	Officers	of	the	Registrant.

Our	executive	officers	as	of	February	9,	2017	are	listed	below,	with	their	ages	on	that	date,	positions	and	offices	currently	held,	and	principal	occupation	and business	experience	during	at	least	the	last	five	years.	There	were	no	family	relationships	among	any	of	our	executive	officers	and	directors.	All	officers	serve	at	the discretion	of	the	Board	of	Directors.

# Richard	F.	Ambrose	(age	58),	Executive	Vice	President	–	Space	Systems

Mr.	Ambrose	has	served	as	Executive	Vice	President	of	Space	Systems	since	April	2013.	He	previously	served	as	Vice	President	and	Deputy,	Space	Systems	from July	2012	to	March	2013;	and	President,	Information	Systems	&	Global	Solutions	–	Security	from	January	2011	to	June	2012.

# Dale	P.	Bennett	(age	60),	Executive	Vice	President	–	Rotary	and	Mission	Systems

Mr.	Bennett	has	served	as	Executive	Vice	President	of	Rotary	and	Mission	Systems	since	December	2012.	He	previously	served	as	President,	Mission	Systems	& Sensors	from	August	2011	to	December	2012.

# Orlando	P.	Carvalho	(age	58),	Executive	Vice	President	–	Aeronautics

Mr.	Carvalho	has	served	as	Executive	Vice	President	of	Aeronautics	since	March	2013.	He	previously	served	as	Executive	Vice	President	and	General	Manager,

# Brian	P.	Colan	(age	56),	Vice	President,	Controller,	and	Chief	Accounting	Officer

Mr.	Colan	has	served	as	Vice	President,	Controller,	and	Chief	Accounting	Officer	since	August	2014.	He	previously	served	as	Vice	President	and	Controller, Missiles	and	Fire	Control	from	January	2013	to	August	2014;	and	Vice	President	and	Controller,	Electronic	Systems	from	October	2011	to	January	2013.

# Richard	H.	Edwards	(age	60),	Executive	Vice	President	–	Missiles	and	Fire	Control

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

# Marillyn	A.	Hewson	(age	63),	Chairman,	President	and	Chief	Executive	Officer

Ms.	Hewson	has	served	as	Chairman,	President	and	Chief	Executive	Officer	of	Lockheed	Martin	since	January	2014.	Having	served	over	30	years	at	Lockheed Martin	in	roles	of	increasing	responsibility,	she	held	the	positions	of	Chief	Executive	Officer	and	President	from	January	2013	to	December	2013;	President	and	Chief Operating	Officer	from	November	2012	to	December	2012;	and	Executive	Vice	President	–	Electronic	Systems	from	January	2010	to	November	2012.

# Maryanne	R.	Lavan	(age	57),	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.

# John	W.	Mollard	(age	59),	Vice	President	and	Treasurer

Mr.	Mollard	has	served	as	Vice	President	and	Treasurer	since	April	2016.	He	previously	served	as	Vice	President,	Corporate	Financial	Planning	and	Analysis	from 2003	to	April	2016.

# Bruce	L.	Tanner	(age	57),	Executive	Vice	President	and	Chief	Financial	Officer

Mr.	Tanner	has	served	as	Executive	Vice	President	and	Chief	Financial	Officer	since	September	2007.

# PART	II

# ITEM	5. Market	for	Registrant's	Common	Equity,	Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity	Securities.

At	January	27,	2017,	we	had	28,697	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	high	and	low	reported	sales	prices	of	Lockheed	Martin	common	stock	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 | Stock	Prices	(High-Low) | Stock	Prices	(High-Low) |
| :--- | :--- | :--- | :--- | :--- |
| Quarter | 2016 | 2015 | 2016 | 2015 |
| \t\t\t\tFirst | $1.65 | $1.50 | $223.19\t\t-\t\t$200.47\t\t\t\t\t\t $ | 207.06\t\t-\t\t$186.01 |
| \t\t\t\tSecond | 1.65 | 1.50 | 245.37\t\t-\t\t\t\t218.34 | 206.19\t\t-\t\t\t\t185.65 |
| \t\t\t\tThird | 1.65 | 1.50 | 266.93\t\t-\t\t\t\t235.28 | 213.34\t\t-\t\t\t\t181.91 |
| \t\t\t\tFourth | 1.82 | 1.65 | 269.90\t\t-\t\t\t\t228.50 | 227.91\t\t-\t\t\t\t199.01 |
| \t\t\t\tYear | $6.77 | $6.15 | $269.90\t\t-\t\t$200.47\t\t\t\t\t\t $ | 227.91\t\t-\t\t$181.91 |

# 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,	2011	to	the	Standard	and Poor's	(S&P)	500	Index	and	the	S&P	Aerospace	&	Defense	(S&P	Aero)	Index.

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

This	graph	is	not	deemed	to	be	"filed"	with	the	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.

# Purchases	of	Equity	Securities

The	following	table	provides	information	about	our	repurchases	of	our	common	stock	registered	pursuant	to	Section	12	of	the	Exchange	Act	during	the	quarter ended	December	31,	2016.

|  |  |  | Total	Number	of | Future	Share |
| :--- | :--- | :--- | :--- | :--- |
|  | Total |  | Shares\tPurchased | Repurchases |
| \t\tPeriod\t(a) | Number\tof\nShares\nPurchased | Average\nPrice\tPaid\nPer\tShare | as\tPart\tof\tPublicly\nAnnounced\tPlans\tor\nPrograms\t(b) | Under\tthe\nPlans\tor\nPrograms\t(b) |
|  |  |  |  | (in\tmillions) |
| September\t26,\t2016\t–\tOctober\t30,\t2016 | \t\t\t1,294,018 | $235.56 | \t\t1,293,734 | $4,015 |
| October\t31,\t2016\t–\tNovember\t27,\t2016 | \t\t\t\t\t\t712,100 | $254.42 | \t\t\t\t\t711,974 | $3,834 |
| November\t28,\t2016\t–\tDecember\t31,\t2016 | \t\t\t1,281,651 | $259.81 | \t\t1,270,668 | $3,504 |
| Total | \t\t\t\t\t3,287,769(c) | $249.09 | \t\t3,276,376 |  |

(a) We	close	our	books	and	records	on	the	last	Sunday	of	each	month	to	align	our	financial	closing	with	our	business	processes,	except	for	the	month	of	December,	as	our	fiscal year	ends	on	December	31.	As	a	result,	our	fiscal	months	often	differ	from	the	calendar	months.	For	example,	September	26,	2016	was	the	first	day	of	our	October	2016 fiscal	month.

(b) In	October	2010,	our	Board	of	Directors	approved	a	share	repurchase	program	pursuant	to	which	we	are	authorized	to	repurchase	our	common	stock	in	privately	negotiated transactions	or	in	the	open	market	at	prices	per	share	not	exceeding	the	then-current	market	prices.	On	September	22,	2016,	our	Board	of	Directors	authorized	a	$2.0	billion increase	to	the	program.	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.	This	includes	purchases	pursuant	to	Rule	10b5-1	plans.	The	program	does	not	have	an	expiration	date.

(c) During	the	quarter	ended	December	31,	2016,	the	total	number	of	shares	purchased	included	11,393	shares	that	were	transferred	to	us	by	employees	in	satisfaction	of minimum	tax	withholding	obligations	associated	with	the	vesting	of	restricted	stock	units.	These	purchases	were	made	pursuant	to	a	separate	authorization	by	our	Board	of Directors	and	are	not	included	within	the	program.

# ITEM	6. Selected	Financial	Data.

The	operating	results	of	the	IS&GS	business	have	been	classified	as	discontinued	operations	for	all	periods	presented	and	the	assets	and	liabilities	of	the	IS&GS business	have	been	classified	as	assets	and	liabilities	of	discontinued	operations	for	all	periods	presented.	However,	the	cash	flows	generated	by	the	IS&GS	business have	not	been	reclassified	in	our	cash	flow	information	as	we	retained	the	cash	as	part	of	the	divestiture	of	the	IS&GS	business.	See	"Note	3	–	Acquisitions	and Divestitures"	included	in	our	Notes	to	Consolidated	Financial	Statements	for	additional	information	about	the	divestiture	of	the	IS&GS	business.

| (In	millions,	except	per	share	data) | 2016 | 2015 | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Operating\tresults |  |  |  |  |  |
| Net\tsales | $47,248 | $40,536 | $39,946 | $39,243 | $40,573 |
| Operating\tprofit\t(a)(b) | 5,549 | 4,712 | 5,012 | 4,066 | 3,748 |
| Net\tearnings\tfrom\tcontinuing\toperations\t(a)(b) | 3,753 | 3,126 | 3,253 | 2,701 | 2,297 |
| Net\tearnings\tfrom\tdiscontinued\toperations\t(c) | 1,549 | 479 | 361 | 280 | 448 |
| Net\tearnings\t(b) | 5,302 | 3,605 | 3,614 | 2,981 | 2,745 |
| Earnings\tfrom\tcontinuing\toperations\tper\tcommon\tshare |  |  |  |  |  |
| Basic\t(a)(b) | 12.54 | 10.07 | 10.27 | 8.42 | 7.10 |
| Diluted\t(a)(b) | 12.38 | 9.93 | 10.09 | 8.27 | 6.99 |
| Earnings\tfrom\tdiscontinued\toperations\tper\tcommon\tshare |  |  |  |  |  |
| Basic | 5.17 | 1.55 | 1.14 | 0.87 | 1.38 |
| Diluted | 5.11 | 1.53 | 1.12 | 0.86 | 1.36 |
| Earnings\tper\tcommon\tshare |  |  |  |  |  |
| Basic\t(b) | 17.71 | 11.62 | 11.41 | 9.29 | 8.48 |
| Diluted\t(b) | 17.49 | 11.46 | 11.21 | 9.13 | 8.36 |
| Cash\tdividends\tdeclared\tper\tcommon\tshare | $6.77 | $6.15 | $5.49 | $4.78 | $4.15 |
| Balance\tsheet\t(d) |  |  |  |  |  |
| Cash,\tcash\tequivalents\tand\tshort-term\tinvestments\t(b) | $1,837 | $1,090 | $1,446 | $2,617 | $1,898 |
| Total\tcurrent\tassets\t(e) | \t 15,108 | \t 14,573 | \t 10,684 | \t 12,081 | \t 12,401 |
| Goodwill\t(f) | \t 10,764 | \t 10,695 | 7,964 | 7,698 | 7,697 |
| Total\tassets\t(b)(e)(f) | \t 47,806 | \t 49,304 | \t 37,190 | \t 36,352 | \t 38,890 |
| Total\tcurrent\tliabilities\t(e) | \t 12,542 | \t 13,918 | \t 10,954 | \t 10,983 | \t 11,993 |
| Total\tdebt,\tnet\t(g) | \t 14,282 | \t 15,261 | 6,142 | 6,127 | 6,280 |
| Total\tliabilities\t(b)(e)(g) | \t 46,200 | \t 46,207 | \t 33,790 | \t 31,434 | \t 38,851 |
| Total\tequity\t(b) | 1,606 | 3,097 | 3,400 | 4,918 | 39 |
| Common\tshares\tin\tstockholders'\tequity\tat\tyear-end | 289 | 303 | 314 | 319 | 321 |
| Cash\tflow\tinformation |  |  |  |  |  |
| Net\tcash\tprovided\tby\toperating\tactivities\t(b)(h) | $5,189 | $5,101 | $3,866 | $4,546 | $1,561 |
| Net\tcash\tused\tfor\tinvesting\tactivities\t(i) | (985) | (9,734) | (1,723) | (1,121) | (1,177) |
| Net\tcash\tprovided\tby\t(used\tfor)\tfinancing\tactivities\t(j) | (3,457) | 4,277 | (3,314) | (2,706) | (2,068) |
| Backlog\t(k) | $96,200 | $94,800 | $74,500 | $76,300 | $75,600 |

(a) Our	operating	profit	and	net	earnings	from	continuing	operations	and	earnings	per	share	from	continuing	operations	were	affected	by	severance	charges	of	$80	million ($52	million	or	$0.17	per	share,	after	tax)	in	2016;	severance	charges	of	$82	million	($53	million	or	$0.17	per	share,	after	tax)	in	2015;	severance	charges	of	$156	million ($101	million	or	$0.31	per	share,	after	tax)	in	2013.	See	"Note	15	–	Restructuring	Charges"	included	in	our	Notes	to	Consolidated	Financial	Statements	for	a	discussion	of 2016	and	2015	restructuring	charges.

(b) The	impact	of	our	postretirement	benefit	plans	can	cause	our	operating	profit,	net	earnings,	cash	flows	and	certain	amounts	recorded	on	our	consolidated	balance	sheets	to fluctuate.	Accordingly,	our	earnings	were	affected	by	a	FAS/CAS	pension	adjustment	of	$902	million,	$400	million	and	$317	million	in	2016,	2015	and	2014	and	$(500) million	and	$(832)	million	in	2013	and	2012.	We	made	$23	million	in	2016	and	$5	million	in	2015	of	pension	contributions	(for	our	newly	established	Sikorsky	plan), $2.0	billion	in	2014,	$2.25	billion	in	2013	and	$3.6	billion	in	2012	(for	our	legacy	plans),	and	these	contributions	caused	fluctuations	in	our	operating	cash	flows	and	cash balance	between	each	of	those	years.	Fluctuations	in	our	total	assets,	total	liabilities	and	stockholders'	equity	between	years	2012	to	2014	primarily	were	due	to	the	annual measurement	of	the	funded	status	of	our	postretirement	benefit	plans.	See	"Critical	Accounting	Policies	–	Postretirement	Benefit	Plans"	in	Management's	Discussion	and Analysis	of	Financial	Condition	and	Results	of	Operations	for	more	information.

(c) Our	net	earnings	from	discontinued	operations	includes	a	$1.2	billion	net	gain	in	2016	related	to	the	divesture	of	our	IS&GS	business.

(d) Certain	prior	period	amounts	have	been	reclassified	to	conform	to	current	year	presentation.

(f) The	increase	in	our	goodwill	and	total	assets	from	2014	to	2015	was	primarily	attributable	to	the	Sikorsky	acquisition,	which	resulted	in	an	increase	in	goodwill	and	total assets	as	of	December	31,	2015	of	$2.8	billion	and	$11.7	billion,	respectively.

(g) The	increase	in	our	total	debt	and	total	liabilities	from	2014	to	2015	was	primarily	a	result	of	the	debt	incurred	to	fund	the	Sikorsky	acquisition,	as	well	as	the	issuance	of debt	in	February	of	2015	for	general	corporate	purposes	(see	"Note	3	–	Acquisitions	and	Divestitures"	and	"Note	10	–	Debt"	included	in	our	Notes	to	Consolidated	Financial Statements).

(h) The	fluctuations	in	our	net	cash	provided	by	operating	activities	between	years	2012	to	2016	were	due	to	changes	in	pension	contributions,	working	capital	and	tax	payments made.	See	"Liquidity	and	Cash	Flows"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	for	more	information.

(i) The	increase	in	our	cash	used	for	investing	activities	in	2015	was	attributable	to	acquisitions	of	businesses,	including	the	$9.0	billion	acquisition	of	Sikorsky	in	2015,	net	of cash	acquired	(see	"Note	3	–	Acquisitions	and	Divestitures"	included	in	our	Notes	to	Consolidated	Financial	Statements).

(j) The	increase	in	our	cash	provided	by	financing	activities	in	2015	was	primarily	a	result	of	the	debt	incurred	to	fund	the	Sikorsky	acquisition	(see	"Note	10	–	Debt"	included in	our	Notes	to	Consolidated	Financial	Statements).	The	increase	in	our	cash	used	for	financing	activities	in	2014	was	due	to	decreased	proceeds	from	stock	option	exercises; higher	dividends	paid	and	increased	payments	for	repurchases	of	common	stock.	See	"Liquidity	and	Cash	Flows"	in	Management's	Discussion	and	Analysis	of	Financial Condition	and	Results	of	Operations	for	more	information.

# ITEM	7. Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations.

# Business	Overview

We	are	a	global	security	and	aerospace	company	principally	engaged	in	the	research,	design,	development,	manufacture,	integration	and	sustainment	of	advanced technology	 systems,	 products	 and	 services.	 We	 also	 provide	 a	 broad	 range	 of	 management,	 engineering,	 technical,	 scientific,	 logistics,	 system	 integration	 and cybersecurity	services.	We	serve	both	U.S.	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	2016,	71%	of	our	$47.2	billion	in	net	sales	were	from	the	U.S.	Government,	either	as	a	prime	contractor or	as	a	subcontractor	(including	59%	from	 the	Department	of	 Defense	 (DoD)),	 27%	 were	 from	 international	 customers	 (including	 foreign	 military	 sales	 (FMS) contracted	through	the	U.S.	Government)	and	2%	were	from	U.S.	commercial	and	other	customers.	Our	main	areas	of	focus	are	in	defense,	space,	intelligence,	homeland security	and	information	technology,	including	cybersecurity.

We	operate	in	four	business	segments:	Aeronautics,	Missiles	and	Fire	Control	(MFC),	Rotary	and	Mission	Systems	(RMS)	and	Space	Systems.	We	organize	our business	segments	based	on	the	nature	of	products	and	services	offered.

We	operate	in	an	environment	characterized	by	both	increasing	complexity	in	global	security	and	continuing	economic	pressures	in	the	U.S.	and	globally.	A significant	component	of	our	strategy	in	this	environment	is	to	focus	on	program	execution,	improving	the	quality	and	predictability	of	the	delivery	of	our	products	and services	and	placing	security	capability	quickly	into	the	hands	of	our	U.S.	and	international	customers	at	affordable	prices.	Recognizing	that	our	customers	are	resource constrained,	we	are	endeavoring	to	develop	and	extend	our	portfolio	domestically	in	a	disciplined	manner	with	a	focus	on	adjacent	markets	close	to	our	core	capabilities, as	well	as	growing	our	international	sales.	We	continue	to	focus	on	affordability	initiatives.	We	also	expect	to	continue	to	invest	in	technologies	to	fulfill	new	mission requirements	for	our	customers	and	invest	in	our	people	so	that	we	have	the	technical	skills	necessary	to	succeed	without	limiting	our	ability	to	return	substantially	all	of our	free	cash	flow1	to	our	investors	in	the	form	of	dividends	and	share	repurchases.

We	expect	2017	net	sales	will	increase	in	the	mid-single	digit	range	from	2016	levels.	The	projected	growth	is	driven	by	increased	production	and	sustainment volume	on	the	F-35	program	at	Aeronautics	as	well	as	increased	volume	at	MFC	and	RMS,	partially	offset	by	decreased	volume	at	Space	Systems.	Operating	profit margin	is	expected	to	decline	from	2016	levels	primarily	driven	by	higher	volume	on	the	F-35	program,	which	is	dilutive	to	our	overall	profit	margin,	contract	mix	at MFC,	lower	AWE	Management	Limited	(AWE)	earnings	as	a	result	of	the	 non-cash	gain	recognized	in	2016	related	the	consolidation	of	AWE,	amortization	of	AWE intangible	assets	in	2017	and	lower	equity	earnings	at	Space	Systems.	Accordingly,	we	expect	2017	segment	operating	profit	margin	will	decline	from	our	2016	margin to	just	above	10%.	Our	outlook	for	2017	assumes	the	U.S.	Government	continues	to	support	and	fund	our	key	programs,	consistent	with	the	government	fiscal	year (GFY)	2017	budget.	Changes	in	circumstances	may	require	us	to	revise	our	assumptions,	which	could	materially	change	our	current	estimate	of	2017	net	sales	and operating	profit	margin.	For	additional	information	related	to	trends	in	net	sales	and	operating	profit	at	our	business	segments,	see	the	"Business	Segment	Results	of Operations"	discussion	below.

We	expect	the	2017	FAS/CAS	pension	adjustment	to	be	approximately	$880	million,	which	incorporates	a	year	end	2016	discount	rate	of	4.125%,	a	25	basis	point decrease	from	the	end	of	2015;	an	actual	investment	return	during	2016	of	approximately	5.0%;	a	50	basis	point	reduction	in	our	long-term	rate	of	return	assumption from	8.00%	to	7.50%;	and	the	revised	longevity	assumptions	released	on	October	20,	2016	by	the	Society	of	Actuaries.	We	do	not	expect	to	make	contributions	to	our legacy	qualified	defined	benefit	pension	plans	in	2017.

# 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.

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	also	may	explore	the	divestiture	of	businesses	that	no	longer	meet	our	needs	or	strategy	or	that	could	perform	better	outside	of	our organization.	In	pursuing	our	business	strategy,	we	routinely	conduct	discussions,	evaluate	targets	and	enter	into	agreements	regarding	possible	acquisitions,	divestitures, ventures	and	equity	investments.

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 consolidated	statements	of	cash	flows.

# Business	Developments

# Acquisition	of	Sikorsky	Aircraft	Corporation

On	November	6,	2015,	pursuant	to	a	Stock	Purchase	Agreement,	dated	as	of	July	19,	2015	by	and	between	us	and	United	Technologies	Corporation	(UTC)	and certain	wholly-owned	subsidiaries	of	UTC,	we	completed	the	acquisition	of	Sikorsky	Aircraft	Corporation	(Sikorsky)	for	$9.0	billion,	net	of	cash	acquired.	Sikorsky,	a global	company	primarily	engaged	in	the	design,	manufacture,	service	and	support	of	military	and	commercial	helicopters,	has	become	a	wholly-owned	subsidiary	of ours,	aligned	under	the	RMS	business	segment.	We	funded	the	acquisition	with	new	debt	issuances,	commercial	paper	and	cash	on	hand.	We	and	UTC	made	a	joint election	under	Section	338(h)(10)	of	the	Internal	Revenue	Code,	which	treats	the	transaction	as	an	asset	purchase	for	tax	purposes.	Calculated	using	the	Federal	Statutory income	tax	rate,	this	election	generates	a	cash	tax	benefit	with	an	estimated	net	present	value	at	the	date	of	acquisition	of	$1.9	billion	for	us	and	our	stockholders.	The 2015	financial	results	of	the	acquired	Sikorsky	business	have	been	included	in	our	consolidated	results	of	operations	from	the	November	6,	2015	acquisition	date through	December	31,	2015.	Accordingly,	the	consolidated	financial	results	for	the	year	ended	December	31,	2015	do	not	reflect	a	full	year	of	Sikorsky's	operations.	See "Capital	Structure,	Resources	and	Other"	included	within	"Liquidity	and	Cash	Flows"	discussion	below	and	"Note	10	–	Debt"	included	in	our	Notes	to	Consolidated Financial	Statements	for	a	discussion	of	the	debt	we	incurred	in	connection	with	the	Sikorsky	acquisition.

On	August	16,	2016,	we	completed	the	previously	announced	divestiture	of	the	IS&GS	business,	which	merged	with	a	subsidiary	of	Leidos,	in	a	Reverse	Morris Trust	transaction	(the	"Transaction").	The	Transaction	was	completed	in	a	multi-step	process	pursuant	to	which	we	initially	contributed	the	IS&GS	business	to	Abacus Innovations	 Corporation	 (Abacus),	 a	 wholly-owned	 subsidiary	 of	 Lockheed	 Martin	 created	 to	 facilitate	 the	 Transaction,	 and	 the	 common	 stock	 of	Abacus	 was distributed	to	participating	Lockheed	Martin	stockholders	through	an	exchange	offer.	Under	the	terms	of	the	exchange	offer,	Lockheed	Martin	stockholders	had	the option	to	exchange	shares	of	Lockheed	Martin	common	stock	for	shares	of	Abacus	common	stock.	At	the	conclusion	of	the	exchange	offer,	all	shares	of	Abacus common	stock	were	exchanged	for	9,369,694	shares	of	Lockheed	Martin	common	stock	held	by	Lockheed	Martin	stockholders	that	elected	to	participate	in	the exchange.	The	shares	of	Lockheed	Martin	common	stock	 that	were	exchanged	and	accepted	were	retired,	reducing	 the	number	of	shares	of	our	common	stock outstanding	by	approximately	3%.	Following	the	exchange	offer,	Abacus	merged	with	a	subsidiary	of	Leidos,	with	Abacus	continuing	as	the	surviving	corporation	and	a wholly-owned	subsidiary	of	Leidos.	As	part	of	the	merger,	each	share	of	Abacus	common	stock	was	automatically	converted	into	one	share	of	Leidos	common	stock. We	did	not	receive	any	shares	of	Leidos	common	stock	as	part	of	the	Transaction	and	do	not	hold	any	shares	of	Leidos	or	Abacus	common	stock	following	the Transaction.	Based	on	an	opinion	of	outside	tax	counsel,	subject	to	customary	qualifications	and	based	on	factual	representations,	both	the	exchange	offer	and	merger will	qualify	as	tax-free	transactions	to	Lockheed	Martin	and	its	stockholders,	except	to	the	extent	that	cash	was	paid	to	Lockheed	Martin	stockholders	in	lieu	of	fractional shares.

In	connection	with	the	Transaction,	Abacus	borrowed	an	aggregate	principal	amount	of	approximately	$1.84	billion	under	term	loan	facilities	with	third	party financial	institutions,	the	proceeds	of	which	were	used	to	make	a	one-time	special	cash	payment	of	$1.80	billion	to	Lockheed	Martin	and	to	pay	associated	borrowing fees	and	expenses.	The	entire	special	cash	payment	was	used	to	repay	debt,	pay	dividends	and	repurchase	stock	in	the	third	and	fourth	quarters	of	2016.	The	obligations under	the	Abacus	term	loan	facilities	were	guaranteed	by	Leidos	as	part	of	the	Transaction.

As	a	result	of	the	Transaction,	we	recognized	a	net	gain	of	approximately	$1.2	billion.	The	net	gain	represents	the	$2.5	billion	fair	value	of	the	shares	of	Lockheed Martin	common	stock	exchanged	and	retired	as	part	of	the	exchange	offer,	plus	the	$1.8	billion	one-time	special	cash	payment,	less	the	net	book	value	of	the	IS&GS business	of	about	$3.0	billion	at	August	16,	2016	and	other	adjustments	of	about	$100	million.	The	final	gain	is	subject	to	certain	post-closing	adjustments,	including final	working	capital	and	tax	adjustments,	which	we	expect	to	complete	in	2017.

We	classified	the	operating	results	of	the	IS&GS	business	as	discontinued	operations	in	our	financial	statements	in	accordance	with	U.S.	GAAP,	as	the	divestiture of	this	business	represented	a	strategic	shift	that	had	a	major	effect	on	our	operations	and	financial	results.	However,	the	cash	flows	generated	by	the	IS&GS	business have	not	been	reclassified	in	our	consolidated	statements	of	cash	flows	as	we	retained	this	cash	as	part	of	the	Transaction.

# Other

On	August	24,	2016,	our	ownership	interest	in	the	AWE	venture	increased	by	18%	in	exchange	for	our	assuming	a	more	significant	role	in	managing	the	operations of	the	venture.	As	a	result	of	the	increase,	we	now	own	a	51%	interest	in	AWE

and	control	its	operations	and	board	of	directors.	Accordingly,	we	are	required	to	consolidate	AWE,	which	has	been	aligned	under	our	Space	Systems	business	segment since	August	24,	2016.	Space	Systems'	operating	results	include	100%	of	AWE's	net	sales	and	51%	of	AWE's	operating	profit.	Previously,	we	accounted	for	our investment	in	AWE	using	the	equity	method	of	accounting.	Under	the	equity	method,	none	of	AWE's	net	sales	and	only	33%	of	AWE's	net	earnings	were	included	in operating	profit	of	the	Space	Systems	business	segment.

Additionally,	we	paid	$898	million	during	2014	for	acquisitions	of	businesses	and	investments	in	affiliates,	net	of	cash	acquired,	primarily	related	to	the	following acquisitions:

•Systems	Made	Simple	–	a	provider	of	health	information	technology	solutions,	which	was	included	in	our	divesture	of	the	IS&GS	business;

•	 Zeta	Associates,	 Inc.	 –	 a	 designer	 of	 systems	 that	 enable	 collection,	 processing,	 safeguarding	 and	 dissemination	 of	 information	 for intelligence	 and	 defense communities,	which	is	included	in	our	Space	Systems	business	segment;	and

•Industrial	Defender	–	a	provider	of	cybersecurity	solutions	for	control	systems	in	the	oil	and	gas,	utility	and	chemical	industries,	which	was	included	in	our	divesture of	the	IS&GS	business.

For	additional	information,	see	"Note	3	–	Acquisitions	and	Divestitures"	included	in	our	Notes	to	Consolidated	Financial	Statements.

# Industry	Considerations

# U.S.	Government	Funding	Constraints

The	U.S.	Government	has	not	yet	passed	an	annual	budget	for	Government	Fiscal	Year	(GFY)	2017.	Accordingly,	the	U.S.	Government	is	currently	operating under	a	continuing	resolution	funding	measure	through	April	28,	2017.	Under	this	continuing	resolution,	partial-year	funding	at	amounts	consistent	with	appropriated levels	for	fiscal	year	2016	are	available,	subject	to	certain	restrictions,	however,	new	spending	initiatives	are	not	authorized.	Our	key	programs	continue	to	be	supported and	funded	despite	the	continuing	resolution	financing	mechanism.	However,	during	periods	covered	by	continuing	resolutions,	or	until	regular	annual	appropriation bills	are	passed,	we	may	experience	delays	in	procurement	of	products	and	services	due	to	lack	of	funding	and	those	delays	may	affect	our	results	of	operations, financial	position	and	cash	flows.

During	2016,	President	Obama's	Administration	and	both	houses	of	Congress	proposed	budget	plans	for	GFY	2017	that	were	broadly	divergent	in	how	they	would be	implemented,	but	set	overall	national	defense	spending	limits	at	amounts	consistent	with	the	current	limit	imposed	by	the	Bipartisan	Budget	Act	of	2015.	Significant differences	remain	in	the	various	proposed	budgets'	funding	sources	and	the	potential	use	of	overseas	continuing	operations	funds	for	additional	DoD-based	budget. While	we	cannot	predict	budget	resolution	timing,	we	are	hopeful	that	congressional	deliberations	can	be	concluded	as	soon	as	possible.	A	substantial	delay	would require	an	extension	of	the	continuing	resolution	to	enable	continuation	of	government	operations	beyond	April	28,	2017.	While	we	think	it	is	unlikely,	a	continuing resolution	and	its	associated	budget	constraints	could	be	extended	for	the	full	2017	fiscal	year	should	the	varying	budget	positions	remain	unresolved.	In	the	event	of	a full	year	continuing	resolution,	we	would	anticipate	some	level	of	impact	against	our	2017	orders	and	associated	backlog	level,	but	minimal	impact	to	sales,	earnings and	cash	flows	in	2017	as	a	large	portion	of	our	backlog	work	is	already	funded	from	prior	fiscal	years,	or	we	could	face	a	government	shutdown	of	unknown	duration.

We	anticipate	there	will	continue	to	be	a	significant	amount	of	debate	and	negotiations	within	the	U.S.	Government	over	defense	spending	for	GFY	2017	and beyond.	In	the	context	of	these	negotiations,	it	is	possible	that	existing	cuts	to	government	programs	could	be	kept	in	place,	replaced	with	different	spending	cuts,	and/or replaced	with	a	package	of	broader	reforms	to	reduce	the	federal	deficit.	However,	we	continue	to	believe	that	our	portfolio	of	products	and	services	will	continue	to	be well	supported	in	a	strategically	focused	allocation	of	budget	resources.

# International	Business

A	key	component	of	our	strategic	plan	is	to	grow	our	international	sales.	To	accomplish	this	growth,	we	continue	to	focus	on	strengthening	our	relationships internationally	through	partnerships	and	joint	technology	efforts.	We	conduct	business	with	international	customers	through	each	of	our	business	segments.

In	 our	 Aeronautics	 business	 segment,	 there	 continues	 to	 be	 strong	 international interest in the	F-35	 program,	 which includes	 commitments from the	 U.S. Government	and	eight	international	partner	countries	and	three	international	customers,

as	well	as	expressions	of	interest	from	other	countries.	The	U.S.	Government	and	the	eight	partner	countries	continue	to	work	together	on	the	design,	testing,	production and	sustainment	of	the	F-35.	The	international	commitment	to	the	program	continues	to	grow.	For	example,	Denmark	formally	committed	in	2016	to	27	F-35A	variant aircraft.	Japan	received	its	first	F-35A	variant	and	two	F-35A	variant	aircraft	arrived	in	Israel.	Additionally	in	2016,	Aeronautics	received	an	undefinitized	contract modification	to	the	Low	Rate	Initial	Production	(LRIP)	10	advance	acquisition	contract,	which	included	35	international	orders.

Other	areas	of	international	expansion	at	our	Aeronautics	business	segment	include	the	F-16	and	C-130J	programs.	Aeronautics	received	a	contract	in	2016	with Korea	for	F-16	upgrades,	extending	work	beyond	2020.	The	C-130J	Super	Hercules	aircraft	continued	to	draw	interest	from	various	international	customers,	including contracts	in	2016	from	France	and	Israel.

Our	MFC	business	segment	continues	to	generate	significant	international	interest,	most	notably	in	the	air	and	missile	defense	product	line,	which	produces	the Patriot	Advanced	Capability-3	(PAC-3)	and	Terminal	High	Altitude	Area	Defense	(THAAD)	systems.	The	PAC-3	is	an	advanced	missile	defense	system	designed	to intercept	incoming	airborne	threats.	During	2016,	we	received	orders	for	PAC-3	systems	from	Qatar,	the	Republic	of	Korea,	the	Kingdom	of	Saudi	Arabia,	Taiwan	and the	United	Arab	Emirates	(UAE).	THAAD	is	an	integrated	system	designed	to	protect	against	short-	and	intermediate-range	ballistic	missiles.	UAE	is	an	international customer	for	THAAD,	and	other	countries	in	the	Middle	East,	Europe	and	the	Asia-Pacific	region	have	also	expressed	interest	in	our	air	and	missile	defense	systems. Additionally,	we	continue	to	see	international	demand	for	our	tactical	missile	and	fire	control	products.	In	2016,	Poland	became	the	first	international	customer	for	the Joint	Air-to-Surface	 Standoff	 Missile-Extended	 Range	(JASSM-ER),	 a	 long	 range,	 conventional	air-to-ground,	 precision-guided	 standoff	 missile.	 Other	 MFC international	customers	include	Japan,	Germany,	the	Netherlands,	Taiwan	and	Kuwait.

In	our	RMS	business	segment,	we	continue	 to	experience	 international	 interest	 in	 the	Aegis	Ballistic	Missile	Defense	System.	We	perform	activities	 in	 the development,	production,	ship	integration	and	test	and	lifetime	support	for	ships	of	international	customers	such	as	Japan,	Spain,	Korea	and	Australia.	We	have	an ongoing	program	in	Canada	for	combat	systems	equipment	upgrades	on	12	Halifax-class	frigates.	In	2016,	we	were	designated	as	the	combat	systems	integrator	for Australia's	Future	Submarine	program.	In	our	training	and	logistics	solutions	portfolio,	we	have	active	programs	and	pursuits	in	the	United	Kingdom,	Saudi	Arabia, Canada,	Singapore	and	Australia.	Our	acquisition	of	Sikorsky	adds	a	significant	international	component	to	the	RMS	business	segment	with	an	installed	base	of	over 1,000	aircraft	internationally.	We	have	active	development,	production	and	sustainment	support	of	the	S-70i	 Black	 Hawk	 and	MH-60	Seahawk	aircraft	to	foreign military	customers,	including	Chile,	Australia,	Denmark,	Taiwan,	Saudi	Arabia,	and	Colombia.	Commercial	aircraft	are	sold	to	customers	in	the	oil	and	gas	industry, emergency	medical	evacuation,	search	and	rescue	fleets	in	over	30	countries,	and	VIP	customers.

Our	Space	Systems	business	segment	includes	the	operations	of	AWE,	which	operates	the	United	Kingdom's	nuclear	deterrent	program.	The	work	at	AWE	covers the	entire	life	cycle,	from	initial	concept,	assessment	and	design,	through	component	manufacture	and	assembly,	in-service	support	and	decommissioning	and	disposal. In	addition,	Space	Systems	has	international	contracts	with	Saudi	Arabia	and	Japan	to	design	and	manufacture	geostationary	communication	satellites	using	the	A2100 satellite	platform.

# Status	of	the	F-35	Program

The	F-35	program	consists	of	development	contracts,	production	contracts	and	sustainment	activities.	The	development	contracts	are	being	performed	concurrent with	the	production	contracts.	Concurrent	performance	of	development	and	production	contracts	is	used	for	complex	programs	to	test	aircraft,	shorten	the	time	to	field systems,	and	achieve	overall	cost	savings.	We	expect	the	System	Development	and	Demonstration	portion	of	the	development	contracts	will	be	substantially	complete	in 2017,	with	less	significant	efforts	continuing	into	2019.	Production	of	the	aircraft	is	expected	to	continue	for	many	years	given	the	U.S.	Government's	current	inventory objective	of	2,443	aircraft	for	the	U.S.	Air	Force,	U.S.	Marine	Corps,	and	U.S.	Navy;	commitments	from	our	eight	international	partners	and	three	international customers;	as	well	as	expressions	of	interest	from	other	countries.

On	November	2,	2016,	the	U.S.	Government	unilaterally	issued	a	contract	(referred	to	as	LRIP	9)	to	purchase	57	F-35	aircraft,	including	42	F-35A	conventional takeoff	and	landing	variant	(F-35A)	aircraft	at	a	production	price	that	is	5.5%	less	than	the	production	price	for	the	F-35A	variant	in	its	previous	contract	to	acquire	F-35 aircraft	(referred	to	as	LRIP	8).	The	unilateral	contract	action	obligates	us	to	perform	under	terms	and	conditions	imposed	by	the	U.S.	Government.	At	the	time	of	the U.S.	Government's	decision	to	issue	the	unilateral	contract,	the	parties	had	reached	agreement	in	principle	on

certain	terms	and	conditions	of	the	contract.	However,	certain	key	terms	remained	under	negotiation,	including	the	amount	of	cost	to	perform	the	contract,	price	and payment	terms.	We	will	continue	to	execute	on	the	F-35	program	and	are	evaluating	our	options	and	path	forward.	Although	the	amount	at	issue	on	the	LRIP	9	contract is	not	a	significant	percentage	of	the	overall	contract	value,	the	unilateral	contract	action	could	negatively	affect	profit	and	cash	flows	on	the	LRIP	9	and	LRIP	10	(which remains	undefinitized)	contracts,	and	establish	a	precedent	for	future	F-35	production	contracts.

There	is	also	uncertainty	regarding	actions	that	may	be	taken	by	the	new	Presidential	Administration	in	light	of	recent	criticisms	of	the	F-35	program.	President Trump	has	publicly	expressed	concerns	over	past	cost	overruns	and	delays	in	the	program	as	well	as	overall	program	cost	and	has	publicly	requested	that	a	competitor price	out	an	alternative.	Defense	Secretary	Mattis	recently	ordered	a	review	of	the	program,	including	a	comparison	review	of	the	F-35C	carrier	variant	with	a	fourth generation	alternative.	Our	Chairman,	President	and	Chief	Executive	Officer	has	had	discussions	with	President	Trump	on	the	importance	of	the	F-35	program	and	our commitment	to	cut	costs.	However,	we	may	continue	to	face	pressure	to	reduce	costs	from	the	new	Presidential	Administration	relating	to	the	F-35	program	and	ongoing contract	negotiations.

Operationally,	the	U.S.	Government	continues	to	complete	various	tests,	including	ship	trials,	mission	system	evaluations	and	weapons	testing,	and	the	F-35	aircraft fleet	recently	surpassed	80,000	flight	hours.	Progress	also	continues	on	the	production	of	aircraft.	In	2016,	the	program	achieved	a	major	milestone	when	the	U.S.	Air Force	declared	the	F-35A	variant	ready	for	combat	(also	referred	to	as	Initial	Operating	Capability	(IOC)).	The	program	continues	to	advance	towards	the	U.S.	Navy declaring	 the	F-35C	 carrier	 variant	 ready	 for	 combat	 in	 2018,	 as	 demonstrated	 by	 completing	 final	 carrier	 tests	 aboard	 the	 USS	 George	 Washington	 in	 2016. Additionally,	in	2016	we	had	initial	deliveries	of	F-35	aircraft	to	Israel	and	Japan.	As	of	December	31,	2016,	we	have	delivered	200	production	aircraft	to	our	U.S.	and international	partners	including	delivery	of	the	first	F-35	aircraft	completed	at	the	Italian	Final	Assembly	and	Check-Out	Facility,	and	we	have	173	production	aircraft	in backlog,	including	orders	from	our	international	partners.

During	aircraft	inspections	in	2016,	debris	was	found	in	the	fuel	tank	of	an	F-35A	variant	aircraft.	It	was	determined	the	debris	was	caused	by	insulation	shedding from	tubing	that	is	part	of	the	system	that	provides	cooling	for	the	electronics	and	avionics	and	is	located	within	the	wing.	Engineering	assessments	determined	the	tube assembly	was	wrapped	using	non-compliant	insulation	material.	The	non-compliant	insulation	was	confined	to	only	the	F-35A	variant	aircraft.	This	issue	affected	15 delivered	aircraft	and	42	aircraft	in	the	factory.	During	the	fourth	quarter	of	2016,	modification	work	was	completed	to	correct	the	issue	on	the	15	operational	aircraft	and flight	operations	have	resumed.	The	issue	was	also	corrected	on	many	of	the	aircraft	in	the	factory	prior	to	delivery.	The	remaining	affected	aircraft	will	be	corrected	and delivered	in	2017.	This	issue	did	not	have	a	significant	impact	on	our	operating	results	or	cash	flows.

