# 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,	2014

Commission	file	number	1-11437

# LOCKHEED	MARTIN	CORPORATION

(Exact	name	of	registrant	as	specified	in	its	charter)

Maryland

(State	or	other	jurisdiction	of incorporation	or	organization)

(I.R.S.	Employer Identification	No.)

(Address	and	telephone	number	of	principal	executive	offices)

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

Title	of	each	class

Common	Stock,	$1	par	value

Name	of	each	exchange	on	which	registered

New	York	Stock	Exchange

Securities	registered	pursuant	to	Section	12(g)	of	the	Act:	None

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.	Yes	x				No	¨

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Act.

Indicate	by	check	mark	whether	the	registrant	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was	required	to	file	such	reports),	and	(2)	has	been	subject	to	such	filing	requirements	for	the	past	90 days.	Yes	x				No	¨

Indicate	by	check	mark	whether	the	registrant	has	submitted	electronically	and	posted	on	its	corporate	Web	site,	if	any,	every	Interactive	Data	File	required	to	be submitted	and	posted	pursuant	to	Rule	405	of	Regulation	S-T	(§232.405	of	this	chapter)	during	the	preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was required	to	submit	and	post	such	files).	Yes	x				No	¨

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

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

Large	accelerated	filer	x

	 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	x

The	aggregate	market	value	of	voting	and	non-voting	common	stock	held	by	non-affiliates	of	the	registrant	computed	by	reference	to	the	last	sales	price	of	such	stock,	as of	the	last	business	day	of	the	registrant's	most	recently	completed	second	fiscal	quarter,	which	was	June	27,	2014,	was	approximately	$51.3	billion.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

Portions	of	Lockheed	Martin	Corporation's	2015	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 | 9 |
| ITEM\t1B. | Unresolved\tStaff\tComments | 18 |
| ITEM\t2. | Properties | 18 |
| ITEM\t3. | Legal\tProceedings | 19 |
| ITEM\t4. | Mine\tSafety\tDisclosures | 19 |
| ITEM\t4(a). | Executive\tOfficers\tof\tthe\tRegistrant | 20 |
| PART\tII |  |  |
| ITEM\t5. | Market\tfor\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 22 |
| ITEM\t6. | Selected\tFinancial\tData | 24 |
| ITEM\t7. | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 25 |
| ITEM\t7A. | Quantitative\tand\tQualitative\tDisclosures\tAbout\tMarket\tRisk | 56 |
| ITEM\t8. | Financial\tStatements\tand\tSupplementary\tData | 58 |
| ITEM\t9. | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 91 |
| ITEM\t9A. | Controls\tand\tProcedures | 91 |
| ITEM\t9B. | Other\tInformation | 93 |
| PART\tIII |  |  |
| ITEM\t10. | Directors,\tExecutive\tOfficers\tand\tCorporate\tGovernance | 94 |
| ITEM\t11. | Executive\tCompensation | 94 |
| ITEM\t12. |  | 95 |
|  | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters |  |
| ITEM\t13. | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | 95 |
| ITEM\t14. | Principal\tAccountant\tFees\tand\tServices | 95 |
| PART\tIV |  |  |
| ITEM\t15. | Exhibits\tand\tFinancial\tStatement\tSchedules | 96 |
| SIGNATURES | SIGNATURES | 100 |

# 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	and	information	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	2014,	79%	of	our	$45.6	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)),	20%	were	from	international	customers	(including	foreign	military	sales	(FMS)	contracted	through	the	U.S.	Government)	and 1%	were	from	U.S.	commercial	and	other	customers.	Our	main	areas	of	focus	are	in	defense,	space,	intelligence,	homeland	security	and	information	technology, including	cyber	security.

We	operate	in	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	cash	to	our investors	in	the	form	of	dividends	and	share	repurchases.

We	operate	in	five	business	segments:	Aeronautics,	Information	Systems	&	Global	Solutions	(IS&GS),	Missiles	and	Fire	Control	(MFC),	Mission	Systems	and Training	(MST)	and	Space	Systems.	We	organize	our	business	segments	based	on	the	nature	of	the	products	and	services	offered.

# Aeronautics

In	2014,	our	Aeronautics	business	segment	generated	net	sales	of	$14.9	billion,	which	represented	32%	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	2014,	U.S.	Government	customers	accounted	for	72%	and international	customers	accounted	for	28%	of	Aeronautics'	net	sales.	Net	sales	from	Aeronautics'	combat	aircraft	products	and	services	represented	23%	of	our	total consolidated	net	sales	in	2014	and	21%	of	our	total	consolidated	net	sales	in	each	of	2013	and	2012.

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,	generating	17%	of	our	total	consolidated	net	sales,	as	well	as	52%	of	Aeronautics'	net	sales	in	2014.	The	F-35	program	consists	of a	development	contract	and	multiple	production	and	sustainment	activities.	The	development	contract	is	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	development	portion	of	the	F-35	program	will	be	substantially	complete	in	2017,	with	less	significant	efforts	continuing	into	2019.	Production	of the	aircraft	is	expected	to	continue	for	many	years	given	the	U.S.	Government's	current	inventory	objective	of	2,443	aircraft	for	the	Air	Force,	Marine	Corps	and	Navy; commitments	from	our	eight	international	partners	and	three	international	customers;	as	well	as	expressions	of	interest	from	other	countries.	During	2014,	we	delivered 36	aircraft	to	our	U.S.	and	international	partners,	resulting	in	total	deliveries	of	109

production	aircraft	as	of	December	31,	2014.	We	have	100	production	aircraft	in	backlog	as	of	December	31,	2014,	including	orders	from	our	international	partners.	For additional	 information	on	 the	F-35	program,	see	"Status	of	 the	F-35	Program"	 in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of Operations.

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	2014,	including	11	to	international	customers,	and	our	backlog	extends	into	2016.	We	currently	have advanced	funding	from	the	U.S.	Government	for	additional	C-130J	aircraft	not	currently	in	backlog.

Aeronautics	 currently	 produces	 F-16	 aircraft	 for	 international	 customers.	Aeronautics	 also	 provides	 service-life	 extension,	 modernization	 and	 other	 upgrade programs	for	our	customers'	F-16	aircraft.	We	delivered	17	F-16	aircraft	in	2014,	and	our	backlog	extends	into	2017.

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

Aeronautics	provides	sustainment	services	for	the	existing	U.S.	Air	Force	C-5	Galaxy	fleet	and	modernization	activities	to	convert	49	C-5	Galaxy	aircraft	to	the	C- 5M	Super	Galaxy	configuration.	These	modernization	activities	include	the	installation	of	new	engines,	landing	gear	and	systems	and	other	improvements	that	enable	a shorter	takeoff,	a	higher	climb	rate,	an	increased	cargo	load	and	longer	flight	range.	As	of	December	31,	2014,	we	had	delivered	20	C-5M	aircraft	under	these modernization	activities,	including	seven	C-5M	aircraft	delivered	in	2014.

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.