Given	the	size	and	complexity	of	the	F-35	program,	we	anticipate	that	there	will	be	continual	reviews	related	to	aircraft	performance,	program	schedule,	cost,	and requirements	as	part	of	the	DoD,	Congressional,	and	international	partners'	oversight	and	budgeting	processes.	Current	program	challenges	include,	but	are	not	limited to,	supplier	and	partner	performance,	software	development,	level	of	cost	associated	with	life	cycle	operations	and	sustainment	and	warranties,	receiving	funding	for production	contracts	on	a	timely	basis,	executing	future	flight	tests,	findings	resulting	from	testing,	and	operating	the	aircraft.

# Consolidated	Results	of	Operations

Since	our	operating	cycle	is	primarily	long	term	and	involves	many	types	of	contracts	for	the	design,	development	and	manufacture	of	products	and	related activities	with	varying	delivery	schedules,	the	results	of	operations	of	a	particular	year,	or	year-to-year	comparisons	of	sales	and	profits,	may	not	be	indicative	of	future operating	results.	The	following	discussions	of	comparative	results	among	years	should	be	reviewed	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):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $47,248 | $\t40,536 | $\t39,946 |
| Cost\tof\tsales | (42,186) | (36,044) | (35,263) |
| Gross\tprofit | 5,062 | 4,492 | 4,683 |
| Other\tincome,\tnet | 487 | 220 | 329 |
| Operating\tprofit\t(a) | 5,549 | 4,712 | 5,012 |
| Interest\texpense | (663) | (443) | (340) |
| Other\tnon-operating\tincome,\tnet | — | 30 | 5 |
| Earnings\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes | 4,886 | 4,299 | 4,677 |
| Income\ttax\texpense | (1,133) | (1,173) | (1,424) |
| Net\tearnings\tfrom\tcontinuing\toperations | 3,753 | 3,126 | 3,253 |
| Net\tearnings\tfrom\tdiscontinued\toperations | 1,549 | 479 | 361 |
| Net\tearnings | $\t\t\t5,302 | $\t\t\t3,605 | $3,614 |
| Diluted\tearnings\tper\tcommon\tshare |  |  |  |
| Continuing\toperations | $\t\t\t12.38 | $\t\t\t9.93 | $10.09 |
| Discontinued\toperations | 5.11 | 1.53 | 1.12 |
| Total\tdiluted\tearnings\tper\tcommon\tshare | $\t\t\t17.49 | $\t\t\t11.46 | $11.21 |

(a) For	the	year	ended	December	31,	2015,	operating	profit	includes	$45	million	of	operating	loss	at	Sikorsky,	which	is	less	than	1%	of	consolidated	operating	profit	in	2015. Sikorsky's	operating	loss	is	net	of	intangible	amortization	and	adjustments	required	to	account	for	the	acquisition	of	this	business	in	the	fourth	quarter	of	2015.

Certain	amounts	reported	in	other	income,	net,	primarily	our	share	of	earnings	or	losses	from	equity	method	investees,	are	included	in	the	operating	profit	of	our business	segments.	Accordingly,	such	amounts	are	included	in	our	discussion	of	our	business	segment	results	of	operations.

# Net	Sales

We	generate	sales	from	the	delivery	of	products	and	services	to	our	customers.	Product	sales	are	predominantly	generated	in	each	of	our	business	segments	and most	of	our	service	sales	are	generated	in	our	RMS	and	Aeronautics	business	segments.	Our	consolidated	net	sales	were	as	follows	(in	millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Products | $\t\t\t40,365 | $\t\t\t34,868 | $\t\t\t34,984 |
| %\tof\ttotal\tnet\tsales | 85.4% | 86.0% | 87.6% |
| Services | 6,883 | 5,668 | 4,962 |
| %\tof\ttotal\tnet\tsales | 14.6% | 14.0% | 12.4% |
| Total\tnet\tsales | $\t\t\t47,248 | $\t\t\t40,536 | $\t\t\t39,946 |

Substantially	all	of	our	contracts	are	accounted	for	using	the	percentage-of-completion	method.	Under	the	percentage-of-completion	method,	we	record	net	sales	on contracts	based	upon	our	progress	towards	completion	on	a	particular	contract,	as	well	as	our	estimate	of	the	profit	to	be	earned	at	completion.	The	following	discussion of	material	changes	in	our	consolidated	net	sales	should	be	read	in	tandem	with	the	subsequent	discussion	of	changes	in	our	consolidated	cost	of	sales	and	our	business segment	 results	 of	 operations	 because	 changes	 in	 our	 sales	 are	 typically	 accompanied	 by	 a	 corresponding	 change	 in	 our	 cost	 of	 sales	 due	 to	 the	 nature	 of	 the percentage-of-completion	method.

# Product	Sales

Product	sales	increased	$5.5	billion,	or	16%,	in	2016	as	compared	to	2015.	The	increase	was	primarily	due	to	higher	product	sales	of	about	$3.7	billion	at	RMS	and approximately	$1.8	billion	at	Aeronautics.	The	increase	in	product	sales	at	RMS	was	primarily	attributable	to	sales	from	Sikorsky,	which	was	acquired	in	the	fourth quarter	of	2015.	This	increase	was	partially	offset	by	lower	net	sales	for	training	and	logistics	programs	due	to	the	divestiture	of	our	Lockheed	Martin	Commercial	Flight Training	(LMCFT)	business,	which	reported	sales	through	the	May	2,	2016	divestiture	date.	The	increase	at	Aeronautics	was	primarily	attributable	to	the	F-35	program due	to	increased	volume	on	aircraft	production	and	the	C-130	program	due	to	increased	aircraft	deliveries.

Product	 sales	 decreased	 $116	 million,	 or	 less	 than	 1%,	 in	 2015	 as	 compared	 to	 2014.	 Lower	 product	 sales	 of	 about	 $290	 million	 at	 Space	 Systems	 and approximately	$250	million	at	MFC	were	partially	offset	by	higher	product	sales	of	about	$300	million	at	RMS	and	approximately	$120	million	at	Aeronautics.	The decrease	in	product	sales	at	Space	Systems	was	attributable	to	lower	volume	for	government	satellite	programs	(primarily	Advanced	Extremely	High	Frequency	(AEHF). Product	sales	at	MFC	decreased	due	to	lower	volume	on	air	and	missile	defense	systems	programs	(primarily	PAC-3).	The	increase	in	product	sales	at	RMS	was primarily	attributable	to	product	sales	from	Sikorsky,	which	we	acquired	in	the	fourth	quarter	of	2015.	Product	sales	at	Aeronautics	increased	primarily	due	to	higher volume	on	F-35	production	contracts,	as	well	as	increased	deliveries	on	our	C-5	program;	partially	offset	by	fewer	aircraft	deliveries	for	our	C-130	and	F-16	programs and	lower	sustainment	activities	on	our	F-22	program.

# Service	Sales

Service	sales	increased	$1.2	billion,	or	21%,	in	2016	as	compared	to	2015,	primarily	due	to	an	increase	in	service	sales	of	about	$700	million	at	RMS	and approximately	$360	million	at	Aeronautics.	The	increase	in	service	sales	at	RMS	was	primarily	attributable	to	sales	from	Sikorsky,	which	was	acquired	in	the	fourth quarter	of	2015.	The	increase	in	service	sales	at	Aeronautics	was	primarily	attributable	to	increased	sustainment	activities	(primarily	the	F-35	and	F-16	programs).

Service	sales	increased	$706	million,	or	14%,	in	2015	as	compared	to	2014.	The	increase	in	service	sales	was	primarily	attributable	to	higher	service	sales	of approximately	$530	million	at	Aeronautics	and	about	$190	million	at	Space	Systems.	Higher	service	sales	at	Aeronautics	were	primarily	due	to	increased	sustainment activities	(primarily	the	F-35	program).	The	increase	in	service	sales	at	Space	Systems	was	primarily	due	to	service	sales	of	entities	acquired	in	the	third	quarter	of	2014.

# Cost	of	Sales

Cost	 of	 sales,	 for	 both	 products	 and	 services,	 consist	 of	 materials,	 labor,	 subcontracting	 costs,	 an	 allocation	 of	 indirect	 costs	 (overhead	 and	 general	 and administrative),	as	well	as	the	costs	to	fulfill	our	industrial	cooperation	agreements,	sometimes	referred	to	as	offset	agreements,	required	under	certain	contracts	with international	customers.	For	each	of	our	contracts,	we	monitor	the	nature	and	amount	of	costs	at	the	contract	level,	which	form	the	basis	for	estimating	our	total	costs	to complete	the	contract.	Our	consolidated	cost	of	sales	were	as	follows	(in	millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Cost\tof\tsales\t–\tproducts | $(36,616) | $(31,091) | $(30,983) |
| %\tof\tproduct\tsales | 90.7% | 89.2% | 88.6% |
| Cost\tof\tsales\t–\tservices | (6,040) | (4,824) | (4,184) |
| %\tof\tservice\tsales | 87.8% | 85.1% | 84.3% |
| Severance\tcharges | (80) | (82) | — |
| Other\tunallocated,\tnet | 550 | (47) | (96) |
| Total\tcost\tof\tsales | $(42,186) | $(36,044) | $(35,263) |

Due	to	the	nature	of	percentage-of-completion	accounting,	changes	in	our	cost	of	sales	for	both	products	and	services	are	typically	accompanied	by	changes	in	our net	sales.	The	following	discussion	of	material	changes	in	our	consolidated	cost	of	sales	for	products	and	services	should	be	read	in	tandem	with	the	preceding	discussion of	changes	in	our	consolidated	net	sales	and	our	business	segment	results	of	operations.	We	have	not	identified	any	developing	trends	in	cost	of	sales	for	products	and services	that	would	have	a	material	impact	on	our	future	operations.

# Product	Costs

Product	costs	increased	approximately	$5.5	billion,	or	18%,	in	2016	as	compared	to	2015.	The	increase	was	primarily	due	to	increased	product	costs	of	about $3.6	billion	at	RMS	and	about	$1.6	billion	at	Aeronautics.	The	increase	at	RMS	was	primarily	attributable	to	product	costs	generated	by	Sikorsky,	which	was	acquired	in the	fourth	quarter	of	2015.	The	increase	at	Aeronautics	was	primarily	attributable	to	increased	volume	on	aircraft	production	for	the	F-35	program	and	increased	aircraft deliveries	on	the	C-130	program.

Product	costs	increased	approximately	$108	million,	or	less	than	1%,	in	2015	as	compared	to	2014.	Increased	product	costs	of	approximately	$445	million	at	RMS and	about	$180	million	at	Aeronautics,	were	offset	by	decreases	in	product	costs	of	approximately	$325	million	at	Space	Systems	and	$195	million	at	MFC.	Increases	in product	costs	at	RMS	were	due	primarily	to	the	Sikorsky	acquisition,	including	costs	of	Sikorsky	products,	intangible	amortization	and	adjustments	required

to	account	for	the	acquisition	in	the	fourth	quarter	of	2015.	Higher	product	costs	at	Aeronautics	were	attributable	to	the	reasons	stated	above	for	higher	product	sales,	as well	as	decreased	risk	retirements	(primarily	F-22).	The	changes	in	product	costs	at	Space	Systems	and	MFC	were	attributable	to	the	reasons	stated	above	for	higher product	sales.

# Service	Costs

Service	costs	increased	approximately	$1.2	billion,	or	25%,	in	2016	compared	to	2015,	primarily	due	to	increased	service	costs	of	about	$670	million	at	RMS	and approximately	$400	million	at	Aeronautics.	The	increase	at	RMS	was	primarily	attributable	to	service	costs	generated	by	Sikorsky,	which	was	acquired	in	the	fourth quarter	of	2015.	The	increase	at	Aeronautics	was	primarily	attributable	to	increased	sustainment	activities	(primarily	the	F-35	and	the	F-22	programs).

Service	costs	increased	approximately	$640	million,	or	15%,	in	2015	compared	to	2014.	Higher	service	costs	of	approximately	$450	million	at	Aeronautics	and about	$230	million	at	Space	Systems	were	due	to	the	reasons	stated	above	for	higher	service	sales.	These	increases	in	service	costs	were	partially	offset	by	a	decrease	in service	costs	of	about	$80	million	at	MFC	due	primarily	to	lower	service	costs	on	various	air	and	missile	defense	programs.

# Restructuring	Charges

During	2016,	we	recorded	severance	charges	totaling	approximately	$80	million	related	to	our	Aeronautics	business	segment.	The	charges	consisted	of	severance costs	associated	with	the	planned	elimination	of	certain	positions	through	either	voluntary	or	involuntary	actions.	Upon	separation,	terminated	employees	receive lump-sum	severance	payments	primarily	based	on	years	of	service,	the	majority	of	which	are	expected	to	be	paid	over	the	next	several	quarters.	During	2016,	we	paid $70	million	in	severance	payments	associated	with	these	actions.

During	2015,	we	recorded	severance	charges	totaling	$82	million,	of	which	$67	million	related	to	our	RMS	business	segment	and	$15	million	related	to	businesses that	were	reported	in	our	former	IS&GS	business	prior	to	our	fourth	quarter	2015	program	realignment.	The	charges	consisted	of	severance	costs	associated	with	the planned	elimination	of	certain	positions	through	either	voluntary	or	involuntary	actions.	Upon	separation,	terminated	employees	receive	lump-sum	severance	payments primarily	based	on	years	of	service,	the	majority	of	which	are	expected	to	be	paid	over	the	next	several	quarters.	During	2016,	we	paid	$64	million	in	severance payments	associated	with	these	actions.

In	connection	with	the	Sikorsky	acquisition,	we	assumed	obligations	related	to	certain	restructuring	actions	committed	to	by	Sikorsky	in	June	2015.	Net	of	amounts we	anticipate	to	recover	through	the	pricing	of	our	products	and	services	to	our	customers,	we	incurred	and	paid	$40	million	of	costs	in	2016	related	to	these	actions.

We	expect	to	recover	a	substantial	amount	of	the	restructuring	charges	through	the	pricing	of	our	products	and	services	to	the	U.S.	Government	and	other	customers in	future	periods,	with	the	impact	included	in	the	respective	business	segment's	results	of	operations.

# Other	Unallocated,	Net

Other	unallocated,	net	primarily	includes	the	FAS/CAS	pension	adjustment	as	described	in	the	Business	Segment	Results	of	Operations	section	below,	stock-based compensation	and	other	corporate	costs.	These	items	are	not	allocated	to	the	business	segments	and,	therefore,	are	excluded	from	the	cost	of	sales	for	products	and services.	Other	unallocated,	net	was	$550	million	of	income	in	2016,	compared	to	expense	of	$47	million	in	2015	and	$96	million	in	2014.

The	fluctuation	between	each	respective	period	was	primarily	attributable	to	the	change	in	the	FAS/CAS	pension	adjustment	of	$902	million	in	2016,	$400	million in	2015	and	$317	million	in	2014,	partially	offset	by	fluctuations	in	other	costs	associated	with	various	corporate	items,	none	of	which	were	individually	significant.	The changes	in	the	FAS/CAS	pension	adjustment	between	the	periods	was	primarily	attributable	to	the	increase	in	U.S.	Government	Cost	Accounting	Standards	(CAS) pension	 cost	 due	 to	 the	 impact	 of	 phasing	 in	 CAS	 Harmonization.	 See	 "Critical	Accounting	 Policies	 –Postretirement	 Benefit	 Plans"	 discussion	 below	 for	 more information	on	our	CAS	pension	cost.

As	a	result	of	the	divestiture	of	the	IS&GS	business,	we	retained	all	assets	and	obligations	related	to	pension	benefits	earned	by	current	and	former	IS&GS	business salaried	employees	through	the	closing	of	the	Transaction.	Pension	costs	were

historically	allocated	to	and	included	in	the	results	of	operations	of	the	IS&GS	business.	In	connection	with	the	reclassification	of	the	IS&GS	business	as	discontinued operations,	we	reclassified	the	non-service	portion	of	net	pension	costs	related	to	IS&GS	business	salaried	employee	benefits	(interest	cost,	actuarial	gains	and	losses	and expected	return	on	plan	assets)	from	cost	of	sales	(and	previously	reported	in	the	IS&GS	business'	operating	profit)	to	other	unallocated,	net	on	our	consolidated statements	of	earnings	as	corporate	expenses	because	these	costs	will	continue	to	be	incurred	by	us	subsequent	to	the	Transaction.	The	service	portion	of	net	pension costs	related	to	IS&GS	business	salaried	employees	that	transferred	to	Leidos	continued	to	be	included	in	the	operating	results	of	the	IS&GS	business	classified	as discontinued	operations	because	such	costs	will	no	longer	be	incurred	by	us	subsequent	to	the	Transaction.	These	net	pension	costs	were	$54	million,	$71	million	and $59	million	for	the	years	ended	December	31,	2016,	2015	and	2014.

In	connection	with	the	divestiture	of	the	IS&GS	business	and	reclassification	of	the	IS&GS	business	to	discontinued	operations	for	all	periods	presented	in	the consolidated	financial	statements,	certain	corporate	overhead	costs	incurred	by	us	and	previously	allocated	to	the	IS&GS	business	were	reclassified	from	the	IS&GS business	results	(which	is	recorded	in	net	earnings	from	discontinued	operations)	to	other	unallocated,	net	in	our	consolidated	statements	of	earnings.	These	overhead costs	related	 to	expenses	for	senior	management,	 legal,	human	resources,	finance,	accounting,	 treasury,	 tax,	 information	 technology,	communications,	ethics	and compliance,	corporate	employee	benefits,	incentives	and	stock-based	compensation,	shared	services	processing	and	administration	and	depreciation	for	corporate	fixed assets,	and	were	not	directly	attributable	to	the	IS&GS	business.	During	the	years	ended	December	31,	2016,	2015	and	2014	we	reclassified	$82	million,	$165	million and	$169	million	of	corporate	overhead	costs	to	other	unallocated,	net.

We	allocate	certain	corporate	overhead	costs	and	defined	benefit	pension	costs	to	our	business	segments	because	under	U.S.	Government	contracting	regulations such	costs	are	allowable	in	establishing	prices	for	contracts	with	the	U.S.	Government.	Although	the	corporate	overhead	costs	and	defined	benefit	pension	costs	that	were historically	allocated	to	and	included	in	the	operating	results	of	the	IS&GS	business	have	been	reclassified	to	and	included	in	the	results	of	our	continuing	operations	for financial	reporting	purposes,	we	will	allocate	similar	costs	incurred	in	future	periods	to	our	remaining	business	segments	and	expect	to	recover	a	substantial	amount	of these	costs	through	the	pricing	of	our	products	and	services	to	the	U.S.	Government	and	other	customers	in	future	periods.

# Other	Income,	Net

Other	income,	net	primarily	includes	our	share	of	earnings	or	losses	from	equity	method	investees	and	gains	or	losses	for	acquisitions	and	divestitures.	Other income,	net	in	2016	was	$487	million,	compared	to	$220	million	in	2015	and	$329	million	in	2014.	The	increase	in	2016,	compared	to	2015,	was	primarily	attributable to	the	non-cash	net	gain	of	$104	million	associated	with	obtaining	a	controlling	interest	in	AWE	and	approximately	$120	million	of	increased	earnings	generated	by equity	method	 investees	as	discussed	 in	 the	"Business	Segment	Results	of	Operations"	section	below.	Additionally,	 in	2015	we	 incurred	a	$90	million	non-cash impairment	charge	related	to	our	decision	in	2015	to	divest	our	LMCFT	business.

The	decrease	in	2015,	compared	to	2014,	was	primarily	due	to	a	$90	million	non-cash	impairment	charge	related	to	our	decision	in	2015	to	divest	our	LMCFT business	and	non-recoverable	transaction	costs	of	approximately	$38	million	associated	with	the	Sikorsky	acquisition,	partially	offset	by	fluctuations	in	other	various costs,	none	of	which	were	individually	significant.	The	asset	impairment	charge	was	partially	offset	by	a	net	deferred	tax	benefit	related	to	LMCFT	of	about	$80	million, which	is	recorded	in	income	tax	expense.	Earnings	from	equity	method	investees	in	2015	were	comparable	to	2014	(reflecting	decreased	earnings	from	equity	method investees	in	our	Space	Systems	business	segment,	offset	by	increased	earnings	from	Sikorsky	equity	method	investees).

# Interest	Expense

Interest	expense	in	2016	was	$663	million,	compared	to	$443	million	in	2015	and	$340	million	in	2014.	The	increases	in	interest	expense	in	2016	and	2015	relate	to debt	we	incurred	to	fund	the	acquisition	of	Sikorsky,	and	the	issuance	of	notes	in	February	of	2015	for	general	corporate	purposes.	See	"Capital	Structure,	Resources	and Other"	included	within	"Liquidity	and	Cash	Flows"	discussion	below	and	"Note	10	–	Debt"	included	in	our	Notes	to	Consolidated	Financial	Statements	for	a	discussion of	our	debt.

# Other	Non-Operating	Income,	Net

Other	non-operating	income,	net	decreased	$30	million	from	2015	to	2016	primarily	due	to	a	gain	from	the	sale	of	an	investment	in	2015	which	did	not	recur	in 2016.	Other	non-operating	income,	net	increased	$25	million	from	2014	to	2015	due	to	a	gain	from	the	sale	of	an	investment	in	2015.

# Income	Tax	Expense

Our	effective	income	tax	rate	from	continuing	operations	was	23.2%	for	2016,	27.3%	for	2015,	and	30.4%	for	2014.	The	rates	for	all	periods	benefited	from	tax deductions	for	U.S.	manufacturing	activities,	deductions	for	dividends	paid	to	our	defined	contribution	plans	with	an	employee	stock	ownership	plan	feature,	and	the U.S.	research	and	development	(R&D)	tax	credit.	The	U.S.	manufacturing	deduction	benefit	for	2016,	2015,	and	2014	reduced	our	effective	tax	rate	by	2.4,	2.9,	and	2.6 percentage	points,	respectively.	The	rate	for	2016	also	benefited	from	the	nontaxable	gain	recorded	in	connection	with	the	consolidation	of	AWE.

In	addition,	the	rate	for	2016	benefited	from	the	additional	tax	benefits	related	to	employee	share-based	payment	awards,	which	are	now	recorded	in	earnings	as income	tax	benefit	or	expense,	effective	with	the	adoption	of	an	accounting	standard	update	during	the	second	quarter	of	2016.	As	a	result,	we	are	required	to	report	the impacts	as	though	the	accounting	standard	update	had	been	adopted	on	January	1,	2016.	Accordingly,	we	recognized	additional	income	tax	benefits	of	$152	million during	the	year	ended	December	31,	2016,	which	reduced	our	effective	income	tax	rate	by	3.1	percentage	points.	The	adjustment	for	the	year	ended	December	31,	2016 includes	second,	third,	and	fourth	quarter	impacts	and	the	reclassification	of	income	tax	benefits	of	$104	million	originally	recognized	in	additional	paid-in	capital	in	the first	quarter	of	2016.

In	2016,	the	R&D	tax	credit	reduced	our	effective	tax	rate	by	2.2	percentage	points.	In	December	2015,	the	R&D	tax	credit	was	permanently	extended	and reinstated,	retroactive	to	the	beginning	of	2015,	which	reduced	our	effective	income	tax	rate	by	1.6	percentage	points.	In	2014,	the	R&D	tax	credit	was	temporarily reinstated	for	one	year,	retroactive	to	the	beginning	of	2014,	which	reduced	our	effective	tax	rate	by	0.9	percentage	point.

As	a	result	of	a	decision	in	2015	to	divest	our	LMCFT	business	in	2016,	we	recorded	an	asset	impairment	charge	of	approximately	$90	million.	This	charge	was partially	offset	by	a	net	deferred	tax	benefit	of	about	$80	million.	The	net	impact	of	the	resulting	tax	benefit	reduced	our	effective	income	tax	rate	by	1.2	percentage points	in	2015.

Future	changes	in	tax	law	could	significantly	impact	our	provision	for	income	taxes,	the	amount	of	taxes	payable,	and	our	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	new	tax	legislation,	with	a corresponding	material,	one-time,	non-cash	increase	in	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,	2016	and	2015	were	$6.6	billion	and	$6.1	billion,	based	on	a	35%	the	Federal	statutory	income	tax	rate,	and	primarily relate	to	our	postretirement	benefit	plans.	If	legislation	reducing	the	Federal	statutory	income	tax	rate	to	15%	had	been	enacted	at	December	31,	2016,	our	net	deferred tax	assets	would	have	been	reduced	by	$3.8	billion	and	we	would	have	recorded	a	corresponding	one-time,	non-cash	increase	in	income	tax	expense	of	$3.8	billion.	This additional	expense	would	be	less	if	the	legislation	phased	in	the	tax	rate	reduction	or	if	the	final	rate	was	higher	than	15%.	The	amount	of	net	deferred	tax	assets	will change	 periodically	 based	 on	 several	 factors,	 including	 the	 measurement	 of	 our	 postretirement	 benefit	 plan	 obligations	 and	 actual	 cash	 contributions	 to	 our postretirement	benefit	plans.

# Net	Earnings	from	Continuing	Operations

We	reported	net	earnings	from	continuing	operations	of	$3.8	billion	($12.38	per	share)	in	2016,	$3.1	billion	($9.93	per	share)	in	2015	and	$3.3	billion	($10.09	per share)	in	2014.	Both	net	earnings	and	earnings	per	share	from	continuing	operations	were	affected	by	the	factors	mentioned	above.	Earnings	per	share	also	benefited from	a	net	decrease	of	approximately	14	million	common	shares	outstanding	from	December	31,	2015	to	December	31,	2016	and	approximately	11	million	common shares	outstanding	from	December	31,	2014	to	December	31,	2015	as	a	result	of	share	repurchases	and	the	completion	of	the	exchange	offer,	which	were	partially	offset by	share	issuance	under	our	stock-based	awards	and	certain	defined	contribution	plans.

# Net	Earnings	from	Discontinued	Operations

We	reported	net	earnings	from	discontinued	operations	of	$1.5	billion	($5.11	per	share)	in	2016,	$479	million	($1.53	per	share)	in	2015	and	$361	million	($1.12 per	share)	in	2014.	Net	earnings	from	discontinued	operations	in	2016	included	a	net	gain	of	approximately	$1.2	billion	recognized	as	a	result	of	the	divestiture	of	the IS&GS	business.

# Net	Earnings

# Business	Segment	Results	of	Operations

We	operate	in	four	business	segments:	Aeronautics,	MFC,	RMS	and	Space	Systems.	We	organize	our	business	segments	based	on	the	nature	of	products	and services	offered.	Net	sales	of	our	business	segments	exclude	 intersegment	sales	as	 these	activities	are	eliminated	 in	consolidation.	The	amounts,	discussion	and presentation	of	our	business	segments	as	set	forth	in	this	Annual	Report	on	Form	10-K	include	the	results	of	the	acquired	Sikorsky	business	from	the	November	6,	2015 acquisition	date.

Operating	profit	of	our	business	segments	includes	our	share	of	earnings	or	losses	from	equity	method	investees	because	the	operating	activities	of	the	equity method	investees	are	closely	aligned	with	the	operations	of	our	business	segments.	United	Launch	Alliance	(ULA),	which	is	part	of	our	Space	Systems	business segment,	is	one	of	our	largest	equity	method	investees.	Operating	profit	of	our	business	segments	excludes	the	FAS/CAS	pension	adjustment	described	below;	expense for	stock-based	compensation;	the	effects	of	items	not	considered	part	of	management's	evaluation	of	segment	operating	performance,	such	as	charges	related	to goodwill	impairments	(see	"Note	1	–	Significant	Accounting	Policies"	included	in	our	Notes	to	Consolidated	Financial	Statements)	and	significant	severance	actions (see	"Note	15	–	Restructuring	Charges"	included	in	our	Notes	to	Consolidated	Financial	Statements);	gains	or	losses	from	divestitures	(see	"Note	3	–	Acquisitions	and Divestitures"	 included	 in	 our	 Notes	 to	 Consolidated	 Financial	 Statements);	 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	items"	between	operating	profit	from	our	business segments	and	our	consolidated	operating	profit.

Our	business	segments'	results	of	operations	include	pension	expense	only	as	calculated	under	U.S.	Government	Cost	Accounting	Standards,	which	we	refer	to	as CAS	pension	cost.	We	recover	CAS	pension	cost	through	the	pricing	of	our	products	and	services	on	U.S.	Government	contracts	and,	therefore,	the	CAS	pension	cost	is recognized	in	each	of	our	business	segments'	net	sales	and	cost	of	sales.	Since	our	consolidated	financial	statements	must	present	pension	expense	calculated	in accordance	with	FAS	requirements	under	U.S.	generally	accepted	accounting	principles	(GAAP),	which	we	refer	to	as	FAS	pension	expense,	the	FAS/CAS	pension adjustment	increases	or	decreases	the	CAS	pension	cost	recorded	in	our	business	segments'	results	of	operations	to	equal	the	FAS	pension	expense.	As	a	result,	to	the extent	that	CAS	pension	cost	exceeds	FAS	pension	expense,	which	occurred	for	2016,	2015	and	2014,	we	have	a	favorable	FAS/CAS	pension	adjustment.

The	operating	results	in	the	following	tables	exclude	businesses	included	in	discontinued	operations	(see	"Note	3	–	Acquisitions	and	Divestitures"	included	in	our Notes	to	Consolidated	Financial	Statements)	for	all	years	presented.

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

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tsales |  |  |  |
| Aeronautics | $17,769 | $15,570 | $14,920 |
| Missiles\tand\tFire\tControl | 6,608 | 6,770 | 7,092 |
| Rotary\tand\tMission\tSystems | \t 13,462 | 9,091 | 8,732 |
| Space\tSystems | 9,409 | 9,105 | 9,202 |
| Total\tnet\tsales | $47,248 | $40,536 | $39,946 |
| Operating\tprofit |  |  |  |
| Aeronautics | $1,887 | $1,681 | $1,649 |
| Missiles\tand\tFire\tControl | 1,018 | 1,282 | 1,344 |
| Rotary\tand\tMission\tSystems | 906 | 844 | 936 |
| Space\tSystems | 1,289 | 1,171 | 1,187 |
| Total\tbusiness\tsegment\toperating\tprofit | 5,100 | 4,978 | 5,116 |
| Unallocated\titems |  |  |  |
| FAS/CAS\tpension\tadjustment |  |  |  |
| FAS\tpension\texpense\t(a) | (1,019) | (1,127) | (1,099) |
| Less:\tCAS\tpension\tcost\t(a)(b) | 1,921 | 1,527 | 1,416 |
| FAS/CAS\tpension\tadjustment\t(c) | 902 | 400 | 317 |
| Severance\tcharges\t(a)(d) | (80) | (82) | — |
| Stock-based\tcompensation | (149) | (133) | (154) |
| Other,\tnet\t(e)(f) | (224) | (451) | (267) |
| Total\tunallocated,\tnet | 449 | (266) | (104) |
| Total\tconsolidated\toperating\tprofit | $5,549 | $4,712 | $5,012 |

(a) FAS	pension	expense,	CAS	pension	costs	and	severance	charges	reflect	the	reclassification	for	discontinued	operations	presentation	of	benefits	related	to	former	IS&GS	salaried employees	(see	"Note	11	–	Postretirement	Plans"	included	in	our	Notes	to	Consolidated	Financial	Statements).

(b) The	higher	CAS	pension	cost	primarily	reflects	the	impact	of	phasing	in	CAS	Harmonization.

(c) We	expect	a	FAS/CAS	pension	adjustment	in	2017	of	about	$880	million	(see	"Critical	Accounting	Policies	–	Postretirement	Benefit	Plans"	discussion	below).

(d) See	"Consolidated	Results	of	Operations	–	Restructuring	Charges"	discussion	above	for	information	on	charges	related	to	certain	severance	actions	at	our	business	segments. Severance	charges	for	initiatives	that	are	not	significant	are	included	in	business	segment	operating	profit.

(e) Other,	net	in	2015	includes	a	non-cash	asset	impairment	charge	of	approximately	$90	million	related	to	our	decision	to	divest	our	LMCFT	business	(see	"Note	3	–	Acquisitions and	Divestitures"	included	in	our	Notes	to	Consolidated	Financial	Statements).	This	charge	was	partially	offset	by	a	net	deferred	tax	benefit	of	about	$80	million,	which	is recorded	in	income	tax	expense.	The	net	impact	reduced	net	earnings	by	about	$10	million.

(f) Other,	net	in	2015	includes	approximately	$38	million	of	non-recoverable	transaction	costs	associated	with	the	acquisition	of	Sikorsky.

The	following	segment	discussions	also	include	information	relating	to	backlog	for	each	segment.	Backlog	was	approximately	$96.2	billion,	$94.8	billion	and $74.5	billion	at	December	31,	2016,	2015	and	2014.	Backlog	at	December	31,	2015	and	2014	excludes	approximately	$4.8	billion	and	$6.0	billion	of	backlog	related	to our	 IS&GS	 business,	 which	 we	 divested	 in	 2016.	 These	 amounts	 included	 both	 funded	 backlog	 (firm	 orders	 for	 which	 funding	 has	 been	 both	 authorized	 and appropriated	by	the	customer)	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	$66.0	billion	at	December	31,	2016.

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	throughout	the	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	a	customer	for

a	product	would	typically	align	to	the	subcomponents	of	that	product	(such	as	a	wing-box	on	an	aircraft)	and	for	services	would	align	to	the	type	of	work	being performed	(such	as	help-desk	support).	Our	contracts	generally	are	cost-based,	which	allows	for	the	recovery	of	costs	in	the	pricing	of	our	products	and	services.	Most	of our	contracts	are	bid	and	negotiated	with	our	customers	under	circumstances	in	which	we	are	required	to	disclose	our	estimated	total	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	cost	aspects	of	the	contract	and	assess	the	effects	of	those	risks	on	our	estimates	of	total	costs	to	complete	the	contract.	The estimates	consider	the	technical	requirements	(e.g.,	a	newly-developed	product	versus	a	mature	product),	the	schedule	and	associated	tasks	(e.g.,	the	number	and	type	of milestone	events)	and	costs	(e.g.,	material,	labor,	subcontractor,	overhead	and	the	estimated	costs	to	fulfill	our	industrial	cooperation	agreements	required	under	certain contracts	with	international	customers).	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	total	costs	to	complete	the	contract.	Profit	booking	rates	may	increase	during	the	performance	of	the	contract	if	we	successfully retire	risks	surrounding	the	technical,	schedule	and	cost	aspects	of	the	contract	which	decreases	the	estimated	total	costs	to	complete	the	contract.	Conversely,	our	profit booking	rates	may	decrease	if	the	estimated	total	costs	to	complete	the	contract	increase.	All	of	the	estimates	are	subject	to	change	during	the	performance	of	the	contract and	may	affect	the	profit	booking	rate.

We	have	a	number	of	programs	that	are	designated	as	classified	by	the	U.S.	Government	which	cannot	be	specifically	described.	The	operating	results	of	these classified	programs	are	included	in	our	consolidated	and	business	segment	results	and	are	subjected	to	the	same	oversight	and	internal	controls	as	our	other	programs.

Our	net	sales	are	primarily	derived	from	long-term	contracts	for	products	and	services	provided	to	the	U.S.	Government	as	well	as	FMS	contracted	through	the	U.S. Government.	 We	 account	 for	 these	 contracts,	 as	 well	 as	 product	 contracts	 with	non-U.S.	 Government	 customers,	 using	 the	percentage-of-completion	 method	 of accounting,	which	represent	substantially	all	of	our	net	sales.	We	derive	our	remaining	net	sales	from	contracts	to	provide	services	to	non-U.S.	Government	customers, which	we	account	for	under	the	services	method	of	accounting.

Under	the	percentage-of-completion	method	of	accounting,	we	record	sales	on	contracts	based	upon	our	progress	towards	completion	on	a	particular	contract	as well	as	our	estimate	of	the	profit	to	be	earned	at	completion.	Cost-reimbursable	contracts	provide	for	the	payment	of	allowable	costs	plus	a	fee.	For	fixed-priced contracts,	net	sales	and	cost	of	sales	are	recognized	as	products	are	delivered	or	as	costs	are	incurred.	Due	to	the	nature	of	the	percentage-of-completion	method	of accounting,	changes	in	our	cost	of	sales	are	typically	accompanied	by	a	related	change	in	our	net	sales.

Changes	in	net	sales	and	operating	profit	generally	are	expressed	in	terms	of	volume.	Changes	in	volume	refer	to	increases	or	decreases	in	sales	or	operating	profit resulting	from	varying	production	activity	levels,	deliveries	or	service	levels	on	individual	contracts.	Volume	changes	in	segment	operating	profit	are	typically	based	on the	current	profit	booking	rate	for	a	particular	contract.

In	addition,	comparability	of	our	segment	sales,	operating	profit	and	operating	margins	may	be	impacted	favorably	or	unfavorably	by	changes	in	profit	booking rates	on	our	contracts	 accounted	 for	 using	 the	percentage-of-completion	method	of	accounting.	Increases	in	the	profit	booking	rates,	typically	referred	to	as	risk retirements,	usually	relate	to	revisions	in	the	estimated	total	costs	that	reflect	improved	conditions	on	a	particular	contract.	Conversely,	conditions	on	a	particular	contract may	deteriorate	resulting	in	an	increase	in	the	estimated	total	costs	to	complete	and	a	reduction	in	the	profit	booking	rate.	Increases	or	decreases	in	profit	booking	rates are	recognized	in	the	current	period	and	reflect	the	inception-to-date	effect	of	such	changes.	Segment	operating	profit	and	margins	may	also	be	impacted	favorably	or unfavorably	by	other	items.	Favorable	items	may	include	the	positive	resolution	of	contractual	matters,	cost	recoveries	on	restructuring	charges,	insurance	recoveries and	gains	on	sales	of	assets.	Unfavorable	items	may	include	the	adverse	resolution	of	contractual	matters;	restructuring	charges,	except	for	significant	severance	actions as	mentioned	above	which	are	excluded	from	segment	operating	results;	reserves	for	disputes;	asset	impairments;	and	losses	on	sales	of	assets.	Segment	operating	profit and	items	such	as	risk	retirements,	reductions	of	profit	booking	rates	or	other	matters	are	presented	net	of	state	income	taxes.

We	have	a	contract	to	provide	an	integrated	air	and	missile	defense	command,	control,	communications,	computers	–Integrated	Surveillance	&	Reconnaissance (C4ISR)	system	to	an	international	customer.	In	the	first	quarter	of	2015,	we	revised	our	estimated	costs	to	complete	the	program	as	a	consequence	of	performance issues	and	recorded	a	reserve	of

$70	million.	Since	that	time,	we	have	continued	to	experience	issues	related	to	customer	requirements	and	the	implementation	of	this	contract	and	have	periodically accrued	additional	reserves.	Consequently,	we	are	continuing	to	monitor	the	scope,	estimated	costs,	and	viability	of	the	program	and	the	possibility	of	additional customer	funding.	It	is	possible	that	we	may	have	to	record	additional	loss	reserves	in	future	periods,	which	could	be	material	to	our	operating	results.	However,	we cannot	make	an	estimate	of	the	total	expected	costs	at	this	time	due	to	uncertainties	inherent	in	the	estimation	process.

Our	consolidated	net	adjustments	not	related	to	volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	net	of	state	income	taxes,	increased segment	operating	profit	by	approximately	$1.5	billion,	$1.7	billion	and	$1.6	billion	for	2016,	2015	and	2014.	The	decrease	in	our	consolidated	net	adjustments	in	2016 compared	to	2015	was	primarily	due	to	a	decrease	in	profit	booking	rate	adjustments	at	our	MFC	and	Space	Systems	business	segments,	partially	offset	by	an	increase	at our	RMS	business	segment.	The	increase	in	our	consolidated	net	adjustments	in	2015	compared	to	2014	was	primarily	due	to	an	increase	in	profit	booking	rate adjustments	at	our	Space	Systems	and	Aeronautics	business	segments,	offset	by	a	decrease	in	profit	booking	rate	adjustments	at	our	RMS	and	MFC	business	segments. The	consolidated	net	adjustments	for	2016	are	inclusive	of	approximately	$530	million	in	unfavorable	items,	which	include	reserves	for	performance	matters	on	an international	program	at	RMS.	The	consolidated	net	adjustments	for	2015	are	inclusive	of	approximately	$550	million	in	unfavorable	items,	which	include	reserves	for performance	matters	on	an	international	program	at	RMS	and	on	commercial	satellite	programs	at	Space	Systems.	The	consolidated	net	adjustments	for	2014	are inclusive	of	approximately	$535	million	in	unfavorable	items,	which	include	reserves	recorded	on	certain	training	and	logistics	solutions	programs	at	RMS	and	net warranty	reserve	adjustments	for	various	programs	(including	JASSM	and	GMLRS)	at	MFC	as	described	in	the	respective	business	segment's	results	of	operations below.

Our	Aeronautics	business	segment	is	engaged	in	the	research,	design,	development,	manufacture,	integration,	sustainment,	support	and	upgrade	of	advanced military	aircraft,	including	combat	and	air	mobility	aircraft,	unmanned	air	vehicles	and	related	technologies.	Aeronautics'	major	programs	include	the	F-35	Lightning II	Joint	Strike	Fighter,	C-130	Hercules,	F-16	Fighting	Falcon,	C-5M	Super	Galaxy	and	F-22	Raptor.	Aeronautics'	operating	results	included	the	following	(in	millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $17,769 | $15,570 | $14,920 |
| Operating\tprofit | 1,887 | 1,681 | 1,649 |
| Operating\tmargin | 10.6% | 10.8% | 11.1% |
| Backlog\tat\tyear-end | $34,200 | $31,800 | $27,600 |

Aeronautics'	net	sales	in	2016	increased	$2.2	billion,	or	14%,	compared	to	2015.	The	increase	was	attributable	to	higher	net	sales	of	approximately	$1.7	billion	for the	F-35	 program	 due	 to	 increased	 volume	 on	 aircraft	 production	 and	 sustainment	 activities,	 partially	 offset	 by	 lower	 volume	 on	 development	 activities;	 and approximately	$290	million	for	 the	C-130	program	due	to	increased	deliveries	(24	aircraft	delivered	in	2016	compared	to	21	in	2015)	and	increased	sustainment activities;	and	approximately	$250	million	for	the	F-16	program	primarily	due	to	higher	volume	on	aircraft	modernization	programs.	The	increases	were	partially	offset by	lower	net	sales	of	approximately	$55	million	for	the	C-5	program	due	to	decreased	sustainment	activities.

Aeronautics'	operating	profit	in	2016	increased	$206	million,	or	12%,	compared	to	2015.	Operating	profit	increased	approximately	$195	million	for	the	F-35 program	due	to	increased	volume	on	aircraft	production	and	sustainment	activities	and	higher	risk	retirements;	and	by	approximately	$60	million	for	aircraft	support	and maintenance	programs	due	to	higher	risk	retirements	and	increased	volume.	These	increases	were	partially	offset	by	lower	operating	profit	of	approximately	$65	million for	 the	C-130	 program	 due	 to	 contract	 mix	 and	 lower	 risk	 retirements.	Adjustments	 not	 related	 to	 volume,	 including	 net	 profit	 booking	 rate	 adjustments,	 were approximately	$20	million	higher	in	2016	compared	to	2015.

Aeronautics'	net	sales	in	2015	increased	$650	million,	or	4%,	compared	to	2014.	The	increase	was	attributable	to	higher	net	sales	of	approximately	$1.4	billion	for F-35	production	contracts	due	to	increased	volume	on	aircraft	production	and	sustainment	activities;	and	approximately	$150	million	for	the	C-5	program	due	 to increased	deliveries	(nine	aircraft

delivered	in	2015	compared	to	seven	delivered	in	2014).	The	increases	were	partially	offset	by	lower	net	sales	of	approximately	$350	million	for	the	C-130	program	due to	fewer	aircraft	deliveries	(21	aircraft	delivered	in	2015,	compared	to	24	delivered	in	2014),	lower	sustainment	activities	and	aircraft	contract	mix;	approximately $200	million	due	to	decreased	volume	and	lower	risk	retirements	on	various	programs;	approximately	$195	million	for	the	F-16	program	due	to	fewer	deliveries	(11 aircraft	delivered	in	2015,	compared	to	17	delivered	in	2014);	and	approximately	$190	million	for	the	F-22	program	as	a	result	of	decreased	sustainment	activities.

Aeronautics'	 operating	 profit	 in	 2015	 increased	 $32	 million,	 or	 2%,	 compared	 to	 2014.	 Operating	 profit	 increased	 by	 approximately	 $240	 million	 for	F-35 production	contracts	due	to	increased	volume	and	risk	retirements;	and	approximately	$40	million	for	the	C-5	program	due	to	increased	risk	retirements.	These	increases were	offset	by	lower	operating	profit	of	approximately	$90	million	for	the	F-22	program	due	to	lower	risk	retirements;	approximately	$70	million	for	the	C-130	program as	 a	 result	 of	 the	 reasons	 stated	 above	 for	 lower	 net	 sales;	 and	 approximately	 $80	 million	 due	 to	 decreased	 volume	 and	 risk	 retirements	 on	 various	 programs. Adjustments	not	related	to	volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	were	approximately	$100	million	higher	in	2015	compared	to	2014.

Backlog	increased	in	2016	compared	to	2015	primarily	due	to	higher	orders	on	F-35	production	and	sustainment	programs.	Backlog	increased	in	2015	compared	to 2014	primarily	due	to	higher	orders	on	F-35	and	C-130	programs.

# Trends

We	expect	Aeronautics'	2017	net	sales	to	increase	in	the	low-double	digit	percentage	range	as	compared	to	2016	due	to	increased	volume	on	the	F-35	program. Operating	profit	is	expected	to	increase	at	a	slightly	lower	percentage	range,	driven	by	the	increased	volume	on	the	F-35	program,	partially	offset	by	contract	mix	that results	in	a	slight	decrease	in	operating	margins	between	years.

Our	MFC	business	segment	provides	air	and	missile	defense	systems;	tactical	missiles	and	air-to-ground	precision	strike	weapon	systems;	logistics;	fire	control systems;	mission	operations	support,	readiness,	engineering	support	and	integration	services;	manned	and	unmanned	ground	vehicles;	and	energy	management	solutions. MFC's	major	programs	include	PAC-3,	THAAD,	Multiple	Launch	Rocket	System,	Hellfire,	JASSM,	Javelin,	Apache,	Sniper®,	Low	Altitude	Navigation	and	Targeting Infrared	for	Night	(LANTIRN®)	and	Special	Operations	Forces	Contractor	Logistics	Support	Services	(SOF	CLSS).	In	2016	we	submitted	a	bid	for	the	Special Operations	Forces	Global	Logistics	Support	Services	(SOF	GLSS)	contract,	which	is	a	competitive	follow-on	contract	to	SOF	CLSS.	We	anticipate	an	award	decision on	the	follow-on	contract	in	mid-2017.	MFC's	operating	results	included	the	following	(in	millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $6,608 | $6,770 | $7,092 |
| Operating\tprofit | 1,018 | 1,282 | 1,344 |
| Operating\tmargin | 15.4% | 18.9% | 19.0% |
| Backlog\tat\tyear-end | $14,700 | $15,500 | $13,300 |

MFC's	net	sales	in	2016	decreased	$162	million,	or	2%,	compared	to	2015.	The	decrease	was	attributable	to	lower	net	sales	of	approximately	$205	million	for	air and	missile	defense	programs	due	to	decreased	volume	(primarily	THAAD);	and	lower	net	sales	of	approximately	$95	million	due	to	lower	volume	on	various	programs. These	decreases	were	partially	offset	by	a	$75	million	increase	for	tactical	missiles	programs	due	to	increased	deliveries	(primarily	Hellfire);	and	approximately $70	million	for	fire	control	programs	due	to	increased	volume	(SOF	CLSS).

MFC's	operating	profit	in	2016	decreased	$264	million,	or	21%,	compared	to	2015.	Operating	profit	decreased	approximately	$145	million	for	air	and	missile defense	programs	due	to	lower	risk	retirements	(PAC-3	and	THAAD)	and	a	reserve	for	a	contractual	matter;	approximately	$45	million	for	tactical	missiles	programs due	to	lower	risk	retirements	(Javelin);	and	approximately	$45	million	for	fire	control	programs	due	to	lower	risk	retirements	(Apache)	and	program	mix.	Adjustments not	related	to	volume,	including	net	profit	booking	rate	adjustments	and	reserves,	were	about	$225	million	lower	in	2016	compared	to	2015.

MFC's	net	sales	in	2015	decreased	$322	million,	or	5%,	compared	to	the	same	period	in	2014.	The	decrease	was	attributable	to	lower	net	sales	of	approximately $345	million	for	air	and	missile	defense	programs	due	to	fewer	deliveries	(primarily	PAC-3)	and	lower	volume	(primarily	THAAD);	and	approximately	$85	million	for tactical	missile	programs	due	to	fewer	deliveries	(primarily	Guided	Multiple	Launch	Rocket	System	(GMLRS))	and	Joint	Air-to-Surface	Standoff	Missile,	partially offset	by	increased	deliveries	for	Hellfire.	These	decreases	were	partially	offset	by	higher	net	sales	of	approximately	$55	million	for	energy	solutions	programs	due	to increased	volume.

MFC's	operating	profit	in	2015	decreased	$62	million,	or	5%,	compared	to	2014.	The	decrease	was	attributable	to	lower	operating	profit	of	approximately $100	million	for	fire	control	programs	due	primarily	to	lower	risk	retirements	(primarily	LANTIRN	and	SNIPER);	and	approximately	$65	million	for	tactical	missile programs	due	to	lower	risk	retirements	(primarily	Hellfire	and	GMLRS)	and	fewer	deliveries.	These	decreases	were	partially	offset	by	higher	operating	profit	of approximately	$75	million	for	air	and	missile	defense	programs	due	to	increased	risk	retirements	(primarily	THAAD).	Adjustments	not	related	to	volume,	including	net profit	booking	rate	adjustments	and	other	matters,	were	approximately	$60	million	lower	in	2015	compared	to	2014.

Backlog	decreased	 in	2016	compared	 to	2015	primarily	due	 to	 lower	orders	on	PAC-3,	Hellfire,	and	JASSM.	Backlog	increased	in	2015	compared to	2014 primarily	due	to	higher	orders	on	PAC-3,	LANTIRN/Sniper	and	certain	tactical	missile	programs,	partially	offset	by	lower	orders	on	THAAD.

We	expect	MFC's	net	sales	to	increase	in	the	mid-single	digit	percentage	range	in	2017	as	compared	to	2016	driven	primarily	by	our	air	and	missile	defense programs.	Operating	profit	is	expected	to	be	flat	or	increase	slightly.	Accordingly,	operating	profit	margin	is	expected	to	decline	from	2016	levels	as	a	result	of	contract mix	and	fewer	risk	retirements	in	2017	compared	to	2016.

As	previously	described,	on	November	6,	2015,	we	acquired	Sikorsky	and	aligned	the	Sikorsky	business	under	our	RMS	business	segment.	The	2015	results	of	the acquired	Sikorsky	business	have	been	included	in	our	financial	results	from	the	November	6,	2015	acquisition	date	through	December	31,	2015.	As	a	result,	our consolidated	operating	results	and	RMS	business	segment	operating	results	for	the	year	ended	December	31,	2015	do	not	reflect	a	full	year	of	Sikorsky	operations.

Our	RMS	business	segment	provides	design,	manufacture,	service	and	support	for	a	variety	of	military	and	civil	helicopters,	ship	and	submarine	mission	and combat	systems;	mission	systems	and	sensors	for	rotary	and	fixed-wing	aircraft;	sea	and	land-based	missile	defense	systems;	radar	systems;	the	Littoral	Combat	Ship (LCS);	simulation	and	training	services;	and	unmanned	systems	and	technologies.	In	addition,	RMS	supports	the	needs	of	government	customers	in	cybersecurity	and delivers	communication	and	command	and	control	capabilities	through	complex	mission	solutions	for	defense	applications.	RMS'	major	programs	include	Black	Hawk and	 Seahawk	 helicopters,	Aegis	 Combat	 System	 (Aegis),	 LCS,	 Space	 Fence,	Advanced	 Hawkeye	 Radar	 System,	TPQ-53	 Radar	 System,	CH-53K	 development helicopter,	and	VH-92A	helicopter	program.	RMS'	operating	results	included	the	following	(in	millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $13,462 | $9,091 | $8,732 |
| Operating\tprofit | 906 | 844 | 936 |
| Operating\tmargin | 6.7% | 9.3% | 10.7% |
| Backlog\tat\tyear-end | $28,400 | $30,100 | $13,300 |

RMS'	net	sales	in	2016	increased	$4.4	billion,	or	48%,	compared	to	2015.	The	increase	was	primarily	attributable	to	higher	net	sales	of	approximately	$4.6	billion from	Sikorsky,	which	was	acquired	on	November	6,	2015.	Net	sales	for	2015	include	Sikorsky's	results	subsequent	to	the	acquisition	date,	net	of	certain	revenue adjustments	required	to	account	for	the	acquisition	of	this	business.	This	increase	was	partially	offset	by	lower	net	sales	of	approximately	$70	million	for	training

and	logistics	programs	due	to	the	divestiture	of	our	LMCFT	business,	which	reported	sales	through	the	May	2,	2016	divestiture	date;	and	approximately	$65	million	for ship	and	aviation	systems	programs	due	to	decreased	volume	on	various	programs.

RMS'	operating	profit	in	2016	increased	$62	million,	or	7%,	compared	to	2015.	Operating	profit	increased	approximately	$85	million	for	training	and	logistics programs	due	primarily	to	the	divestiture	of	our	LMCFT	business	which	generated	operating	losses	through	its	May	2,	2016	divestiture	date;	about	$60	million	for	our integrated	warfare	systems	and	sensors	programs	due	to	investments	made	in	connection	with	a	next	generation	radar	technology	program	awarded	during	2015;	and approximately	$55	million	for	undersea	systems	programs	due	primarily	to	higher	reserves	for	performance	matters	on	an	international	program	in	2015.	These	increases were	partially	offset	by	a	decrease	of	$70	million	as	a	result	of	a	higher	operating	 loss	from	Sikorsky,	 inclusive	of	 the	unfavorable	 impacts	of	 intangible	asset amortization	and	other	adjustments	required	to	account	for	the	acquisition	of	this	business;	about	$30	million	for	ship	and	aviation	systems	programs	due	primarily	to performance	on	various	programs;	and	about	$25	million	for	other	matters.	Adjustments	not	related	to	volume,	including	net	profit	booking	rate	adjustments	and reserves,	were	about	$155	million	higher	in	2016	compared	to	2015.

RMS'	net	sales	in	2015	increased	$359	million,	or	4%,	compared	to	2014.	The	increase	was	attributable	to	net	sales	of	approximately	$400	million	from	Sikorsky, net	of	adjustments	required	to	account	for	the	acquisition	of	this	business	in	the	fourth	quarter	of	2015;	and	approximately	$220	million	for	integrated	warfare	systems and	 sensors	 programs,	 primarily	 due	 to	 the	ramp-up	 of	 recently	 awarded	 programs	 (Space	 Fence).	 These	 increases	 were	 partially	 offset	 by	 lower	 net	 sales	 of approximately	$150	million	for	undersea	systems	programs	due	to	decreased	volume	as	a	result	of	in-theater	force	reductions	(primarily	Persistent	Threat	Detection System);	and	approximately	$105	million	for	ship	and	aviation	systems	programs	primarily	due	to	decreased	volume	(Merlin	Capability	Sustainment	Program).

RMS'	operating	profit	in	2015	decreased	$92	million,	or	10%,	compared	to	2014.	Operating	profit	decreased	by	approximately	$75	million	due	to	performance matters	on	an	international	program;	approximately	$45	million	for	Sikorsky	due	primarily	to	intangible	amortization	and	adjustments	required	to	account	for	the acquisition	of	 this	business	 in	 the	fourth	quarter	of	2015;	and	approximately	$15	million	for	 integrated	warfare	systems	and	sensors	programs,	primarily	due	 to investments	made	in	connection	with	a	recently	awarded	next	generation	radar	technology	program,	partially	offset	by	higher	risk	retirements	(including	Halifax Class	Modernization).	These	decreases	were	partially	offset	by	approximately	$20	million	in	increased	operating	profit	for	training	and	logistics	services	programs, primarily	due	to	reserves	recorded	on	certain	programs	in	2014	that	were	not	repeated	in	2015.	Adjustments	not	related	to	volume,	including	net	profit	booking	rate adjustments	and	other	matters,	were	approximately	$100	million	lower	in	2015	compared	to	2014.

Backlog	decreased	in	2016	compared	to	2015	primarily	due	to	sales	being	recognized	on	several	multi-year	programs	(primarily	in	Sikorsky)	related	to	prior	year awards.	Backlog	increased	in	2015	compared	to	2014	primarily	due	to	the	addition	of	Sikorsky's	backlog,	as	well	as	higher	orders	on	new	program	starts	(such	as Australian	Defence	Force	Pilot	Training	System).

We	 expect	 RMS'	 2017	 net	 sales	 to	 increase	 in	 the	low-single	 digit	 percentage	 range	 compared	 to	 2016.	 Operating	 profit	 is	 expected	 to	 increase	 in	 the low-double-digit	percentage	range	due	to	a	reduction	in	certain	purchase	accounting	adjustments	that	were	attributable	to	the	Sikorsky	acquisition,	resulting	in	higher operating	profit	margins	between	years.

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	provides	network-enabled	situational	awareness	and	 integrates	complex	space	and	ground-based	global systems	to	help	our	customers	gather,	analyze,	and	securely	distribute	critical	intelligence	data.	Space	Systems	is	also	responsible	for	various	classified	systems	and services	in	support	of	vital	national	security	systems.	Space	Systems'	major	programs	include	the	Trident	II	D5	Fleet	Ballistic	Missile	(FBM),	Orion,	Space	Based Infrared	System	(SBIRS),	AEHF,	GPS-III,	Geostationary	Operational	Environmental	Satellite	R-Series	(GOES-R),	and	The	Mobile	User	Objective	System	(MUOS). Operating	profit	for	our	Space	Systems	business

segment	includes	AWE	and	our	share	of	earnings	for	our	investment	in	ULA,	which	provides	expendable	launch	services	to	the	U.S.	Government.	Space	Systems' operating	results	included	the	following	(in	millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $9,409 | $9,105 | $9,202 |
| Operating\tprofit | 1,289 | 1,171 | 1,187 |
| Operating\tmargin | 13.7% | 12.9% | 12.9% |
| Backlog\tat\tyear-end | $18,900 | $17,400 | $20,300 |

Space	Systems'	net	sales	in	2016	increased	$304	million,	or	3%,	compared	to	2015.	The	increase	was	attributable	to	net	sales	of	approximately	$410	million	from AWE	following	the	consolidation	of	this	business	in	the	third	quarter	of	2016;	and	approximately	$150	million	for	commercial	space	transportation	programs	due	to increased	launch-related	activities;	and	approximately	$70	million	of	higher	net	sales	for	various	programs	(primarily	Fleet	Ballistic	Missiles)	due	to	increased	volume. These	increases	were	partially	offset	by	a	decrease	in	net	sales	of	approximately	$340	million	for	government	satellite	programs	due	to	decreased	volume	(primarily SBIRS	and	MUOS)	and	the	wind-down	or	completion	of	mission	solutions	programs.

Space	Systems'	operating	profit	in	2016	increased	$118	million,	or	10%,	compared	to	2015.	The	increase	was	primarily	attributable	to	a	non-cash,	pre-tax	gain	of approximately	$127	million	related	to	the	consolidation	of	AWE;	and	approximately	$80	million	of	increased	equity	earnings	from	joint	ventures	(primarily	ULA). These	increases	were	partially	offset	by	a	decrease	of	approximately	$105	million	for	government	satellite	programs	due	to	lower	risk	retirements	(primarily	SBIRS, MUOS	and	mission	solutions	programs)	and	decreased	volume.	Adjustments	not	related	to	volume,	including	net	profit	booking	rate	adjustments,	were	approximately $185	million	lower	in	2016	compared	to	2015.

Space	Systems'	net	sales	in	2015	decreased	$97	million,	or	1%,	compared	to	2014.	The	decrease	was	attributable	to	approximately	$335	million	lower	net	sales	for government	 satellite	 programs	 due	 to	 decreased	 volume	 (primarily	AEHF)	 and	 the	 wind-down	 or	 completion	 of	 mission	 solutions	 programs;	 and	 approximately $55	million	for	strategic	missile	and	defense	systems	due	to	lower	volume.	These	decreases	were	partially	offset	by	higher	net	sales	of	approximately	$235	million	for businesses	acquired	in	2014;	and	approximately	$75	million	for	the	Orion	program	due	to	increased	volume.

Space	Systems'	operating	profit	in	2015	decreased	$16	million,	or	1%,	compared	to	2014.	Operating	profit	increased	approximately	$85	million	for	government satellite	programs	due	primarily	to	increased	risk	retirements.	This	increase	was	offset	by	lower	operating	profit	of	approximately	$65	million	for	commercial	satellite programs	due	to	performance	matters	on	certain	programs;	and	approximately	$35	million	due	to	decreased	equity	earnings	in	joint	ventures.	Adjustments	not	related	to volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	were	approximately	$105	million	higher	in	2015	compared	to	2014.

# Equity	earnings

Total	equity	earnings	recognized	by	Space	Systems	(primarily	ULA)	represented	approximately	$325	million,	$245	million	and	$280	million,	or	25%,	21%	and 24%	of	this	business	segment's	operating	profit	during	2016,	2015	and	2014.

Backlog	increased	in	2016	compared	to	2015	primarily	due	to	the	addition	of	AWE's	backlog.	Backlog	decreased	in	2015	compared	to	2014	primarily	due	to	lower orders	for	government	satellite	programs	and	the	Orion	program	and	higher	sales	on	the	Orion	program.

We	expect	Space	Systems'	2017	net	sales	to	decrease	in	the	mid-single	digit	percentage	range	as	compared	to	2016,	driven	by	program	lifecycles	on	government satellite	programs,	partially	offset	by	the	recognition	of	AWE	net	sales	for	a	full	year	in	2017	versus	a	partial	year	in	2016	following	the	consolidation	of	AWE	in	the third	quarter	of	2016.	Operating	profit

is	expected	to	decline	in	the	low-	to	mid-double	digit	percentage	range,	primarily	driven	by	sales	volume,	the	one-time	AWE	non-cash	gain	in	2016,	amortization	of	the AWE	intangible	assets	in	2017,	and	lower	equity	earnings	in	2017	compared	to	2016.	As	a	result	operating	profit	margin	is	expected	to	decline	from	2016	levels.

# 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	continued	to	invest	in	our	business,	including	capital	expenditures,	independent	research	and	development	and	made	selective business	acquisitions,	while	returning	cash	to	stockholders	through	dividends	and	share	repurchases,	and	managing	our	debt	levels,	maturities	and	interest	rates.

We	 have	 generated	 strong	 operating	 cash	 flows,	 which	 have	 been	 the	 primary	 source	 of	 funding	 for	 our	 operations,	 capital	 expenditures,	 debt	 service	 and repayments,	dividends,	share	repurchases	and	postretirement	benefit	plan	contributions.	Our	strong	operating	cash	flows	enabled	our	Board	of	Directors	to	approve	two key	cash	deployment	initiatives	in	September	2016.	First,	we	increased	our	fourth	quarter	dividend	rate	by	10%	to	$1.82	per	share.	Second,	the	Board	of	Directors approved	a	$2.0	billion	increase	to	our	share	repurchase	program.	Inclusive	of	this	increase,	the	total	remaining	authorization	for	future	common	share	repurchases under	our	program	was	$3.5	billion	as	of	December	31,	2016.

During	2016,	we	received	a	one-time,	tax-free	special	cash	payment	of	approximately	$1.8	billion	as	a	result	of	the	divestiture	of	the	IS&GS	business	in	the	third quarter	of	2016.	We	used	the	proceeds	to	repay	$500	million	of	long-term	notes	at	their	scheduled	maturity	and	paid	$484	million	in	dividends	with	a	portion	of	this cash.	The	remainder	was	used	for	share	repurchases.

We	have	accessed	the	capital	markets	opportunistically	as	we	did	in	February	2015	when	we	issued	$2.25	billion	of	long-term	debt	and	as	needed	as	we	did	in November	2015	when	we	issued	$7.0	billion	of	long-term	debt	in	connection	with	our	acquisition	of	Sikorsky.	We	also	used	a	combination	of	short-term	debt	financing, commercial	paper	and	available	cash	to	fund	the	Sikorsky	acquisition,	as	discussed	below	in	"Capital	Structure,	Resources	and	Other"	and	"Note	10	–	Debt"	included	in our	Notes	to	Consolidated	Financial	Statements.	We	expect	our	cash	from	operations	will	continue	to	be	sufficient	to	support	our	operations	and	anticipated	capital expenditures	for	the	foreseeable	future.	However,	we	expect	to	continue	to	issue	commercial	paper	backed	by	our	revolving	credit	facility	to	manage	the	timing	of	our cash	flows.	As	described	in	the	"Capital	Structure,	Resources	and	Other"	section	below,	we	have	financing	resources	available	to	fund	potential	cash	outflows	that	are less	predictable	or	more	discretionary,	should	they	occur.	We	also	have	access	to	credit	markets,	if	needed,	for	liquidity	or	general	corporate	purposes,	including,	but	not limited	to,	our	revolving	credit	facility	or	the	ability	to	issue	commercial	paper,	and	letters	of	credit	to	support	customer	advance	payments	and	for	other	trade	finance purposes	such	as	guaranteeing	our	performance	on	particular	contracts.

Cash	received	from	customers,	either	from	the	payment	of	invoices	for	work	performed	or	for	advances	in	excess	of	costs	incurred,	is	our	primary	source	of	cash. We	generally	do	not	begin	work	on	contracts	until	funding	is	appropriated	by	the	customer.	However,	we	may	determine	to	fund	customer	programs	ourselves	pending government	appropriations	and	are	doing	so	with	increased	frequency.	If	we	incur	costs	in	excess	of	funds	obligated	on	the	contract,	we	may	be	at	risk	for	reimbursement of	the	excess	costs.

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	2016,	as	we	are	authorized to	bill	as	the	costs	are	incurred	or	work	is	performed.	A	number	of	our	fixed-price	contracts	may	provide	for	performance-based	payments,	which	allow	us	to	bill	and collect	cash	as	we	perform	on	the	contract.	The	amount	of	performance-based	payments	and	the	related	milestones	are	encompassed	in	the	negotiation	of	each	contract. The	timing	of	such	payments	may	differ	from	our	incurrence	of	costs	related	to	our	contract	performance,	thereby	affecting	our	cash	flows.

The	U.S.	Government	has	indicated	that	it	would	consider	progress	payments	as	the	baseline	for	negotiating	payment	terms	on	fixed-price	contracts,	rather	than performance-based	payments.	In	contrast	to	negotiated	performance-based	payment	terms,	progress	payment	provisions	correspond	to	a	percentage	of	the	amount	of costs	incurred	during	the	performance	of	the	contract.	While	the	total	amount	of	cash	collected	on	a	contract	is	the	same,	performance-based	payments	have	had	a	more favorable	impact	on	the	timing	of	our	cash	flows.	In	addition,	our	cash	flows	may	be	affected	if	the	U.S.	Government	decides	to	withhold	payments	on	our	billings. While	the	impact	of	withholding	payments	delays	the	receipt	of	cash,	the	cumulative	amount	of	cash	collected	during	the	life	of	the	contract	will	not	vary.

The	majority	of	our	capital	expenditures	for	2016	and	those	planned	for	2017	are	for	equipment,	facilities	infrastructure	and	information	technology.	Expenditures for	equipment	and	facilities	infrastructure	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	higher	production	of	the	F-35	combat	aircraft,	and	we	have	projects underway	to	modernize	certain	of	our	facilities.	We	also	incur	capital	expenditures	for	information	technology	to	support	programs	and	general	enterprise	information technology	infrastructure,	inclusive	of	costs	for	the	development	or	purchase	of	internal-use	software.

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

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | $1,090 | $1,446 | $2,617 |
| Operating\tactivities |  |  |  |
| Net\tearnings | 5,302 | 3,605 | 3,614 |
| Non-cash\tadjustments | (35) | 821 | 876 |
| Changes\tin\tworking\tcapital | (1,042) | (846) | (372) |
| Other,\tnet | 964 | 1,521 | (252) |
| Net\tcash\tprovided\tby\toperating\tactivities | 5,189 | 5,101 | 3,866 |
| Net\tcash\tused\tfor\tinvesting\tactivities | (985) | (9,734) | (1,723) |
| Net\tcash\tprovided\tby\t(used\tfor)\tfinancing\tactivities | (3,457) | 4,277 | (3,314) |
| Net\tchange\tin\tcash\tand\tcash\tequivalents | 747 | (356) | (1,171) |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $1,837 | $1,090 | $1,446 |

# Operating	Activities

Net	cash	provided	by	operating	activities	increased	$88	million	in	2016	compared	to	2015	primarily	due	to	a	reduction	in	cash	paid	for	income	taxes,	partially	offset by	an	increase	in	cash	paid	for	interest	expense	and	an	increase	in	cash	used	for	working	capital.	The	$196	million	increase	in	cash	flows	used	for	working	capital (defined	as	receivables	and	inventories	less	accounts	payable	and	customer	advances	and	amounts	in	excess	of	costs	incurred)	was	attributable	to	timing	of	cash	receipts for	receivables	(primarily	F-35	program),	partially	offset	by	timing	of	production	and	billing	cycles	affecting	customer	advances	and	progress	payments	applied	to inventories	(primarily	C-130	program).	See	"Critical	Accounting	Policies	–Postretirement	Benefit	Plans"	(under	the	caption	"Funding	Considerations")	for	discussion	of future	postretirement	benefit	plan	funding.	We	made	net	income	tax	payments	of	$1.3	billion	and	$1.8	billion	during	the	years	ended	December	31,	2016	and	2015, respectively.	We	made	 interest	payments	of	approximately	$600	million	and	approximately	$375	million	during	 the	years	ended	December	31,	2016	and	2015, respectively.

We	may	determine	to	fund	customer	programs	ourselves	pending	government	appropriations.	If	we	incur	costs	in	excess	of	funds	obligated	on	a	contract,	we	are	at risk	for	reimbursement	of	the	excess	costs.	In	2014	and	2015,	we	received	customer	authorization	and	initial	funding	to	begin	producing	F-35	aircraft	to	be	acquired under	LRIP	9	and	10	contracts,	respectively.	As	a	result	of	recent	funding	by	the	U.S.	Government,	our	potential	cash	exposure	and	termination	liability	were	not material	at	December	31,	2016.	However,	it	may	become	material	if	government	appropriations	are	delayed	as	was	the	case	in	the	second	and	third	quarters	of	2016.

Net	cash	provided	by	operating	activities	increased	$1.2	billion	in	2015	compared	to	2014	primarily	due	to	lower	pension	contributions,	partially	offset	by	decreases in	working	capital	and	higher	tax	payments.	The	$1.8	billion	increase	in	cash	flows	related	to	other,	net	in	the	table	above	is	primarily	because	we	made	no	contributions to	our	heritage	qualified	defined	benefit	pension	trust	in	2015	compared	to	$2.0	billion	in	2014.	We	made	$5.0	million	in	contributions	to	our	new	Sikorsky	bargained qualified	defined	benefit	pension	plan	in	2015.	The	increase	in	cash	flows	related	to	other,	net	was	offset	by	higher	federal	and	foreign	income	tax	payments,	net	of refunds	received,	of	approximately	$210	million	in	2015	compared	to	2014	due	primarily	to	the	absence	of	refunds	received	in	2015	(prior	year's	tax	refunds	were attributable	to	timing	of	discretionary	pension	contributions	made	during	the	fourth	quarter	of	the	respective	previous	years).	The	$474	million	decrease	in	cash	flows related	to	working	capital	(defined	as	receivables	and	inventories	less	accounts	payable

and	customer	advances	and	amounts	in	excess	of	costs	incurred)	was	attributable	to	an	increase	in	receivables	due	to	timing	of	customer	collections	(primarily	F-35 contracts)	as	well	as	timing	of	production	and	billing	cycles	affecting	customer	advances	and	progress	payments	applied	to	inventories	(primarily	C-130	program).

# Investing	Activities

Net	cash	used	for	investing	activities	decreased	$8.7	billion	in	2016	compared	to	the	prior	year,	primarily	due	to	$9.0	billion	of	cash	used	for	acquisition	activities	in 2015	that	did	not	recur	in	2016.	Net	cash	used	for	investing	activities	increased	$8.0	billion	in	2015	compared	to	2014,	primarily	due	to	cash	used	for	acquisition activities.	Acquisition	activities	include	both	the	acquisition	of	businesses	and	investments	in	affiliates.	We	had	no	acquisitions	in	2016.	In	2015	we	paid	$9.0	billion	for the	Sikorsky	acquisition,	net	of	cash	acquired.	In	2014,	we	paid	$898	million	for	acquisition	activities,	primarily	related	to	the	acquisitions	of	Zeta,	Systems	Made Simple,	and	Industrial	Defender	(see	"Note	3	–	Acquisitions	and	Divestitures"	included	in	our	Notes	to	Consolidated	Financial	Statements).

Capital	expenditures	amounted	to	$1.1	billion	in	2016,	$939	million	in	2015	and	$845	million	in	2014.	The	majority	of	our	capital	expenditures	were	for	equipment and	facilities	infrastructure	that	generally	are	incurred	to	support	new	and	existing	programs	across	all	of	our	business	segments.	We	also	incur	capital	expenditures	for information	 technology	 to	 support	 programs	 and	 general	 enterprise	 information	 technology	 infrastructure,	 inclusive	 of	 costs	 for	 the	 development	 or	 purchase	 of internal-use-software.

Additionally,	in	2015,	we	received	cash	proceeds	of	approximately	$165	million	related	to	three	properties	sold	in	California.

# Financing	Activities

Net	cash	used	for	financing	activities	increased	$7.7	billion	in	2016	compared	to	2015	primarily	due	to	proceeds	from	the	issuance	of	long-term	debt	in	2015	which did	not	recur	in	2016,	the	repayments	of	long-term	debt	in	2016,	and	higher	dividend	payments,	partially	offset	by	the	proceeds	from	the	one-time	special	cash	payment of	$1.8	billion	from	the	divestiture	of	the	IS&GS	business	and	a	reduction	in	cash	used	for	repurchases	of	common	stock.

Net	cash	provided	by	financing	activities	increased	$7.6	billion	in	2015	compared	to	2014	primarily	due	to	proceeds	from	new	debt	issuances,	partially	offset	by increased	repurchases	of	common	stock	and	higher	dividends	paid.

In	May	2016,	we	repaid	$452	million	of	long-term	notes	with	a	fixed	interest	rate	of	7.65%	according	to	their	scheduled	maturities.

In	September	2016,	we	repaid	$500	million	of	long-term	notes	with	a	fixed	interest	rate	of	2.13%	according	to	their	scheduled	maturities.

In	February	2015,	we	received	net	proceeds	of	$2.21	billion	for	the	issuance	of	$2.25	billion	of	fixed	interest-rate	long-term	notes.	In	November	2015,	we	borrowed $7.0	billion	of	fixed	interest-rate	long-term	notes	and	received	net	proceeds	of	$6.9	billion	(the	November	2015	Notes).	These	proceeds	were	used	to	repay	$6.0	billion	of outstanding	borrowings	under	a	364-day	revolving	credit	facility	that	was	used	to	finance	a	portion	of	the	purchase	price	for	the	Sikorsky	acquisition.	Additionally,	in	the fourth	quarter	of	2015,	to	partially	finance	the	Sikorsky	acquisition	we	borrowed	and	repaid	approximately	$1.0	billion	under	our	commercial	paper	program.	See	the "Capital	Structure,	Resources	and	Other"	discussion	below	and	"Note	10	–	Debt"	included	in	our	Notes	to	Consolidated	Financial	Statements	for	more	information about	our	debt	financing	activities.

We	paid	dividends	totaling	$2.0	billion	($6.77	per	share)	in	2016,	$1.9	billion	($6.15	per	share)	in	2015	and	$1.8	billion	($5.49	per	share)	in	2014.	We	have increased	our	quarterly	dividend	rate	in	each	of	the	last	three	years,	including	a	10%	increase	in	the	quarterly	dividend	rate	in	the	fourth	quarter	of	2016.	We	declared quarterly	dividends	of	$1.65	per	share	during	each	of	the	first	three	quarters	of	2016	and	$1.82	per	share	during	the	fourth	quarter	of	2016;	$1.50	per	share	during	each of	the	first	three	quarters	of	2015	and	$1.65	per	share	during	the	fourth	quarter	of	2015;	and	$1.33	per	share	during	each	of	the	first	three	quarters	of	2014	and	$1.50	per share	during	the	fourth	quarter	of	2014.

Cash	received	from	the	issuance	of	our	common	stock	in	connection	with	employee	stock	option	exercises	during	2016,	2015	and	2014	totaled	$106	million, $174	million	and	$308	million.	The	exercises	resulted	in	the	issuance	of	1.2	million,	2.2	million	and	3.7	million	shares	of	our	common	stock.

# Capital	Structure,	Resources	and	Other

At	December	31,	2016,	we	held	cash	and	cash	equivalents	of	$1.8	billion.	As	of	December	31,	2016,	approximately	$400	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	had	been	repatriated	at	the	end	of	2016,	we	estimate	that	about	$64	million	of	U.S.	federal	income	tax would	have	been	due	after	considering	foreign	tax	credits.

Our	outstanding	debt,	net	of	unamortized	discounts	and	issuance	costs,	amounted	to	$14.3	billion	at	December	31,	2016	and	mainly	is	in	the	form	of	publicly-issued notes	that	bear	interest	at	fixed	rates.	As	of	December	31,	2016,	we	were	in	compliance	with	all	covenants	contained	in	our	debt	and	credit	agreements.

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.

On	occasion,	customers	may	seek	financing	for	the	purchase	of	our	products.	In	connection	with	these	transactions,	we	may	enter	into	arrangements	along	with	our customers	with	unrelated	third	–	party	financial	institutions	to	facilitate	the	non-recourse	sale	of	customer	receivables.	For	accounting	purposes,	these	transactions	are treated	as	a	sale	of	receivables	and	the	sale	proceeds	from	the	banks	are	reflected	in	our	operating	cash	flows	on	the	consolidated	statements	of	cash	flows.	During	2016, there	was	no	significant	activity	related	to	sales	of	customer	receivables.

# Revolving	Credit	Facilities

On	October	9,	2015,	we	entered	into	a	new	$2.5	billion	revolving	credit	facility	(the	5-year	Facility)	with	various	banks.	The	5-year	Facility,	was	amended	in October	2016	to	extend	its	expiration	date	by	one	year	from	October	9,	2020	to	October	9,	2021.	The	5-year	Facility	is	available	for	general	corporate	purposes.	The undrawn	portion	of	the	5-year	Facility	is	also	available	to	serve	as	a	backup	facility	for	the	issuance	of	commercial	paper.	We	may	request	and	the	banks	may	grant,	at their	discretion,	an	increase	to	the	credit	facility	up	to	an	additional	$500	million.	There	were	no	borrowings	outstanding	under	the	5-year	Facility	as	of	and	for	the	year ended	December	31,	2016.

Borrowings	under	the	5-year	Facility	are	unsecured	and	bear	interest	at	rates	based,	at	our	option,	on	a	Eurodollar	Rate	or	a	Base	Rate,	as	defined	in	the	5-year Facility's	agreement.	Each	bank's	obligation	to	make	loans	under	the	5-year	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	5-year	Facility	agreement.

# Long-Term	Debt

See	"Note	10	–	Debt"	included	in	our	Notes	to	Consolidated	Financial	Statements	for	information	about	our	long-term	debt.

We	have	an	effective	shelf	registration	statement	on	Form	S-3	on	file	with	the	U.S.	Securities	and	Exchange	Commission	to	provide	for	the	issuance	of	an indeterminate	amount	of	debt	securities.

# Commercial	Paper

We	have	agreements	in	place	with	financial	institutions	to	provide	for	the	issuance	of	commercial	paper	backed	by	our	$2.5	billion	credit	facility.	During	2016,	we borrowed	and	fully	repaid	amounts	under	our	commercial	paper	programs.	There	 were	 no	 commercial	 paper	 borrowings	 outstanding	 as	 of	 December	 31,	 2016. However,	we	expect	to	continue	to	issue	commercial	paper	backed	by	our	credit	facility	to	manage	the	timing	of	our	cash	flows.

# Total	Equity

Our	total	equity	was	$1.6	billion	at	December	31,	2016,	a	decrease	of	$1.5	billion	from	December	31,	2015.	The	decrease	was	primarily	due	to	the	9.4	million common	shares	tendered	and	retired	in	connection	with	the	divestiture	of	our	IS&GS	business	for	$2.5	billion;	the	repurchase	of	8.9	million	common	shares	for $2.1	billion;	and	dividends	declared	of	$2.0	billion	during	the	year.	These	decreases	were	partially	offset	by	net	earnings	of	$5.3	billion	and	employee	stock	activity	of $399	million	(including	the	impacts	of	stock	option	exercises,	ESOP	activity	and	stock-based	compensation).

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	purchase	price	over	par	value	of	$1.7	billion	recorded	as	a	reduction	of	retained	earnings	in	2016.