# Information	Systems	&	Global	Solutions

In	2014,	our	IS&GS	business	segment	generated	net	sales	of	$7.8	billion,	which	represented	17%	of	our	total	consolidated	net	sales.	IS&GS'	customers	include	the various	government	agencies	of	the	U.S.	and	other	countries,	military	services,	as	well	as	commercial	and	other	customers.	In	2014,	U.S.	Government	customers accounted	for	89%,	international	customers	accounted	for	8%	and	U.S.	commercial	and	other	customers	accounted	for	3%	of	IS&GS'	net	sales.	IS&GS	has	been impacted	by	the	continued	downturn	in	certain	federal	agencies'	information	technology	budgets	and	increased	re-competition	on	existing	contracts	coupled	with	the fragmentation	of	large	contracts	into	multiple	smaller	contracts	that	are	awarded	primarily	on	the	basis	of	price.

IS&GS	provides	advanced	technology	systems	and	expertise,	integrated	information	technology	solutions	and	management	services	across	a	broad	spectrum	of applications	for	civil,	defense,	intelligence	and	other	government	customers.	In	addition,	IS&GS	supports	the	needs	of	customers	in	data	analytics,	cyber	security,	air traffic	management	and	energy	demand	management.	IS&GS	provides	network-enabled	situational	awareness,	delivers	communications	and	command	and	control capability	through	complex	mission	solutions	for	defense	applications,	and	integrates	complex	global	systems	to	help	our	customers	gather,	analyze	and	securely distribute	critical	intelligence	data.	Also,	IS&GS	is	responsible	for	various	classified	systems	and	services	in	support	of	vital	national	security	systems.	While	IS&GS	has a	portfolio	of	many	smaller	contracts	as	compared	to	our	other	business	segments,	this	business	segment's	major	programs	include:

•	 The	Hanford	Mission	Support	contract,	a	program	to	provide	infrastructure	and	site	support	services	to	the	Department	of	Energy.

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

•	 The	Command,	Control,	Battle	Management	and	Communications	(C2BMC)	contract,	a	program	to	increase	the	integration	of	the	Ballistic	Missile	Defense	System for	the	U.S.	Government.

•	 The	National	Science	Foundation	Antarctic	Support	program,	which	manages	sites	and	equipment	to	enable	universities,	research	institutions	and	federal	agencies	to conduct	scientific	research	in	the	Antarctic.

# Missiles	and	Fire	Control

In	2014,	our	MFC	business	segment	generated	net	sales	of	$7.7	billion,	which	represented	17%	of	our	total	consolidated	net	sales.	MFC's	customers	include	the military	services,	principally	the	U.S.	Army,	and	various	government	agencies	of	the	U.S.	and	other	countries,	as	well	as	commercial	and	other	customers.	In	2014,	U.S. Government	customers	accounted	for	68%	and	international	customers	accounted	for	32%	of	MFC's	net	sales.

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

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

•	 MFC's	Technical	Services	business	provides	a	comprehensive	portfolio	of	technical	and	sustainment	services	to	enhance	our	customers'	mission	success,	with	core markets	in	engineering	services;	global	aviation	solutions;	command,	control,	communications,	computers,	intelligence,	surveillance	and	reconnaissance	(C4ISR) product	support;	counter	threat	services;	and	education	and	sustainment	services.	MFC	technical	services	has	been	impacted	by	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.

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

# Mission	Systems	and	Training

In	2014,	our	MST	business	segment	generated	net	sales	of	$7.1	billion,	which	represented	16%	of	our	total	consolidated	net	sales.	MST's	customers	include	the military	services,	principally	the	U.S.	Navy,	and	various	government	agencies	of	the	U.S.	and	other	countries,	as	well	as	commercial	and	other	customers.	In	2014,	U.S. Government	customers	accounted	for	75%,	international	customers	accounted	for	24%	and	U.S.	commercial	and	other	customers	accounted	for	1%	of	MST's	net	sales.

MST	provides	ship	and	submarine	mission	and	combat	systems;	mission	systems	and	sensors	for	rotary	and	fixed-wing	aircraft;	sea	and	land-based	missile	defense systems;	radar	systems;	the	Littoral	Combat	Ship	(LCS);	simulation	and	training	services;	and	unmanned	systems	and	technologies.	MST's	major	programs	include:

•	 The	Aegis	Combat	System	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.

•	 MH-60	maritime	helicopter	mission	systems	and	sensors,	including	the	digital	cockpit	and	weapons,	for	the	U.S.	Navy	and	international	customers.

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

•	 The	Advanced	 Hawkeye	 Radar	 System,	 an	 airborne	 early	 warning	 radar,	 which	 MST	 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	are	tracked	in	space	and	increase	the ability	to	prevent	space-based	collisions.

# Space	Systems

In	2014,	our	Space	Systems	business	segment	generated	net	sales	of	$8.1	billion,	which	represented	18%	of	our	total	consolidated	net	sales.	Space	Systems' customers	 include	 various	 government	 agencies	 of	 the	 U.S.	 and	 commercial	 customers.	 In	 2014,	 U.S.	 Government	 customers	 accounted	 for	 97%,	 international customers	accounted	for	1%	and	U.S.	commercial	and	other	customers	accounted	for	2%	of	Space	Systems'	net	sales.	Net	sales	from	Space	Systems'	satellite	products and	services	represented	12%	of	our	total	consolidated	net	sales	in	each	of	2014,	2013	and	2012.

Space	Systems	is	engaged	in	the	research	and	development,	design,	engineering	and	production	of	satellites,	strategic	and	defensive	missile	systems	and	space transportation	systems.	Space	Systems	is	also	responsible	for	various	classified	systems	and	services	in	support	of	vital	national	security	systems.	Space	Systems'	major programs	include:

•	 The	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.

•	 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.

•	 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.	On	December	5,	2014,	Orion	successfully	completed	its	first	unmanned	test	flight.

Operating	profit	for	our	Space	Systems	business	segment	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	2014, 2013	and	2012,	see	"Business	Segment	Results	of	Operations"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	and	"Note	3 –	Information	on	Business	Segments"	of	our	consolidated	financial	statements.

# Competition

Our	broad	portfolio	of	products	and	services	competes	both	domestically	and	internationally	against	the	products	and	services	of	other	large	aerospace,	defense	and information	 technology	 companies,	 as	 well	 as	 numerous	 smaller	 competitors,	 particularly	 in	 certain	 of	 our	 services	 businesses.	 We	 often	 form	 teams	 with	 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,	such	as	information	technology	contracts	where	there	may	be	a	wide	range	of	small	to	large	contractors	bidding	on procurements.	Additionally,	information	technology	procurements	are	increasingly	focusing	on	price	over	other	factors	of	competition.	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.

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	our	patents	for	government	purposes.	Unpatented	research, development	and	engineering	skills	also	make	an	important	contribution	to	our	business.	Although	our	intellectual	property	rights	in	the	aggregate	are	important	to	the operation	of	our	business,	we	do	not	believe	that	any	existing	patent,	license	or	other	intellectual	property	right	is	of	such	importance	that	its	loss	or	termination	would have	a	material	adverse	effect	on	our	business	taken	as	a	whole.