# Contractual	Commitments	and	Off-Balance	Sheet	Arrangements

At	December	31,	2016,	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$15,228 | \t\t\t\t$— | $1,650 | $2,150 | $11,428 |
| Interest\tpayments | 10,602 | 630 | 1,245 | 1,120 | 7,607 |
| Other\tliabilities | 2,923 | 268 | 531 | 417 | 1,707 |
| Operating\tlease\tobligations | 762 | 179 | 281 | 181 | 121 |
| Purchase\tobligations: |  |  |  |  |  |
| Operating\tactivities | 38,357 | 20,060 | \t 13,271 | 3,484 | 1,542 |
| Capital\texpenditures | 229 | 168 | 54 | 7 | — |
| Total\tcontractual\tcash\tobligations | \t$68,101 | \t\t\t\t$21,305 | $17,032 | $7,359 | $22,405 |

(a) Long-term	debt	includes	scheduled	principal	payments	only	and	excludes	approximately	$13	million	of	debt	issued	by	a	consolidated	joint	venture,	for	which	the	debt	is	not guaranteed	by	us.

Amounts	related	to	other	liabilities	represent	the	contractual	obligations	for	certain	long-term	liabilities	recorded	as	of	December	31,	2016.	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	$33	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	Federal	Acquisition	Regulation	(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	facilities	infrastructure,	equipment	and	information	technology.

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	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. Satisfaction	of	our	offset	obligations	are	included	in	the	estimates	of	our	total	costs	to	complete	the	contract	and	may	impact	our	sales,	profitability	and	cash	flows.	Our ability	to	recover	investments	on	our	consolidated	balance	sheet	that	we	make	to	satisfy	offset	obligations	is	generally	dependent	upon	the	successful	operation	of ventures	that	we	do	not	control	and	may	involve	products	and	services	that	are	dissimilar	to	our	business	activities.	At	December	31,	2016,	the	notional	value	of remaining	obligations	under	our	outstanding	offset	agreements	totaled	approximately	$15	billion,	which	primarily	relate	to	our	Aeronautics,	MFC	and	RMS	business segments,	most	of	which	extend	through	2044.	To	the	extent	we	have	entered	into	purchase	obligations	at	December	31,	2016	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,	estimated	at	approximately	$1.7	billion	at December	31,	2016,	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)	are	required	to	provide	ULA	an	additional	capital	contribution	if ULA	is	unable	to	make	required	payments	under	its	inventory	supply	agreement	with	Boeing.	As	of	December	31,	2016,	ULA's	total	remaining	obligation	to	Boeing under	 the	 inventory	 supply	 agreement	 was	 $120	 million.	The	 parties	 have	 agreed	 to	 defer	 the	 remaining	 payment	 obligation	 as	 it	 is	 more	 than	 offset	 by	 other commitments	to	ULA.	Accordingly,	we	do	not	expect	to	be	required	to	make	a	capital	contribution	to	ULA	under	this	agreement.

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,	2016,	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	venture	partners.	At	December	31,	2016,	we	had the	following	outstanding	letters	of	credit,	surety	bonds	and	third-party	guarantees	(in	millions):

|  |  | Commitment	Expiration	By	Period | Commitment	Expiration	By	Period |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Total | Less\tThan | Years | Years | After |
|  | Commitment | 1\tYear | 2\tand\t3 | 4\tand\t5 | 5\tYears |
| Standby\tletters\tof\tcredit\t(a) | $2,661 | $1,232 | \t$\t\t\t893 | $363 | $173 |
| Surety\tbonds | 368 | 366 | — | 2 | — |
| Third-party\tGuarantees | 709 | 14 | 276 | 20 | 399 |
| Total\tcommitments | $3,738 | $1,612 | \t$1,169 | $385 | $572 |

(a) Approximately	$850	million	of	standby	letters	of	credit	in	the	"Less	Than	1	Year"	category,	$554	million	in	the	"Years	2	and	3"	category	and	$295	million	in	the	"Years	4	and	5" category	are	expected	to	renew	for	additional	periods	until	completion	of	the	contractual	obligation.

At	December	31,	2016,	third-party	guarantees	totaled	$709	million,	of	which	approximately	56%	related	to	guarantees	of	contractual	performance	of	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	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	venture	partner.	We	believe	our	current	and	former	venture	partners	will	be	able	to	perform	their	obligations,	as	they	have	done	through	December	31,	2016,	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	venture	partners.

# Critical	Accounting	Policies

# Contract	Accounting	/	Sales	Recognition

Substantially	all	of	our	net	sales	are	accounted	for	using	the	percentage-of-completion	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	a 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	percentage-of-completion	accounting	model	or	the	services	accounting	model,	as	appropriate.

We	classify	net	sales	as	products	or	services	on	our	consolidated	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	international	governments	contracted	through	the U.S.	Government.

# Contract	Types

Our	contracts	generally	record	sales	for	both	products	and	services	under	cost-reimbursable,	fixed-price	and	time-and-materials	contracts.

# Cost-reimbursable	contracts

Cost-reimbursable	contracts,	which	accounted	for	about	38%,	42%,	and	41%	of	our	total	net	sales	in	2016,	2015,	and	2014,	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	 contracts,	 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

Under	fixed-price	contracts,	which	accounted	for	about	61%,	57%,	and	58%	of	our	total	net	sales	in	2016,	2015,	and	2014,	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.

# Percentage-of-Completion	Method

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

The	percentage-of-completion	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,	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	percentage-of-completion	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	percentage-of-completion	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	using	the	percentage-of-completion	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	costs	at completion	is	complicated	and	subject	to	many	variables	and,	accordingly,	is	subject	to	change.	When	adjustments	in	estimated	total	contract	sales	or	estimated	total costs	are	required,	any	changes	from	prior	estimates	are	recognized	in	the	current	period	for	the	inception-to-date	effect	of	such	changes.

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	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	cost	aspects	of	the	contract	and	assess	the	effects	of	those	risks	on	our	estimates	of	total	costs	to	complete	the	contract.	The estimates	consider	the	technical	requirements	(e.g.,	a	newly-developed	product	versus	a	mature	product),	the	schedule	and	associated	tasks	(e.g.,	the	number	and	type	of milestone	events)	and	costs	(e.g.,	material,	labor,	subcontractor,	overhead	and	the	estimated	costs	to	fulfill	our	industrial	cooperation	agreements,	sometimes	referred	to as	offset	agreements,	required	under	certain	contracts	with	international	customers).	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	total	costs	to	complete	the	contract.	Profit	booking	rates	may	increase	during	the performance	of	the	contract	if	we	successfully	retire	risks	surrounding	the	technical,	schedule	and	cost	aspects	of	the	contract	which	decreases	the	estimated	total	costs	to complete	the	contract.	Conversely,	our	profit	booking	rates	may	decrease	if	the	estimated	total	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.

# Services	Method

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	participate	in	qualified	and	nonqualified	defined	benefit	pension	plans,	retiree	medical	and	life	insurance	plans	and	other	postemployment plans	(collectively,	postretirement	benefit	plans	–	see	"Note	11	–	Postretirement	Plans"	included	in	our	Notes	to	Consolidated	Financial	Statements).	The	majority	of	our accrued	benefit	obligations	relate	to	our	qualified	defined	benefit	pension	plans	and	retiree	medical	and	life	insurance	plans.	We	recognize	on	a	plan-by-plan	basis	the	net funded	status	of	these	postretirement	benefit	plans	under	GAAP	as	either	an	asset	or	a	liability	on	our	consolidated	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	represents	the difference	between	the	fair	value	of	each	plan's	assets	and	the	benefit	obligation	of	the	plan.	The	GAAP	benefit	obligation	represents	the	present	value	of	the	estimated future	benefits	we	currently	expect	to	pay	to	plan	participants	based	on	past	service.

In	June	2014,	we	amended	certain	of	our	qualified	and	nonqualified	defined	benefit	pension	plans	for	non-union	employees	to	freeze	future	retirement	benefits.	The freeze	will	take	effect	in	two	stages.	Beginning	on	January	1,	2016,	the	pay-based	component	of	the	formula	used	to	determine	retirement	benefits	was	frozen	so	that future	pay	increases,	annual	incentive	bonuses	or	other	amounts	earned	for	or	related	to	periods	after	December	31,	2015	will	not	be	used	to	calculate	retirement benefits.	On	January	1,	2020,	the	service-based	component	of	the	formula	used	to	determine	retirement	benefits	will	also	be	frozen	so	that	participants	will	no	longer earn	further	credited	service	for	any	period	after	December	31,	2019.	When	the	freeze	is	complete,	the	majority	of	our	salaried	employees	will	have	transitioned	to	an enhanced	defined	contribution	retirement	savings	plan.

Notwithstanding	these	actions,	the	impact	of	these	plans	and	benefits	on	our	earnings	may	be	volatile	in	that	the	amount	of	expense	we	record	and	the	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,	actual	rates	of	return	on	plan	assets	and	other	actuarial	assumptions	including	participant	longevity	and	employee turnover,	as	well	as	the	timing	of	cash	funding.

# Actuarial	Assumptions

The	plan	assets	and	benefit	obligations	are	measured	at	the	end	of	each	year	or	more	frequently,	upon	the	occurrence	of	certain	events	such	as	a	significant	plan amendment,	settlement	or	curtailment.	The	amounts	we	record	are	measured	using	actuarial	valuations,	which	are	dependent	upon	key	assumptions	such	as	discount rates,	the	expected	long-term	rate	of	return	on	plan	assets,	participant	longevity,	employee	turnover	and	the	health	care	cost	trend	rates	for	our	retiree	medical	plans.	The assumptions	we	make	affect	both	the	calculation	of	the	benefit	obligations	as	of	the	measurement	date	and	the	calculation	of

net	periodic	benefit	cost	in	subsequent	periods.	When	reassessing	these	assumptions	we	consider	past	and	current	market	conditions	and	make	judgments	about	future market	trends.	We	also	consider	factors	such	as	the	timing	and	amounts	of	expected	contributions	to	the	plans	and	benefit	payments	to	plan	participants.

We	continue	to	use	a	single	weighted	average	discount	rate	approach	when	calculating	our	benefit	obligations	related	to	our	defined	benefit	pension	plans	resulting in	4.125%	at	December	31,	2016,	compared	to	4.375%	at	December	31,	2015	and	4.00%	at	December	31,	2014.	We	utilized	a	weighted	average	discount	rate	of	4.00% when	 calculating	 our	 benefit	 obligations	 related	 to	 our	 retiree	 medical	 plans	 at	 December	 31,	 2016,	 compared	 to	 4.25%	 at	 December	 31,	 2015	 and	 3.75%	 at December	31,	2014.	We	evaluate	several	data	points	in	order	to	arrive	at	an	appropriate	weighted	average	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	selected	to	match	our	projected	postretirement	benefit	plan	cash	flows.

We	utilized	an	expected	long-term	rate	of	return	on	plan	assets	of	7.50%	at	December	31,	2016,	as	compared	to	8.00%	at	December	31,	2015	and	December	31, 2014.	We	reduced	our	expected	long-term	rate	of	return	assumption	due	to	downward	pressure	on	the	equity	and	fixed	income	asset	classes	in	our	trust.	An	increasingly aging	population	and	debt	burden	place	downward	pressure	on	already	low	interest	rates	and	economic	growth;	suggesting	the	future	return	for	our	fixed-income	may	be lower	than	historical	norms.	Surges	in	equities	since	2009	have	led	to	a	high	valuation	of	the	equity	markets,	suggesting	the	forward	return	may	also	be	lower	than historical	norms.	The	long-term	rate	of	return	assumption	represents	the	expected	long-term	rate	of	return	on	the	funds	invested	or	to	be	invested,	to	provide	for	the benefits	included	in	the	benefit	obligations.	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	difference	between	the	long-term	rate	of return	on	plan	assets	assumption	we	select	and	the	actual	return	on	plan	assets	in	any	given	year	affects	both	the	funded	status	of	our	benefit	plans	and	the	calculation	of FAS	pension	expense	in	subsequent	periods.	Although	the	actual	return	in	any	specific	year	likely	will	differ	from	the	assumption,	the	average	expected	return	over	a long-term	future	horizon	should	be	approximately	equal	to	the	assumption.	Any	variance	in	a	given	year	should	not,	by	itself,	suggest	that	the	assumption	should	be changed.	Patterns	of	variances	are	reviewed	over	time,	and	then	combined	with	expectations	for	the	future.	As	a	result,	changes	in	this	assumption	are	less	frequent	than changes	in	the	discount	rate.

On	October	20,	2016,	the	Society	of	Actuaries	published	revised	longevity	assumptions	that	refined	its	prior	studies	of	longevity.	We	used	the	revised	assumptions indicating	a	shortened	longevity	in	our	December	31,	2016	remeasurement	of	benefit	obligation.	The	publication	was	a	refinement	to	the	assumptions	the	Society	of Actuaries	published	in	October	2014	and	October	2015	that	we	previously	adopted	beginning	year	2014.

Our	stockholders'	equity	has	been	reduced	cumulatively	by	$12.0	billion	from	the	annual	year-end	measurements	of	the	funded	status	of	postretirement	benefit plans.	The	cumulative	non-cash,	after-tax	reduction	primarily	represents	net	actuarial	losses	resulting	from	declines	in	discount	rates,	investment	losses	and	updated longevity.	A	market-related	value	of	our	plan	assets,	determined	using	actual	asset	gains	or	losses	over	the	prior	three	year	period,	is	used	to	calculate	the	amount	of deferred	asset	gains	or	losses	to	be	amortized.	These	cumulative	actuarial	losses	will	be	amortized	to	expense	using	the	corridor	method,	where	gains	and	losses	are recognized	to	the	extent	they	exceed	10%	of	the	greater	of	plan	assets	or	benefit	obligations,	over	the	average	future	service	period	of	employees	expected	to	receive benefits	under	the	plans	of	approximately	nine	years	as	of	December	31,	2016.	This	amortization	period	is	expected	to	extend	(approximately	double)	in	2020	when	our non-union	 pension	 plan	 is	 completely	 frozen	 to	 use	 the	 average	 remaining	 life	 expectancy	 of	 the	 participants	 instead	 of	 average	 future	 service.	 During	 2016, $699	million	of	these	amounts	was	recognized	as	a	component	of	postretirement	benefit	plans	expense	and	about	$800	million	is	expected	to	be	recognized	as	expense	in 2017.

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	4.125%	discount	rate	assumption	at	December	31,	2016,	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	2016	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	4.125%	discount	rate	at	December	31,	2016	that	was	used	to	compute	the expected	2017	FAS	pension	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	FAS	pension	expense	projected	for	2017	would	be	lower	or	higher	by	approximately	$120	million.	If	the	7.50%	expected	long-term	rate	of	return	on	plan assets	assumption	at	December	31,	2016	that	was	used	to	compute	the	expected	2017	FAS	pension	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	 FAS	 pension	 expense	 projected	 for	 2017	 would	 be	 lower	 or	 higher	 by approximately	$80	million.

Each	year,	differences	between	the	actual	plan	asset	return	and	the	expected	long-term	rate	of	return	on	plan	assets	impacts	the	measurement	of	the	following	year's FAS	expense.	Every	100	basis	points	difference	in	return	during	2016	between	our	actual	return	of	5.0%	and	our	expected	long-term	rate	of	return	of	8.0%	impacted 2017	FAS	pension	expense	by	approximately	$20	million.

# Funding	Considerations

There	were	no	contributions	to	our	heritage	qualified	defined	benefit	pension	plans	in	2016	and	2015.	We	made	contributions	related	to	our	heritage	qualified defined	benefit	pension	plans	of	$2.0	billion	in	2014	inclusive	of	amounts	in	excess	of	our	required	contributions.	Funding	of	our	qualified	defined	benefit	pension	plans is	determined	in	a	manner	consistent	with	CAS	and	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	under	the	PPA.	The	ERISA	funded	status	is calculated	on	a	different	basis	than	under	GAAP.	As	a	result	of	the	Moving	Ahead	for	Progress	in	the	21st	Century	Act	of	2012	 (MAP-21),	which	included	a	provision that	changed	the	methodology	for	calculating	the	interest	rate	assumption	used	in	determining	the	minimum	funding	requirements	under	the	PPA,	there	was	an	increase in	the	interest	rate	assumption,	which	in	turn	lowered	the	minimum	funding	requirements.	On	August	8,	2014,	the	Highway	and	Transportation	Funding	Act	of	2014 (HATFA)	was	enacted;	and	on	November	2,	2015,	the	Bipartisan	Budget	Act	of	2015;	which	extend	the	methodology	put	in	place	by	 MAP-21	to	calculate	the	interest rate	assumption	so	that	the	impact	will	begin	to	decrease	in	2021	and	phase	out	by	2024.	This	has	the	effect	of	lowering	our	minimum	funding	requirements	during	the affected	periods	from	what	they	otherwise	would	have	been.	The	ERISA	funded	status	of	our	qualified	defined	benefit	pension	plans	was	about	87%	and	90%	as	of December	31,	2016	and	2015.	The	GAAP	funded	status	of	our	qualified	defined	benefit	pension	plans	was	about	70%	and	73%	at	December	31,	2016	and	2015.

Contributions	to	our	defined	benefit	pension	plans	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.	CAS	govern	the	extent	to	which	our	pension	costs	are	allocable	to	and	recoverable	under	contracts	with	the U.S.	Government,	including	FMS.	We	recovered	$2.0	billion	in	2016,	$1.6	billion	in	2015,	and	$1.5	billion	in	2014	as	CAS	pension	costs.	Effective	February	27,	2012, CAS	 rules	 were	 revised	 to	 better	 align	 the	 recovery	 of	 pension	 costs,	 including	 prepayment	 credits,	 on	 U.S.	 Government	 contracts	 with	 the	 minimum	 funding requirements	of	the	PPA	(referred	to	as	CAS	Harmonization).	Specifically,	CAS	Harmonization	shortened	the	amortization	period	for	allocating	gains	and	losses	to	U.S. Government	contracts	from	15	to	10	years	and	requires	the	use	of	an	interest	rate	to	determine	CAS	pension	cost	consistent	with	the	interest	rate	used	to	determine minimum	pension	funding	requirements	under	the	PPA.	While	the	change	in	the	amortization	period	was	applicable	beginning	in	2013,	there	is	a	transition	period	for	the impact	of	the	change	in	the	CAS	liability	measurement	due	to	the	revised	interest	rate	that	will	be	phased	in	with	the	full	impact	occurring	in	2017.	We	expect	the incremental	impact	of	CAS	Harmonization	will	increase	successively	through	2017,	primarily	due	to	the	liability	measurement	transition	period	included	in	the	amended rule.	The	enactment	of	the	HATFA	and	Bipartisan	Budget	Act	of	2015	also	increased	the	interest	rate	assumption	used	to	determine	our	CAS	pension	costs,	which	has the	effect	of	lowering	the	recovery	of	pension	contributions	during	the	affected	periods	as	it	decreases	our	CAS	pension	costs.

Pension	cost	recoveries	under	CAS	occur	in	different	periods	from	when	pension	contributions	are	made	under	the	PPA.	Amounts	contributed	in	excess	of	the	CAS pension	costs	recovered	under	U.S.	Government	contracts	are	considered	to	be	prepayment	credits	under	the	CAS	rules.	As	of	December	31,	2016,	our	prepayment credits	were	approximately	$7.7	billion	as	compared	to	$9.0	billion	at	December	31,	2015.	The	recovery	of	CAS	pension	costs	under	U.S.	Government	contracts	in excess	of	our	contributions	reduces	the	prepayment	credit	balance.	The	prepayment	credit	balance	will	also	increase	or	decrease	based	on	our	actual	investment	return	on plan	assets.

We	do	not	plan	to	make	contributions	to	our	heritage	pension	plans	in	2017	because	none	are	required	using	current	assumptions,	including	investment	returns	on plan	assets.	However,	we	do	plan	to	make	contributions	of	approximately	$45	million	in	2017	to	our	new	Sikorsky	bargained	qualified	defined	benefit	pension	plan. Pension	contributions	to	our	heritage	plans	are	expected	to	resume	with	contributions	projected	of	about	$1.5	billion	to	$2.0	billion	in	2018	using	current	assumptions including	investment	returns	on	plan	assets.	We	anticipate	recovering	almost	$2.3	billion	of	CAS	pension	cost	in	2017	with	a	higher	CAS	recovery	projected	in	2018. Since	the	annual	amount	of	CAS	cost	is	more	than	our	planned	cash	funding	in	each	of	these	years,	we	will	recover	a	portion	of	the	$7.7	billion	of	prepayment	credits existing	at	December	31,	2016.

We	expect	our	2017	FAS	pension	expense	to	be	$1.4	billion,	as	compared	to	our	2016	FAS	pension	expense	of	$1.0	billion,	primarily	due	to	the	lower	discount	rate of	4.125%	for	2017	versus	4.375%	for	2016	and	lower	expected	long-

term	rate	of	return	on	plan	assets	of	7.50%	at	December	31,	2016	versus	8.00%	at	December	31,	2015.	We	expect	a	FAS/CAS	pension	adjustment	in	2017	of	about $880	million,	as	compared	to	$902	million	in	2016.	The	increase	in	2017	FAS	pension	expense	is	mostly	offset	by	higher	2017	CAS	pension	costs,	as	compared	to	2016, due	to	CAS	Harmonization.

# 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).	At	each	of	December	31,	2016	and	2015,	the	total	amount	of	liabilities	recorded	on	our	consolidated	balance	sheet for	environmental	matters	was	$1.0	billion.	We	have	recorded	receivables	totaling	$870	million	and	$858	million	at	December	31,	2016	and	2015	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	not	be	recoverable	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	environmental	remediation	activities	at	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	governmental	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	14	– Legal	Proceedings,	Commitments	and	Contingencies"	included	in	our	Notes	to	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).

The	current	standard	in	California	for	the	maximum	level	of	the	contaminant	hexavalent	chromium	in	drinking	water	is	10	parts	per	billion	(ppb).	This	standard	is being	challenged	by	the	California	Manufacturers	and	Technology	Association	(CMTA)	as	being	lower	than	is	required	to	protect	public	health.	If	the	standard	remains at	10	ppb,	it	will	not	have	a	material	impact	on	our	existing	remediation	costs	in	California.	The	U.S.	EPA	is	considering	whether	to	regulate	hexavalent	chromium.

In	addition,	California	is	reevaluating	its	existing	drinking	water	standard	of	6	ppb	for	perchlorate,	and	the	U.S.	Environmental	Protection	Agency	(U.S.	EPA)	is taking	steps	to	regulate	perchlorate	in	drinking	water.	If	substantially	lower	standards	are	adopted,	in	either	California	or	at	the	federal	level	for	perchlorate	or	for hexavalent	chromium,	we	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	not	be	recoverable	under	U.S.	Government	contracts	would	be	expensed,	which	may	have	a	material	effect	on	our	earnings	in	any particular	interim	reporting	period.

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,	our	history	of	receiving	reimbursement	of	such	costs,	and	recent	efforts	by	some	U.S.	Government	representatives	to	limit	such reimbursement.

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	cannot	reasonably	determine	the	extent	of	our	financial	exposure	at	all	environmental	sites	with	which	we	are	involved.	There	are	a	number	of	former	operating facilities	we	are	monitoring	or	investigating	for	potential	future	remediation.	In	some	cases,	although	a	loss	may	be	probable,	it	is	not	possible	at	this	time	to	reasonably estimate	the	amount	of	any	obligation	for	remediation	activities	because	of	uncertainties	(e.g.,	assessing	the	extent	of	the	contamination).	During	any	particular	quarter, such	uncertainties	may	be	resolved,	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,	which	may	have	a	material effect	in	any	particular	interim	reporting	period.

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

The	assets	and	liabilities	of	acquired	businesses	are	recorded	under	the	acquisition	method	of	accounting	at	their	estimated	fair	values	at	the	date	of	acquisition. Goodwill	represents	costs	in	excess	of	fair	values	assigned	to	the	underlying	identifiable	net	assets	of	acquired	businesses.

Our	goodwill	balance	was	$10.8	billion	and	$10.7	billion	at	December	31,	2016	and	2015.	We	perform	an	impairment	test	of	our	goodwill	at	least	annually	in	the fourth	quarter	or	more	frequently	whenever	events	or	changes	in	circumstances	indicate	the	carrying	value	of	goodwill	may	be	impaired.	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,	U.S.	Government	budget	restrictions	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	us	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	may	use	both	qualitative	and	quantitative	approaches	when	testing	goodwill	for	impairment.	For	selected	reporting	units	where	we	use	the	qualitative	approach, we	perform	a	qualitative	evaluation	of	events	and	circumstances	impacting	the	reporting	unit	to	determine	the	likelihood	of	goodwill	impairment.	Based	on	that qualitative	evaluation,	if	we	determine	it	is	more	likely	than	not	that	the	fair	value	of	a	reporting	unit	exceeds	its	carrying	amount,	no	further	evaluation	is	necessary. Otherwise	we	perform	a	quantitative	two-step	impairment	test.	We	perform	quantitative	tests	for	most	reporting	units	at	least	once	every	three	years.	However,	for certain	reporting	units	we	may	perform	a	quantitative	impairment	test	every	year.

Under	step	one	of	the	quantitative	two	step	impairment	test,	we	compare	the	fair	value	of	a	reporting	unit	to	its	carrying	value,	including	goodwill.	If	the	fair	value of	a	reporting	unit	exceeds	its	carrying	value,	goodwill	of	the	reporting	unit	is	not	impaired.	If	the	carrying	value	of	a	reporting	unit	exceeds	its	fair	value,	we	then perform	step	two	of	the	quantitative	impairment	test	and	compare	the	implied	value	of	the	reporting	unit's	goodwill	with	the	carrying	value	of	its	goodwill.	The	implied value	of	the	reporting	unit's	goodwill	is	calculated	by	creating	a	hypothetical	balance	sheet	as	if	the	reporting	unit	had	just	been	acquired.	This	balance	sheet	contains	all assets	and	liabilities	recorded	at	fair	value	(including	any	assumed	intangible	assets	that	may	not	have	any	corresponding	carrying	value	in	our	balance	sheet).	The implied	value	of	the	reporting	unit's	goodwill	is	calculated	by	subtracting	the	fair	value	of	the	net	assets	from	the	fair	value	of	the	reporting	unit.	If	the	carrying	value	of the	reporting	unit's	goodwill	exceeds	the	implied	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	(DCF)	analysis	and	market-based	valuation	methodologies	such	as comparable	public	company	trading	values	and	values	observed	in	recent	business	acquisitions.	Determining	fair	value	requires	the	exercise	of	significant	judgments, including	the	amount	and	timing	of	expected	future	cash	flows,	long-term	growth	rates,	discount	rates	and	relevant	comparable	public	company	earnings	multiples	and relevant	transaction	multiples.	The	cash	flows	employed	in	the	DCF	analyses	are	based	on	our	best	estimate	of	future	sales,	earnings	and	cash	flows	after	considering factors	such	as	general	market	conditions,	U.S.	Government	budgets,	existing	firm	orders,	expected	future	orders,	contracts	with	suppliers,	labor	agreements,	changes	in working	capital,	long	term	business	plans	and	recent	operating	performance.	The	discount	rates	utilized	in	the	DCF	analysis	are	based	on	the	respective	reporting	unit's weighted	average	cost	of	capital,	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.	The	carrying	value	of	each	reporting	unit includes	the	assets	and	liabilities	employed	in	its	operations,	goodwill	and	allocations	of	amounts	held	at	the	business	segment	and	corporate	levels.

In	the	fourth	quarter	of	2016,	we	performed	our	annual	goodwill	impairment	test	for	each	of	our	reporting	units.	The	results	of	our	2016	annual	impairment	tests	of goodwill	indicated	that	no	impairment	existed.	The	carrying	value	of	our	Sikorsky	reporting	unit	includes	goodwill	of	$2.7	billion	as	of	December	31,	2016.	Currently, we	estimate	that	the	fair	value	of	our	Sikorsky	reporting	unit	exceeds	its	carrying	value	by	a	margin	of	approximately	10%.	We	acquired	Sikorsky	in	November	2015	and recorded	the	assets	acquired	and	liabilities	assumed	at	fair	value.	Due	to	the	recent	acquisition	and	valuation,	the	carrying	value	and	fair	value	of	our	Sikorsky	reporting unit	are	currently	closely	aligned.	Therefore,	any	business	deterioration,	contract	cancelations	or	terminations,	or	market	pressures	could	cause	our	sales,	earnings	and cash	flows	to	decline	below	current	projections.	Similarly,	market	factors	utilized	in	the	impairment	analysis,	including	long-term	growth	rates,	discount	rates	and relevant	comparable	public	company	earnings	multiples	and	transaction	multiples,	could	negatively	impact	the	fair	value	of	our	reporting	units.	Based	on	our	current assessment	of	these	circumstances,	we	have	determined	that	our	Sikorsky	reporting	unit	is	at	risk	of	a	future	goodwill	impairment	should	there	be	deterioration	of projected	cash	flows,	negative	changes	in	market	factors	or	a	significant	increase	in	the	carrying	value	of	the	reporting	unit.

In	the	fourth	quarter	of	2015,	we	performed	our	annual	goodwill	impairment	test	for	each	of	our	reporting	units.	In	connection	with	our	fourth	quarter	2015	program realignment,	goodwill	was	reallocated	between	affected	reporting	units	on	a	relative	fair	value	basis.	We	performed	goodwill	impairment	tests	prior	and	subsequent	to	the realignment.	The	results	of	our	2015	annual	impairment	tests	of	goodwill	indicated	that	no	impairment	existed.

Impairment	assessments	inherently	involve	management	judgments	regarding	a	number	of	assumptions	such	as	those	described	above.	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	could	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.

# Intangible	Assets

Intangible	assets	from	acquired	businesses	are	recognized	at	their	estimated	fair	values	at	the	date	of	acquisition	and	consist	of	customer	programs,	trademarks, customer	relationships,	technology	and	other	intangible	assets.	Customer	programs	include	values	assigned	to	major	programs	of	acquired	businesses	and	represent	the aggregate	value	associated	with	the	customer	relationships,	contracts,	technology	and	trademarks	underlying	the	associated	program	and	are	amortized	on	a	straight-line basis	over	a	period	of	expected	cash	flows	used	to	measure	the	fair	value,	which	ranges	from	nine	to	20	years.	Acquired	intangibles	deemed	to	have	indefinite	lives	are not	amortized,	but	are	subject	to	annual	impairment	testing.	This	testing	compares	carrying	value	to	fair	value	and,	when	appropriate,	the	carrying	value	of	these	assets	is reduced	to	fair	value.	Finite-lived	intangibles	are	amortized	to	expense	over	the	applicable	useful	lives,	ranging	from	three	to	20	years,	based	on	the	nature	of	the	asset and	the	underlying	pattern	of	economic	benefit	as	reflected	by	future	net	cash	inflows.

In	the	fourth	quarter	of	2016,	we	performed	the	annual	impairment	test	for	the	Sikorsky	indefinite-lived	trademark	intangible	asset	and	the	results	indicated	that	no impairment	existed.	The	carrying	value	of	our	Sikorsky	reporting	unit	includes	a	trademark	intangible	asset	of	$887	million	as	of	December	31,	2016.	Using	the	relief from	royalty	method,	we	estimated	that	the	fair	value	of	this	intangible	asset	approximated	its	carrying	value.	As	discussed	above	in	the	Goodwill	section,	the	carrying value	and	fair	value	of	our	Sikorsky	reporting	unit	are	currently	closely	aligned	due	to	the	recent	acquisition	of	Sikorsky.	Therefore,	any	business	deterioration,	contract cancelations	or	terminations,	or	market	pressures	could	cause	our	sales	to	decline	below	current	projections.	Based	on	our	current	assessment	of	these	circumstances,	we have	determined	that	our	Sikorsky	trademark	intangible	asset	is	at	risk	of	a	future	impairment.

# Recent	Accounting	Pronouncements

See	"Note	1	–	Significant	Accounting	Policies"	included	in	our	Notes	to	Consolidated	Financial	Statements	for	information	under	the	caption	"Recent	Accounting Pronouncements"	related	to	new	accounting	standards.

# ITEM	7A. Quantitative	and	Qualitative	Disclosures	About	Market	Risk.

We	maintain	active	relationships	with	a	broad	and	diverse	group	of	U.S.	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.	The	estimated	fair	value	of	our	outstanding	debt	was	$16.2	billion	at	December	31, 2016	and	the	outstanding	principal	amount	was	$15.3	billion,	excluding	unamortized	discounts	and	issuance	costs	of	$1.0	billion.	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,	2016.

We	use	derivative	instruments	principally	to	reduce	our	exposure	to	market	risks	from	changes	in	foreign	currency	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,	 the	Euro,	 the	Canadian	dollar	and	 the	Australian	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	also	may	enter	into	derivative	instruments	that	are	not	designated	as	hedges	and	do	not	qualify	for	hedge	accounting,	which	are	intended	to	mitigate	certain 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	interest	rate	swaps	at	December	31,	2016	and	2015 was	$1.2	billion	and	$1.5	billion.	The	aggregate	notional	amount	of	our	outstanding	foreign	currency	hedges	at	December	31,	2016	and	2015	was	$4.0	billion	and $4.1	billion.	At	December	31,	2016	and	2015,	the	net	fair	value	of	our	derivative	instruments	was	not	material	(see	"Note	16	–	Fair	Value	Measurements")	included	in our	Notes	to	Consolidated	Financial	Statements).	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,	2016	would	not	have	a	material	impact	on	the	aggregate	net	fair	value	of	such	contracts	or	our	consolidated	financial statements.

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,	2016,	investments	in the	trust	totaled	$1.2	billion	and	are	reflected	at	fair	value	on	our	consolidated	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	consolidated	statements	of	earnings	in	other	unallocated,	net	and	were	not	material	for	the	year	ended	December	31,	2016.

# 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,	2016	and	2015,	and	the	related	consolidated statements	of	earnings,	comprehensive	income,	equity,	and	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2016.	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,	2016	and	2015,	and	the	consolidated	results	of	its	operations	and	its	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2016,	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,	2016,	based	on	criteria	established	in	Internal	Control	–	Integrated	Framework	issued	by	the	Committee	of Sponsoring	Organizations	of	the	Treadway	Commission	(2013	framework),	and	our	report	dated	February	9,	2017	expressed	an	adverse	opinion	thereon.

/s/	Ernst	&	Young	LLP

McLean,	Virginia

# Consolidated	Statements	of	Earnings

# (in	millions,	except	per	share	data)

|  | 2016 | Years	Ended	December	31,<br>2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tsales |  |  |  |
| Products | $\t40,365 | $\t34,868 | $\t34,984 |
| Services | 6,883 | 5,668 | 4,962 |
| Total\tnet\tsales | 47,248 | 40,536 | 39,946 |
| Cost\tof\tsales |  |  |  |
| Products | (36,616) | (31,091) | (30,983) |
| Services | (6,040) | (4,824) | (4,184) |
| Severance\tcharges | (80) | (82) | — |
| Other\tunallocated,\tnet | 550 | (47) | (96) |
| Total\tcost\tof\tsales | (42,186) | (36,044) | (35,263) |
| Gross\tprofit | 5,062 | 4,492 | 4,683 |
| Other\tincome,\tnet | 487 | 220 | 329 |
| Operating\tprofit | 5,549 | 4,712 | 5,012 |
| Interest\texpense | (663) | (443) | (340) |
| Other\tnon-operating\tincome,\tnet | — | 30 | 5 |
| Earnings\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes | 4,886 | 4,299 | 4,677 |
| Income\ttax\texpense | (1,133) | (1,173) | (1,424) |
| Net\tearnings\tfrom\tcontinuing\toperations | 3,753 | 3,126 | 3,253 |
| Net\tearnings\tfrom\tdiscontinued\toperations | 1,549 | 479 | 361 |
| Net\tearnings | $5,302 | $3,605 | $3,614 |
| Earnings\tper\tcommon\tshare |  |  |  |
| Basic |  |  |  |
| Continuing\toperations | $12.54 | $10.07 | $10.27 |
| Discontinued\toperations | 5.17 | 1.55 | 1.14 |
| Basic\tearnings\tper\tcommon\tshare | $17.71 | $11.62 | $11.41 |
| Diluted |  |  |  |
| Continuing\toperations | $12.38 | $9.93 | $10.09 |
| Discontinued\toperations | 5.11 | 1.53 | 1.12 |
| Diluted\tearnings\tper\tcommon\tshare | $17.49 | $11.46 | $11.21 |

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, | Years	Ended	December	31, |
| :--- | :--- | :--- | :--- |
|  | 2016 | 2015 | 2014 |
| Net\tearnings | $\t5,302 | $\t3,605 | $\t3,614 |
| Other\tcomprehensive\t(loss)\tincome,\tnet\tof\ttax |  |  |  |
| Postretirement\tbenefit\tplans |  |  |  |
| Net\tother\tcomprehensive\tloss\trecognized\tduring\tthe\tperiod,\tnet\tof\ttax\tbenefit\tof\t$668\tmillion\tin\t2016, |  |  |  |
| $192\tmillion\tin\t2015\tand\t$1.5\tbillion\tin\t2014 | (1,232) | (351) | (2,870) |
| Amounts\treclassified\tfrom\taccumulated\tother\tcomprehensive\tloss,\tnet\tof\ttax\texpense\tof\t$382\tmillion\tin\t2016, |  |  |  |
| $464\tmillion\tin\t2015\tand\t$386\tmillion\tin\t2014 | 699 | 850 | 706 |
| Reclassifications\tfrom\tdivestiture\tof\tIS&amp;GS\tbusiness | (134) | — | — |
| Other,\tnet | 9 | (73) | (105) |
| Other\tcomprehensive\t(loss)\tincome,\tnet\tof\ttax | (658) | 426 | (2,269) |
| Comprehensive\tincome | $4,644 | $4,031 | $1,345 |

# Consolidated	Balance	Sheets

# (in	millions,	except	par	value)

|  | 2016 | 2015 |
| :--- | :--- | :--- |
| Assets |  |  |
| Current\tassets |  |  |
| Cash\tand\tcash\tequivalents | $1,837 | $1,090 |
| Receivables,\tnet | 8,202 | 7,254 |
| Inventories,\tnet | 4,670 | 4,819 |
| Other\tcurrent\tassets | 399 | 441 |
| Assets\tof\tdiscontinued\toperations | — | 969 |
| Total\tcurrent\tassets | 15,108 | 14,573 |
| Property,\tplant\tand\tequipment,\tnet | 5,549 | 5,389 |
| Goodwill | 10,764 | 10,695 |
| Intangible\tassets,\tnet | 4,093 | 4,022 |
| Deferred\tincome\ttaxes | 6,625 | 6,068 |
| Other\tnoncurrent\tassets | 5,667 | 5,396 |
| Assets\tof\tdiscontinued\toperations | — | 3,161 |
| Total\tassets | $\t47,806 | $\t49,304 |
| Liabilities\tand\tequity |  |  |
| Current\tliabilities |  |  |
| Accounts\tpayable | $1,653 | $1,745 |
| Customer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred | 6,776 | 6,703 |
| Salaries,\tbenefits\tand\tpayroll\ttaxes | 1,764 | 1,707 |
| Current\tmaturities\tof\tlong-term\tdebt | — | 956 |
| Other\tcurrent\tliabilities | 2,349 | 1,859 |
| Liabilities\tof\tdiscontinued\toperations | — | 948 |
| Total\tcurrent\tliabilities | 12,542 | 13,918 |
| Long-term\tdebt,\tnet | 14,282 | 14,305 |
| Accrued\tpension\tliabilities | 13,855 | 11,807 |
| Other\tpostretirement\tbenefit\tliabilities | 862 | 1,070 |
| Other\tnoncurrent\tliabilities | 4,659 | 4,902 |
| Liabilities\tof\tdiscontinued\toperations | — | 205 |
| Total\tliabilities | 46,200 | 46,207 |
| Stockholders'\tequity |  |  |
| Common\tstock,\t$1\tpar\tvalue\tper\tshare | 289 | 303 |
| Additional\tpaid-in\tcapital | — | — |
| Retained\tearnings | 13,324 | 14,238 |
| Accumulated\tother\tcomprehensive\tloss | (12,102) | (11,444) |
| Total\tstockholders'\tequity | 1,511 | 3,097 |
| Noncontrolling\tinterests\tin\tsubsidiary | 95 | — |
| Total\tequity | 1,606 | 3,097 |
| Total\tliabilities\tand\tequity | $47,806 | $49,304 |

# Consolidated	Statements	of	Cash	Flows

|  | 2016 | Years	Ended	December	31,<br>				2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Operating\tactivities |  |  |  |
| Net\tearnings | $\t5,302 | $\t3,605 | $\t3,614 |
| Adjustments\tto\treconcile\tnet\tearnings\tto\tnet\tcash\tprovided\tby\toperating\tactivities |  |  |  |
| Depreciation\tand\tamortization | 1,215 | 1,026 | 994 |
| Stock-based\tcompensation | 149 | 138 | 164 |
| Deferred\tincome\ttaxes | (152) | (445) | (401) |
| Goodwill\timpairment\tcharges | — | — | 119 |
| Severance\tcharges | 99 | 102 | — |
| Gain\ton\tdivestiture\tof\tIS&amp;GS\tbusiness | (1,242) | — | — |
| Gain\ton\tstep\tacquisition\tof\tAWE | (104) | — | — |
| Changes\tin\tassets\tand\tliabilities |  |  |  |
| Receivables,\tnet | (811) | (256) | 28 |
| Inventories,\tnet | (46) | (398) | 77 |
| Accounts\tpayable | (188) | (160) | 95 |
| Customer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred | 3 | (32) | (572) |
| Postretirement\tbenefit\tplans | 1,028 | 1,068 | (880) |
| Income\ttaxes | 146 | (48) | 351 |
| Other,\tnet | (210) | 501 | 277 |
| Net\tcash\tprovided\tby\toperating\tactivities | 5,189 | 5,101 | 3,866 |
| Investing\tactivities |  |  |  |
| Capital\texpenditures | (1,063) | (939) | (845) |
| Acquisitions\tof\tbusinesses\tand\tinvestments\tin\taffiliates | — | (9,003) | (898) |
| Other,\tnet | 78 | 208 | 20 |
| Net\tcash\tused\tfor\tinvesting\tactivities | (985) | (9,734) | (1,723) |
| Financing\tactivities |  |  |  |
| Special\tcash\tpayment\tfrom\tdivestiture\tof\tIS&amp;GS\tbusiness | 1,800 | — | — |
| Repurchases\tof\tcommon\tstock | (2,096) | (3,071) | (1,900) |
| Proceeds\tfrom\tstock\toption\texercises | 106 | 174 | 308 |
| Dividends\tpaid | (2,048) | (1,932) | (1,760) |
| Proceeds\tfrom\tthe\tissuance\tof\tlong-term\tdebt | — | 9,101 | — |
| Repayments\tof\tlong-term\tdebt | (952) | — | — |
| Proceeds\tfrom\tborrowings\tunder\trevolving\tcredit\tfacilities | — | 6,000 | — |
| Repayments\tof\tborrowings\tunder\trevolving\tcredit\tfacilities | — | (6,000) | — |
| Other,\tnet | (267) | 5 | 38 |
| Net\tcash\t(used\tfor)\tprovided\tby\tfinancing\tactivities | (3,457) | 4,277 | (3,314) |
| Net\tchange\tin\tcash\tand\tcash\tequivalents | 747 | (356) | (1,171) |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 1,090 | 1,446 | 2,617 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $\t1,837 | $\t1,090 | $\t1,446 |

# Consolidated	Statements	of	Equity

|  |  | Additional |  | Other | Total | Noncontrolling |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | \t\tCommon | Paid-In | \t\tRetained | \t\tComprehensive | \t\tStockholders' | Interests\tin | Total |
|  | Stock | Capital | Earnings | Loss | Equity | Subsidiary | \t\tEquity |
| Balance\tat\tDecember\t31,\t2013 | $319 | $\t\t\t\t— | $14,200 | $\t\t\t\t\t\t(9,601) | $\t4,918 | $\t\t\t\t— | \t$\t\t\t\t4,918 |
| Net\tearnings | — | — | 3,614 | — | 3,614 | — | 3,614 |
| Other\tcomprehensive\tloss,\tnet\tof\ttax | — | — | — | (2,269) | (2,269) | — | (2,269) |
| Repurchases\tof\tcommon\tstock | (12) | (792) | (1,096) | — | (1,900) | — | (1,900) |
| Dividends\tdeclared\t($5.49\tper\tshare) | — | — | (1,762) | — | (1,762) | — | (1,762) |
| Stock-based\tawards\tand\tESOP\tactivity\tand\tother | 7 | 792 | — | — | 799 | — | 799 |
| Balance\tat\tDecember\t31,\t2014 | 314 | — | 14,956 | (11,870) | 3,400 | — | 3,400 |
| Net\tearnings | — | — | 3,605 | — | 3,605 | — | 3,605 |
| Other\tcomprehensive\tincome,\tnet\tof\ttax | — | — | — | 426 | 426 | — | 426 |
| Repurchases\tof\tcommon\tstock | (15) | (656) | (2,400) | — | (3,071) | — | (3,071) |
| Dividends\tdeclared\t($6.15\tper\tshare) | — | — | (1,923) | — | (1,923) | — | (1,923) |
| Stock-based\tawards\tand\tESOP\tactivity\tand\tother | 4 | 656 | — | — | 660 | — | 660 |
| Balance\tat\tDecember\t31,\t2015 | 303 | — | 14,238 | (11,444) | 3,097 | — | 3,097 |
| Net\tearnings | — | — | 5,302 | — | 5,302 | — | 5,302 |
| Other\tcomprehensive\tloss,\tnet\tof\ttax | — | — | — | (658) | (658) | — | (658) |
| Shares\texchanged\tand\tretired\tin\tconnection\twith |  |  |  |  |  |  |  |
| divestiture\tof\tIS&amp;GS\tbusiness | (9) | — | (2,488) | — | (2,497) | — | (2,497) |
| Repurchases\tof\tcommon\tstock | (9) | (395) | (1,692) | — | (2,096) | — | (2,096) |
| Dividends\tdeclared\t($6.77\tper\tshare) | — | — | (2,036) | — | (2,036) | — | (2,036) |
| Stock-based\tawards\tand\tESOP\tactivity\tand\tother | 4 | 395 | — | — | 399 | — | 399 |
| Increase\tin\tnoncontrolling\tinterests\tin\tsubsidiary | — | — | — | — | — | 95 | 95 |
| Balance\tat\tDecember\t31,\t2016 | $289 | $\t\t\t\t— | $13,324 | $\t\t\t\t(12,102) | $\t1,511 | $\t\t\t\t95 | \t$\t\t\t\t1,606 |

# 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,	products	and	services.	We	also	provide	a	broad	range	of	management,	engineering,	technical,	scientific,	logistics,	system integration	and	cybersecurity	services.	We	serve	both	U.S.	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	variable	interest	entities	if	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.	Unless	otherwise	noted,	we	present	all	per share	amounts	cited	in	these	consolidated	financial	statements	on	a	"per	diluted	share"	basis.	Certain	prior	period	amounts	have	been	reclassified	to	conform	with	current year	presentation.