# Raw	Materials	and	Seasonality

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

Aluminum	and	titanium	are	important	raw	materials	used	in	certain	of	our	Aeronautics	and	Space	Systems	programs.	Long-term	agreements	have	helped	enable	a continued	supply	of	aluminum	and	titanium.	Carbon	fiber	is	an	important	ingredient	in	composite	materials	used	in	our	Aeronautics	programs,	such	as	the	F-35	aircraft. Aluminum	lithium,	which	we	use	for	F-16	aircraft	structural	components,	is	currently	only	available	from	limited	sources.	We	have	been	advised	by	some	suppliers	that pricing	and	the	timing	of	availability	of	materials	in	some	commodities	markets	can	fluctuate	widely.	These	fluctuations	may	negatively	affect	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,	including	all	branches	of	the	U.S.	military,	the	departments of	 Defense,	 Homeland	 Security,	 Justice,	 Commerce,	 Health	 and	 Human	 Services,	 Transportation	 and	 Energy,	 the	 U.S.	 Postal	 Service,	 the	 Social	 Security Administration,	the	Federal	Aviation	Administration,	NASA,	the	U.S.	Environmental	Protection	Agency	and	Veterans	Affairs.	Similar	government	authorities	exist	in other	countries	and	regulate	our	international	efforts.

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

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

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

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

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

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

The	U.S.	Government	may	terminate	any	of	our	government	contracts	and	subcontracts	either	at	its	convenience	or	for	default	based	on	our	performance.	If	a contract	is	terminated	for	convenience,	we	generally	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;	however,	the	U.S.	Government could	make	claims	to	reduce	the	contract	value	or	recover	its	procurement	costs	and	could	assess	other	special	penalties.	For	more	information	regarding	the	U.S. Government's	right	to	terminate	our	contracts,	see	Item	1A	–	Risk	Factors.	For	more	information	regarding	government	contracting	laws	and	regulations,	see	Item	1A	– Risk	Factors	as	well	as	"Critical	Accounting	Policies	–	Contract	Accounting	/	Sales	Recognition"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and Results	of	Operations.

A	portion	of	our	business	is	classified	by	the	U.S.	Government	and	cannot	be	specifically	described.	The	operating	results	of	these	classified	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	probable	and	estimable,	see	"Critical	Accounting	Policies	–	Environmental	Matters"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and Results	of	Operations	and	"Note	12	–	Legal	Proceedings,	Commitments	and	Contingencies"	of	our	consolidated	financial	statements.	See	also	 the	discussion	of environmental	matters	within	Section	1A	–	Risk	Factors.

# Backlog

At	December	31,	2014,	our	backlog	was	$80.5	billion	compared	with	$82.6	billion	at	December	31,	2013.	Backlog	is	converted	into	sales	in	future	periods	as	work is	performed	or	deliveries	are	made.	Approximately	$32.2	billion,	or	40%,	of	our	backlog	at	December	31,	2014	is	expected	to	be	converted	into	sales	in	2015.

Our	backlog	includes	both	funded	(firm	orders	for	our	products	and	services	for	which	funding	has	been	both	authorized	and	appropriated	by	the	customer	– Congress,	in	the	case	of	U.S.	Government	agencies)	and	unfunded	(firm	orders	for	which	funding	has	not	been	appropriated)	amounts.	We	do	not	include	unexercised options	or	potential	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	$56.5	billion	at	December	31,	2014,	as	compared	to	$55.0 billion	at	December	31,	2013.	For	backlog	related	to	each	of	our	business	segments,	see	"Business	Segment	Results	of	Operations"	in	Management's	Discussion	and Analysis	of	Financial	Condition	and	Results	of	Operations.

# Research	and	Development

We	 conduct	 research	 and	 development	 activities	 under	 customer-sponsored	 contracts	 and	 with	 our	 own	 independent	 research	 and	 development	 funds.	 Our independent	research	and	development	costs	include	basic	research,	applied	research,	development,	systems	and	other	concept	formulation	studies.	Generally,	these costs	are	allocated	among	all	contracts	and	programs	in	progress	under	U.S.	Government	contractual	arrangements.	Costs	we	incur	under	customer-sponsored	research

and	development	programs	pursuant	 to	contracts	are	 included	 in	net	sales	and	cost	of	sales.	Under	certain	arrangements	 in	which	a	customer	shares	 in	product development	costs,	our	portion	of	the	unreimbursed	costs	is	expensed	as	incurred	in	cost	of	sales.	Independent	research	and	development	costs	charged	to	cost	of	sales were	$751	million	in	2014,	$697	million	in	2013	and	$616	million	in	2012.	See	"Research	and	development	and	similar	costs"	in	"Note	1	–	Significant	Accounting Policies"	of	our	consolidated	financial	statements.

# Employees

At	December	31,	2014,	we	had	approximately	112,000	employees,	about	95%	of	whom	were	located	in	the	U.S.	Approximately	15%	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	and	were	formed	in	1995	by	combining	the	businesses	of	Lockheed	Corporation	and	Martin	Marietta	Corporation.	Our	principal executive	offices	are	located	at	6801	Rockledge	Drive,	Bethesda,	Maryland	20817.	Our	telephone	number	is	(301)	897-6000	and	our	website	home	page	on	the	Internet is	www.lockheedmartin.com.	We	make	our	website	content	available	for	information	purposes	only.	It	should	not	be	relied	upon	for	investment	purposes,	nor	is	it incorporated	by	reference	into	this	Annual	Report	on	Form	10-K	(Form	10-K).

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

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

# Forward-Looking	Statements

This	Form	10-K	contains	statements	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	and	planned	acquisitions	or	dispositions	of	assets	or	the	anticipated	consequences	are	examples	of	forward-looking statements.	 Numerous	 factors,	 including	 potentially	 the	 risk	 factors	 described	 in	 the	 following	 section,	 could	 affect	 our	 forward-looking	 statements	 and	 actual performance.

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

# ITEM	1A. Risk	Factors.

An	investment	in	our	common	stock	or	debt	securities	involves	risks	and	uncertainties.	We	seek	to	identify,	manage	and	mitigate	risks	to	our	business,	but	risk	and uncertainty	cannot	be	eliminated	or	necessarily	predicted.	You	should	carefully	consider	the	following	factors,	in	addition	to	the	other	information	contained	in	this Annual	Report	on	Form	10-K,	before	deciding	to	purchase	our	common	stock	or	debt	securities.

# We	depend	heavily	on	contracts	with	the	U.S.	Government.

We	derived	79%	of	our	consolidated	net	sales	from	the	U.S.	Government	in	2014,	including	59%	from	the	Department	of	Defense.	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.

The	programs	in	which	we	participate	must	compete	with	other	programs	and	policy	imperatives	for	consideration	during	the	budget	and	appropriation	process. Concerns	about	increased	deficit	spending,	along	with	ongoing	economic	challenges,	continue	to	place	pressure	on	U.S.	Government	budgets.	While	we	believe	that	our programs	are	well	aligned	with	national	defense	and	other	priorities,	shifts	in	the	U.S.	and	international	spending	and	tax	policy,	changes	in	security,	defense	and intelligence	priorities,	the	affordability	of	our	products	and	services,	general	economic	conditions	and	developments	and	other	factors	may	affect	a	decision	to	fund	or the	level	of	funding	for	existing	or	proposed	programs.