The	discussion	and	presentation	of	the	operating	results	of	our	business	segments	have	been	impacted	by	the	following	recent	events.

On	August	16,	2016,	we	completed	the	previously	announced	divestiture	of	the	Information	Systems	&	Global	Solutions	(IS&GS)	business,	which	merged	with	a subsidiary	of	Leidos	Holdings,	Inc.	(Leidos),	in	a	Reverse	Morris	Trust	transaction	(the	"Transaction").	This	Transaction	represents	the	culmination	of	the	strategic review	of	our	government	information	technology	infrastructure	services	business	and	our	technical	services	business	performed	in	2015	to	explore	whether	the	IS&GS business	could	achieve	greater	growth	and	create	more	value	for	customers	and	stockholders	outside	of	Lockheed	Martin.	As	a	result	of	the	divestiture,	the	operating results	of	the	IS&GS	business	have	been	classified	as	discontinued	operations	in	the	consolidated	statements	of	earnings	for	all	periods	presented	and	the	assets	and liabilities	of	the	IS&GS	business	have	been	classified	as	assets	and	liabilities	of	discontinued	operations	in	the	consolidated	balance	sheet	as	of	December	31,	2015. However,	 the	cash	flows	of	 the	IS&GS	business	have	not	been	reclassified	 in	our	consolidated	statements	of	cash	flows	as	we	retained	 the	cash	as	part	of	 the Transaction.	See	"Note	3	–	Acquisitions	and	Divestitures"	for	additional	information	about	the	divestiture	of	the	IS&GS	business.

On	August	24,	2016,	our	ownership	interest	in	the	AWE	Management	Limited	(AWE)	venture,	which	operates	the	United	Kingdom's	nuclear	deterrent	program, increased	by	18%.	As	a	result	of	the	increase,	we	now	hold	a	51%	controlling	interest	in	AWE	and	are	required	to	consolidate	the	AWE	venture	in	our	consolidated financial	statements.	Accordingly,	 the	operating	results	and	cash	flows	of	AWE	have	been	 included	 in	our	consolidated	statements	of	earnings	and	consolidated statements	of	cash	flows	since	August	24,	2016,	the	date	we	obtained	a	controlling	interest,	and	the	assets	and	liabilities	of	AWE	are	included	in	the	consolidated balance	sheet	as	of	December	31,	2016.	Previously,	we	accounted	for	our	investment	in	AWE	using	the	equity	method	of	accounting.	See	"Note	3	–	Acquisitions	and Divestitures"	for	additional	information	about	the	change	in	ownership	of	AWE.

During	the	third	quarter	of	2016,	the	business	segment	formerly	known	as	Mission	Systems	and	Training	(MST)	was	renamed	Rotary	and	Missions	Systems (RMS)	to	better	reflect	a	broader	range	of	products	and	capabilities	subsequent	to	the	acquisition	of	Sikorsky	Aircraft	Corporation	(Sikorsky)	in	November	2015	and	the realignment	of	certain	programs	from	the	former	IS&GS	business	to	RMS	in	the	fourth	quarter	of	2015.	While	RMS	was	renamed	to	more	accurately	reflect	the expanded	portfolio,	there	was	no	additional	change	to	the	composition	of	the	portfolio	in	connection	with	the	name	change.	The	information	for	this	segment	for	all periods	included	in	these	consolidated	financial	statements	has	been	labeled	using	the	new	name.

On	November	6,	2015,	we	completed	the	acquisition	of	Sikorsky	for	$9.0	billion,	net	of	cash	acquired,	and	aligned	Sikorsky	under	our	RMS	business	segment.	The operating	results	and	cash	flows	of	Sikorsky	have	been	included	in	our	consolidated	statements	of	earnings	and	consolidated	statements	of	cash	flows	since	 the November	6,	2015	acquisition	date.	Additionally,	the	assets	and	liabilities	of	Sikorsky	are	included	in	our	consolidated	balance	sheets	as	of	December	31,	2016	and December	31,	2015.	See	"Note	3	–	Acquisitions	and	Divestitures"	for	additional	information	about	the	acquisition	of	Sikorsky	and	related	final	purchase	accounting.

During	 the	fourth	quarter	of	2015,	we	realigned	certain	programs	among	our	business	segments.	The	amounts,	discussion	and	presentation	of	our	business segments	for	all	periods	presented	in	these	consolidated	financial	statements	reflect	the	program	realignment.

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	amounts	reported	in	the	consolidated	financial	statements	and	accompanying	notes.	We	base	these	estimates on	historical	experience	and	on	various	other	assumptions	that	we	believe	are	reasonable	under	the	circumstances,	the	results	of	which	form	the	basis	for	making judgments	about	the	carrying	amounts	of	assets	and	liabilities	that	are	not	readily	apparent	from	other	sources.	Our	actual	results	may	differ	materially	from	these estimates.	Significant	estimates	 inherent	 in	 the	preparation	of	our	consolidated	financial	statements	 include,	but	are	not	 limited	 to,	accounting	for	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.

Sales	and	earnings	 –	 We record	 net	 sales	 and	 estimated	 profits	 for	 substantially	 all	 of	 our	 contracts	 using	 the	percentage-of-completion	 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	consolidated	statements	of	earnings	based	on	the	attributes	of	the	underlying	contracts.

Percentage-of-Completion	Method	–	The	percentage-of-completion	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	percentage-of-completion	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	percentage-of-completion	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	costs	at completion	is	complicated	and	subject	to	many	variables	and,	accordingly,	is	subject	to	change.	When	adjustments	in	estimated	total	contract	sales	or	estimated	total costs	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	estimates	of	total	sales	to	be	earned,	a	provision	for	the	entire	loss	on	the	contract	is	recorded	in	the	period	in	which	the	loss	is determined.

In	addition,	comparability	of	our	business	segment	sales,	operating	profit	and	operating	margins	may	be	impacted	by	changes	in	profit	booking	rates	on	our contracts	accounted	for	using	the	percentage-of-completion	method	of	accounting.	Increases	in	the	profit	booking	rates,	typically	referred	to	as	risk	retirements,	usually relate	to	revisions	in	the	estimated	total	costs	that	reflect	improved	conditions	on	a	particular	contract.	Conversely,	conditions	on	a	particular	contract	may	deteriorate resulting	in	an	increase	in	the	estimated	total	costs	to	complete	and	a	reduction	in	the	profit	booking	rate.	Increases	or	decreases	in	profit	booking	rates	are	recognized	in the	current	period	and	reflect	the	inception-to-date	effect	of	such	changes.	Segment	operating	profit	and	margins	may	also	be	impacted	favorably	or	unfavorably	by	other items.	Favorable	items	may	include	the	positive	resolution	of	contractual	matters,	cost	recoveries	on	restructuring	charges,	insurance	recoveries	and	gains	on	sales	of assets.	Unfavorable	items	may	include	the	adverse	resolution	of	contractual	matters;	restructuring	charges,	except	for	significant	severance	actions	(such	as	those mentioned	below	in	"Note	15	–	Restructuring	Charges"),	which	are	excluded	from	segment	operating	results;	reserves	for	disputes;	asset	impairments;	and	losses	on sales	of	assets.	Segment	operating	profit	and	items	such	as	risk	retirements,	reductions	of	profit	booking	rates	or	other	matters	are	presented	net	of	state	income	taxes.

Our	consolidated	net	adjustments	not	related	to	volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	net	of	state	income	taxes,	increased segment	operating	profit,	by	approximately	$1.5	billion	in	2016,	$1.7	billion	in	2015	and	$1.6	billion	in	2014.	These	adjustments	increased	net	earnings	by	approximately $950	million	($3.13	per	share)	in	2016,	$1.1	billion	($3.50	per	share)	in	2015	and	$1.1	billion	($3.41	per	share)	in	2014.

Services	Method	–	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	certain	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	$988	million	in	2016,	$817	million	in	2015	and	$733	million	in	2014.	Costs we	incur	under	customer-sponsored	research	and	development	programs	pursuant	to	contracts	are	included	in	net	sales	and	cost	of	sales.

Stock-based	compensation	–	Compensation	cost	related	to	all	share-based	payments	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,	net	of	estimated	forfeitures.	At	each	reporting	date,	the	number	of	shares	is adjusted	to	the	number	ultimately	expected	to	vest.

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	amount	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.

We	periodically	assess	our	tax	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)	or	other	taxing	authorities.	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	consolidated	statements	of	earnings.	Interest	and	penalties	were	not	material.

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	basis	using	the	cost-to-cost	method	to measure	progress	towards	completion.

On	occasion,	customers	may	seek	financing	for	the	purchase	of	our	products.	In	connection	with	these	transactions,	we	may	enter	into	arrangements	along	with	our customers	with	unrelated	third–party	financial	institutions	to	facilitate	the	non-recourse	sale	of	customer	receivables.	For	accounting	purposes,	these	transactions	are treated	as	a	sale	of	receivables	and	the	sale	proceeds	from	the	banks	are	reflected	in	our	operating	cash	flows	on	the	statement	of	cash	flows.	During	2016,	there	was	no significant	activity	related	to	sales	of	customer	receivables.

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	and	substantially	all	other	governments,	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	percentage-of-completion	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	$747	million	in	2016,	$716	million	in	2015 and	$713	million	in	2014.

We	review	the	carrying	amounts	of	long-lived	assets	for	impairment	if	events	or	changes	in	the	facts	and	circumstances	indicate	that	their	carrying	amounts	may not	be	recoverable.	We	assess	impairment	by	comparing	the	estimated	undiscounted	future	cash	flows	of	the	related	asset	grouping	to	its	carrying	amount.	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	amount.

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	consolidated	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,	2016	and	2015,	capitalized	software	totaled	$427	million	and	$473	million,	net	of	accumulated	amortization	of	$1.9	billion	in each	of	the	years.	No	amortization	expense	is	recorded	until	the	software	is	ready	for	its	intended	use.	Amortization	expense	related	to	capitalized	software	was $136	million	in	2016,	$161	million	in	2015	and	$194	million	in	2014.

Goodwill	–	The	assets	and	liabilities	of	acquired	businesses	are	recorded	under	the	acquisition	method	of	accounting	at	their	estimated	fair	values	at	the	date	of acquisition.	Goodwill	represents	costs	in	excess	of	fair	values	assigned	to	the	underlying	identifiable	net	assets	of	acquired	businesses.

We	perform	an	impairment	test	of	our	goodwill	at	least	annually	in	the	fourth	quarter	and	more	frequently	whenever	certain	events	or	changes	in	circumstances indicate	 the	 carrying	 value	 of	 goodwill	 may	 be	 impaired.	 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	us	to	determine	whether	the operations	below	the	business	segment	constitute	a	business	for	which	discrete	financial	information	is	available	and	segment	management	regularly	reviews	the operating	results.

We	may	use	both	qualitative	and	quantitative	approaches	when	testing	goodwill	for	impairment.	Under	the	qualitative	approach,	for	selected	reporting	units	we perform	a	qualitative	evaluation	of	events	and	circumstances	impacting	the

reporting	unit	to	determine	the	likelihood	of	goodwill	impairment.	Based	on	that	qualitative	evaluation,	if	we	determine	it	is	more	likely	than	not	that	the	fair	value	of	a reporting	unit	exceeds	its	carrying	amount,	no	further	evaluation	is	necessary.	Otherwise,	we	perform	a	quantitative	two-step	impairment	test.	For	certain	reporting	units we	only	perform	a	quantitative	impairment	test.

Under	step	one	of	the	quantitative	impairment	test,	we	compare	the	fair	value	of	each	reporting	unit	to	its	carrying	value,	including	goodwill.	If	the	fair	value	of	a reporting	unit	exceeds	its	carrying	value,	goodwill	of	the	reporting	unit	is	not	impaired.	If	the	carrying	value	of	a	reporting	unit	exceeds	its	fair	value,	we	then	perform step	two	of	the	quantitative	impairment	test	and	compare	the	implied	value	of	the	reporting	unit's	goodwill	with	the	carrying	value	of	its	goodwill.	The	implied	value	of the	reporting	unit's	goodwill	is	calculated	by	creating	a	hypothetical	balance	sheet	as	if	the	reporting	unit	had	just	been	acquired.	This	balance	sheet	contains	all	assets and	liabilities	recorded	at	fair	value	(including	any	intangible	assets	that	may	not	have	any	corresponding	carrying	value	in	our	balance	sheet).	The	implied	value	of	the reporting	unit's	goodwill	is	calculated	by	subtracting	the	fair	value	of	the	net	assets	from	the	fair	value	of	the	reporting	unit.	If	the	carrying	value	of	the	reporting	unit's goodwill	exceeds	the	implied	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	(DCF)	analysis	and	market-based	valuation	methodologies	such	as comparable	public	company	trading	values	and	values	observed	in	recent	business	acquisitions.	Determining	fair	value	requires	the	exercise	of	significant	judgments, including	judgments	about	the	amount	and	timing	of	expected	future	cash	flows,	long-term	growth	rates,	discount	rates	and	relevant	comparable	public	company earnings	multiples	and	relevant	transaction	multiples.	The	cash	flows	employed	in	the	DCF	analyses	are	based	on	our	best	estimate	of	future	sales,	earnings	and	cash flows	after	considering	factors	such	as	general	market	conditions,	U.S.	Government	budgets,	existing	firm	orders,	expected	future	orders,	contracts	with	suppliers,	labor agreements,	changes	in	working	capital,	long-term	business	plans	and	recent	operating	performance.	The	discount	rates	utilized	in	the	DCF	analysis	are	based	on	the respective	reporting	unit's	weighted	average	cost	of	capital,	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	2016,	we	performed	our	annual	goodwill	impairment	test	for	each	of	our	reporting	units.	The	results	of	our	2016	annual	impairment	tests	of goodwill	indicated	that	no	impairment	existed.

In	the	fourth	quarter	of	2015,	we	performed	our	annual	goodwill	impairment	test	for	each	of	our	reporting	units.	During	the	fourth	quarter	of	2015,	we	realigned certain	programs	between	our	business	segments	in	connection	with	our	strategic	review	of	our	government	IT	and	technical	services	businesses.	As	part	of	the realignment,	goodwill	was	reallocated	between	affected	reporting	units	on	a	relative	fair	value	basis.	We	performed	goodwill	impairment	tests	prior	and	subsequent	to	the realignment.	The	results	of	our	2015	annual	impairment	tests	of	goodwill	indicated	that	no	impairment	existed.

In	the	fourth	quarter	of	2014,	we	completed	our	annual	goodwill	impairment	test	for	each	of	our	reporting	units.	The	results	of	these	tests	indicated	that	the estimated	fair	values	of	our	reporting	units	exceeded	their	carrying	values,	with	the	exception	of	our	Technical	Services	reporting	unit	within	our	IS&GS	business.	The impact	of	market	pressures	such	as	lower	in-theater	support	as	troop	levels	are	drawn	down	and	increased	re-competition	on	existing	contracts	that	are	awarded	primarily on	the	basis	of	price	adversely	impacted	the	fair	value	of	this	reporting	unit.	As	a	result,	we	compared	the	implied	value	of	that	reporting	unit's	goodwill	with	the carrying	value	of	its	goodwill,	and	since	the	carrying	value	exceeded	the	implied	value,	we	recorded	a	non-cash	impairment	charge	of	$119	million	in	the	fourth	quarter of	2014	equal	to	that	differential.	The	impairment	charge	of	$119	million	was	reclassified	in	connection	with	the	divestiture	of	the	IS&GS	business	and	reclassification	of the	IS&GS	business	to	discontinued	operations.

Intangible	assets	–	Intangible	assets	from	acquired	businesses	are	recognized	at	their	estimated	fair	values	at	the	date	of	acquisition	and	consist	of	customer programs,	trademarks,	customer	relationships,	technology	and	other	intangible	assets.	Customer	programs	include	values	assigned	to	major	programs	of	acquired businesses	and	represent	the	aggregate	value	associated	with	the	customer	relationships,	contracts,	technology	and	trademarks	underlying	the	associated	program	and	are amortized	on	a	straight-line	basis	over	a	period	of	expected	cash	flows	used	to	measure	the	fair	value,	which	ranges	from	nine	to	20	years.	Acquired	intangibles	deemed to	have	indefinite	lives	are	not	amortized,	but	are	subject	to	annual	impairment	testing.	This	testing	compares	carrying	value	to	fair	value	and,	when	appropriate,	the carrying	value	of	these	assets	is	reduced	to	fair	value.	Finite-lived	intangibles	are	amortized	to	expense	over	the	applicable	useful	lives,	ranging	from	three	to	20	years, based	on	the	nature	of	the	asset	and	the	underlying	pattern	of	economic	benefit	as	reflected	by	future	net	cash	inflows.

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,	based on	service	to	date,	using	actuarial	valuations	that	are	based	in	part	on	certain	key	economic	assumptions	we	make,	including	the	discount	rate,	the	expected	long-term rate	of	return	on	plan	assets	and	other	actuarial	assumptions	including	participant	longevity	(also	known	as	mortality)	estimates,	health	care	cost	trend	rates	and employee	turnover,	each	as	appropriate	based	on	the	nature	of	the	plans.

A	market-related	value	of	our	plan	assets,	determined	using	actual	asset	gains	or	losses	over	the	prior	three	year	period,	is	used	to	calculate	the	amount	of	deferred asset	gains	or	losses	to	be	amortized.	These	asset	gains	or	losses,	along	with	those	resulting	from	adjustments	to	our	benefit	obligation,	will	be	amortized	to	expense using	the	corridor	method,	where	gains	and	losses	are	recognized	to	the	extent	they	exceed	10%	of	the	greater	of	plan	assets	or	benefit	obligations,	over	the	average future	service	period	of	employees	expected	to	receive	benefits	under	the	plans	of	approximately	9	years	as	of	December	31,	2016.	This	amortization	period	is	expected to	extend	(approximately	double)	in	2020	when	our	non-union	pension	plan	is	frozen	to	use	the	average	remaining	life	expectancy	of	the	participants	instead	of	average future	service.

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	 consolidated	 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 consolidated	balance	sheets	within	other	liabilities,	both	current	and	noncurrent.	We	expect	to	include	a	substantial	portion	of	environmental	costs	in	our	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,	our	history	of	receiving	reimbursement	of	such	costs,	and	recent	efforts	by	some	U.S. Government	representatives	to	limit	such	reimbursement.	We	include	the	portion	of	those	environmental	costs	expected	to	be	allocated	to	our	non-U.S.	Government contracts,	or	that	is	determined	to	not	be	recoverable	under	U.S.	Government	contracts,	in	our	cost	of	sales	at	the	time	the	liability	is	established.	Our	environmental receivables	are	recorded	on	our	consolidated	balance	sheets	within	other	assets,	both	current	and	noncurrent.	We	project	costs	and	recovery	of	costs	over	approximately 20	years.

Investments	in	marketable	securities	–	Investments	in	marketable	securities	consist	of	debt	and	equity	securities	and	are	classified	as	trading	securities.	As	of December	31,	2016	and	2015,	the	fair	value	of	our	trading	securities	totaled	$1.2	billion	and	$1.1	billion	and	was	included	in	other	noncurrent	assets	on	our	consolidated 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	2016	were	$66	million,	net	losses	on	trading	securities	in	2015	were	$11	million	and	net	gains	on	trading	securities	in	2014	were	$65	million.	Gains	and losses	on	these	investments	are	included	in	other	unallocated,	net	within	cost	of	sales	on	our	consolidated	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	our	consolidated	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	our	consolidated	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,	2016	and	2015,	our	equity	method	investments	totaled	$1.4	billion	and $1.3	billion,	which	primarily	are	composed	of	our	Space	Systems	business	segment's	investment	in	United	Launch	Alliance	(ULA),	see	"Note	14	–	Legal	Proceedings, Commitments	and	Contingencies",	and	our	Aeronautics	and	RMS	business	segments'	investments	in	the	Advanced	Military	Maintenance,	Repair	and	Overhaul	Center (AMMROC)	venture.	Our	share	of	net	earnings	related	to	our	equity	method	investees	was	$443	million	in	2016,	$320	million	in	2015	and	$327	million	in	2014,	of which	approximately	$325	million,	$245	million	and	$280	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	currency	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	also	may	enter	into	derivative	instruments	that	are	not	designated	as	hedges	and	do	not	qualify	for	hedge accounting,	which	are	intended	to	mitigate	certain	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	interest	rate swaps	at	December	31,	2016	and	2015	was	$1.2	billion	and	$1.5	billion.	The	aggregate	notional	amount	of	our	outstanding	foreign	currency	hedges	at	December	31, 2016	and	2015	was	$4.0	billion	and	$4.1	billion.	Derivative	instruments	did	not	have	a	material	impact	on	net	earnings	and	comprehensive	income	during	2016,	2015 and	2014.	Substantially	all	of	our	derivatives	are	designated	for	hedge	accounting.	See	"Note	16	–	Fair	Value	Measurements"	for	more	information	on	the	fair	value measurements	related	to	our	derivative	instruments.

Recent	 Accounting	 Pronouncements	 – In	 May	 2014,	 the	 Financial	 Accounting	 Standards	 Board	 (FASB)	 issued	 Accounting	 Standards	 Update	 (ASU) No.	2014-09,	Revenue	from	Contracts	with	Customers,	as	amended	(Topic	606)	(the	ASU),	which	will	change	the	way	we	recognize	revenue	and	significantly	expand the	disclosure	requirements	for	revenue	arrangements.	In	July	2015,	the	FASB	approved	a	one-year	deferral	of	the	effective	date	of	the	ASU	to	2018	for	public companies,	with	an	option	that	would	permit	companies	to	adopt	the	ASU	in	2017.	Further	amendments	and	technical	corrections	were	made	to	the	ASU	during	2016. This	ASU	may	be	adopted	using	the	full	retrospective	method,	whereby	the	ASU	would	be	applied	to	each	prior	year	presented	and	the	cumulative	effect	of	applying	the ASU	would	be	recognized	at	the	beginning	of	the	earliest	year	presented	or	the	modified	retrospective	method,	whereby	the	cumulative	effect	of	applying	the	ASU would	be	recognized	at	the	beginning	of	the	year	of	adoption.	We	will	adopt	the	requirements	of	the	new	standard	effective	January	1,	2018	using	the	full	retrospective transition	method.

As	the	ASU	will	supersede	substantially	all	existing	revenue	guidance	affecting	us	under	GAAP,	it	could	impact	revenue	and	cost	recognition	on	thousands	of contracts	across	all	of	our	business	segments,	as	well	as,	our	business	processes	and	our	information	technology	systems.	As	a	result,	our	evaluation	of	the	effect	of	the ASU	will	extend	through	2017.	We	have	closely	monitored	the	standard	setting	process,	including	amendments	and	technical	corrections	to	the	ASU	following	its issuance	in	May	2014	and	participated	in	aerospace	and	defense	forums	to	understand	the	impact	of	the	ASU	on	our	industry.

We	commenced	our	evaluation	of	the	impact	of	the	ASU	in	late	2014,	by	evaluating	its	impact	on	selected	contracts	at	each	of	our	business	segments.	With	this baseline	understanding,	we	developed	a	project	plan	to	evaluate	thousands	of	contracts	across	our	business	segments,	develop	processes	and	tools	to	dual	report	financial results	under	both	GAAP	and	the

ASU	and	assess	the	internal	control	structure	in	order	to	adopt	the	ASU	on	January	1,	2018.	We	have	periodically	briefed	our	Audit	Committee	on	our	progress	made towards	adoption.	Based	on	our	evaluation	to	date,	we	anticipate	being	able	to	estimate	the	impacts	of	adopting	the	ASU	in	the	second	half	of	2017.

We	recognize	the	majority	of	our	revenue	using	the	percentage-of-completion	method	of	accounting,	whereby	revenue	is	recognized	as	we	progress	on	the	contract. For	contracts	with	a	significant	amount	of	development	and/or	requiring	 the	delivery	of	a	minimal	number	of	units,	revenue	and	profit	 is	recognized	using	 the percentage-of-completion	cost-to-cost	method	to	measure	progress.	For	example,	we	use	this	method	in	Aeronautics	for	the	F-35	program;	in	MFC	for	the	THAAD program;	in	RMS	for	the	Littoral	Combat	Ship	and	Aegis	Combat	System	programs;	and	in	Space	Systems	for	government	satellite	programs.	For	contracts	that	require us	to	produce	a	substantial	number	of	similar	items	without	a	significant	level	of	development,	we	record	revenue	and	profit	using	the	percentage-of-completion units-of-delivery	as	the	basis	for	measuring	progress	on	the	contract.	For	example,	we	use	this	method	in	Aeronautics	for	the	C-130J	and	C-5	programs;	in	MFC	for tactical	missile	programs	(i.e.,	Hellfire,	JASSM),	PAC-3	programs	and	fire	control	programs	(i.e.,	LANTIRN,	Sniper);	in	RMS	for	Black	Hawk	and	Seahawk	helicopter programs;	and	in	Space	Systems	for	commercial	satellite	programs.	For	contracts	to	provide	services	to	the	U.S.	Government,	revenue	is	generally	recorded	using	the percentage-of-completion	cost-to-cost	method.

Under	the	ASU,	revenue	will	be	recognized	as	the	customer	obtains	control	of	the	goods	and	services	promised	in	the	contract	(i.e.,	performance	obligations).	Given the	nature	of	our	products	and	terms	and	conditions	in	our	contracts,	in	particular	those	with	the	U.	S.	Government	(including	FMS	contracts),	the	customer	obtains control	as	we	perform	on	the	contract.	Therefore,	we	expect	to	recognize	revenue	over	time	for	almost	all	of	our	contracts	using	a	method	similar	to	our	current percentage-of-completion	cost-to-cost	method.	Accordingly,	adoption	of	the	ASU	will	primarily	impact	our	contracts	where	revenue	is	currently	recognized	using	the percentage-of-completion	units-of-delivery	method,	with	the	resulting	impact	being	revenue	will	be	recognized	earlier	in	the	performance	period	as	we	incur	costs,	as opposed	to	when	units	are	delivered.	This	change	will	also	impact	our	balance	sheet	presentation	with	an	expected	decrease	in	inventories,	an	increase	in	contract	assets (i.e.,	unbilled	receivables)	and	a	net	increase	to	retained	earnings	to	primarily	reflect	the	impact	of	converting	units-of-delivery	contracts	to	the	cost-to-cost	method	for recognizing	revenue	and	profits.

In	January	2017,	the	FASB	issued	ASU	No.	2017-04,	Intangibles-Goodwill	and	Other	(Topic	350),	which	will	simplify	the	goodwill	impairment	calculation,	by eliminating	Step	2	from	the	current	goodwill	impairment	test.	The	new	standard	does	not	change	how	a	goodwill	impairment	is	identified.	We	will	continue	to	perform our	quantitative	goodwill	impairment	test	by	comparing	the	fair	value	of	each	reporting	unit	to	its	carrying	amount,	but	if	we	are	required	to	recognize	a	goodwill impairment	charge,	under	the	new	standard	the	amount	of	the	charge	will	be	calculated	by	subtracting	the	reporting	unit's	fair	value	from	its	carrying	amount.	Under	the current	standard,	if	we	are	required	to	recognize	a	goodwill	impairment	charge,	Step	2	requires	us	to	calculate	the	implied	value	of	goodwill	by	assigning	the	fair	value	of a	reporting	unit	to	all	of	its	assets	and	liabilities	as	if	that	reporting	unit	had	been	acquired	in	a	business	combination	and	the	amount	of	the	charge	is	calculated	by subtracting	the	reporting	unit's	implied	fair	value	of	goodwill	from	its	actual	goodwill	balance.	The	standard	should	be	applied	prospectively	from	the	date	of	adoption. We	are	currently	evaluating	when	we	will	adopt	the	ASU	and	the	expected	impact	to	related	disclosures.

In	February	2016,	the	FASB	issued	ASU	No.	2016-02,	Leases	(Topic	842),	which	increases	transparency	and	comparability	among	organizations	by	requiring	the recognition	of	lease	assets	and	lease	liabilities	on	the	balance	sheet	and	disclosure	of	key	information	about	leasing	arrangements	for	both	lessees	and	lessors.	The	ASU is	effective	January	1,	2019	for	public	companies,	with	early	adoption	permitted.	The	ASU	will	be	applied	using	a	modified	retrospective	approach	to	the	beginning	of the	earliest	period	presented	in	the	financial	statements.	We	are	currently	evaluating	when	we	will	adopt	the	ASU	and	the	expected	impact	to	our	consolidated	financial statements	and	related	disclosures.

In	 March	 2016,	 the	 FASB	 issued	ASU	No.	2016-09,	 Compensation	 –	 Stock	 Compensation	 (Topic	 718):	 Improvements	 to	 Employee	 Share-Based	 Payment Accounting,	which	changed	the	accounting	for	certain	aspects	of	employee	share-based	payments.	The	ASU	requires	companies	to	recognize	additional	tax	benefits	or expenses	related	to	the	vesting	or	settlement	of	employee	share-based	awards	(the	difference	between	the	actual	tax	benefit	and	the	tax	benefit	initially	recognized	for financial	reporting	purposes)	as	income	tax	benefit	or	expense	in	earnings,	rather	than	in	additional	paid-in	capital,	in	the	reporting	period	in	which	they	occur.	The	ASU also	requires	companies	to	classify	cash	flows	resulting	from	employee	share-based	payments,	including	the	additional	tax	benefits	or	expenses	related	to	the	vesting	or settlement	of	share-based	awards,	as	cash	flows	from	operating	activities	rather	than	financing	activities.	Although	this	change	will	reduce	some	of	the	administrative complexities	of	tracking	share-based	awards,	it	will	increase	the	volatility	of	our	income	tax	expense	and	cash	flows	from	operations.	The	new	standard	is	effective	for annual	reporting	periods	beginning	after	December	15,	2016,	with	early	adoption	permitted.	We	early	adopted	the	ASU	during	the	second	quarter	of	2016	and	are therefore	required	to	report	the	impacts	as	though	the	ASU	had	been	adopted	on	January	1,	2016.	Accordingly,	we	recognized	additional	income	tax

benefits	as	an	increase	to	earnings	of	$152	million	($0.50	per	share)	during	the	year	ended	December	31,	2016.	Additionally,	we	recognized	additional	income	tax benefits	as	an	increase	to	operating	cash	flows	of	$152	million	during	the	year	ended	December	31,	2016.	The	new	accounting	standard	did	not	impact	any	periods	prior to	January	1,	2016,	as	we	applied	the	changes	in	the	ASU	on	a	prospective	basis.

In	September	2015,	the	FASB	issued	ASU	No.	2015-16,	Business	Combinations	(Topic	805),	which	simplifies	the	accounting	for	adjustments	made	to	preliminary amounts	recognized	in	a	business	combination	by	eliminating	the	requirement	to	retrospectively	account	for	those	adjustments.	Instead,	adjustments	will	be	recognized	in the	period	in	which	the	adjustments	are	determined,	including	the	effect	on	earnings	of	any	amounts	that	would	have	been	recorded	in	previous	periods	if	the	accounting had	been	completed	at	the	acquisition	date.	We	adopted	the	ASU	on	January	1,	2016	and	are	prospectively	applying	the	ASU	to	business	combination	adjustments identified	after	the	date	of	adoption.

In	November	2015,	the	FASB	issued	ASU	No.	2015-17,	Income	Taxes	(Topic	740),	which	simplifies	the	presentation	of	deferred	income	taxes	and	requires	that deferred	tax	assets	and	liabilities,	as	well	as	any	related	valuation	allowance,	be	classified	as	noncurrent	in	our	consolidated	balance	sheets.	We	applied	the	provisions	of the	ASU	retrospectively	and	reclassified	approximately	$1.6	billion	from	current	to	noncurrent	assets	and	approximately	$140	million	from	current	to	noncurrent liabilities	in	our	consolidated	balance	sheet	as	of	December	31,	2015.

# Note	2	–	Earnings	Per	Share

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

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Weighted\taverage\tcommon\tshares\toutstanding\tfor\tbasic\tcomputations | \t299.3 | \t310.3 | \t316.8 |
| Weighted\taverage\tdilutive\teffect\tof\tequity\tawards | 3.8 | 4.4 | 5.6 |
| Weighted\taverage\tcommon\tshares\toutstanding\tfor\tdiluted\tcomputations | \t303.1 | \t314.7 | \t322.4 |

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	also	includes	the	dilutive	effects	for	the	assumed	vesting	of	outstanding	restricted	stock units	and	exercise	of	outstanding	stock	options	based	on	the	treasury	stock	method.

There	were	no	anti-dilutive	equity	awards	for	the	years	ended	December	31,	2016,	2015	and	2014.

# Note	3	–	Acquisitions	and	Divestitures

# Acquisitions

On	November	6,	2015,	we	completed	the	acquisition	of	Sikorsky	Aircraft	Corporation	and	certain	affiliated	companies	(collectively	"Sikorsky")	from	United Technologies	Corporation	(UTC)	and	certain	of	UTC's	subsidiaries.	The	purchase	price	of	the	acquisition	was	$9.0	billion,	net	of	cash	acquired.	As	a	result	of	the acquisition,	Sikorsky	became	a	wholly-owned	subsidiary	of	ours.	Sikorsky	is	a	global	company	primarily	engaged	in	the	research,	design,	development,	manufacture and	support	of	military	and	commercial	helicopters.	Sikorsky's	products	include	military	helicopters	such	as	the	Black	Hawk,	Seahawk,	CH-53K,	H-92;	and	commercial helicopters	such	as	the	S-76	and	S-92.	The	acquisition	enables	us	to	extend	our	core	business	into	the	military	and	commercial	rotary	wing	markets,	allowing	us	to strengthen	our	position	in	the	aerospace	and	defense	industry.	Further,	this	acquisition	will	expand	our	presence	in	commercial	and	international	markets.	Sikorsky	has been	aligned	under	our	RMS	business	segment.

To	fund	the	$9.0	billion	acquisition	price,	we	utilized	$6.0	billion	of	proceeds	borrowed	under	a	temporary	364-day	revolving	credit	facility	(the	364-day	Facility), $2.0	billion	of	cash	on	hand	and	$1.0	billion	from	the	issuance	of	commercial	paper.	In	the	fourth	quarter	of	2015,	we	repaid	all	outstanding	borrowings	under	the 364-day	Facility	with	the	proceeds	from	the	issuance	of	$7.0	billion	of	fixed	interest-rate	long-term	notes	in	a	public	offering	(the	November	2015	Notes).	In	the	fourth quarter	of	2015,	we	also	repaid	the	$1.0	billion	in	commercial	paper	borrowings	(see	"Note	10	–	Debt").

# Allocation	of	Purchase	Price	to	Assets	Acquired	and	Liabilities	Assumed

We	accounted	for	the	acquisition	of	Sikorsky	as	a	business	combination,	which	requires	us	to	record	the	assets	acquired	and	liabilities	assumed	at	fair	value.	The amount	by	which	the	purchase	price	exceeds	the	fair	value	of	the	net	assets	acquired	is	recorded	as	goodwill.	During	the	fourth	quarter	of	2016,	we	completed	our appraisals	and	determined	the	fair	values	of	the	assets	acquired	and	liabilities	assumed	upon	acquisition	of	Sikorsky.	As	a	result	of	the	completed	valuation	the significant	adjustments	to	the	carrying	amounts	were	as	follows:	Goodwill,	trademarks	intangible	assets	and	customer	programs	intangible	assets	increased	by	about $78	million,	$71	million	and	$57	million	and	inventories,	net	was	decreased	by	about	$185	million.	The	measurement	period	adjustments	did	not	result	in	a	significant adjustment	to	amortization	expense	for	intangible	assets	during	2016.

The	following	table	summarizes	the	fair	values	of	the	assets	acquired	and	liabilities	assumed	at	the	acquisition	date,	including	the	refinements	described	in	the previous	paragraph	(in	millions):

(a) Recorded	in	other	noncurrent	liabilities	on	our	consolidated	balance	sheets.

Intangible	assets	related	to	customer	programs	were	recognized	for	each	major	helicopter	and	aftermarket	program	and	represent	the	aggregate	value	associated with	the	customer	relationships,	contracts,	technology	and	tradenames	underlying	the	associated	program.	These	intangible	assets	will	be	amortized	on	a	straight-line basis	over	a	weighted-average	useful	life	of	approximately	15	years.	The	useful	life	is	based	on	a	period	of	expected	cash	flows	used	to	measure	the	fair	value	of	each	of intangible	assets.

Customer	contractual	obligations	represent	liabilities	on	certain	development	programs	where	the	expected	costs	exceed	the	expected	sales	under	contract.	We measured	these	liabilities	based	on	the	price	to	transfer	the	obligation	to	a	market	participant	at	the	measurement	date,	assuming	that	the	liability	will	remain	outstanding in	the	marketplace.	Based	on	the	estimated	net	cash	outflows	of	the	developmental	programs	plus	a	reasonable	contracting	profit	margin	required	to	transfer	the	contracts to	market	participants,	we	recorded	assumed	liabilities	of	$507	million.	These	liabilities	will	be	liquidated	in	accordance	with	the	underlying	economic	pattern	of	the contractual	obligations,	as	reflected	by	the	estimated	future	net	cash	outflows	incurred	on	the	associated	contracts.	From	the	acquisition	date	through	the	year	ended December	31,	2016,	we	recognized	approximately	$130	million	in	sales	related	to	customer	contractual	obligations.	Estimated	liquidation	of	the	customer	contractual obligation	is	approximated	as	follows:	$110	million	in	2017,	$70	million	in	2018,	$70	million	in	2019,	$60	million	in	2020,	$40	million	in	2021	and	$27	million thereafter.

The	fair	values	of	the	assets	acquired	and	liabilities	assumed	were	determined	using	income,	market	and	cost	valuation	methodologies.	The	fair	value	measurements were	estimated	using	significant	inputs	that	are	not	observable	in	the	market	and	thus	represent	a	Level	3	measurement	as	defined	in	Accounting	Standards	Codification (ASC)	820,	Fair	Value	Measurement.	The	income	approach	was	primarily	used	to	value	the	customer	programs	and	trademarks	intangible	assets.

The	income	approach	indicates	value	for	an	asset	or	liability	based	on	the	present	value	of	cash	flow	projected	to	be	generated	over	the	remaining	economic	life	of	the asset	or	liability	being	measured.	Both	the	amount	and	the	duration	of	the	cash	flows	are	considered	from	a	market	participant	perspective.	Our	estimates	of	market participant	net	cash	flows	considered	historical	and	projected	pricing,	remaining	developmental	effort,	operational	performance	including	company-specific	synergies, aftermarket	retention,	product	life	cycles,	material	and	labor	pricing,	and	other	relevant	customer,	contractual	and	market	factors.	Where	appropriate,	the	net	cash	flows are	adjusted	to	reflect	the	uncertainties	associated	with	the	underlying	assumptions,	as	well	as	the	risk	profile	of	the	net	cash	flows	utilized	in	the	valuation.	The	adjusted future	cash	flows	are	then	discounted	to	present	value	using	an	appropriate	discount	rate.	Projected	cash	flow	is	discounted	at	a	required	rate	of	return	that	reflects	the relative	risk	of	achieving	the	cash	flows	and	the	time	value	of	money.	The	market	approach	is	a	valuation	technique	that	uses	prices	and	other	relevant	information generated	by	market	transactions	involving	identical	or	comparable	assets,	liabilities,	or	a	group	of	assets	and	liabilities.	Valuation	techniques	consistent	with	the	market approach	often	use	market	multiples	derived	from	a	set	of	comparables.	The	cost	approach,	which	estimates	value	by	determining	the	current	cost	of	replacing	an	asset with	another	of	equivalent	economic	utility,	was	used,	as	appropriate,	for	property,	plant	and	equipment.	The	cost	to	replace	a	given	asset	reflects	the	estimated reproduction	or	replacement	cost,	less	an	allowance	for	loss	in	value	due	to	depreciation.

The	purchase	price	allocation	resulted	in	the	recognition	of	$2.8	billion	of	goodwill,	all	of	which	is	expected	to	be	amortizable	for	tax	purposes.	Substantially	all	of the	goodwill	was	assigned	to	our	RMS	business.	The	goodwill	recognized	is	attributable	to	expected	revenue	synergies	generated	by	the	integration	of	our	products	and technologies	with	those	of	Sikorsky,	costs	synergies	resulting	from	the	consolidation	or	elimination	of	certain	functions,	and	intangible	assets	that	do	not	qualify	for separate	recognition,	such	as	the	assembled	workforce	of	Sikorsky.

Determining	the	fair	value	of	assets	acquired	and	liabilities	assumed	requires	the	exercise	of	significant	judgments,	including	the	amount	and	timing	of	expected future	cash	flows,	long-term	growth	rates	and	discount	rates.	The	cash	flows	employed	in	the	DCF	analyses	are	based	on	our	best	estimate	of	future	sales,	earnings	and cash	flows	after	considering	factors	such	as	general	market	conditions,	customer	budgets,	existing	firm	orders,	expected	future	orders,	contracts	with	suppliers,	labor agreements,	changes	in	working	capital,	long	term	business	plans	and	recent	operating	performance.	Use	of	different	estimates	and	judgments	could	yield	different results.

# Impact	to	2015	Financial	Results

Sikorsky's	2015	financial	results	have	been	included	in	our	consolidated	financial	results	only	for	the	period	from	the	November	6,	2015	acquisition	date	through December	31,	2015.	As	a	result,	our	consolidated	financial	results	for	the	year	ended	December	31,	2015	do	not	reflect	a	full	year	of	Sikorsky's	results.	From	the November	6,	2015	acquisition	date	through	December	31,	2015,	Sikorsky	generated	net	sales	of	approximately	$400	million	and	operating	loss	of	approximately $45	million,	inclusive	of	intangible	amortization	and	adjustments	required	to	account	for	the	acquisition.

We	incurred	approximately	$38	million	of	non-recoverable	transaction	costs	associated	with	the	Sikorsky	acquisition	in	2015	that	were	expensed	as	incurred.	These costs	are	included	in	other	income,	net	on	our	consolidated	statements	of	earnings.	We	also	incurred	approximately	$48	million	in	costs	associated	with	issuing	the $7.0	billion	November	2015	Notes	used	to	repay	all	outstanding	borrowings	under	the	364-day	Facility	used	to	finance	the	acquisition.	The	financing	costs	were recorded	as	a	reduction	of	debt	and	will	be	amortized	to	interest	expense	over	the	term	of	the	related	debt.

# Supplemental	Pro	Forma	Financial	Information	(unaudited)

The	following	table	presents	summarized	unaudited	pro	forma	financial	information	as	if	Sikorsky	had	been	included	in	our	financial	results	for	the	entire	years	in 2015	and	2014	(in	millions):

|  | 2015 | 2014 |
| :--- | :--- | :--- |
| Net\tsales | $\t45,366 | $ \t47,369 |
| Net\tearnings | 3,534 | 3,475 |
| Basic\tearnings\tper\tcommon\tshare | 11.39 | 10.97 |
| Diluted\tearnings\tper\tcommon\tshare | 11.23 | 10.78 |

The	unaudited	supplemental	pro	forma	financial	data	above	has	been	calculated	after	applying	our	accounting	policies	and	adjusting	the	historical	results	of Sikorsky	with	pro	forma	adjustments,	net	of	tax,	that	assume	the	acquisition	occurred	on	January	1,	2014.	Significant	pro	forma	adjustments	include	the	recognition	of additional	amortization	expense	related	to	acquired	intangible	assets	and	additional	interest	expense	related	to	the	short-term	debt	used	to	finance	the	acquisition.	These

adjustments	assume	the	application	of	fair	value	adjustments	to	intangibles	and	the	debt	issuance	occurred	on	January	1,	2014	and	are	approximated	as	follows: amortization	expense	of	$125	million	and	$150	million	in	2015	and	2014,	respectively;	and	interest	expense	of	$40	million	and	$50	million	in	2015	and	2014, respectively.	In	addition,	significant	nonrecurring	adjustments	include	the	elimination	of	a	$72	million	pension	curtailment	loss,	net	of	tax,	recognized	in	2015	and	the elimination	of	a	$58	million	income	tax	charge	related	to	historic	earnings	of	foreign	subsidiaries	recognized	by	Sikorsky	in	2015.

The	 unaudited	 supplemental	 pro	 forma	 financial	 information	 also	 reflects	 an	 increase	 in	 interest	 expense,	 net	 of	 tax,	 of	 approximately	 $110	 million	 and approximately	$120	million	in	2015	and	2014,	respectively.	The	increase	in	interest	expense	is	the	result	of	assuming	the	November	2015	Notes	were	issued	on January	1,	2014.	Proceeds	of	the	November	2015	Notes	were	used	to	repay	all	outstanding	borrowings	under	the	364-day	Facility	used	to	finance	a	portion	of	the purchase	price	of	Sikorsky,	as	contemplated	at	the	date	of	acquisition.

The	unaudited	supplemental	pro	forma	financial	information	does	not	reflect	the	realization	of	any	expected	ongoing	cost	or	revenue	synergies	relating	to	the integration	of	the	two	companies.	Further,	the	pro	forma	data	should	not	be	considered	indicative	of	the	results	that	would	have	occurred	if	the	acquisition,	related financing	and	associated	notes	issuance	and	repayment	of	the	364-day	Facility	had	been	consummated	on	January	1,	2014,	nor	are	they	indicative	of	future	results.

On	August	24,	2016,	our	ownership	interest	in	the	AWE	venture	increased	by	18%	in	exchange	for	our	assuming	a	more	significant	role	in	managing	the	operations of	the	venture.	As	a	result	of	the	increase	in	ownership	interest,	we	now	hold	a	51%	controlling	interest	in	AWE.	Accordingly,	we	are	required	to	consolidate	AWE, which	has	been	aligned	under	our	Space	Systems	business	segment.	Space	Systems'	operating	results	includes	100%	of	AWE's	net	sales	and	51%	of	AWE's	operating profit	since	August	24,	2016.	Previously,	we	accounted	for	our	investment	in	AWE	using	the	equity	method	of	accounting.	Under	the	equity	method,	none	of	AWE's	net sales	and	only	33%	of	AWE's	net	earnings	were	included	in	operating	profit	of	the	Space	Systems	business	segment.

We	accounted	for	this	transaction	as	a	"step	acquisition"	(as	defined	by	U.S.	GAAP),	which	requires	us	to	consolidate	and	record	the	assets	and	liabilities	of	AWE at	fair	value.	Accordingly,	we	recorded	intangible	assets	of	$243	million	related	to	customer	relationships,	$32	million	of	net	liabilities,	and	noncontrolling	interests	of $107	million.	The	intangible	assets	are	being	amortized	over	a	period	of	eight	years	in	accordance	with	the	underlying	pattern	of	economic	benefit	reflected	by	the	future net	cash	flows.	In	2016,	we	recognized	a	non-cash	net	gain	of	$104	million	associated	with	obtaining	a	controlling	interest	in	AWE,	which	consisted	of	a	$127	million pretax	gain	recognized	in	the	operating	results	of	our	Space	Systems	business	segment	and	$23	million	of	tax-related	items	at	our	corporate	office.	The	gain	represents the	fair	value	of	our	51%	interest	in	AWE,	less	the	carrying	value	of	our	previously	held	investment	in	AWE	and	deferred	taxes.	The	gain	was	recorded	in	other	income, net	in	the	consolidated	statements	of	earnings.	The	fair	value	of	AWE	(including	the	intangible	assets),	our	controlling	interest,	and	the	noncontrolling	interests	were determined	using	the	income	approach.

# Other	acquisitions

We	paid	$898	million	in	2014	for	acquisitions	of	businesses	and	investments	in	affiliates,	net	of	cash	acquired,	primarily	related	to	the	acquisitions	of	Zeta,	Systems Made	Simple	and	Industrial	Defender.	In	August	2014,	we	completed	the	acquisition	of	all	interests	in	Zeta,	a	designer	of	systems	that	enable	collection,	processing, safeguarding	and	dissemination	of	information	for	intelligence	and	defense	communities,	which	is	included	in	our	Space	Systems	business	segment.	In	connection	with the	acquisition	of	Zeta,	we	recorded	goodwill	of	approximately	$290	million,	related	to	expected	synergies	from	combining	operations	and	value	of	the	existing workforce.	The	recorded	goodwill	is	not	deductible	for	tax	purposes.	Additionally,	in	connection	with	the	acquisition	of	Zeta,	we	recorded	other	intangible	assets	of approximately	$100	million,	primarily	related	to	customer	relationships	and	technologies,	which	will	be	amortized	over	a	weighted	average	period	of	10	years.	Also during	2014,	we	completed	the	acquisitions	of	interests	in	Systems	Made	Simple,	a	provider	of	health	information	technology	solutions,	and	Industrial	Defender,	a provider	of	cybersecurity	solutions	for	control	systems	in	the	oil	and	gas,	utility	and	chemical	industries.	Both	businesses	were	included	in	our	former	IS&GS	business. We	recorded	goodwill	of	approximately	$370	million	and	intangible	assets	of	approximately	$125	million	related	to	these	acquisitions,	which	were	reclassified	to discontinued	operations	in	connection	with	the	divestiture	of	IS&GS.

On	August	16,	2016,	we	completed	the	previously	announced	divestiture	of	the	IS&GS	business,	which	merged	with	a	subsidiary	of	Leidos,	in	a	Reverse	Morris Trust	transaction	(the	"Transaction").	The	Transaction	was	completed	in	a	multi-step	process	pursuant	to	which	we	initially	contributed	the	IS&GS	business	to	Abacus Innovations	Corporation	(Abacus),	a	wholly	owned	subsidiary	of	Lockheed	Martin	created	to	facilitate	the	Transaction,	and	the	common	stock	of	Abacus	was	distributed to	participating	Lockheed	Martin	stockholders	through	an	exchange	offer.	Under	the	terms	of	the	exchange	offer,	Lockheed	Martin	stockholders	had	the	option	to exchange	shares	of	Lockheed	Martin	common	stock	for	shares	of	Abacus	common	stock.	At	the	conclusion	of	the	exchange	offer,	all	shares	of	Abacus	common	stock were	exchanged	for	9,369,694	shares	of	Lockheed	Martin	common	stock	held	by	Lockheed	Martin	stockholders	that	elected	to	participate	in	the	exchange.	The	shares	of Lockheed	Martin	common	stock	that	were	exchanged	and	accepted	were	retired,	reducing	the	number	of	shares	of	our	common	stock	outstanding	by	approximately	3%. Following	the	exchange	offer,	Abacus	merged	with	a	subsidiary	of	Leidos,	with	Abacus	continuing	as	the	surviving	corporation	and	a	wholly-owned	subsidiary	of Leidos.	As	part	of	the	merger,	each	share	of	Abacus	common	stock	was	automatically	converted	into	one	share	of	Leidos	common	stock.	We	did	not	receive	any	shares of	Leidos	common	stock	as	part	of	the	Transaction	and	do	not	hold	any	shares	of	Leidos	or	Abacus	common	stock	following	the	Transaction.	Based	on	an	opinion	of outside	tax	counsel,	subject	to	customary	qualifications	and	based	on	factual	representations,	the	exchange	offer	and	merger	will	qualify	as	tax-free	transactions	to Lockheed	Martin	and	its	stockholders,	except	to	the	extent	that	cash	was	paid	to	Lockheed	Martin	stockholders	in	lieu	of	fractional	shares.

In	connection	with	the	Transaction,	Abacus	borrowed	an	aggregate	principal	amount	of	approximately	$1.84	billion	under	term	loan	facilities	with	third	party financial	institutions,	the	proceeds	of	which	were	used	to	make	a	one-time	special	cash	payment	of	$1.80	billion	to	Lockheed	Martin	and	to	pay	associated	borrowing fees	and	expenses.	The	entire	special	cash	payment	was	used	to	repay	debt,	pay	dividends	and	repurchase	stock	during	the	third	and	fourth	quarters	of	2016.	The obligations	under	the	Abacus	term	loan	facilities	were	guaranteed	by	Leidos	as	part	of	the	Transaction.

As	a	result	of	the	Transaction,	we	recognized	a	net	gain	of	approximately	$1.2	billion.	The	net	gain	represents	the	$2.5	billion	fair	value	of	the	shares	of	Lockheed Martin	common	stock	exchanged	and	retired	as	part	of	the	exchange	offer,	plus	the	$1.8	billion	one-time	special	cash	payment,	less	the	net	book	value	of	the	IS&GS business	of	about	$3.0	billion	at	August	16,	2016	and	other	adjustments	of	about	$100	million.	The	final	gain	is	subject	to	certain	post-closing	adjustments,	including final	working	capital,	indemnification,	and	tax	adjustments,	which	we	expect	to	complete	in	2017.

We	classified	the	operating	results	of	our	IS&GS	business	as	discontinued	operations	in	our	consolidated	financial	statements	in	accordance	with	U.S.	GAAP,	as the	divestiture	of	this	business	represented	a	strategic	shift	that	had	a	major	effect	on	our	operations	and	financial	results.	However,	the	cash	flows	generated	by	the IS&GS	business	have	not	been	reclassified	in	our	consolidated	statements	of	cash	flows	as	we	retained	this	cash	as	part	of	the	Transaction.

The	carrying	amounts	of	major	classes	of	the	IS&GS	business	assets	and	liabilities	that	were	classified	as	assets	and	liabilities	of	discontinued	operations	as	of December	31,	2015	are	as	follows	(in	millions):

The	operating	results	of	IS&GS	that	have	been	reflected	within	net	earnings	from	discontinued	operations	are	as	follows	(in	millions):

|  | Year	Ended	December	31, | Year	Ended	December	31, |  |
| :--- | :--- | :--- | :--- |
|  | 2016\t(a) | 2015 | 2014 |
| Net\tsales | $\t3,410 | $5,596 | $5,654 |
| Cost\tof\tsales | (2,953) | (4,868) | (4,963) |
| Goodwill\timpairment\tcharges | — | — | (119) |
| Severance\tcharges | (19) | (20) | — |
| Gross\tprofit | 438 | 708 | 572 |
| Other\tincome,\tnet | 16 | 16 | 8 |
| Operating\tprofit | 454 | 724 | 580 |
| Other\tnon-operating\tincome,\tnet | — | — | 1 |
| Earnings\tfrom\tdiscontinued\toperations\tbefore\tincome\ttaxes | 454 | 724 | 581 |
| Income\ttax\texpense | (147) | (245) | (220) |
| Net\tgain\ton\tdivestiture\tof\tdiscontinued\toperations | 1,242 | — | — |
| Net\tearnings\tfrom\tdiscontinued\toperations | $1,549 | $479 | $361 |

(a) Operating	results	for	the	year	ended	December	31,	2016	reflect	operating	results	prior	to	the	August	16,	2016	divestiture	date,	not	the	full	year	as	shown	for	the	prior	years.

The	 operating	 profit	 reflected	 above	 does	 not	 represent	 the	 IS&GS	 business's	 historical	 operating	 profit,	 as	 the	 results	 reported	 within	 net	 earnings	 from discontinued	operations	only	include	costs	that	were	directly	attributable	to	the	IS&GS	business	and	exclude	certain	overhead	costs	that	were	previously	allocated	to	the IS&GS	business	for	each	period.	For	instance,	certain	corporate	overhead	costs	and	certain	defined	benefit	pension	costs	that	were	historically	allocated	to	and	included in	the	operating	results	of	the	IS&GS	business	have	been	reclassified	and	included	in	the	results	of	our	continuing	operations	because	we	will	continue	to	incur	these costs	subsequent	to	the	divestiture	of	the	IS&GS	business.

Certain	corporate	overhead	costs	incurred	by	us	and	previously	allocated	to	the	IS&GS	business	were	reclassified	from	the	IS&GS	business	to	other	unallocated,	net in	 our	 consolidated	 statements	 of	 earnings.	 These	 overhead	 costs	 were	 primarily	 related	 to	 expenses	 for	 senior	 management,	 legal,	 human	 resources,	 finance, accounting,	treasury,	tax,	information	technology,	communications,	ethics	and	compliance,	corporate	employee	benefits,	incentives	and	stock-based	compensation, shared	services	processing	and	administration	and	depreciation	for	corporate	fixed	assets,	and	were	not	directly	attributable	to	the	IS&GS	business.	We	reclassified $82	million	in	2016,	$165	million	in	2015	and	$169	million	in	2014	of	corporate	overhead	costs	to	other	unallocated,	net.	Additionally,	we	retained	all	assets	and obligations	related	to	the	pension	benefits	earned	by	current	and	former	IS&GS	business	salaried	employees	through	the	divestiture	of	the	IS&GS	business.	As	a	result, the	non-service	portion	of	net	pension	costs	(interest	cost,	actuarial	gains	and	losses	and	expected	return	on	plan	assets)	for	these	plans	was	reclassified	from	the operating	results	of	the	IS&GS	business	and	reported	as	a	reduction	to	the	FAS/CAS	pension	adjustment.	The	service	portion	of	pension	costs	related	to	IS&GS	business salaried	employees	that	transferred	to	Leidos	continued	to	be	included	in	the	operating	results	of	the	IS&GS	business	classified	as	discontinued	operations	because	such costs	will	no	longer	be	incurred	by	us	subsequent	to	the	divestiture	of	the	IS&GS	business.	These	net	pension	costs	were	$54	million	in	2016,	$71	million	in	2015	and $59	million	in	2014.

Significant	 severance	 charges	 related	 to	 the	 IS&GS	 business	 were	 historically	 recorded	 at	 the	 Lockheed	 Martin	 corporate	 office.	These	 charges	 have	 been reclassified	into	the	operating	results	of	the	IS&GS	business,	classified	as	discontinued	operations,	and	excluded	from	the	operating	results	of	our	continuing	operations. The	amount	of	severance	charges	reclassified	were	$19	million	in	2016	and	$20	million	in	2015.

Financial	information	related	to	the	IS&GS	business's	cash	flows,	such	as	depreciation	and	amortization,	capital	expenditures,	and	other	non-cash	items,	included in	our	consolidated	statements	of	cash	flows	was	not	significant.

# Other	Divestitures

During	2016,	we	completed	the	sale	of	our	Lockheed	Martin	Commercial	Flight	Training	(LMCFT)	business,	which	was	classified	as	held	for	sale	in	the	fourth quarter	of	2015.	Other,	net	in	2015	includes	a	non-cash	asset	impairment	charge	of	approximately	$90	million.	This	charge	was	partially	offset	by	a	net	deferred	tax benefit	of	about	$80	million,	which	is

recorded	in	income	tax	expense.	The	net	impact	reduced	net	earnings	by	about	$10	million.	LMCFT's	financial	results	are	not	material	and	there	was	no	significant impact	on	our	consolidated	financial	results	as	a	result	of	completing	the	sale	of	our	LMCFT	business.	Accordingly,	LMCFT's	financial	results	are	not	classified	in discontinued	operations.

# Note	4	–	Goodwill	and	Acquired	Intangibles

Changes	in	the	carrying	amount	of	goodwill	by	segment	were	as	follows	(in	millions):

|  | Aeronautics | MFC | RMS | Systems | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Balance\tat\tDecember\t31,\t2014\t(a) | $171 | $2,181 | $4,022 | $1,590 | $7,964 |
| Sikorsky\tacquisition | — | — | \t 2,764 | — | 2,764 |
| Other | — | 17 | (48) | (2) | (33) |
| Balance\tat\tDecember\t31,\t2015 | 171 | \t 2,198 | \t 6,738 | 1,588 | \t 10,695 |
| Purchase\taccounting\tadjustments | — | — | 78 | — | 78 |
| Other | — | 62 | (68) | (3) | (9) |
| Balance\tat\tDecember\t31,\t2016 | $171 | $2,260 | $6,748 | $1,585 | $10,764 |

(a) Includes	reclassifications	of	goodwill	among	our	business	segments	as	a	result	of	our	program	realignment,	which	occurred	during	the	fourth	quarter	of	2015	(see	"Note 1	–	Significant	Accounting	Policies").

The	gross	carrying	amounts	and	accumulated	amortization	of	our	acquired	intangible	assets	consisted	of	the	following	(in	millions):

|  | Gross<br>Carrying<br>Amount | 2016<br>Accumulated<br>Amortization | Net<br>Carrying<br>Amount | Gross<br>Carrying<br>Amount | 2015<br>Accumulated<br>Amortization | Net<br>Carrying<br>Amount |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Finite-Lived: |  |  |  |  |  |  |
| Customer\tprograms | \t$3,184 | $(273) | \t$2,911 | \t$3,127 | $\t(38) | \t$3,089 |
| Customer\trelationships | 359 | (92) | 267 | 137 | (59) | 78 |
| Other | 111 | (83) | 28 | 111 | (72) | 39 |
| Total\tfinite-lived\tintangibles | 3,654 | (448) | 3,206 | 3,375 | (169) | 3,206 |
| Indefinite-Lived: |  |  |  |  |  |  |
| Trademarks | 887 | — | 887 | 816 | — | 816 |
| Total\tacquired\tintangibles | \t$4,541 | $(448) | \t$4,093 | \t$4,191 | $(169) | \t$4,022 |

Acquired	finite-lived	intangible	assets	are	amortized	to	expense	primarily	on	a	straight-line	basis	over	the	following	estimated	useful	lives:	customer	programs, from	nine	to	20	years;	customer	relationships,	from	four	to	10	years;	technology,	from	five	to	seven	years;	trademarks,	from	two	to	five	years;	and	other	intangibles, from	three	to	10	years.

# Note	5	–	Information	on	Business	Segments

Following	is	a	brief	description	of	the	activities	of	our	business	segments:

•	 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.

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

•	 Rotary	and	Mission	Systems	–	Provides	design,	manufacture,	service	and	support	for	a	variety	of	military	and	civil	helicopters;	ship	and	submarine	mission	and combat	systems;	mission	systems	and	sensors	for	rotary	and	fixed-wing	aircraft;	sea	and	land-based	missile	defense	systems;	radar	systems;	the	Littoral	Combat	Ship; simulation	 and	 training	 services;	 and	 unmanned	 systems	 and	 technologies.	 In	 addition,	 RMS	 supports	 the	 needs	 of	 customers	 in	 cybersecurity	 and	 delivers communications	and	command	and	control	capability	through	complex	mission	solutions	for	defense	applications.	The	2015	results	of	the	acquired	Sikorsky	business have	been	included	in	our	consolidated	results	of	operations	from	the	November	6,	2015	acquisition	date	through	December	31,	2015.	Accordingly,	the	consolidated results	of	operations	for	the	year	ended	December	31,	2015	do	not	reflect	a	full	year	of	Sikorsky	operations.

•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	provides	network-enabled	situational	awareness	and	integrates	complex	space	and	ground-based	global	systems	to	help	our customers	gather,	analyze	and	securely	distribute	critical	intelligence	data.	Space	Systems	is	also	responsible	for	various	classified	systems	and	services	in	support	of vital	national	security	systems.	The	results	of	AWE	have	been	included	in	our	consolidated	results	of	operations	from	August	24,	2016,	when	we	obtained	controlling interest	through	December	31,	2016.	Accordingly,	the	consolidated	results	of	operations	for	the	year	ended	December	31,	2016	do	not	reflect	a	full	year	of	AWE operations.	Operating	profit	for	our	Space	Systems	business	segment	also	includes	our	share	of	earnings	for	our	investment	in	ULA,	which	provides	expendable launch	services	to	the	U.S.	Government.

The	financial	information	in	the	following	tables	includes	the	results	of	businesses	we	have	acquired	during	the	past	three	years	(see	"Note	3	–	Acquisitions	and Divestitures")	from	their	respective	dates	of	acquisition.	The	business	segment	operating	results	in	the	following	tables	exclude	businesses	included	in	discontinued operations	(see	"Note	3	–	Acquisitions	and	Divestitures")	for	all	years	presented.	Net	sales	of	our	business	segments	exclude	intersegment	sales	as	these	activities	are eliminated	in	consolidation.

Operating	profit	of	our	business	segments	includes	our	share	of	earnings	or	losses	from	equity	method	investees	as	the	operating	activities	of	the	equity	method investees	are	closely	aligned	with	the	operations	of	our	business	segments.	United	Launch	Alliance	(ULA),	which	is	part	of	our	Space	Systems	business	segment,	is	our primary	equity	method	 investee.	Operating	profit	of	our	business	segments	excludes	 the	FAS/CAS	pension	adjustment	described	below;	expense	for	stock-based compensation;	the	effects	of	items	not	considered	part	of	management's	evaluation	of	segment	operating	performance,	such	as	charges	related	to	significant	severance actions	(see	"Note	15	–	Restructuring	Charges")	and	goodwill	impairments;	gains	or	losses	from	divestitures;	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	items"	between	operating profit	from	our	business	segments	and	our	consolidated	operating	profit.	See	"Note	1	–	Significant	Accounting	Policies"	under	the	caption	"Use	of	Estimates"	for	a discussion	related	to	certain	factors	that	may	impact	the	comparability	of	net	sales	and	operating	profit	of	our	business	segments.

Our	business	segments'	results	of	operations	include	pension	expense	only	as	calculated	under	U.S.	Government	Cost	Accounting	Standards	(CAS),	which	we	refer to	as	CAS	pension	cost.	We	recover	CAS	pension	cost	through	the	pricing	of	our	products	and	services	on	U.S.	Government	contracts	and,	therefore,	the	CAS	pension cost	is	recognized	in	each	of	our	business	segments'	net	sales	and	cost	of	sales.	Since	our	consolidated	financial	statements	must	present	pension	expense	calculated	in accordance	with	the	financial	accounting	standards	(FAS)	requirements	under	GAAP,	which	we	refer	to	as	FAS	pension	expense,	the	FAS/CAS	pension	adjustment increases	or	decreases	the	CAS	pension	cost	recorded	in	our	business	segments'	results	of	operations	to	equal	the	FAS	pension	expense.

# Selected	Financial	Data	by	Business	Segment

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Net\tsales |  |  |  |
| Aeronautics | $17,769 | $15,570 | $14,920 |
| Missiles\tand\tFire\tControl | 6,608 | 6,770 | 7,092 |
| Rotary\tand\tMission\tSystems | \t 13,462 | 9,091 | 8,732 |
| Space\tSystems | 9,409 | 9,105 | 9,202 |
| Total\tnet\tsales | $47,248 | $40,536 | $39,946 |
| Operating\tprofit |  |  |  |
| Aeronautics | $1,887 | $1,681 | $1,649 |
| Missiles\tand\tFire\tControl | 1,018 | 1,282 | 1,344 |
| Rotary\tand\tMission\tSystems | 906 | 844 | 936 |
| Space\tSystems | 1,289 | 1,171 | 1,187 |
| Total\tbusiness\tsegment\toperating\tprofit | 5,100 | 4,978 | 5,116 |
| Unallocated\titems |  |  |  |
| FAS/CAS\tpension\tadjustment |  |  |  |
| FAS\tpension\texpense\t(a) | (1,019) | (1,127) | (1,099) |
| Less:\tCAS\tpension\tcost\t(a)\t(b) | 1,921 | 1,527 | 1,416 |
| FAS/CAS\tpension\tadjustment | 902 | 400 | 317 |
| Severance\tcharges\t(a)\t(c) | (80) | (82) | — |
| Stock-based\tcompensation | (149) | (133) | (154) |
| Other,\tnet\t(d),\t(e) | (224) | (451) | (267) |
| Total\tunallocated\titems | 449 | (266) | (104) |
| Total\tconsolidated\toperating\tprofit | $5,549 | $4,712 | $5,012 |

(a) FAS	pension	expense,	CAS	pension	costs	and	severance	charges	reflect	the	reclassification	for	discontinued	operations	presentation	of	benefits	related	to	former	IS&GS	salaried employees	(see	"Note	11	–	Postretirement	Plans").

(c) See	"Note	15	–	Restructuring	Charges"	for	information	on	charges	related	to	certain	severance	actions	at	our	business	segments.	Severance	charges	for	initiatives	that	are	not significant	are	included	in	business	segment	operating	profit.

(d) Other,	net	in	2015	includes	a	non-cash	asset	impairment	charge	of	approximately	$90	million	related	to	our	decision	in	2015	to	divest	our	LMCFT	business	(see	"Note	3	– Acquisitions	and	Divestitures").	This	charge	was	partially	offset	by	a	net	deferred	tax	benefit	of	about	$80	million,	which	is	recorded	in	income	tax	expense.	The	net	impact reduced	net	earnings	by	about	$10	million.

(e) Other,	net	in	2015	includes	approximately	$38	million	of	non-recoverable	transaction	costs	associated	with	the	acquisition	of	Sikorsky.

# Selected	Financial	Data	by	Business	Segment	(continued)

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Intersegment\tsales |  |  |  |
| Aeronautics | $137 | $102 | $103 |
| Missiles\tand\tFire\tControl | 305 | 315 | 256 |
| Rotary\tand\tMission\tSystems | \t 1,816 | \t 1,533 | \t 1,245 |
| Space\tSystems | 110 | 146 | 137 |
| Total\tintersegment\tsales | $2,368 | $2,096 | $1,741 |
| Depreciation\tand\tamortization |  |  |  |
| Aeronautics | $299 | $317 | $322 |
| Missiles\tand\tFire\tControl | 105 | 99 | 99 |
| Rotary\tand\tMission\tSystems | 476 | 211 | 167 |
| Space\tSystems | 212 | 220 | 232 |
| Total\tbusiness\tsegment\tdepreciation\tand\tamortization | \t 1,092 | 847 | 820 |
| Corporate\tactivities | 75 | 98 | 107 |
| Total\tdepreciation\tand\tamortization\t(a) | $1,167 | $945 | $927 |
| Capital\texpenditures |  |  |  |
| Aeronautics | $358 | $387 | $283 |
| Missiles\tand\tFire\tControl | 167 | 120 | 142 |
| Rotary\tand\tMission\tSystems | 271 | 169 | 164 |
| Space\tSystems | 183 | 172 | 172 |
| Total\tbusiness\tsegment\tcapital\texpenditures | 979 | 848 | 761 |
| Corporate\tactivities | 75 | 60 | 66 |
| Total\tcapital\texpenditures\t(b) | $1,054 | $908 | $827 |

(a) Total	depreciation	and	amortization	in	the	table	above	excludes	$48	million,	$81	million	and	$67	million	for	the	years	ended	December	31,	2016,	2015	and	2014	related	to	the former	IS&GS	business	segment.	These	amounts	are	included	in	depreciation	and	amortization	in	our	consolidated	statements	of	cash	flows	as	we	did	not	reclassify	our	cash flows	to	exclude	the	IS&GS	business	segment.	See	"Note	3	–	Acquisitions	and	Divestitures"	for	more	information.

(b) Total	capital	expenditures	in	the	table	above	excludes	$9	million,	$31	million	and	$18	million	for	the	years	ended	December	31,	2016,	2015	and	2014	related	to	the	former IS&GS	business	segment.	These	amounts	are	included	in	capital	expenditures	in	our	consolidated	statements	of	cash	flows	as	we	did	not	reclassify	our	cash	flows	to	exclude	the IS&GS	business	segment.	See	"Note	3	–	Acquisitions	and	Divestitures"	for	more	information.

# Net	Sales	by	Customer	Category

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

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| U.S.\tGovernment |  |  |  |
| Aeronautics | $11,714 | $11,195 | $10,704 |
| Missiles\tand\tFire\tControl | 4,026 | 4,150 | 4,509 |
| Rotary\tand\tMission\tSystems | 9,187 | 6,961 | 6,752 |
| Space\tSystems | 8,543 | 8,845 | 8,921 |
| Total\tU.S.\tGovernment\tnet\tsales | $33,470 | $31,151 | $30,886 |
| International\t(a) |  |  |  |
| Aeronautics | $5,973 | $4,328 | $4,183 |
| Missiles\tand\tFire\tControl | 2,444 | 2,449 | 2,421 |
| Rotary\tand\tMission\tSystems | 3,798 | 2,016 | 1,921 |
| Space\tSystems | 488 | 218 | 89 |
| Total\tinternational\tnet\tsales | $12,703 | $9,011 | $8,614 |
| U.S.\tCommercial\tand\tOther |  |  |  |
| Aeronautics | $82 | $47 | $33 |
| Missiles\tand\tFire\tControl | 138 | 171 | 162 |
| Rotary\tand\tMission\tSystems | 477 | 114 | 59 |
| Space\tSystems | 378 | 42 | 192 |
| Total\tU.S.\tcommercial\tand\tother\tnet\tsales | $1,075 | $374 | $446 |
| Total\tnet\tsales | $47,248 | $40,536 | $39,946 |

(a) International	sales	include	foreign	military	sales	contracted	through	the	U.S.	Government,	direct	commercial	sales	with	international	governments	and	commercial	and	other	sales to	international	customers.

Our	Aeronautics	business	segment	includes	our	largest	program,	the	F-35	Lightning	II	Joint	Strike	Fighter,	an	international	multi-role,	multi-variant,	stealth	fighter aircraft.	Net	sales	for	the	F-35	program	represented	approximately	23%	of	our	total	consolidated	net	sales	during	each	of	2016	and	2015,	and	20%	during	2014.

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

|  | 2016 | 2015 |
| :--- | :--- | :--- |
| Assets\t(a) |  |  |
| Aeronautics | $7,896 | $6,618 |
| Missiles\tand\tFire\tControl | 4,000 | 4,027 |
| Rotary\tand\tMission\tSystems | \t 18,367 | \t 19,187 |
| Space\tSystems | 5,250 | 4,861 |
| Total\tbusiness\tsegment\tassets | \t 35,513 | \t 34,693 |
| Assets\tof\tdiscontinued\toperations | — | 4,130 |
| Corporate\tassets\t(b) | \t 12,293 | \t 10,481 |
| Total\tassets | $47,806 | $49,304 |
| Customer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred |  |  |
| Aeronautics | $2,133 | $2,045 |
| Missiles\tand\tFire\tControl | 1,517 | 1,766 |
| Rotary\tand\tMission\tSystems | 2,590 | 2,415 |
| Space\tSystems | 536 | 477 |
| Total\tcustomer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred | $6,776 | $6,703 |

(a) We	have	no	long-lived	assets	with	material	carrying	values	located	in	foreign	countries.

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

# Note	6	–	Receivables,	net

Receivables,	net	consisted	of	the	following	(in	millions):

|  | 2016 | 2015 |
| :--- | :--- | :--- |
| U.S.\tGovernment |  |  |
| Amounts\tbilled | $792 | $1,205 |
| Unbilled\tcosts\tand\taccrued\tprofits | 6,877 | 5,243 |
| Less:\tcustomer\tadvances\tand\tprogress\tpayments | (1,346) | (1,193) |
| Total\tU.S.\tGovernment\treceivables,\tnet | 6,323 | 5,255 |
| Other\tgovernments\tand\tcommercial |  |  |
| Amounts\tbilled | 546 | 704 |
| Unbilled\tcosts\tand\taccrued\tprofits | 1,847 | 1,888 |
| Less:\tcustomer\tadvances | (514) | (593) |
| Total\tother\tgovernments\tand\tcommercial\treceivables,\tnet | 1,879 | 1,999 |
| Total\treceivables,\tnet | $8,202 | $7,254 |

We	expect	to	bill	substantially	all	of	the	December	31,	2016	unbilled	costs	and	accrued	profits	during	2017.

# Note	7	–	Inventories,	net

Inventories,	net	consisted	of	the	following	(in	millions):

|  | 2016 | 2015 |
| :--- | :--- | :--- |
| Work-in-process,\tprimarily\trelated\tto\tlong-term\tcontracts\tand\tprograms\tin\tprogress | $7,864 | $8,081 |
| Spare\tparts,\tused\taircraft\tand\tgeneral\tstock\tmaterials | 833 | 1,030 |
| Other\tinventories | 719 | 740 |
| Total\tinventories | 9,416 | 9,851 |
| Less:\tcustomer\tadvances\tand\tprogress\tpayments | (4,746) | (5,032) |
| Total\tinventories,\tnet | $4,670 | $4,819 |

# Note	8	–	Property,	Plant	and	Equipment,	net

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

|  | 2016 | 2015 |
| :--- | :--- | :--- |
| Land | $127 | $112 |
| Buildings | 6,385 | 6,007 |
| Machinery\tand\tequipment | 7,389 | 7,261 |
| Construction\tin\tprogress | 976 | 886 |
| Total\tproperty,\tplant\tand\tequipment | \t 14,877 | \t 14,266 |
| Less:\taccumulated\tdepreciation\tand\tamortization | (9,328) | (8,877) |
| Total\tproperty,\tplant\tand\tequipment,\tnet | $5,549 | $5,389 |

# Note	9	–	Income	Taxes

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

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Federal\tincome\ttax\texpense\t(benefit): |  |  |  |
| Current | $1,327 | $1,573 | $1,770 |
| Deferred | (231) | (473) | (351) |
| Total\tfederal\tincome\ttax\texpense | \t 1,096 | \t 1,100 | \t 1,419 |
| Foreign\tincome\ttax\texpense\t(benefit): |  |  |  |
| Current | 56 | 39 | 13 |
| Deferred | (19) | 34 | (8) |
| Total\tforeign\tincome\ttax\texpense | 37 | 73 | 5 |
| Total\tincome\ttax\texpense | $1,133 | $1,173 | $1,424 |

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	consolidated	financial	statements	is	disclosed	net	of	state income	taxes.	Our	total	net	state	income	tax	expense	was	$112	million	for	2016,	$106	million	for	2015,	and	$149	million	for	2014.