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.	Our largest	program,	the	F-35,	represented	17%	of	our	total	consolidated	net	sales	in	2014	and	is	expected	to	represent	a	higher	percentage	of	our	sales	in	future	years.	A decision	to	cut	spending	or	reduce	planned	orders	could	have	an	adverse	impact	on	our	results	of	operations.	For	more	information	regarding	the	F-35	program,	see "Status	of	the	F-35	Program"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations.

Based	upon	our	diverse	range	of	defense,	homeland	security	and	information	technology	products	and	services,	we	believe	that	this	makes	it	less	likely	that	cuts	in any	specific	contract	or	program	will	have	a	long-term	effect	on	our	business.	However,	termination	of	multiple	or	large	programs	or	contracts	could	adversely	affect our	business	and	future	financial	performance.	We	could	incur	expenses	beyond	those	that	would	be	reimbursed	if	one	or	more	of	our	existing	contracts	were	terminated for	convenience	due	to	lack	of	funding	or	other	reasons.	Potential	changes	in	funding	priorities	may	afford	new	or	additional	opportunities	for	our	businesses	in	terms	of existing,	follow-on	or	replacement	programs.	While	we	would	expect	to	compete	and	be	well	positioned	as	the	incumbent	on	existing	programs,	we	may	not	be successful	or	the	replacement	programs	may	be	funded	at	lower	levels.

Generally,	we	expect	that	the	impact	of	budget	reductions	on	our	operating	results	will	lag	in	certain	of	our	businesses	with	longer	cycles	such	as	our	Aeronautics and	Space	Systems	business	segments	and	in	our	products	businesses	within	our	Missiles	and	Fire	Control	(MFC)	and	Mission	Systems	and	Training	(MST)	business segments	due	 to	our	production	contract	backlog.	However,	our	businesses	with	smaller,	short-term	contracts	are	 the	most	susceptible	 to	 the	 impacts	of	budget reductions,	such	as	our	Information	Systems	&	Global	Solutions	(IS&GS)	business	segment	and	certain	services	businesses	within	our	MFC	and	MST	business segments.	We	have	also	experienced	increased	market	pressures	in	these	services	businesses	including	lower	in-theater	support	as	troop	levels	are	drawn	down	and increased	re-competition	on	existing	contracts	coupled	with	the	fragmentation	of	large	contracts	into	multiple	smaller	contracts	that	are	awarded	primarily	on	the	basis	of price.	Additionally,	our	services	businesses	across	most	of	our	business	segments	have	experienced	lower	volume	due	to	improved	product	field	performance	that require	less	service	support.

On	December	16,	2014,	the	U.S.	Government	passed	the	government	fiscal	year	(GFY)	2015	omnibus	spending	bill	to	finance	most	federal	activities	through September	30,	2015,	the	end	of	its	current	fiscal	year,	after	operating	under	continuing	resolution	temporary	funding	measures	from	October	1,	2014	to	December	16, 2014.	Currently,	the	Department	of	Homeland	Security	remains	funded	through	a	continuing	resolution	until	February	27,	2015.	The	omnibus	spending	bill	provides	for a	revised	defense	spending	limit	of	$585	billion	for	GFY	2015	and	eliminates	much	of	the	uncertainty	and	inefficiency	in	procuring	products	and	services	under	the continuing	resolution.	Under	continuing	resolutions,	partial-year	funding	is	available	at	prior	year	levels,	subject	to	certain	restrictions,	but	new	spending	initiatives	are not	authorized.	In	years	when	the	U.S.	Government	does	not	complete	its	budget	process	before	the	end	of	its	fiscal	year,	government	operations	typically	are	funded through	a	continuing	resolution	that	authorizes	agencies	of	the	U.S.	Government	to	continue	to	operate,	but	does	not	authorize	new	spending	initiatives.	When	the	U.S. Government	operates	under	a	continuing	resolution,	delays	can	occur	in	contract	awards	due	to	lack	of	funding.	Historically,	this	has	not	had	a	material	effect	on	our business.	Should	a	continuing	resolution	be	used	to	fund	U.S.	Government	Operations	after	GFY	2015	or	decisions	regarding	sequestration	remain	pending,

it	may	cause	additional	government	contract	awards	to	be	delayed,	canceled	or	funded	at	lower	levels	and	cause	our	results	of	operations	to	vary	between	periods.	In some	circumstances,	we	may	continue	to	work	without	funding	and	use	our	funds	in	order	to	meet	our	customer's	desired	delivery	dates	for	products	or	services.	Such funds	could	be	at	risk	if	the	U.S.	Government	does	not	provide	authorization	and	additional	funding	to	our	programs.

# We	are	subject	to	a	number	of	procurement	laws	and	regulations.	Our	business	and	our	reputation	could	be	adversely	affected	if	we	fail	to	comply	with	these laws.

We	must	comply	with	and	are	affected	by	laws	and	regulations	relating	to	the	award,	administration	and	performance	of	U.S.	Government	contracts.	Government contract	laws	and	regulations	affect	how	we	do	business	with	our	customers	and	impose	certain	risks	and	costs	on	our	business.	A	violation	of	specific	laws	and regulations	could	harm	our	reputation	and	result	in	the	imposition	of	fines	and	penalties,	the	termination	of	our	contracts,	suspension	or	debarment	from	bidding	on	or being	awarded	contracts,	loss	of	our	ability	to	export	products	or	services	and	civil	or	criminal	investigations	or	proceedings.

In	some	instances,	these	laws	and	regulations	impose	terms	or	rights	that	are	different	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.	Any	costs	found	to	be	misclassified	may	be	subject	to	repayment.	We	have	unaudited	and/or	unsettled incurred	cost	claims	related	to	past	years,	which	places	risk	on	our	ability	to	issue	final	billings	on	contracts	for	which	authorized	and	appropriated	funds	may	be expiring.

Certain	deficiencies	identified	during	government	audits	of	contractor	business	systems	may	result	in	the	government	withholding	payments	on	our	billings.	Such deficiencies	have	not	impacted	our	internal	control	over	financial	reporting.	Withholding	payments	on	billings	are	capped	at	5%	of	billings	when	deficiencies	impact	a single	business	system	and	10%	when	deficiencies	impact	multiple	systems.	Such	withholdings	are	typically	reduced	to	2%	after	the	contractor's	corrective	action	plan has	been	accepted	and	progress	to	implement	the	corrective	actions	has	been	demonstrated	and	are	withdrawn	upon	satisfactory	completion	and	verification	of	the corrective	action	plan.

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

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

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

Our	backlog	includes	a	variety	of	contract	types	which	are	intended	to	address	changing	risk	and	reward	profiles	as	a	program	matures.	Contract	types	include	cost- reimbursable,	fixed-price	incentive-fee,	fixed-price	and	time-and-materials	contracts.	Contracts	for	development	programs	with	complex	design	and	technical	challenges are	typically	cost-reimbursable.	Under	cost-reimbursable	contracts,	we	are	reimbursed	for	allowable	costs	and	paid	a	fee,	which	may	be	fixed	or	performance-based.	In these	cases,	the	associated	financial	risks	primarily	relate	to	a	reduction	in	fees	and	the	program	could	be	cancelled	if	cost,	schedule	or	technical	performance	issues arise.

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

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

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

The	U.S.	Government	is	currently	pursuing	and	implementing	policies	that	could	negatively	impact	our	profitability.	Changes	in	procurement	policy	favoring	more incentive-based	 fee	 arrangements,	 different	 award	 fee	 criteria	 or	 government	 contract	 negotiation	 offers	 that	 indicate	 what	 our	 costs	 should	 be	 may	 affect	 the predictability	of	our	profit	rates.	Our	customers	are	subject	to	pressures	that	may	result	in	a	change	in	contract	types	referenced	above	earlier	in	a	program's	maturity than	is	traditional.	An	example	of	this	is	the	use	of	fixed-price	incentive-fee	contracts	for	recent	LRIP	contracts	on	the	F-35	program	while	the	development	contract	is being	performed	concurrently.	Our	customers	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,	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	facing	increased	competition,	particularly	in	information	technology	and	cyber	security	at	our	IS&GS	business	segment,	from	non-traditional	competitors outside	of	the	aerospace	and	defense	industry,	in	addition	to	our	customers	determining	to	source	work	internally	rather	than	hiring	a	contractor.	At	the	same	time,	our customers	are	facing	budget	constraints,	trying	to	do	more	with	less	by	cutting	costs,	identifying	more	affordable	solutions	and	reducing	product	development	cycles.	We have	also	experienced	increased	market	pressures	in	our	services	businesses	due	to	the	fragmentation	of	large	contracts	into	multiple	smaller	contracts	that	are	awarded primarily	on	the	basis	of	price.	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.

As	a	leader	in	defense	and	global	security,	we	have	a	large	number	of	programs	for	which	we	are	the	incumbent	contractor.	A	substantial	portion	of	our	business	is awarded	through	competitive	bidding.	The	U.S.	Government	increasingly	has	relied	upon	competitive	contract	award	types,	including	indefinite-delivery,	indefinite- quantity,	GSA	Schedule	and	other	multi-award	contracts,	which	has	the	potential	to	create	pricing	pressure	and	increase	our	cost	by	requiring	that	we	submit	multiple bids	and	proposals.	In	addition,	multi-award	contracts	require	that	we	make	sustained	efforts	to	obtain	task	orders	under	the	contract.	The	competitive	bidding	process entails	substantial	costs	and	managerial	time	to	prepare	bids	and	proposals	for	contracts	that	may	not	be	awarded	to	us	or	may	be	split	among	competitors.	Following award,	we	may	encounter	significant	expenses,	delays,	contract	modifications	or	bid	protests	from	unsuccessful	bidders	on	new	program	awards.	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,	therefore,	delay	our	recognizing	sales.

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

For	most	of	our	contracts	we	rely	on	other	companies	to	provide	materials,	major	components	and	products	and	to	perform	a	portion	of	the	services	that	we	provide to	our	customers.	Such	arrangements	may	involve	subcontracts,	teaming	arrangements,	ventures	or	supply	agreements	with	other	companies	upon	which	we	rely (contracting	parties).	There	is	a	risk	that	we	may	have	disputes	with	our	contracting	parties,	including	disputes	regarding	the	quality	and	timeliness	of	work	performed, the	workshare	provided	to	that	party,	customer	concerns	about	the	other	party's	performance,	our	failure	to	extend	existing	task	orders	or	issue	new	task	orders,	or	our hiring	of	the	personnel	of	a	subcontractor,	teammate	or	venture	partner	or	vice	versa.	In	addition,	changes	in	the	economic	environment,	including	defense	budgets	and constraints	on	available	financing,	may	adversely	affect	the	financial	stability	of	our	contracting	parties	and	their	ability	to	meet	their	performance	requirements	or	to provide	needed	supplies	on	a	timely	basis.	A	failure	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	may	affect	our	ability	to	perform	our	obligations	and	require	that	we	transition	the	work	to	other	companies.	For	example,	on February	5,	2015,	one	of	our	suppliers	experienced	a	fire	in	its	factory	which	produces	propellers	for	our	C-130J	aircraft.	That	supplier	is	the	sole	source	of	these propellers.	We	are	working	with	that	supplier	to	assess	whether	the	supplier	will	be	able	to	meet	its	commitments	to	us	and	the	potential	disruption	if	it	is	not. Contracting	party	performance	deficiencies	may	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	2014,	20%	of	our	net	sales	were	from	international	customers.	We	have	a	strategy	to	grow	international	sales	over	the	next	several	years,	inclusive	of	sales	of	F- 35	 aircraft to	 our	 international	 partners	 and	 other	 countries.	 International	 sales	 are	 subject	 to	 numerous	 political	 and	 economic	 factors,	 regulatory	 requirements, significant	competition	and	other	risks	associated	with	doing	business	in	foreign	countries.	Our	exposure	to	such	risks	may	increase	if	our	international	sales	grow	as	we anticipate.

Our	international	business	is	conducted	through	foreign	military	sales	(FMS)	contracted	through	the	U.S.	Government	or	direct	commercial	sales	(DCS)	with international	customers.	In	2014,	approximately	half	of	our	sales	to	international	customers	were	FMS	while	the	other	half	were	DCS.	These	transaction	types	differ	as FMS	transactions	represent	sales	by	the	U.S.	Government	to	international	governments	and	our	contract	with	the	U.S.	Government	is	subject	to	FAR.	By	contrast,	DCS transactions	represent	sales	by	us	directly	to	another	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.	We	frequently	team	with	international	subcontractors	and	suppliers	who	are	also	exposed	to	similar	risks.	While	we	have	stringent	policies	in	place to	comply	with	such	laws	and	regulations,	failure	by	us,	our	employees	or	others	working	on	our	behalf	to	comply	with	these	laws	and	regulations	could	result	in administrative,	civil	or	criminal	liabilities,	including	suspension,	proposed	debarment	or	debarment	from	bidding	for	or	performing	government	contracts	or	suspension of	our	export	privileges,	which	could	have	a	material	adverse	effect	on	us.

While	international	sales,	whether	contracted	as	FMS	or	DCS,	present	risks	that	are	different	and	potentially	greater	than	those	encountered	in	our	U.S.	business, DCS	with	international	customers	may	impose	even	greater	risks	as	such	transactions	involve	commercial	relationships	with	parties	with	whom	we	have	less	familiarity and	where	there	may	be	significant	cultural	differences.	Additionally,	international	procurement	rules	and	regulations,	contract	laws	and	regulations	and	contractual terms	differ	from	those	in	the	U.S.,	are	less	familiar	to	us,	may	be	interpreted	by	foreign	courts	less	bound	by	precedent	and	with	more	discretion	and	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,	the	pricing	of	our	products	and	services	is	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	and	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	and anti-boycott	restrictions.	Offset	agreements	generally	extend	over	several	years	and	may	provide	for	penalties,	which	are	subject	to	change,	in	the	event	we	fail	to perform	in	accordance	with	the	offset	requirements	which	are	typically	subjective	and	can	be	outside	our	control.