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

|  | 2016 |  | 2015 |  | 2014 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Amount | Rate | Amount | Rate | Amount | Rate |
| Income\ttax\texpense\tat\tthe\tU.S.\tfederal\tstatutory\ttax\trate | $1,710 | \t 35.0% | $1,505 | 35.0% | $1,637 | 35.0% |
| Adoption\tof\tstock-based\tcompensation\tASU | (152) | (3.1) | — | — | — | — |
| U.S.\tmanufacturing\tdeduction\tbenefit | (117) | (2.4) | (123) | (2.9) | (124) | (2.6) |
| Research\tand\tdevelopment\ttax\tcredit | (107) | (2.2) | (70) | (1.6) | (63) | (1.3) |
| Tax\tdeductible\tdividends | (92) | (1.9) | (87) | (2.0) | (82) | (1.8) |
| Other,\tnet | (109) | (2.2) | (52) | (1.2) | 56 | 1.1 |
| Income\ttax\texpense | $1,133 | \t 23.2% | $1,173 | 27.3% | $1,424 | 30.4% |

In	2016,	we	early	adopted	the	accounting	standard	update	for	employee	share-based	payment	awards.	Accordingly,	we	recognized	additional	income	tax	benefits	of $152	million	during	the	year	ended	December	31,	2016.	The	2016	income	tax	rate	also	benefited	from	the	nontaxable	gain	recorded	in	connection	with	the	consolidation of	AWE.

We	recognized	tax	benefits	of	$107	million	in	2016,	$70	million	in	2015,	and	$63	million	in	2014	from	U.S.	research	and	development	(R&D)	tax	credits, including	benefits	attributable	to	prior	periods.	In	December	2015,	the	R&D	tax	credit	was	permanently	extended	and	reinstated,	retroactive	to	the	beginning	of	2015, which	reduced	income	tax	expense	by	approximately	$70	million.	In	2014,	the	R&D	tax	credit	was	temporarily	reinstated	for	one	year,	retroactive	to	the	beginning	of 2014,	which	reduced	income	tax	expense	by	approximately	$45	million.

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	feature.	The	amount	of	the	tax	deduction	has	increased	as	we	increased	our	dividend	over	the	last	three	years,	partially	offset	by	a	decline	in	the	number	of	shares	in these	plans.

As	a	result	of	a	decision	in	2015	to	divest	our	LMCFT	business	(see	"Note	3	–	Acquisitions	and	Divestitures),	we	recorded	an	asset	impairment	charge	of approximately	$90	million.	This	charge	was	partially	offset	by	a	net	deferred	tax	benefit	of	about	$80	million.	The	net	impact	of	the	resulting	tax	benefit	reduced	the effective	income	tax	rate	by	1.2	percentage	points	in	2015.

We	participate	in	the	IRS	Compliance	Assurance	Process	program.	Examinations	of	the	years	2015	and	2016	remain	under	IRS	review.

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

|  | 2016 | 2015 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets\trelated\tto: |  |  |
| Accrued\tcompensation\tand\tbenefits | $1,012 | $919 |
| Pensions\t(a) | \t 5,197 | \t 4,462 |
| Other\tpostretirement\tbenefit\tobligations | 302 | 375 |
| Contract\taccounting\tmethods | 878 | \t 1,039 |
| Foreign\tcompany\toperating\tlosses\tand\tcredits | 30 | 62 |
| Other | 327 | 418 |
| Valuation\tallowance\t(b) | (15) | (73) |
| Deferred\ttax\tassets,\tnet | \t 7,731 | \t 7,202 |
| Deferred\ttax\tliabilities\trelated\tto: |  |  |
| Goodwill\tand\tpurchased\tintangibles | 378 | 274 |
| Property,\tplant\tand\tequipment | 346 | 457 |
| Exchanged\tdebt\tsecurities\tand\tother\t(c) | 418 | 408 |
| Deferred\ttax\tliabilities | \t 1,142 | \t 1,139 |
| Net\tdeferred\ttax\tassets | $6,589 | $6,063 |

(a) The	increase	in	2016	was	primarily	due	to	the	reduction	in	the	discount	rate	used	to	measure	our	postretirement	benefit	plans	(see	"Note	11	–	Postretirement	Plans").

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

(c) Includes	deferred	taxes	associated	with	the	exchange	of	debt	securities	in	prior	years.

As	of	December	31,	2016	and	2015,	our	liabilities	associated	with	unrecognized	tax	benefits	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	2013,	other	than	with	respect	to	refunds.

U.S.	income	taxes	and	foreign	withholding	taxes	have	not	been	provided	on	earnings	of	$386	million,	$310	million,	and	$249	million	that	have	not	been	distributed by	our	non-U.S.	companies	as	of	December	31,	2016,	2015,	and	2014.	Our	intention	is	to	permanently	reinvest	these	earnings,	thereby	indefinitely	postponing	their remittance	to	the	U.S.	If	these	earnings	had	been	remitted,	we	estimate	that	the	additional	income	taxes	after	foreign	tax	credits	would	have	been	approximately $64	million	in	2016,	$49	million	in	2015,	and	$52	million	in	2014.

Our	federal	and	foreign	income	tax	payments,	net	of	refunds	received,	were	$1.3	billion	in	2016,	$1.8	billion	in	2015,	and	$1.5	billion	in	2014.	Our	2014	net payments	reflect	a	$200	million	refund	from	the	IRS	primarily	attributable	to	our	tax-deductible	discretionary	pension	contributions	during	the	fourth	quarter	of	2013.

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

December	31,

|  | 2016 | 2015 |
| :--- | :--- | :--- |
| Notes |  |  |
| 2.13%\tand\t7.65%\tdue\t2016 | $— | $952 |
| 1.85%\tdue\t2018 | 750 | 750 |
| 4.25%\tdue\t2019 | 900 | 900 |
| 2.50%\tdue\t2020 | 1,250 | 1,250 |
| 3.35%\tdue\t2021 | 900 | 900 |
| 3.10%\tdue\t2023 | 500 | 500 |
| 2.90%\tdue\t2025 | 750 | 750 |
| 3.55%\tdue\t2026 | 2,000 | 2,000 |
| 3.60%\tdue\t2035 | 500 | 500 |
| 4.50%\tand\t6.15%\tdue\t2036 | 1,152 | 1,152 |
| 4.85%\tdue\t2041 | 600 | 600 |
| 4.07%\tdue\t2042 | 1,336 | 1,336 |
| 3.80%\tdue\t2045 | 1,000 | 1,000 |
| 4.70%\tdue\t2046 | 2,000 | 2,000 |
| Other\tnotes\twith\trates\tfrom\t5.50%\tto\t8.50%,\tdue\t2023\tto\t2040 | 1,656 | 1,706 |
| Total\tdebt | 15,294 | 16,296 |
| Less:\tunamortized\tdiscounts\tand\tissuance\tcosts | (1,012) | (1,035) |
| Total\tdebt,\tnet | 14,282 | 15,261 |
| Less:\tcurrent\tportion | — | (956) |
| Long-term\tdebt,\tnet | $14,282 | $14,305 |

On	October	9,	2015,	we	entered	into	a	new	$2.5	billion	revolving	credit	facility	(the	5-year	Facility)	with	various	banks	and	concurrently	terminated	our	existing $1.5	billion	revolving	credit	facility,	which	was	scheduled	to	expire	in	August	2019.	The	5-year	Facility	was	amended	in	October	2016	to	extend	its	expiration	date	by one	year	from	October	9,	2020	to	October	9,	2021.	The	5-year	Facility	is	available	for	general	corporate	purposes.	The	undrawn	portion	of	the	5-year	Facility	is	also available	to	serve	as	a	backup	facility	for	the	issuance	of	commercial	paper.	We	may	request	and	the	banks	may	grant,	at	their	discretion,	an	increase	in	the	borrowing capacity	under	the	5-year	Facility	of	up	to	an	additional	$500	million.	During	2016,	we	borrowed	and	fully	repaid	amounts	under	our	commercial	paper	programs.	There were	no	borrowings	outstanding	under	the	5-year	Facility	as	of	years	ended	December	31,	2016	and	2015.

In	contemplation	of	our	acquisition	of	Sikorsky,	on	October	9,	2015,	we	also	entered	into	a	364-day	revolving	credit	facility	(the	364-day	Facility,	and	together	with the	5-year	Facility,	the	Facilities)	with	various	banks	that	provided	$7.0	billion	of	funding	for	general	corporate	purposes,	including	the	acquisition	of	Sikorsky. Concurrent	with	the	consummation	of	the	Sikorsky	acquisition,	we	borrowed	$6.0	billion	under	the	364-day	Facility.	On	November	23,	2015,	we	repaid	all	outstanding borrowings	under	the	364-day	Facility	with	proceeds	received	from	an	issuance	of	new	debt	(see	below)	and	terminated	any	remaining	commitments	of	the	lenders under	the	364-day	Facility.

Borrowings	under	the	5-year	Facility	bear	interest	at	rates	based,	at	our	option,	on	a	Eurodollar	Rate	or	a	Base	Rate,	as	defined	in	the	5-year	Facility's	agreement. Each	bank's	obligation	to	make	loans	under	the	5-year	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	5-year	Facility	agreement.	As	of	December	31,	2016	and	2015,	we	were	in	compliance	with	all	covenants	contained	in	the	5-year	Facility	agreement,	as	well	as	in our	debt	agreements.

In	May	2016,	we	repaid	$452	million	of	long-term	notes	with	a	fixed	interest	rate	of	7.65%	according	to	their	scheduled	maturities.	We	also	had	related	variable interest	rate	swaps	with	a	notional	amount	of	$450	million	mature,	which	did	not	have	a	significant	impact	on	net	earnings	or	comprehensive	income.

We	made	interest	payments	of	approximately	$600	million,	approximately	$375	million	and	approximately	$325	million	during	the	years	ended	December	31, 2016,	2015	and	2014,	respectively.

On	November	23,	2015,	we	issued	$7.0	billion	of	notes	(the	November	2015	Notes)	in	a	registered	public	offering.	We	received	net	proceeds	of	$6.9	billion	from the	offering,	after	deducting	discounts	and	debt	issuance	costs,	which	are	being	amortized	as	interest	expense	over	the	life	of	the	debt.	The	November	2015	Notes	consist of:

We	may,	at	our	option,	redeem	some	or	all	of	the	November	2015	Notes	and	unpaid	interest	at	any	time	by	paying	the	principal	amount	of	notes	being	redeemed plus	any	make-whole	premium	and	accrued	and	unpaid	interest	to	the	date	of	redemption.	Interest	is	payable	on	the	2018	Notes	and	the	2020	Notes	on	May	23	and November	23	of	each	year;	on	the	2023	Notes	and	the	2026	Notes	on	January	15	and	July	15	of	each	year;	and	on	the	2036	Notes	and	the	2046	Notes	on	May	15	and November	15	of	each	year.	The	November	2015	Notes	rank	equally	in	right	of	payment	with	all	of	our	existing	unsecured	and	unsubordinated	indebtedness.	The proceeds	of	the	November	2015	Notes	were	used	to	repay	$6.0	billion	of	borrowings	under	our	364-day	Facility	and	for	general	corporate	purposes.

On	February	20,	2015,	we	issued	$2.25	billion	of	notes	(the	February	2015	Notes)	in	a	registered	public	offering.	We	received	net	proceeds	of	$2.21	billion	from the	offering,	after	deducting	discounts	and	debt	issuance	costs,	which	are	being	amortized	as	interest	expense	over	the	life	of	the	debt.	The	February	2015	Notes	consist of	$750	million	maturing	in	2025	with	a	fixed	interest	rate	of	2.90%,	$500	million	maturing	in	2035	with	a	fixed	interest	rate	of	3.60%	and	$1.0	billion	maturing	in	2045 with	a	fixed	interest	rate	of	3.80%.	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	any make-whole	premium	and	accrued	and	unpaid	interest	to	the	date	of	redemption.	Interest	on	the	notes	is	payable	on	March	1	and	September	1	of	each	year.	These	notes rank	equally	in	right	of	payment	with	all	of	our	existing	unsecured	and	unsubordinated	indebtedness.	The	proceeds	of	the	February	2015	Notes	were	used	for	general corporate	purposes.

We	have	agreements	in	place	with	financial	institutions	to	provide	for	the	issuance	of	commercial	paper.	In	connection	with	the	Sikorsky	acquisition,	in	the	fourth quarter	of	2015	we	borrowed	and	repaid	approximately	$1.0	billion	under	our	commercial	paper	programs.	There	were	no	commercial	paper	borrowings	outstanding	as of	December	31,	2016	and	2015.	If	we	were	to	issue	commercial	paper	in	the	future,	the	borrowings	would	be	supported	by	the	5-year	Facility.

# Note	11	–	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	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	various labor	organizations	such	that	new	union	represented	employees	do	not	participate	in	our	defined	benefit	pension	plans.	In	June	2014,	we	amended	certain	of	our qualified	and	nonqualified	defined	benefit	pension	plans	for	non-union	employees	to	freeze	future	retirement	benefits.	The	calculation	of	retirement	benefits	under	the affected	defined	benefit	pension	plans	is	determined	by	a	formula	that	takes	into	account	the	participants'	years	of	credited	service	and	average	compensation.	The freeze	will	take	effect	in	two	stages.

Beginning	on	January	1,	2016,	the	pay-based	component	of	the	formula	used	to	determine	retirement	benefits	was	frozen	so	that	future	pay	increases,	annual	incentive bonuses	or	other	amounts	earned	for	or	related	to	periods	after	December	31,	2015	are	not	used	to	calculate	retirement	benefits.	On	January	1,	2020,	the	service-based component	of	the	formula	used	to	determine	retirement	benefits	will	also	be	frozen	so	that	participants	will	no	longer	earn	further	credited	service	for	any	period	after December	31,	2019.	When	the	freeze	is	complete,	the	majority	of	our	salaried	employees	will	have	transitioned	to	an	enhanced	defined	contribution	retirement	savings plan.	As	part	of	the	November	6,	2015	acquisition	of	Sikorsky,	we	established	a	new	defined	benefit	pension	plan	for	Sikorsky's	union	workforce	that	provides	benefits for	their	prospective	service	with	us.	The	Sikorsky	salaried	employees	participate	in	a	defined	contribution	plan.	We	did	not	assume	any	legacy	pension	liability	from UTC.

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	consolidated	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 | Qualified	Defined |  | Retiree	Medical	and | Retiree	Medical	and |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Benefit\tPension\tPlans\t(a) | Benefit\tPension\tPlans\t(a) |  | Life\tInsurance\tPlans | Life\tInsurance\tPlans |  |
|  | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 |
| Service\tcost | \t $827\t\t\t\t\t\t $ | 836\t\t\t\t\t\t $ | 841 | \t $\t\t24\t\t\t\t\t\t\t$ | \t\t21\t\t\t\t\t\t\t$ | \t\t22 |
| Interest\tcost | 1,861 | 1,791 | 1,912 | 119 | 110 | 123 |
| Expected\treturn\ton\tplan\tassets | (2,666) | (2,734) | (2,693) | (138) | (147) | (146) |
| Recognized\tnet\tactuarial\tlosses | 1,359 | 1,599 | 1,173 | 34 | 43 | 23 |
| Amortization\tof\tnet\tprior\tservice\t(credit)\tcost\t(b) | (362) | (365) | (134) | 22 | 4 | 4 |
| Total\tnet\tperiodic\tbenefit\tcost | \t $\t1,019\t\t\t\t\t\t $\t1,127\t\t\t\t\t\t $\t1,099 | \t $\t1,019\t\t\t\t\t\t $\t1,127\t\t\t\t\t\t $\t1,099 | \t $\t1,019\t\t\t\t\t\t $\t1,127\t\t\t\t\t\t $\t1,099 | \t\t\t\t $61\t\t\t\t\t\t\t$ | 31\t\t\t\t\t\t\t$ | 26 |

(a) Total	net	periodic	benefit	cost	associated	with	our	qualified	defined	benefit	plans	represents	pension	expense	calculated	in	accordance	with	GAAP	(FAS	pension	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 pension	cost	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	pension	expense	and	CAS	pension	cost,	referred	to	as	the	FAS/CAS	pension	adjustment,	as	a	component	of	other unallocated,	net	on	our	consolidated	statements	of	earnings.	The	FAS/CAS	pension	adjustment,	which	was	$902	million	in	2016,	$400	million	in	2015,	and	$317	million	in 2014,	effectively	adjusts	the	amount	of	CAS	pension	cost	in	the	business	segment	operating	profit	so	that	pension	expense	recorded	on	our	consolidated	statements	of	earnings	is equal	to	FAS	pension	expense.	FAS	pension	expense	and	CAS	pension	costs	reflect	the	reclassification	for	discontinued	operations	presentation	of	benefits	related	to	former IS&GS	salaried	employees.

(b) Net	of	the	reclassification	for	discontinued	operations	presentation	of	pension	benefits	related	to	former	IS&GS	salaried	employees	($14	million	in	2016,	$24	million	in	2015	and $17	million	in	2014).

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 | Qualified	Defined	Benefit | Retiree	Medical	and | Retiree	Medical	and |
| :--- | :--- | :--- | :--- | :--- |
|  | Pension\tPlans\n\t\t\t\t\t\t2016 | \t\t\t\t\t\t2015 | Life\tInsurance\tPlans\n\t\t\t\t\t\t\t\t\t\t\t2016 | \t\t\t\t\t\t\t\t2015 |
| Change\tin\tbenefit\tobligation |  |  |  |  |
| Beginning\tbalance | \t\t$43,702\t\t\t\t\t\t\t\t\t$ | 45,882 | \t\t$\t2,883\t\t\t\t\t\t\t\t\t$ | 3,034 |
| Service\tcost | 827 | 836 | 24 | 21 |
| Interest\tcost | 1,861 | 1,791 | 119 | 110 |
| Benefits\tpaid | (2,172) | (2,055) | (222) | (307) |
| Actuarial\tlosses\t(gains) | 1,402 | (1,988) | (135) | (170) |
| New\tlongevity\tassumptions\t(a) | (687) | (834) | (53) | (77) |
| Plan\tamendments\tand\tacquisitions\t(b) | 110 | 31 | (32) | 157 |
| Service\tcost\trelated\tto\tdiscontinued\toperations | 21 | 39 | — | — |
| Medicare\tPart\tD\tsubsidy | — | — | 4 | 14 |
| Participants'\tcontributions | — | — | 61 | 101 |
| Ending\tbalance | \t\t$45,064\t\t\t\t\t\t\t\t\t$ | 43,702 | \t\t\t\t\t$\t2,649\t\t\t\t\t\t\t\t\t$ | 2,883 |
| Change\tin\tplan\tassets |  |  |  |  |
| Beginning\tbalance\tat\tfair\tvalue | \t\t$32,096\t\t\t\t\t\t\t\t\t$ | 34,673 | \t\t$\t1,813\t\t\t\t\t\t\t\t\t$ | 1,932 |
| Actual\treturn\ton\tplan\tassets | 1,470 | (527) | 95 | (27) |
| Benefits\tpaid | (2,172) | (2,055) | (222) | (307) |
| Company\tcontributions | 23 | 5 | 36 | 100 |
| Medicare\tPart\tD\tsubsidy | — | — | 4 | 14 |
| Participants'\tcontributions | — | — | 61 | 101 |
| Ending\tbalance\tat\tfair\tvalue | \t\t$\t\t31,417\t\t\t\t\t\t\t\t\t$ | 32,096 | \t\t\t\t\t$1,787\t\t\t\t\t\t\t\t\t$ | 1,813 |
| Unfunded\tstatus\tof\tthe\tplans | \t\t$(13,647)\t\t\t\t\t\t\t\t$(11,606) | \t\t$(13,647)\t\t\t\t\t\t\t\t$(11,606) | \t\t\t\t\t$(862)\t\t\t\t\t\t\t\t$\t(1,070) | \t\t\t\t\t$(862)\t\t\t\t\t\t\t\t$\t(1,070) |

(a) We	adopted	new	longevity	assumptions	originally	published	by	the	Society	of	Actuaries	in	October	2014.	The	Society	of	Actuaries	refined	their	original	publication	in	October 2015	and	again	in	October	2016.

(b) Includes	special	termination	benefits	of	$27	million	for	qualified	pension	and	$9	million	for	retiree	medical	recognized	in	2016	related	to	former	IS&GS	salaried	employees.	The November	2015	acquisition	of	Sikorsky	increased	our	qualified	defined	benefit	pension	obligations	by	about	$30	million.

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

|  | Qualified	Defined	Benefit | Qualified	Defined	Benefit | Retiree	Medical	and | Retiree	Medical	and |
| :--- | :--- | :--- | :--- | :--- |
|  | Pension\tPlans |  | Life\tInsurance\tPlans | Life\tInsurance\tPlans |
|  | \t\t\t\t\t\t\t\t2016 | 2015 | \t\t\t\t\t\t\t\t\t\t\t2016 | \t2015 |
| Prepaid\tpension\tasset | \t\t$208\t\t\t\t\t\t\t\t\t$ | 201 | \t\t$—\t\t\t\t\t\t\t\t\t$ | — |
| Accrued\tpostretirement\tbenefit\tliabilities | (13,855) | (11,807) | (862) | (1,070) |
| Accumulated\tother\tcomprehensive\tloss\t(pre-tax)\trelated\tto: |  |  |  |  |
| Net\tactuarial\tlosses | 20,184 | 19,632 | 447 | 627 |
| Prior\tservice\t(credit)\tcost\t(a) | (2,896) | (3,565) | 96 | 167 |
| Total\t(b) | \t\t$\t\t\t\t17,288\t\t\t\t\t\t\t\t\t$\t\t\t\t16,067 | \t\t$\t\t\t\t17,288\t\t\t\t\t\t\t\t\t$\t\t\t\t16,067 | \t\t\t\t\t$\t\t\t\t543\t\t\t\t\t\t\t\t\t$ | 794 |

(a) Pre-tax	amounts	of	$210	million	for	qualified	pension	prior	service	credits	and	$9	million	for	retiree	medical	prior	service	costs	were	recognized	from	the	divestiture	of	our IS&GS	business	(combined	$134	million,	net	of	tax).

The	accumulated	benefit	obligation	(ABO)	for	all	qualified	defined	benefit	pension	plans	was	$44.9	billion	and	$43.5	billion	at	December	31,	2016	and	2015,	of which	$44.8	billion	and	$43.4	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,	2016	and	2015	is	as follows	(in	millions):

|  | 2016 | 2015 |
| :--- | :--- | :--- |
| Plans\twhere\tABO\twas\tin\texcess\tof\tplan\tassets |  |  |
| Projected\tbenefit\tobligation | \t\t$\t44,946 | $\t43,575 |
| Less:\tfair\tvalue\tof\tplan\tassets | 31,091 | 31,768 |
| Unfunded\tstatus\tof\tplans\t(a) | (13,855) | (11,807) |
| Plans\twhere\tABO\twas\tless\tthan\tplan\tassets |  |  |
| Projected\tbenefit\tobligation | 118 | 127 |
| Less:\tfair\tvalue\tof\tplan\tassets | 326 | 328 |
| Funded\tstatus\tof\tplans\t(b) | \t\t$208 | $201 |

(a) Represents	accrued	pension	liabilities,	which	are	included	on	our	consolidated	balance	sheets.

(b) Represents	prepaid	pension	assets,	which	are	included	on	our	consolidated	balance	sheets	in	other	noncurrent	assets.

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, 2016	and	2015	were	$1.2	billion,	which	also	represent	the	plans'	unfunded	status.	We	have	set	aside	certain	assets	totaling	$460	million	and	$421	million	as	of December	31,	2016	and	2015	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,	2016	and	2015	were	$642	million	and	$632	million.	The	unrecognized	prior	service	credit	at	December	31,	2016	was	$74	million	and	was $95	million	at	December	31,	2015.	The	expense	associated	with	these	plans	totaled	$125	million	in	2016,	$117	million	in	2015	and	$115	million	in	2014.	We	also sponsor	a	small	number	of	other	postemployment	plans	and	foreign	benefit	plans.	The	aggregate	liability	for	the	other	postemployment	plans	was	$63	million	and $70	million	as	of	December	31,	2016	and	2015.	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	income	(loss)	related	to	postretirement	benefit	plans,	net	of	tax,	for	the	years	ended December	31,	2016,	2015	and	2014	(in	millions):

|  | Incurred	but	Not	Yet | Incurred	but	Not	Yet |  | Recognition	of | Recognition	of |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Recognized\tin\tNet | Recognized\tin\tNet |  |  | Previously |  |
|  | Periodic\tBenefit\tCost | Periodic\tBenefit\tCost |  | Deferred\tAmounts | Deferred\tAmounts |  |
|  | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 |
|  | Gains\t(losses) | Gains\t(losses) |  |  | (Gains)\tlosses | (Gains)\tlosses |
| Actuarial\tgains\tand\tlosses |  |  |  |  |  |  |
| Qualified\tdefined\tbenefit\tpension\tplans | \t $(1,236)\t\t\t\t\t\t$(291)\t\t\t\t\t\t$(5,505) | \t $(1,236)\t\t\t\t\t\t$(291)\t\t\t\t\t\t$(5,505) | \t $(1,236)\t\t\t\t\t\t$(291)\t\t\t\t\t\t$(5,505) | \t $879\t\t\t\t\t$1,034\t\t\t\t\t\t\t$ | \t $879\t\t\t\t\t$1,034\t\t\t\t\t\t\t$ | 758 |
| Retiree\tmedical\tand\tlife\tinsurance\tplans | 94 | 46 | (160) | 22 | 28 | 15 |
| Other\tplans | (62) | 21 | (245) | 37 | 47 | 33 |
|  | (1,204) | (224) | (5,910) | 938\t\t\t\t\t\t 1,109 | 938\t\t\t\t\t\t 1,109 | 806 |
|  | Credit\t(cost) | Credit\t(cost) |  | (Credit)\tcost\t(a) | (Credit)\tcost\t(a) |  |
| Net\tprior\tservice\tcredit\tand\tcost |  |  |  |  |  |  |
| Qualified\tdefined\tbenefit\tpension\tplans | (54) | (18) | 2,959 | (235) | (235) | (87) |
| Retiree\tmedical\tand\tlife\tinsurance\tplans | 27 | (102) | (3) | 14 | 2 | 3 |
| Other\tplans | (1) | (7) | 84 | (9) | (10) | (5) |
|  | (28) | (127) | 3,040 | (230) | (243) | (89) |
|  | \t $(1,232)\t\t\t\t\t\t$(351)\t\t\t\t\t\t$(2,870) | \t $(1,232)\t\t\t\t\t\t$(351)\t\t\t\t\t\t$(2,870) | \t $(1,232)\t\t\t\t\t\t$(351)\t\t\t\t\t\t$(2,870) | \t\t\t\t $\t\t708\t\t\t\t\t$ | 866\t\t\t\t\t\t\t$\t\t\t\t717 | 866\t\t\t\t\t\t\t$\t\t\t\t717 |

(a) Reflects	the	reclassification	for	discontinued	operations	presentation	of	benefits	related	to	former	IS&GS	salaried	employees	($9	million	in	2016,	$16	million	in	2015	and $11	million	in	2014).	In	addition,	we	recognized	$134	million	of	prior	service	credits	from	the	divestiture	of	our	IS&GS	business,	which	were	reclassified	as	discontinued operations.

We	expect	that	approximately	$1.2	billion,	or	about	$800	million	net	of	tax,	of	actuarial	losses	and	net	prior	service	credit	related	to	postretirement	benefit	plans included	in	accumulated	other	comprehensive	loss	at	the	end	of	2016	to	be	recognized	in	net	periodic	benefit	cost	during	2017.	Of	this	amount,	$1.1	billion,	or $743	million	net	of	tax,	relates	to	our	qualified	defined	benefit	plans	and	is	included	in	our	expected	2017	pension	expense	of	$1.4	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 | Qualified	Defined	Benefit | Retiree	Medical	and | Retiree	Medical	and |
| :--- | :--- | :--- | :--- | :--- |
|  | Pension\tPlans |  | Life\tInsurance\tPlans | Life\tInsurance\tPlans |
|  | \t\t\t2016\n2015 | \t\t2014 | 2016\n\t\t2015 | 2014 |
| Weighted\taverage\tdiscount\trate | \t\t\t4.125%\t\t\t\t\t4.375%\t\t\t\t\t4.00% | \t\t\t4.125%\t\t\t\t\t4.375%\t\t\t\t\t4.00% | 4.00%\t\t\t\t\t4.25% | 3.75% |
| Expected\tlong-term\trate\tof\treturn\ton\tassets | 7.50% | 8.00%\t\t\t\t\t8.00% | 7.50%\t\t\t\t\t8.00% | 8.00% |
| Rate\tof\tincrease\tin\tfuture\tcompensation\tlevels\t(for\tapplicable\tbargained\tpension\tplans) | 4.50% | 4.50%\t\t\t\t\t4.30% |  |  |
| Health\tcare\ttrend\trate\tassumed\tfor\tnext\tyear |  |  | 8.75%\t\t\t\t\t9.00% | 8.50% |
| Ultimate\thealth\tcare\ttrend\trate |  |  | 5.00%\t\t\t\t\t5.00% | 5.00% |
| Year\tthat\tthe\tultimate\thealth\tcare\ttrend\trate\tis\treached |  |  | \t2032\t\t\t\t\t\t\t\t\t\t2032\t\t\t\t\t\t\t\t2029 | \t2032\t\t\t\t\t\t\t\t\t\t2032\t\t\t\t\t\t\t\t2029 |

The	decrease	in	the	discount	rate	from	December	31,	2015	to	December	31,	2016	resulted	in	an	increase	in	the	projected	benefit	obligations	of	our	qualified	defined benefit	pension	plans	of	approximately	$1.4	billion	at	December	31,	2016.	The	increase	in	the	discount	rate	from	December	31,	2014	to	December	31,	2015	resulted	in	a decrease	in	the	projected	benefit	obligations	of	our	qualified	defined	benefit	pension	plans	of	approximately	$2.1	billion	at	December	31,	2015.

The	long-term	rate	of	return	assumption	represents	the	expected	long-term	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	allocation	of	plan assets,	the	historical	return	data	for	the	trust	funds,	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 | \t0-20% |
| Equity | 15-65% |
| Fixed\tincome | 10-60% |
| Alternative\tinvestments: |  |
| Private\tequity\tfunds | \t0-15% |
| Real\testate\tfunds | \t0-10% |
| Hedge\tfunds | \t0-20% |
| Commodities | \t0-25% |

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	consolidated	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.	Certain	other	investments	are	measured	at	fair	value	using	their	Net	Asset	Value	(NAV)	per	share	and	do	not	have	readily	determined	values	and are	thus	not	subject	to	leveling	in	the	fair	value	hierarchy.	The	NAV	is	the	total	value	of	the	fund	divided	by	the	number	of	shares	outstanding.

|  |  | December	31,	2016 | December	31,	2016 |  |  | December	31,	2015 | December	31,	2015 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Total | Level\t1 | Level\t2 | Level\t3 | Total | Level\t1 | Level\t2 | Level\t3 |
| Investments\tmeasured\tat\tfair\tvalue |  |  |  |  |  |  |  |  |
| Cash\tand\tcash\tequivalents\t(a) | $2,301 | $2,301 | $\t\t\t\t\t— | $— | $2,658 | $2,658 | $\t\t\t\t\t— | \t $\t\t\t\t— |
| Equity\t(a): |  |  |  |  |  |  |  |  |
| U.S.\tequity\tsecurities | 4,166 | 4,139 | 23 | 4 | 4,790 | 4,771 | 19 | — |
| International\tequity\tsecurities | 3,971 | 3,927 | 40 | 4 | 6,121 | 6,087 | 24 | 10 |
| Commingled\tequity\tfunds | 2,332 | 788 | 1,544 | — | 1,794 | 614 | 1,180 | — |
| Fixed\tincome\t(a): |  |  |  |  |  |  |  |  |
| Corporate\tdebt\tsecurities | 4,333 | — | 4,316 | 17 | 3,929 | — | 3,914 | 15 |
| U.S.\tGovernment\tsecurities | 6,811 | — | 6,811 | — | 5,069 | — | 5,069 | — |
| U.S.\tGovernment-sponsored\tenterprise\tsecurities | 919 | — | 919 | — | 1,377 | — | 1,377 | — |
| Other\tfixed\tincome\tinvestments | 2,215 | — | 2,214 | 1 | 3,252 | — | 3,246 | 6 |
| Alternative\tinvestments: |  |  |  |  |  |  |  |  |
| Hedge\tfunds | 33 | — | 33 | — | 57 | — | 57 | — |
| Private\tequity\tfunds | — | — | — | — | 200 | — | — | 200 |
| Commodities\t(a) | 523 | 525 | (2) | — | (26) | 1 | (27) | — |
| Total | $27,604 | $11,680 | $15,898 | $26 | $29,221 | $14,131 | $14,859 | \t $\t\t231 |
| Investments\tmeasured\tat\tNAV\t(b) |  |  |  |  |  |  |  |  |
| Commingled\tequity\tfunds | 60 |  |  |  | 141 |  |  |  |
| Private\tequity\tfunds | 3,614 |  |  |  | 2,931 |  |  |  |
| Real\testate\tfunds | 1,411 |  |  |  | 1,108 |  |  |  |
| Hedge\tfunds | 462 |  |  |  | 465 |  |  |  |
| Total\tinvestments\tmeasured\tat\tNAV | 5,547 |  |  |  | 4,645 |  |  |  |
| Receivables,\tnet | 53 |  |  |  | 43 |  |  |  |
| Total | $33,204 |  |  |  | $33,909 |  |  |  |

(a) Cash	and	cash	equivalents,	equity	securities,	fixed	income	securities	and	commodities	included	derivative	assets	and	liabilities	whose	fair	values	were	not	material	as	of December	31,	2016	and	2015.	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.

(b) Certain	investments	that	are	valued	using	the	net	asset	value	per	share	(or	its	equivalent)	as	a	practical	expedient	have	not	been	classified	in	the	fair	value	hierarchy	and	are included	in	the	table	to	permit	reconciliation	of	the	fair	value	hierarchy	to	the	aggregate	postretirement	benefit	plan	assets.

As	of	December	31,	2016	and	2015,	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	2016	and	2015	in	the	fair	value	of	plan	assets	categorized	as	Level	3	in	the	preceding	table	(in	millions):

|  | Equity |  |  |
| :--- | :--- | :--- | :--- |
|  | \t\tFunds | \t\tOther | Total |
| Balance\tat\tJanuary\t1,\t2015 | $\t\t— | $\t\t61 | \t$\t\t61 |
| Actual\treturn\ton\tplan\tassets: |  |  |  |
| Realized\tlosses,\tnet | — | (12) | (12) |
| Unrealized\tgains,\tnet | — | 7 | 7 |
| Purchases,\tsales\tand\tsettlements,\tnet | — | (22) | (22) |
| Transfers\tinto\t(out\tof)\tLevel\t3,\tnet | 200 | (3) | 197 |
| Balance\tat\tDecember\t31,\t2015 | $200 | $\t\t31 | \t$231 |
| Actual\treturn\ton\tplan\tassets: |  |  |  |
| Realized\tlosses,\tnet | — | (6) | (6) |
| Unrealized\tgains,\tnet | — | 3 | 3 |
| Purchases,\tsales\tand\tsettlements,\tnet | (200) | (7) | \t(207) |
| Transfers\tinto\tLevel\t3,\tnet | — | 5 | 5 |
| Balance\tat\tDecember\t31,\t2016 | $\t\t— | $\t\t26 | \t$\t\t26 |

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	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	commingled	equity	funds	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.

Fixed	income	investments	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	and	credit	spreads),	bids	provided	by	brokers	or	dealers	or	quoted	prices	of	securities	with	similar	characteristics. Fixed	income	investments	are	categorized	at	Level	3	when	valuations	using	observable	inputs	are	unavailable.	The	trustee	obtains	pricing	based	on	indicative	quotes	or bid	evaluations	from	vendors,	brokers	or	the	investment	manager.

Commodities	are	traded	on	an	active	commodity	exchange	and	are	valued	at	their	closing	prices	on	the	last	trading	day	of	the	year.

Certain	commingled	equity	funds,	consisting	of	equity	mutual	funds,	are	valued	using	the	NAV.	The	NAV	valuations	are	based	on	the	underlying	investments	and typically	redeemable	within	90	days.

Private	 Equity	 funds	 consist	 of	 partnership	 and	co-investment	 funds.	 The	 NAV	 is	 based	 on	 valuation	 models	 of	 the	 underlying	 securities,	 which	 includes unobservable	inputs	that	cannot	be	corroborated	using	verifiable	observable	market	data.	These	funds	typically	have	redemption	periods	between	eight	and	12	years.

Real	Estate	funds	consist	of	partnerships,	most	of	which	are	closed-end	funds,	for	which	the	NAV	is	based	on	valuation	models	and	periodic	appraisals.	These funds	typically	have	redemption	periods	between	eight	and	10	years.

Hedge	Funds	consist	of	direct	hedge	funds	for	which	the	NAV	is	generally	based	on	the	valuation	of	the	underlying	investments.	Redemptions	in	hedge	funds	are based	on	the	specific	terms	of	each	fund,	and	generally	range	from	a	minimum	of	one	month	to	several	months.

# Contributions	and	Expected	Benefit	Payments

The	funding	of	our	qualified	defined	benefit	pension	plans	is	determined	in	accordance	with	ERISA,	as	amended	by	the	PPA,	and	in	a	manner	consistent	with	CAS and	Internal	Revenue	Code	rules.	There	were	no	contributions	to	our	legacy	qualified	defined	benefit	pension	plans	during	2016.	We	do	not	plan	to	make	contributions to	our	 legacy	pension	plans	 in	2017	because	none	are	required	using	current	assumptions	 including	 investment	returns	on	plan	assets.	We	made	$23	million	 in contributions	during	2016	to	our	newly	established	Sikorsky	pension	plan	and	expect	to	make	$45	million	in	contributions	to	this	plan	during	2017.

The	following	table	presents	estimated	future	benefit	payments,	which	reflect	expected	future	employee	service,	as	of	December	31,	2016	(in	millions):

|  | 2017 | 2018 | 2019 | 2020 | 2021 | 2022	–	2026 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Qualified\tdefined\tbenefit\tpension\tplans | $2,260 | $2,340 | $2,420 | $2,510 | $2,590 | $13,920 |
| Retiree\tmedical\tand\tlife\tinsurance\tplans | 180 | 180 | 190 | 190 | 190 | 870 |

# 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	$617	million	in	2016,	$393	million	in	2015	and $385	million	in	2014,	the	majority	of	which	were	funded	in	our	common	stock.	Our	defined	contribution	plans	held	approximately	36.9	million	and	40.0	million	shares of	our	common	stock	as	of	December	31,	2016	and	2015.

# Note	12	–	Stockholders'	Equity

At	December	31,	2016	and	2015,	our	authorized	capital	was	composed	of	1.5	billion	shares	of	common	stock	and	50	million	shares	of	series	preferred	stock.	Of	the 290	million	shares	of	common	stock	issued	and	outstanding	as	of	December	31,	2016,	289	million	shares	were	considered	outstanding	for	consolidated	balance	sheet presentation	purposes;	the	remaining	shares	were	held	in	a	separate	trust.	Of	the	305	million	shares	of	common	stock	issued	and	outstanding	as	of	December	31,	2015, 303	million	shares	were	considered	outstanding	for	consolidated	balance	sheet	presentation	purposes;	the	remaining	shares	were	held	in	a	separate	trust.	No	shares	of preferred	stock	were	issued	and	outstanding	at	December	31,	2016	or	2015.

# Repurchases	of	Common	Stock

During	2016,	we	repurchased	8.9	million	shares	of	our	common	stock	for	$2.1	billion.	During	2015	and	2014,	we	paid	$3.1	billion	and	$1.9	billion	to	repurchase 15.2	million	and	11.5	million	shares	of	our	common	stock.

On	September	22,	2016,	our	Board	of	Directors	approved	a	$2.0	billion	increase	to	our	share	repurchase	program.	Inclusive	of	this	increase,	the	total	remaining authorization	for	future	common	share	repurchases	under	our	program	was	$3.5	billion	as	of	December	31,	2016.	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	purchase	price over	par	value	of	$1.7	billion	and	$2.4	billion	recorded	as	a	reduction	of	retained	earnings	in	2016	and	2015.