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

A	significant	portion	of	our	business	relates	to	designing,	developing	and	manufacturing	advanced	defense	and	technology	products	and	systems.	New	technologies may	be	untested	or	unproven.	Failure	of	some	of	these	products	and	services	could	result	in	extensive	loss	of	life	or	property	damage.	Accordingly,	we	also	may	incur liabilities	that	are	unique	to	our	products	and	services,	including	combat	and	air	mobility	aircraft,	missile	and	space	systems,	command	and	control	systems,	air	traffic control	 management	 systems,	 cyber	 security,	 homeland	 security	 and	 training	 programs.	 In	 some	 but	 not	 all	 circumstances,	 we	 may	 be	 entitled	 to	 certain	 legal protections	or	indemnifications	from	our	customers,	either	through	U.S.	Government	indemnifications	under	Public	Law	85-804,	qualification	of	our	products	and services	by	the	Department	of	Homeland	Security	under	the	SAFETY	Act	provisions	of	the	Homeland	Security	Act	of	2002,	contractual	provisions	or	otherwise.	We endeavor	to	obtain	insurance	coverage	from	established	insurance	carriers	to	cover	these	risks	and	liabilities.	The	amount	of	insurance	coverage	that	we	maintain	may not	be	adequate	to	cover	all	claims	or	liabilities,	existing	coverage	may	be	cancelled	while	we	remain	exposed	to	the	risk,	and	it	is	not	possible	to	obtain	insurance	to protect	against	all

operational	risks	and	liabilities.	For	example,	we	are	limited	in	the	amount	of	insurance	we	can	obtain	to	cover	certain	natural	hazards	such	as	earthquakes	and	we	have significant	operations	in	geographic	areas	prone	to	this	risk,	such	as	Sunnyvale,	California.	Even	if	insurance	coverage	is	available,	we	may	not	be	able	to	obtain	it	at	a price	or	on	terms	acceptable	to	us.	Additionally,	disputes	with	insurance	carriers	over	coverage	terms	or	the	insolvency	of	one	or	more	of	our	insurance	carriers	may significantly	affect	the	amount	or	timing	of	our	cash	flows.

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

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

Many	of	our	employees	are	covered	by	defined	benefit	pension	plans	and	we	provide	certain	health	care	and	life	insurance	benefits	to	eligible	retirees.	The	impact of	these	plans	on	our	U.S.	generally	accepted	accounting	principles	(GAAP)	earnings	may	be	volatile	in	that	the	amount	of	expense	we	record	for	our	postretirement benefit	 plans	 may	 materially	 change	 from	 year	 to	 year	 because	 those	 calculations	 are	 sensitive	 to	 funding	 levels	 as	 well	 as	 changes	 in	 several	 key	 economic assumptions,	including	interest	rates,	rates	of	return	on	plan	assets	and	other	actuarial	assumptions	including	participant	longevity	(also	known	as	mortality)	estimates, expected	rates	of	increase	in	future	compensation	levels	through	December	31,	2015	for	our	non-union	plans,	and	employee	turnover,	as	well	as	the	timing	of	cash funding.	Changes	in	these	factors	also	affect	our	plan	funding,	cash	flow	and	stockholders'	equity.	In	addition,	the	funding	of	our	plans	and	recovery	of	costs	on	our contracts,	as	described	below,	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	volatility	the	plans	may	have	on	our	cash	flows	and	earnings,	including	amendments	made	in	June	2014	to	certain	of	our	qualified	and	nonqualified	defined benefit	pension	plans	for	non-union	employees	to	freeze	future	retirement	benefits.	However,	the	impact	of	these	actions	may	be	less	than	anticipated	or	may	be	offset by	other	pension	cost	increases	due	to	factors	such	as	changes	in	actuarial	assumptions.

With	regard	to	cash	flow,	in	the	past	few	years	we	have	made	substantial	cash	contributions	to	our	plans	in	excess	of	the	amounts	required	by	the	Employee Retirement	Income	Security	Act	of	1974	(ERISA),	as	amended	by	the	Pension	Protection	Act	of	2006	(PPA).	We	generally	are	able	to	recover	these	contributions related	to	our	plans	as	allowable	costs	on	our	U.S.	Government	contracts,	including	FMS,	but	there	is	a	lag	between	when	we	contribute	cash	to	our	plans	under	pension funding	rules	and	recover	 it	under	U.S.	Government	Cost	Accounting	Standards	(CAS).	Effective	February	2012,	 the	CAS	rules	were	revised	 to	harmonize	 the measurement	and	period	assignment	of	the	pension	cost	allocable	to	government	contracts	with	the	PPA	(CAS	Harmonization).	In	2013,	the	cost	impact	of	CAS Harmonization	started	being	phased	in	with	the	goal	of	better	aligning	the	CAS	pension	cost	and	ERISA	funding	requirements	being	fully	achieved	in	2017.	The enactment	of	the	Highway	and	Transportation	Funding	Act	of	2014	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	9	–	Postretirement	Plans"	of	our consolidated	financial	statements.

# If	we	fail	to	manage	acquisitions,	divestitures,	equity	investments	and	other	transactions	successfully,	our	financial	results,	business	and	future	prospects	could be	harmed.

In	pursuing	our	business	strategy,	we	routinely	conduct	discussions,	evaluate	 targets	and	enter	 into	agreements	regarding	possible	acquisitions,	divestitures, ventures	and	equity	investments.	We	seek	to	identify	acquisition	or	investment	opportunities	that	will	expand	or	complement	our	existing	products	and	services	or customer	base,	at	attractive	valuations.	We	often	compete	with	others	for	the	same	opportunities.	To	be	successful,	we	must	conduct	due	diligence	to	identify	valuation issues	and	potential	loss	contingencies,	negotiate	transaction	terms,	complete	and	close	complex	transactions,	integrate	acquired	companies	and	employees	and	realize anticipated	operating	synergies	efficiently	and	effectively.	Acquisition,	divestiture,	venture	and	investment	transactions	often	require	substantial	management	resources and	have	 the	potential	 to	divert	our	attention	from	our	existing	business.	Unidentified	pre-closing	 liabilities	could	affect	our	future	financial	results,	particularly successor	liability	under	anti-corruption,	import-export	and	technology	transfer	laws	which	provide	for	civil	and	criminal	penalties	and	the	potential	for	debarment.

Ventures	 or	 equity	 investments	 operate	 under	 shared	 control	 with	 other	 parties.	 Under	 the	 equity	 method	 of	 accounting	 for	 nonconsolidated	 ventures	 and investments,	we	recognize	our	share	of	the	operating	profit	of	these	ventures	in	our	results	of	operations.	Our	operating	results	may	be	affected	by	the	performance	of businesses	over	which	we	do	not	exercise	control	and	which	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	27%	of	its	2014	operating	profit	was	derived	from	its	share	of	earnings	from	equity	method investees,	particularly	that	in	United	Launch	Alliance	(ULA).

Our	ULA	investment	may	be	negatively	impacted	by	a	provision	in	the	National	Defense	Authorization	Act	for	Fiscal	Year	2015	(NDAA)	which	prevents	the Secretary	of	Defense	from	awarding	or	renewing	contracts	for	evolved	expendable	launch	vehicle	services	after	December	19,	2014	which	utilize	a	rocket	engine designed	or	manufactured	in	the	Russian	Federation.	ULA	uses	the	Russian-made	RD-180	engine	for	its	Atlas	V	launch	vehicle.	ULA's	current	block	buy	contract	with the	Air	Force,	which	provides	for	launch	vehicle	services	through	2017	(with	options	through	2019),	is	exempted	from	the	NDAA	prohibition,	as	are	contracts	that utilize	Russian	engines	that	were	paid	for	or	covered	by	a	legally	binding	commitment	prior	to	February	1,	2014.	Lockheed	Martin	does	not	anticipate	any	impact	on	the carrying	value	of	its	equity	investment	in	ULA	in	2015	as	a	consequence	of	the	NDAA	prohibition.	ULA	is	currently	evaluating	domestic	engine	alternatives	for	its Atlas	V	launch	vehicle	and	we	will	monitor	the	situation	for	potential	impacts	on	our	Space	Systems	business	segment	after	2015.

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

As	a	U.S.	defense	contractor,	we	face	cyber	threats,	insider	threats,	threats	to	the	physical	security	of	our	facilities	and	employees	and	terrorist	acts,	as	well	as	the potential	for	business	disruptions	associated	with	information	technology	failures,	natural	disasters	or	public	health	crises.

We	routinely	experience	cyber	security	threats,	threats	to	our	information	technology	infrastructure	and	unauthorized	attempts	to	gain	access	to	our	company sensitive	information,	as	do	our	customers,	suppliers,	subcontractors	and	venture	partners.	We	may	experience	similar	security	threats	at	customer	sites	that	we	operate and	manage	as	a	contractual	requirement.

Prior	cyberattacks	directed	at	us	have	not	had	a	material	impact	on	our	financial	results	and	we	believe	our	threat	detection	and	mitigation	processes	and	procedures are	adequate.	The	threats	we	face	vary	from	attacks	common	to	most	industries	to	more	advanced	and	persistent,	highly	organized	adversaries	who	target	us	because	we protect	national	security	information.	If	we	are	unable	to	protect	sensitive	information,	our	customers	or	governmental	authorities	could	question	the	adequacy	of	our threat	mitigation	and	detection	processes	and	procedures.	Due	to	the	evolving	nature	of	these	security	threats,	however,	the	impact	of	any	future	incident	cannot	be predicted.

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

The	costs	related	to	cyber	or	other	security	threats	or	disruptions	may	not	be	fully	insured	or	indemnified	by	other	means.	Additionally,	some	cyber	technologies	we develop	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;	or	such	events	could	result	in	the	loss	of	competitive advantages	derived	from	our	research	and	development	efforts	or	other	intellectual	property,	early	obsolescence	of	our	products	and	services	or	contractual	penalties.

# Environmental	costs	could	affect	our	future	earnings	as	well	as	the	affordability	of	our	products	and	services.

Our	operations	are	subject	to	and	affected	by	a	variety	of	federal,	state,	local	and	foreign	environmental	protection	laws	and	regulations.	We	are	involved	in environmental	responses	at	some	of	our	facilities	and	former	facilities	and	at	third-party	sites	not	owned	by	us	where	we	have	been	designated	a	potentially	responsible party	by	the	U.S.	Environmental	Protection	Agency	or	by	a	state	agency.	In	addition,	we	could	be	affected	by	future	regulations	imposed	in	response	to	concerns	over climate	change,	other	aspects	of	the	environment	or	natural	resources.	We	have	an	ongoing	comprehensive	sustainability	program	to	reduce	the	effects	of	our	operations on	the	environment.

We	manage	various	government-owned	facilities	on	behalf	of	the	government.	At	such	facilities,	environmental	compliance	and	remediation	costs	historically	have been	the	responsibility	of	the	government	and	we	have	relied,	and	continue	to	rely	with	respect	to	past	practices,	upon	government	funding	to	pay	such	costs.	Although the	government	remains	responsible	for	capital	and	operating	costs	associated	with	environmental	compliance,	responsibility	for	fines	and	penalties	associated	with environmental	noncompliance	typically	are	borne	by	either	the	government	or	the	contractor,	depending	on	the	contract	and	the	relevant	facts.	Some	environmental	laws include	criminal	provisions.	An	environmental	law	conviction	could	affect	our	ability	to	be	awarded	future,	or	perform	existing,	U.S.	Government	contracts.

We	have	incurred	and	will	continue	to	incur	liabilities	under	various	federal,	state,	local	and	foreign	statutes	for	environmental	protection	and	remediation.	The extent	of	our	financial	exposure	cannot	in	all	cases	be	reasonably	estimated	at	this	time.	Among	the	variables	management	must	assess	in	evaluating	costs	associated with	these	cases	and	remediation	sites	generally	are	the	status	of	site	assessment,	extent	of	the	contamination,	impacts	on	natural	resources,	changing	cost	estimates, evolution	of	technologies	used	to	remediate	the	site	and	continually	evolving	governmental	environmental	standards	and	cost	allowability	issues.	For	information regarding	these	matters,	including	current	estimates	of	the	amounts	that	we	believe	are	required	for	remediation	or	cleanup	to	the	extent	probable	and	estimable,	see "Critical	Accounting	Policies	–	Environmental	Matters"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	and	"Note	12	– Legal	Proceedings,	Commitments	and	Contingencies"	of	our	consolidated	financial	statements.

# We	are	involved	in	a	number	of	legal	proceedings.	We	cannot	predict	the	outcome	of	litigation	and	other	contingencies	with	certainty.

Our	business	may	be	adversely	affected	by	the	outcome	of	legal	proceedings	and	other	contingencies	that	cannot	be	predicted	with	certainty.	As	required	by GAAP,	we	estimate	loss	contingencies	and	establish	reserves	based	on	our	assessment	of	contingencies	where	liability	is	deemed	probable	and	reasonably	estimable	in light	of	the	facts	and	circumstances	known	to	us	at	a	particular	point	in	time.	Subsequent	developments	in	legal	proceedings	may	affect	our	assessment	and	estimates	of the	loss	contingency	recorded	as	a	liability	or	as	a	reserve	against	assets	in	our	financial	statements.	For	a	description	of	our	current	legal	proceedings,	see	Item	3	– Legal	Proceedings	and	"Note	12	–	Legal	Proceedings,	Commitments	and	Contingencies"	of	our	consolidated	financial	statements.

# Our	success	depends,	in	part,	on	our	ability	to	maintain	a	qualified	workforce.

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,	 cyber	 security,	 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	 will	 be	 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,	our	workforce	demographic	continues	to shift	toward	a	higher	population	that	is	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.

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,	or	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	 15%	 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	were	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.	Another	example	is	the	$10.9	billion	of	goodwill	assets	recorded	on	our	Balance Sheet	as	of	December	31,	2014	from	previous	acquisitions	that	were	made	over	time	which	represent	greater	than	25%	of	our	total	assets	and	are	subject	to	annual impairment	testing	and	more	frequent	testing	upon	the	occurrence	of	certain	events	or	significant	changes	in	circumstances	that	indicate	goodwill	may	be	impaired.	If	we experience	changes	or	factors	arise	that	negatively	affect	the	expected	cash	flows	of	a	reporting	unit,	we	may	be	required	to	write	off	all	or	a	portion	of	the	reporting unit's	related	goodwill	assets.