# Accumulated	Other	Comprehensive	Loss

Changes	in	the	balance	of	AOCL,	net	of	income	taxes,	consisted	of	the	following	(in	millions):

|  | Postretirement |  |  |
| :--- | :--- | :--- | :--- |
|  | Benefit\tPlans | Other,\tnet | AOCL |
| Balance\tat\tDecember\t31,\t2013\t(a) | $\t\t(9,649) | $\t\t48 | \t$\t\t(9,601) |
| Other\tcomprehensive\tloss\tbefore\treclassifications | (2,870) | (103) | (2,973) |
| Amounts\treclassified\tfrom\tAOCL |  |  |  |
| Recognition\tof\tnet\tactuarial\tlosses | 806 | — | 806 |
| Amortization\tof\tnet\tprior\tservice\tcredits | (100) | — | (100) |
| Other | — | (2) | (2) |
| Total\treclassified\tfrom\tAOCL | 706 | (2) | 704 |
| Total\tother\tcomprehensive\tloss | (2,164) | (105) | (2,269) |
| Balance\tat\tDecember\t31,\t2014\t(a) | (11,813) | (57) | (11,870) |
| Other\tcomprehensive\tloss\tbefore\treclassifications | (351) | (73) | (424) |
| Amounts\treclassified\tfrom\tAOCL |  |  |  |
| Recognition\tof\tnet\tactuarial\tlosses | 1,109 | — | 1,109 |
| Amortization\tof\tnet\tprior\tservice\tcredits | (259) | — | (259) |
| Total\treclassified\tfrom\tAOCL | 850 | — | 850 |
| Total\tother\tcomprehensive\tincome\t(loss) | 499 | (73) | 426 |
| Balance\tat\tDecember\t31,\t2015\t(a) | (11,314) | (130) | (11,444) |
| Other\tcomprehensive\tloss\tbefore\treclassifications | (1,232) | — | (1,232) |
| Amounts\treclassified\tfrom\tAOCL |  |  |  |
| Recognition\tof\tnet\tactuarial\tlosses | 938 | — | 938 |
| Amortization\tof\tnet\tprior\tservice\tcredits | (239) | — | (239) |
| Recognition\tof\tnet\tprior\tservice\tcredits\tfrom\tdivestiture\tof\tIS&amp;GS\tsegment\t(b) | (134) | — | (134) |
| Other\t(b) | — | 9 | 9 |
| Total\treclassified\tfrom\tAOCL | 565 | 9 | 574 |
| Total\tother\tcomprehensive\t(loss)\tincome | (667) | 9 | (658) |
| Balance\tat\tDecember\t31,\t2016\t(a) | $(11,981) | $(121) | \t$(12,102) |

(a) AOCL	related	to	postretirement	benefit	plans	is	shown	net	of	tax	benefits	at	December	31,	2016,	2015	and	2014	of	$6.5	billion,	$6.2	billion	and	$6.4	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	9 –	Income	Taxes"	and	"Note	11	–Postretirement	Plans"	for	more	information	on	our	income	taxes	and	postretirement	benefit	plans.

(b) Associated	with	the	divesture	of	the	IS&GS	business	and	included	in	net	gain	on	divestiture	of	discontinued	operations.

# Note	13	–	Stock-Based	Compensation

During	2016,	2015	and	2014,	we	recorded	non-cash	stock-based	compensation	expense	totaling	$149	million,	$133	million	and	$154	million,	which	is	included	as a	component	of	other	unallocated,	net	on	our	consolidated	statements	of	earnings.	The	net	impact	to	earnings	for	the	respective	years	was	$97	million,	$86	million	and $100	million.

As	of	December	31,	2016,	we	had	$83	million	of	unrecognized	compensation	cost	related	to	nonvested	awards,	which	is	expected	to	be	recognized	over	a	weighted average	period	of	1.8	years.	We	received	cash	from	the	exercise	of	stock	options	totaling	$106	million,	$174	million	and	$308	million	during	2016,	2015	and	2014.	In addition,	our	income	tax	liabilities	for	2016,	2015	and	2014	were	reduced	by	$219	million,	$213	million	and	$215	million	due	to	recognized	tax	benefits	on	stock-based compensation	arrangements.

# Stock-Based	Compensation	Plans

Under	plans	approved	by	our	stockholders,	we	are	authorized	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.	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.	The	maximum	term	of	a	stock	option	or	any other	award	is	10	years.

At	December	31,	2016,	inclusive	of	the	shares	reserved	for	outstanding	stock	options,	RSUs	and	PSUs,	we	had	approximately	12	million	shares	reserved	for issuance	under	the	plans.	At	December	31,	2016,	approximately	six	million	of	the	shares	reserved	for	issuance	remained	available	for	grant	under	our	stock-based compensation	plans.	We	issue	new	shares	upon	the	exercise	of	stock	options	or	when	restrictions	on	RSUs	and	PSUs	have	been	satisfied.

The	following	table	summarizes	activity	related	to	nonvested	RSUs:

|  | Number | Weighted	Average |
| :--- | :--- | :--- |
|  | of\tRSUs | Grant-Date\tFair |
|  | (In\tthousands) | Value\tPer\tShare |
| Nonvested\tat\tDecember\t31,\t2013 | 3,859 | $\t\t\t\t82.42 |
| Granted | 745 | 146.85 |
| Vested | (2,194) | 87.66 |
| Forfeited | (84) | 91.11 |
| Nonvested\tat\tDecember\t31,\t2014 | 2,326 | $\t\t\t\t97.80 |
| Granted | 595 | 192.47 |
| Vested | (1,642) | 103.30 |
| Forfeited | (43) | 132.28 |
| Nonvested\tat\tDecember\t31,\t2015 | 1,236 | $\t\t134.87 |
| Granted | 679 | 206.69 |
| Vested | (1,009) | 137.62 |
| Forfeited | (118) | 203.65 |
| Nonvested\tat\tDecember\t31,\t2016 | 788 | $\t\t183.00 |

In	2016,	we	granted	certain	employees	approximately	0.7	million	restricted	stock	units	(RSUs)	with	a	grant-date	fair	value	of	$206.69	per	RSU.	The	grant-date	fair value	of	these	RSUs	is	equal	to	the	closing	market	price	of	our	common	stock	on	the	grant	date	less	a	discount	to	reflect	the	delay	in	payment	of	dividend-equivalent cash	payments	that	are	made	only	upon	vesting,	which	is	generally	three	years	from	the	grant	date.	We	recognize	the	grant-date	fair	value	of	RSUs,	less	estimated forfeitures,	as	compensation	expense	ratably	over	the	requisite	service	period,	which	is	shorter	than	the	vesting	period	if	the	employee	is	retirement	eligible	on	the	date	of grant	or	will	become	retirement	eligible	before	the	end	of	the	vesting	period.

# Stock	Options

We	generally	recognize	compensation	cost	for	stock	options	ratably	over	the	three-year	vesting	period.	At	December	31,	2016	and	2015,	there	were	3.0	million (weighted	average	exercise	price	of	$85.82)	and	4.2	million	(weighted	average	exercise	price	of	$86.61)	stock	options	outstanding.	All	of	the	stock	options	outstanding are	 vested	 as	 of	 December	 31,	 2016	 and	 have	 a	 weighted	 average	 remaining	 contractual	 life	 of	 approximately	 three	 years	 and	 an	 aggregate	 intrinsic	 value	 of $491	million.	There	were	1.2	million	(weighted	average	exercise	price	of	$88.61)	stock	options	exercised	during	2016.	We	did	not	grant	stock	options	to	employees during	2016	and	2015.

The	following	table	pertains	to	stock	options	granted	through	2012,	in	addition	to	stock	options	that	vested	and	were	exercised	in	2016,	2015	and	2014	(in millions):

|  | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- |
| Grant-date\tfair\tvalue\tof\tall\tstock\toptions\tthat\tvested | $ — | $8 | $18 |
| Intrinsic\tvalue\tof\tall\tstock\toptions\texercised | \t 172 | \t 265 | \t 297 |

In	2012,	we	estimated	the	fair	value	for	stock	options	at	the	date	of	grant	using	the	Black-Scholes	option	pricing	model,	which	required	us	to	make	certain assumptions.	We	used	the	following	weighted	average	assumptions	in	the	model:	risk-free	interest	rate	of	0.78%,	dividend	yield	of	5.40%,	a	five	year	historical	volatility factor	of	0.28	and	an	expected	option	life	of	five	years.

In	2016,	we	granted	certain	employees	PSUs	with	an	aggregate	target	award	of	approximately	0.1	million	shares	of	our	common	stock.	The	PSUs	vest	three	years from	the	grant	date	based	on	continuous	service,	with	the	number	of	shares	earned	(0%	to	200%	of	the	target	award)	depending	upon	the	extent	to	which	we	achieve certain	financial	and	market	performance	targets	measured	over	the	period	from	January	1,	2016	through	December	31,	2018.	About	half	of	the	PSUs	were	valued	at $206.37	per	PSU	in	a	manner	similar	to	RSUs	mentioned	above	as	the	financial	targets	are	based	on	our	operating	results.	We	recognize	the	grant-date	fair	value	of	these PSUs,	less	estimated	forfeitures,	as	compensation	expense	ratably	over	the	vesting	period	based	on	the	number	of	awards	expected	to	vest	at	each	reporting	date.	The remaining	PSUs	were	valued	at	$212.37	per	PSU	using	a	Monte	Carlo	model	as	the	performance	target	is	related	to	our	total	shareholder	return	relative	to	our	peer group.	We	recognize	the	grant-date	fair	value	of	these	awards,	less	estimated	forfeitures,	as	compensation	expense	ratably	over	the	vesting	period.

# Note	14	–	Legal	Proceedings,	Commitments	and	Contingencies

We	are	a	party	to	or	have	property	subject	to	litigation	and	other	proceedings	that	arise	in	the	ordinary	course	of	our	business,	including	matters	arising	under provisions	relating	to	the	protection	of	the	environment	and	are	subject	to	contingencies	related	to	certain	businesses	we	previously	owned.	These	types	of	matters	could result	in	fines,	penalties,	compensatory	or	treble	damages	or	non-monetary	sanctions	or	relief.	We	believe	the	probability	is	remote	that	the	outcome	of	each	of	these matters,	including	the	legal	proceedings	described	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.

Although	we	cannot	predict	the	outcome	of	legal	or	other	proceedings	with	certainty,	where	there	is	at	least	a	reasonable	possibility	that	a	loss	may	have	been incurred,	GAAP	requires	us	to	disclose	an	estimate	of	the	reasonably	possible	loss	or	range	of	loss	or	make	a	statement	that	such	an	estimate	cannot	be	made.	We	follow a	thorough	process	in	which	we	seek	to	estimate	the	reasonably	possible	loss	or	range	of	loss,	and	only	if	we	are	unable	to	make	such	an	estimate	do	we	conclude	and disclose	that	an	estimate	cannot	be	made.	Accordingly,	unless	otherwise	indicated	below	in	our	discussion	of	legal	proceedings,	a	reasonably	possible	loss	or	range	of loss	associated	with	any	individual	legal	proceeding	cannot	be	estimated.

# Legal	Proceedings

As	a	result	of	our	acquisition	of	Sikorsky,	we	assumed	the	defense	of	and	any	potential	liability	for	the	following	civil	False	Claims	Act	lawsuit.	In	October	2014, the	U.S.	Government	filed	a	complaint	in	the	U.S.	District	Court	for	the	Eastern	District	of	Wisconsin	alleging	that	Sikorsky	and	two	of	its	wholly-owned	subsidiaries, Derco	Aerospace	(Derco)	and	Sikorsky	Support	Services,	Inc.	(SSSI),	violated	the	civil	False	Claims	Act	in	connection	with	a	contract	that	the	U.S.	Navy	awarded	to SSSI	in	June	2006	to	support	the	Navy's	T-34	and	T-44	fixed-wing	turboprop	training	aircraft.	SSSI	subcontracted	with	Derco	primarily	to	procure	and	manage	the	spare parts	for	the	training	aircraft.	The	Government	alleges	that	SSSI	overbilled	the	Navy	on	the	contract	because	Derco	added	profit	and	overhead	costs	to	the	price	of	the spare	parts	that	Derco	procured	and	then	sold	to	SSSI.	The	Government	also	claims	that	SSSI	submitted	false	Certificates	of	Final	Indirect	Costs	in	the	years	2006 through	2012.

The	Government's	complaint	asserts	numerous	claims	for	violations	of	the	False	Claims	Act,	breach	of	contract	and	unjust	enrichment.	The	Government	seeks damages	in	excess	of	$45	million,	subject	to	trebling,	plus	statutory	penalties.	We	believe	that	we	have	legal	and	factual	defenses	to	the	government's	claims.	Although we	continue	to	evaluate	our	liability	and	exposure,	we	do	not	currently	believe	that	it	is	probable	that	we	will	incur	a	material	loss.	If,	contrary	to	our	expectations,	the Government	prevails	in	this	matter	and	proves	damages	at	the	high	end	of	the	range	sought	and	is	successful	in	having	these	trebled,	the	outcome	could	have	an	adverse effect	on	our	results	of	operations	in	the	period	in	which	a	liability	is	recognized	and	on	our	cash	flows	for	the	period	in	which	any	damages	are	paid.

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	the	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	primary	damages	sought	by	the	MTA are	the	cost	to	complete	the	contract	and	potential	re-procurement	costs.	While	we	are	unable	to	estimate	the	cost	of	another	contractor	to	complete	the	contract	and	the costs	of	re-procurement,	we	note	that	our	contract	with	the	MTA	had	a	total	value	of	$323	million,	of	which	$241	million	was	paid	to	us,	and	that	the	MTA	is	seeking damages	of	approximately	$190	million.	We	dispute	the	MTA's	allegations	and	are	defending	against	them.	Additionally,	following	an	investigation,	our	sureties	on	a performance	bond	related	to	this	matter,	who	were	represented	by	independent	counsel,	concluded	that	the	MTA's	termination	of	the	contract	was	improper.	Finally,	our declaratory	judgment	action	was	later	amended	to	include	claims	for	monetary	damages	against	the	MTA	of	approximately	$95	million.	This	matter	was	taken	under submission	by	the	District	Court	in	December	2014,	after	a	five-week	bench	trial	and	the	filing	of	post-trial	pleadings	by	the	parties.	At	this	time	we	are	awaiting	a decision	from	the	District	Court.	Although	this	matter	relates	to	the	IS&GS	business,	we	retained	it	when	IS&GS	was	divested.

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,	our	history	of receiving	reimbursement	of	such	costs,	and	recent	efforts	by	some	U.S.	Government	representatives	to	limit	such	reimbursement.	We	include	the	portion	of	those environmental	costs	expected	to	be	allocated	to	our	non-U.S.	Government	contracts,	or	that	is	determined	to	not	be	recoverable	under	U.S.	Government	contracts,	in	our cost	of	sales	at	the	time	the	liability	is	established.

At	each	of	December	31,	2016	and	2015,	the	aggregate	amount	of	liabilities	recorded	relative	to	environmental	matters	was	$1.0	billion,	most	of	which	are	recorded in	other	noncurrent	liabilities	on	our	consolidated	balance	sheets.	We	have	recorded	receivables	totaling	$870	million	and	$858	million	at	December	31,	2016	and	2015, most	of	which	are	recorded	in	other	noncurrent	assets	on	our	consolidated	balance	sheets,	for	the	estimated	future	recovery	of	these	costs,	as	we	consider	the	recovery probable	based	on	the	factors	previously	mentioned.	We	project	costs	and	recovery	of	costs	over	approximately	20	years.

Environmental	cleanup	activities	usually	span	several	years,	which	makes	estimating	liabilities	a	matter	of	judgment	because	of	uncertainties	with	respect	to assessing	the	extent	of	the	contamination	as	well	as	such	factors	as	changing	remediation	technologies	and	continually	evolving	regulatory	environmental	standards. There	are	a	number	of	former	operating	facilities	that	we	are	monitoring	or	investigating	for	potential	future	remediation.	We	perform	quarterly	reviews	of	the	status	of our	environmental	remediation	sites	and	the	related	liabilities	and	receivables.	Additionally,	in	our	quarterly	reviews	we	consider	these	and	other	factors	in	estimating	the timing	and	amount	of	any	future	costs	that	may	be	required	for	remediation	activities	and	record	a	liability	when	it	is	probable	that	a	loss	has	occurred	and	the	loss	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	as,	although	a	loss	may	be	probable	or	reasonably	possible,	in	some	cases	it	is	not	possible	at	this	time	to	estimate	the	loss	or	reasonably possible	loss	or	range	of	loss.

We	also	are	pursuing	claims	for	recovery	of	costs	incurred	or	contribution	to	site	cleanup	costs	against	other	PRPs,	including	the	U.S.	Government,	and	are conducting	remediation	activities	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	Government	under	short-term	or cancelable	arrangements.	Our	total	rental	expense	under	operating	leases	was	$202	million,	$195	million	and	$197	million	for	2016,	2015	and	2014.	Future	minimum lease	commitments	at	December	31,	2016	for	long-term	non-cancelable	operating	leases	were	$762	million	($179	million	in	2017,	$150	million	in	2018,	$131	million	in 2019,	$103	million	in	2020,	$78	million	in	2021	and	$121	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	venture	partners.	We	had	total	outstanding	letters of	credit,	surety	bonds	and	third-party	guarantees	aggregating	$3.7	billion	at	December	31,	2016	and	$3.8	billion	at	December	31,	2015.

At	December	31,	2016	and	2015,	third-party	guarantees	totaled	$709	million	and	$678	million,	of	which	approximately	56%	and	79%	related	to	guarantees	of contractual	performance	of	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	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	venture	partner.	We	believe	our	current	and	former	venture	partners	will	be	able	to	perform	their	obligations,	as	they	have	done	through December	31,	2016,	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	venture	partners.	There	were	no	material	amounts	recorded	in	our	consolidated	financial	statements	related	to third-party	guarantees.

# United	Launch	Alliance

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,	2016,	and	that	it	will	not	be necessary	to	make	payments	under	the	cross-indemnities	or	guarantees.

Our	50%	ownership	share	of	ULA's	net	assets	initially	exceeded	the	book	value	of	our	investment	by	approximately	$395	million	(of	which	approximately $40	million	remaining	was	amortized	during	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	consolidated	statements	of	earnings.	Our	investment	in	ULA	totaled	$788	million	and	$748	million	at	December	31,	2016	and 2015.

# Note	15	–	Restructuring	Charges

# Note	16	–	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,	2016<br>Level	1 | Level	2 | Total | December	31,	2015<br>Level	1 | Level	2 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Assets |  |  |  |  |  |  |
| Equity\tsecurities | $79 | $\t\t79 | $\t\t— | $89 | $\t\t89 | $\t\t— |
| Mutual\tfunds | 856 | 856 | — | 745 | 745 | — |
| U.S.\tGovernment\tsecurities | 113 | — | 113 | 119 | — | 119 |
| Other\tsecurities | 151 | — | 151 | 147 | — | 147 |
| Derivatives | 27 | — | 27 | 15 | — | 15 |
| Liabilities |  |  |  |  |  |  |
| Derivatives | 85 | — | 85 | 35 | — | 35 |

Substantially	all	assets	measured	at	fair	value,	other	than	derivatives,	represent	investments	classified	as	trading	securities	held	in	a	separate	trust	to	fund	certain	of our	non-qualified	deferred	compensation	plans	and	are	recorded	in	other	noncurrent	assets	on	our	consolidated	balance	sheets.	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	pricing	models	that	use	observable	inputs	(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.	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	2016.

In	addition	to	the	financial	instruments	listed	in	the	table	above,	we	hold	other	financial	instruments,	including	cash	and	cash	equivalents,	receivables,	accounts payable	and	debt.	The	carrying	amounts	for	cash	and	cash	equivalents,	receivables	and	accounts	payable	approximated	their	fair	values.	The	estimated	fair	value	of	our outstanding	debt	was	$16.2	billion	and	$16.6	billion	at	December	31,	2016	and	2015	and	the	outstanding	principal	amount	was	$15.3	billion	and	$16.3	billion	at December	31,	2016	and	2015,	excluding	$1.0	billion	of	unamortized	discounts	and	issuance	costs	at	the	end	of	each	of	those	years.	The	estimated	fair	values	of	our outstanding	debt	were	determined	based	on	quoted	prices	for	similar	instruments	in	active	markets	(Level	2).

In	connection	with	the	Sikorsky	acquisition,	we	recorded	the	assets	acquired	and	liabilities	assumed	at	fair	value.	See	"Note	3	–	Acquisitions	and	Divestitures"	for further	information	about	the	fair	values	assigned	and	amounts	subject	to	adjustment.

# Note	17	–	Summary	of	Quarterly	Information	(Unaudited)

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

|  |  | 2016	Quarters | 2016	Quarters |  |
| :--- | :--- | :--- | :--- | :--- |
|  | First\t(b) | Second | \t\t\t\t Third\t(c)(d) | \t\t\t\t Fourth\t(d) |
| Net\tsales\t(a) | \t$10,368 | \t$11,577 | $11,551 | \t$13,752 |
| Operating\tprofit\t(a) | 1,158 | 1,375 | 1,588 | 1,428 |
| Net\tearnings\tfrom\tcontinuing\toperations | 806 | 899 | 1,089 | 959 |
| Net\tearnings\tfrom\tdiscontinued\toperations | 92 | 122 | 1,306 | 29 |
| Net\tearnings | 898 | 1,021 | 2,395 | 988 |
| Earnings\tper\tcommon\tshare\tfrom\tcontinuing\toperations\t(f): |  |  |  |  |
| Basic | 2.65 | 2.97 | 3.64 | 3.29 |
| Diluted | 2.61 | 2.93 | 3.61 | 3.25 |
| Earnings\tper\tcommon\tshare\tfrom\tdiscontinued\toperations\t(f): |  |  |  |  |
| Basic | 0.30 | 0.40 | 4.38 | 0.10 |
| Diluted | 0.30 | 0.39 | 4.32 | 0.10 |
| Basic\tearnings\tper\tcommon\tshare\t(f) | 2.95 | 3.37 | 8.02 | 3.39 |
| Diluted\tearnings\tper\tcommon\tshare\t(f) | 2.91 | 3.32 | 7.93 | 3.35 |

|  |  | 2015	Quarters | 2015	Quarters |  |
| :--- | :--- | :--- | :--- | :--- |
|  | First | Second | Third | Fourth\t(e) |
| Net\tsales\t(a) | $8,721 | \t$10,235 | $10,060 | \t$11,520 |
| Operating\tprofit\t(a) | 1,147 | 1,273 | 1,192 | 1,100 |
| Net\tearnings\tfrom\tcontinuing\toperations | 738 | 815 | 756 | 817 |
| Net\tearnings\tfrom\tdiscontinued\toperations | 140 | 114 | 109 | 116 |
| Net\tearnings\t(g) | 878 | 929 | 865 | 933 |
| Earnings\tper\tcommon\tshare\tfrom\tcontinuing\toperations\t(f): |  |  |  |  |
| Basic | 2.34 | 2.61 | 2.45 | 2.67 |
| Diluted | 2.30 | 2.58 | 2.42 | 2.63 |
| Earnings\tper\tcommon\tshare\tfrom\tdiscontinued\toperations\t(f): |  |  |  |  |
| Basic | 0.44 | 0.37 | 0.35 | 0.38 |
| Diluted | 0.44 | 0.36 | 0.35 | 0.38 |
| Basic\tearnings\tper\tcommon\tshare\t(f) | 2.78 | 2.98 | 2.80 | 3.05 |
| Diluted\tearnings\tper\tcommon\tshare\t(f) | 2.74 | 2.94 | 2.77 | 3.01 |

(a) Net	sales	and	operating	profit	vary	from	the	amounts	previously	reported	on	Form	10-Q	as	a	result	of	our	former	IS&GS	business	being	classified	as	discontinued	operations	in the	third	quarter	of	2016,	which	is	reflected	for	all	periods	presented.

(b) The	first	quarter	of	2016	varies	from	the	amounts	previously	reported	on	Form	10-Q	as	a	result	of	adopting	ASU	No.	2016-09	(see	"Note	1	–	Significant	Accounting	Policies").

(c) The	third	quarter	of	2016	includes	a	net	gain	of	$1.2	billion	related	to	the	divestiture	of	our	former	IS&GS	business.

(d) The	third	quarter	of	2016	includes	the	results	of	AWE	from	August	26,	2016,	the	date	we	obtained	controlling	interest,	including	approximately	$103	million	in	net	sales	and $104	million	in	net	earnings.	Third	quarter	net	earnings	includes	a	non-cash	gain	on	the	step	acquisition	of	AWE	(see	"Note	3	–	Acquisitions	and	Divestitures").	The	fourth quarter	of	2016	includes	the	results	of	AWE	for	the	entire	quarter,	including	approximately	$307	million	in	net	sales	and	$2.9	million	in	net	earnings.

(e) The	fourth	quarter	of	2015	includes	the	results	of	Sikorsky	since	the	November	6,	2015	acquisition	date	through	December	31,	2015,	including	approximately	$400	million	in net	sales	and	about	$45	million	in	operating	loss,	inclusive	of	intangible	amortization	and	adjustments	required	to	account	for	the	acquisition.

(f) The	sum	of	the	quarterly	earnings	per	share	amounts	do	not	equal	the	earnings	per	share	amounts	included	on	our	consolidated	statements	of	earnings,	primarily	due	to	the timing	of	our	share	repurchases	during	each	respective	year.

(g) The	third	and	fourth	quarters	of	2015	include	charges	for	workforce	reductions	of	$15	million	and	$67	million	($10	million	and	$44	million	after	tax).	The	fourth	quarter	of	2015 includes	a	tax	benefit	of	about	$71	million	due	to	the	retroactive	reinstatement	of	the	R&D	tax	credit	in	2015.

# ITEM	9. Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial	Disclosure.

# ITEM	9A. Controls	and	Procedures.

# Evaluation	of	Disclosure	Controls	and	Procedures

We	performed	an	evaluation	of	the	effectiveness	of	our	disclosure	controls	and	procedures	as	of	December	31,	2016.	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	not	effective	due	to	a	material weakness	in	internal	control	over	financial	reporting	at	Sikorsky	Aircraft	Corporation	which	we	acquired	on	November	6,	2015	and	which	operates	as	a	business	unit	of our	Rotary	and	Mission	Systems	business	segment.

Notwithstanding	the	identified	material	weakness,	management,	including	our	CEO	(principal	executive	officer)	and	CFO	(principal	financial	officer),	believes	the consolidated	financial	statements	included	in	this	annual	report	on	Form	10-K	fairly	represent	in	all	material	respects	our	financial	condition,	results	of	operations	and cash	flows	at	and	for	the	periods	presented	in	accordance	with	U.S.	GAAP.

# 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	is	designed	to provide	reasonable	assurance	to	our	management	and	Board	of	Directors	regarding	the	reliability	of	financial	reporting	and	the	preparation	of	consolidated	financial statements	for	external	purposes.

Our	management	conducted	an	assessment	of	the	effectiveness	of	our	internal	control	over	financial	reporting	as	of	December	31,	2016.	This	assessment	was	based on	the	criteria	set	forth	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	in	Internal	Control	–	Integrated	Framework	(2013	framework). Based	on	this	assessment,	management	concluded	that	a	material	weakness	exists	in	our	internal	control	over	financial	reporting	as	of	December	31,	2016.	A	material weakness	 is	 a	 deficiency,	 or	 combination	 of	 deficiencies,	 in	 internal	 control	 over	 financial	 reporting,	 such	 that	 there	 is	 a	 reasonable	 possibility	 that	 a	 material misstatement	of	our	annual	or	interim	financial	statements	could	occur	but	will	not	be	prevented	or	detected	on	a	timely	basis.

Sikorsky	was	acquired	on	November	6,	2015	and	generated	about	10%	of	our	total	net	sales	for	the	year	ended	December	31,	2016.	Prior	to	2016,	Sikorsky	was	not included	in	assessments	of	the	effectiveness	of	our	internal	control	over	financial	reporting	as	the	Securities	and	Exchange	Commission	(SEC)	rules	provide	companies one	year	to	assess	controls	at	an	acquired	entity.	Accordingly,	within	this	period,	we	performed	our	first	comprehensive	assessment	of	the	design	and	effectiveness	of internal	controls	at	Sikorsky	and	determined	that	Sikorsky's	internal	control	over	financial	reporting	was	ineffective	as	of	December	31,	2016.	Specifically,	Sikorsky	did not	adequately	identify,	design	and	implement	appropriate	process-level	controls	for	its	processes	and	appropriate	information	technology	controls	for	its	information technology	systems,	including	Sikorsky's	contract	accounting	/	sales	recognition	processes,	inventory	accounting	process	and	payroll	process.	There	were	no	material errors	in	the	financial	results	or	balances	identified	as	a	result	of	the	control	deficiencies,	and	there	was	no	restatement	of	prior	period	financial	statements	and	no	change in	previously	released	financial	results	were	required	as	the	result	of	these	control	deficiencies.

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

# Remediation	Efforts	to	Address	Material	Weakness

Management	has	and	will	continue	to	enhance	the	risk	assessment	process	and	design	of	internal	control	over	financial	reporting	at	Sikorsky.	This	includes initiation	of	compensating	controls	and	enhanced	and	revised	design	of	existing	financial	reporting	controls,	information	technology	applications	and	procedures	at Sikorsky.	The	material	weakness	will	not	be	considered	remediated	until	the	applicable	remedial	controls	operate	for	a	sufficient	period	of	time	and	management	has concluded,	through	testing,	that	these	controls	are	operating	effectively.	We	expect	that	the	remediation	of	this	material	weakness	will	be	completed	prior	to	the	end	of fiscal	year	2017.

# Changes	in	Internal	Control	Over	Financial	Reporting

Other	than	with	respect	to	the	remediation	efforts	described	above,	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.

# Regarding	Internal	Control	Over	Financial	Reporting

We	have	audited	Lockheed	Martin	Corporation's	 internal	control	over	financial	reporting	as	of	December	31,	2016,	based	on	criteria	established in	Internal Control	–	Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(2013	framework)	(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.

A	material	weakness	is	a	deficiency,	or	combination	of	deficiencies,	in	internal	control	over	financial	reporting,	such	that	there	is	a	reasonable	possibility	that	a material	misstatement	of	the	company's	annual	or	interim	financial	statements	will	not	be	prevented	or	detected	on	a	timely	basis.	The	following	material	weakness	has been	identified	and	included	in	management's	assessment.	Management	identified	a	material	weakness	in	the	design	and	operation	of	internal	controls,	including information	technology	controls,	within	Sikorsky's	processes	(including	the	contract	accounting	/	sales	recognition	processes,	inventory	accounting	process,	and	payroll process).	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,	2016	and	2015,	and	the	related	consolidated	statement	of	earnings,	comprehensive	income,	equity,	and	cash	flows	for each	of	the	three	years	in	the	period	ended	December	31,	2016.	This	material	weakness	was	considered	in	determining	the	nature,	timing,	and	extent	of	audit	tests applied	in	our	audit	of	the	2016	financial	statements,	and	this	report	does	not	affect	our	report	dated	February	9,	2017,	which	expressed	an	unqualified	opinion	on	those financial	statements.

In	our	opinion,	because	of	the	effect	of	the	material	weakness	described	above	on	the	achievement	of	the	objectives	of	the	control	criteria,	Lockheed	Martin Corporation	has	not	maintained	effective	internal	control	over	financial	reporting	as	of	December	31,	2016,	based	on	the	COSO	criteria.

# 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	2017	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	2017	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	–	2016	Membership	on	Board	Committees"	and	"Committees	of	the	Board	of	Directors	–	Audit	Committee	Report"	in	the	2017 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	2017	Proxy	Statement	and	that	information	is	incorporated	by	reference	in	this	Form	10-K.	The	information	required	by	Item	407(e)(5)	of Regulation	S-K	is	included	under	the	caption	"Executive	Compensation	–	Compensation	Committee	Report"	in	the	2017	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	Item	12	is	included	under	the	heading	"Security	Ownership	of	Management	and	Certain	Beneficial	Owners"	in	the	2017	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,	2016.

|  |  |  | available	for |
| :--- | :--- | :--- | :--- |
|  | Number\tof |  | future |
|  | securities |  | issuance |
|  | to\tbe\tissued | Weighted-average | under\tequity |
|  | upon | exercise | compensation |
|  | exercise\tof | price\tof | plans |
|  | outstanding | outstanding | (excluding |
|  | options, | options, | securities |
|  | warrants | warrants\tand | reflected\tin |
|  | and\trights | rights | column\t(a)) |
| Plan\tcategory | (a) | (b) | (c) |
| Equity\tcompensation\tplans\tapproved\tby\tsecurity\tholders\t(1) | 5,802,673 | $85.82 | 6,216,471 |
| Equity\tcompensation\tplans\tnot\tapproved\tby\tsecurity |  |  |  |
| holders\t(2) | 1,082,347 | — | 2,481,032 |
| Total | 6,885,020 | $85.82 | 8,697,503 |

(1) Column	(a)	includes,	as	of	December	31,	2016:	1,747,151	shares	that	have	been	granted	as	Restricted	Stock	Units	(RSUs),	936,308	shares	that	could	be	earned	pursuant	to	grants of	Performance	Stock	Units	(PSUs)	(assuming	the	maximum	number	of	PSUs	are	earned	and	payable	at	the	end	of	the	three-year	performance	period)	and	2,967,046	shares granted	as	options	under	the	Lockheed	Martin	Corporation	2011	Incentive	Performance	Award	Plan	(2011	IPA	Plan)	or	predecessor	plans	prior	to	January	1,	2013	and	23,346 shares	granted	as	options	and	128,822	stock	units	payable	in	stock	or	cash	under	the	Lockheed	Martin	Corporation	2009	Directors	Equity	Plan	(Directors	Equity	Plan)	or predecessor	plans	for	members	(or	former	members)	of	the	Board	of	Directors.	Column	(c)	includes,	as	of	December	31,	2016,	5,751,655	shares	available	for	future	issuance under	the	2011	IPA	Plan	as	options,	stock	appreciation	rights	(SARs),	restricted	stock	awards	(RSAs),	RSUs	or	PSUs	and	464,816	shares	available	for	future	issuance	under	the Directors	Equity	Plan	as	stock	options	and	stock	units.	Of	the	5,751,655	shares	available	for	grant	under	the	2011	IPA	Plan	on	December	31,	2016,	516,653	and	236,654	shares are	issuable	pursuant	to	grants	made	on	January	26,	2017,	of	RSUs	and	PSUs	(assuming	the	maximum	number	of	PSUs	are	earned	and	payable	at	the	end	of	the	three-year performance	period),	respectively.	The	weighted	average	price	does	not	take	into	account	shares	issued	pursuant	to	RSUs	or	PSUs.

(2) The	shares	represent	annual	incentive	bonuses	and	Long-Term	Incentive	Performance	(LTIP)	payments	earned	and	voluntarily	deferred	by	employees.	The	deferred	amounts	are payable	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,	these	shares	also	were	not	considered	in	calculating	the	total	weighted	average	exercise price	in	the	table.	Because	the	DMICP	shares	are	outstanding,	they	should	be	included	in	the	denominator	(and	not	the	numerator)	of	a	dilution	calculation.

# 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	2017	Proxy	Statement,	and	that	information	is	incorporated	by	reference	in	this	Form	10-K.

# ITEM	14. Principal	Accountant	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	2017	Proxy Statement,	and	that	information	is	incorporated	by	reference	in	this	Form	10-K.

# PART	IV

# ITEM	15. Exhibits	and	Financial	Statement	Schedules.

# 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:

|  | Page |
| :--- | :--- |
| Consolidated\tStatements\tof\tEarnings\t–\t\tYears\tended\tDecember\t31,\t2016,\t2015\tand\t2014 | 62 |
| Consolidated\tStatements\tof\tComprehensive\tIncome\t–\t\tYears\tended\tDecember\t31,\t2016,\t2015\tand\t2014 | 63 |
| Consolidated\tBalance\tSheets\t–\tAt\tDecember\t\t31,\t2016\tand\t2015 | 64 |
| Consolidated\tStatements\tof\tCash\tFlows\t–\t\tYears\tended\tDecember\t31,\t2016,\t2015\tand\t2014 | 65 |
| Consolidated\tStatements\tof\tEquity\t–\t\tYears\tended\tDecember\t31,\t2016,\t2015\tand\t2014 | 66 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 67 |

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	61	and	107	of	this	Form	10-K.	Their	consent	appears	as	Exhibit	23	of	this	Form	10-K.

# 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.

# Exhibits

2.1 Stock	Purchase	Agreement	dated	as	of	July	19,	2015	by	and	among	United	Technologies	Corporation,	 the	other	Sellers	 identified	 therein	and Lockheed	Martin	Corporation	(incorporated	by	reference	to	Exhibit	2.1	to	Lockheed	Martin	Corporation's	Current	Report	on	Form	8-K	filed	with	the SEC	on	July	20,	2015).	The	schedules	and	exhibits	to	the	Stock	Purchase	Agreement	have	been	omitted	pursuant	to	Item	601(b)(2)	of	Regulation	S-K. Lockheed	Martin	agrees	to	furnish	supplementally	a	copy	of	such	schedules	and	exhibits,	or	any	section	thereof,	to	the	SEC	upon	request.

2.2 Amendment	No.	1	to	Stock	Purchase	Agreement	dated	as	of	November	5,	2015	by	and	among	United	Technologies	Corporation	and	certain	affiliated entities	identified	therein	and	Lockheed	Martin	Corporation	(incorporated	by	reference	to	Exhibit	2.1	to	Lockheed	Martin	Corporation's	Current Report	on	Form	8-K	filed	with	the	SEC	on	November	6,	2015).	The	exhibits	to	Amendment	No.	1	to	Stock	Purchase	Agreement	have	been	omitted pursuant	to	Item	601(b)(2)	of	Regulation	S-K.	Lockheed	Martin	agrees	to	furnish	supplementally	a	copy	of	such	exhibits,	or	any	section	thereof,	to	the SEC	upon	request.

2.3 Agreement	and	Plan	of	Merger,	dated	as	of	January	26,	2016,	among	Lockheed	Martin	Corporation,	Leidos	Holdings,	Inc.,	Abacus	Innovations Corporation	and	Lion	Merger	Co.	(incorporated	by	reference	to	Exhibit	2.1	to	Lockheed	Martin	Corporation's	Current	Report	on	Form	8-K	filed	with the	SEC	on	January	27,	2016).	The	schedules	and	attachments	to	the	Merger	Agreement	have	been	omitted	pursuant	to	Item	601(b)(2)	of	Regulation S-K,	and	such	schedules	and	attachments	will	be	furnished	to	the	SEC	upon	request.

2.4 Amendment	dated	as	of	June	27,	2016	to	Agreement	and	Plan	of	Merger,	dated	as	of	January	26,	2016,	among	Lockheed	Martin	Corporation,	Leidos Holdings,	Inc.,	Abacus	Innovations	Corporation	and	Lion	Merger	Co.	(incorporated	by	reference	to	Exhibit	2.1	to	Lockheed	Martin	Corporation's Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	June	26,	2016).

2.5 Separation	Agreement,	dated	as	of	January	26,	2016,	between	Lockheed	Martin	Corporation	and	Abacus	Innovations	Corporation	(incorporated	by reference	to	Exhibit	2.2	to	Lockheed	Martin	Corporation's	Current	Report	on	Form	8-K	filed	with	the	SEC	on	January	27,	2016).	The	schedules	and attachments	to	the	Separation	Agreement	have	been	omitted	pursuant	to	Item	601(b)(2)	of	Regulation	S-K,	and	such	schedules	and	attachments	will be	furnished	to	the	SEC	upon	request.

10.5 Lockheed	Martin	Corporation	Directors	Deferred	Compensation	Plan,	as	amended	(incorporated	by	reference	to	Exhibit	10.2	to	Lockheed	Martin Corporation's	Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2008	(File	No.	001-11437)).

10.12 Lockheed	 Martin	 Corporation	Amended	 and	 Restated	 2003	 Incentive	 Performance	Award	 Plan	 (incorporated	 by	 reference to	 Exhibit	 10.17 to Lockheed	Martin	Corporation's	Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2008	(File	No.	001-11437)).

10.13 Forms	of	Stock	Option	Award	Agreements	under	 the	Lockheed	Martin	Corporation	2003	Incentive	Performance	Award	Plan	(incorporated	by reference	 to	 Exhibit 10.39 to	 Lockheed	 Martin	 Corporation's	 Annual	 Report	 on	 Form	10-K	 for	 the	 year	 ended	 December	 31,	 2007	 (File No.	001-11437)).

* Exhibits	10.4	through	10.27	constitute	management	contracts	or	compensatory	plans	or	arrangements.

# Form	10-K	Summary.

# SIGNATURES

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

(Registrant)

Brian	P.	Colan

Vice	President,	Controller,	and	Chief	Accounting

Officer

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

*By	Maryanne	R.	Lavan	pursuant	to	a	Power	of	Attorney	executed	by	the	Directors	listed	above,	which	has	been	filed	with	this	Annual	Report	on	Form	10-K.

	 Maryanne	R.	Lavan

	 Attorney-in-fact



Question: what is the growth rate of net sales from 2015 to 2016?
Calculation: net_sales_2016 = 6608
net_sales_2015 = 6770
percent_change = (net_sales_2016 - net_sales_2015) / net_sales_2015
answer = percent_change * 100
Answer: -2.4%