Changes	in	U.S.	or	foreign	tax	laws,	including	possibly	with	retroactive	effect,	and	audits	by	tax	authorities	could	result	in	unanticipated	increases	in	our	tax expense	and	affect	profitability	and	cash	flows.	For	example,	proposals	to	lower	the	U.S.	corporate	income	tax	rate	would	require	us	to	reduce	our	net	deferred	tax	assets upon	enactment	of	the	related	tax	legislation,	with	a	corresponding	material,	one-time	increase	to	income	tax	expense,	but	our	income	tax	expense	and	payments	would be	materially	reduced	in	subsequent	years.

Actual	financial	results	could	differ	from	our	judgments	and	estimates.	Refer	to	"Critical	Accounting	Policies"	in	Management's	Discussion	and	Analysis	of Financial	Condition	and	Results	of	Operations	and	"Note	1	–	Significant	Accounting	Policies"	of	our	consolidated	financial	statements	for	a	complete	discussion	of	our significant	accounting	policies	and	use	of	estimates.

# ITEM	1B. Unresolved	Staff	Comments.

# None.

# ITEM	2. Properties.

At	December	31,	2014,	we	owned	or	leased	building	space	(including	offices,	manufacturing	plants,	warehouses,	service	centers,	laboratories	and	other	facilities) at	approximately	540	locations	primarily	in	the	U.S.	Additionally,	we	manage	or	occupy	various	U.S.	Government-owned	facilities	under	lease	and	other	arrangements.

At	December	31,	2014,	we	had	significant	operations	in	the	following	locations:

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

•Information	 Systems	 &	 Global	 Solutions –	 Colorado	 Springs	 and	 Denver,	 Colorado;	 Baltimore,	 Gaithersburg	 and	 Rockville,	 Maryland;	 Valley	 Forge, Pennsylvania;	and	Herndon,	Virginia.

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

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

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

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

In	November	2013,	we	committed	to	a	plan	to	vacate	our	leased	facilities	in	Goodyear,	Arizona	and	Akron,	Ohio,	and	close	our	owned	facility	in	Newtown, Pennsylvania	and	certain	owned	buildings	at	our	Sunnyvale,	California	facility.	These	closures	will	reduce	approximately	2.5	million	square	feet	of	facility	space. Approximately	200,000	square	feet	was	vacated	during	2014	and	the	remaining	2.3	million	square	feet	will	be	vacated	during	2015.	For	information	regarding	these matters,	see	"Note	14	–	Restructuring	Charges"	of	our	consolidated	financial	statements.

The	following	is	a	summary	of	our	square	feet	of	floor	space	by	business	segment	at	December	31,	2014,	inclusive	of	the	facilities	that	we	plan	to	vacate	as mentioned	above	(in	millions):

|  |  |  | U.S.	Government- |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Owned | Leased | Owned | Total |
| \t\t\t\tAeronautics | \t\t5.8 | \t\t2.5 | 14.2 | 22.5 |
| \t\t\t\tInformation\tSystems\t&\tGlobal\tSolutions | \t\t2.5 | \t\t5.0 | \t\t\t— | \t\t7.5 |
| \t\t\t\tMissiles\tand\tFire\tControl | \t\t4.2 | \t\t4.9 | \t\t1.8 | 10.9 |
| \t\t\t\tMission\tSystems\tand\tTraining | \t\t5.7 | \t\t5.3 | \t\t0.4 | 11.4 |
| \t\t\t\tSpace\tSystems | \t\t8.7 | \t\t1.8 | \t\t7.8 | 18.3 |
| \t\t\t\tCorporate\tactivities | \t\t3.1 | \t\t0.9 | \t\t\t— | \t\t4.0 |
| Total | 30.0 | 20.4 | 24.2 | 74.6 |

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	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	12	–	Legal	Proceedings,	Commitments	and	Contingencies"	of	our	consolidated	financial	statements.

We	are	subject	 to	federal,	state,	 local	and	foreign	requirements	for	protection	of	 the	environment,	 including	 those	for	discharge	of	hazardous	materials	and remediation	of	contaminated	sites.	As	a	result,	we	are	a	party	to	or	have	our	property	subject	to	various	lawsuits	or	proceedings	involving	environmental	protection matters.	Due	in	part	to	their	complexity	and	pervasiveness,	such	requirements	have	resulted	in	us	being	involved	with	related	legal	proceedings,	claims	and	remediation obligations.	The	extent	of	our	financial	exposure	cannot	in	all	cases	be	reasonably	estimated	at	this	time.	For	information	regarding	these	matters,	including	current estimates	of	the	amounts	that	we	believe	are	required	for	remediation	or	clean-up	to	the	extent	estimable,	see	"Critical	Accounting	Policies	–	Environmental	Matters"	in Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	and	"Note	12	–	Legal	Proceedings,	Commitments	and	Contingencies"	of	our consolidated	financial	statements.

As	a	U.S.	Government	contractor,	we	are	subject	to	various	audits	and	investigations	by	the	U.S.	Government	to	determine	whether	our	operations	are	being conducted	in	accordance	with	applicable	regulatory	requirements.	U.S.	Government	investigations	of	us,	whether	relating	to	government	contracts	or	conducted	for	other reasons,	could	result	in	administrative,	civil	or	criminal	liabilities,	including	repayments,	fines	or	penalties	being	imposed	upon	us,	or	could	lead	to	suspension,	proposed debarment,	debarment	from	eligibility	for	future	U.S.	Government	contracting	or	suspension	of	export	privileges.	Suspension	or	debarment	could	have	a	material adverse	effect	on	us	because	of	our	dependence	on	contracts	with	the	U.S.	Government.	U.S.	Government	investigations	often	take	years	to	complete	and	many	result	in no	adverse	action	against	us.	We	also	provide	products	and	services	to	customers	outside	of	the	U.S.,	which	are	subject	to	U.S.	and	foreign	laws	and	regulations	and foreign	procurement	policies	and	practices.	Our	compliance	with	local	regulations	or	applicable	U.S.	Government	regulations	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,	2015	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	56),	Executive	Vice	President	–	Space	Systems

Mr.	Ambrose	has	served	as	Executive	Vice	President	of	Space	Systems	since	April	2013.	He	previously	served	as	Vice	President	and	Deputy,	Space	Systems	from July	2012	to	March	2013;	President,	Information	Systems	&	Global	Solutions	–	Security	from	January	2011	to	June	2012;	and	Vice	President	and	General	Manager, Space	Systems	–	Surveillance	and	Navigations	Systems	from	January	2008	to	December	2010.

# Sondra	L.	Barbour	(age	52),	Executive	Vice	President	–	Information	Systems	&	Global	Solutions

Ms.	Barbour	has	served	as	Executive	Vice	President	of	Information	Systems	&	Global	Solutions	since	April	2013.	She	previously	served	as	Senior	Vice	President and	Chief	Information	Officer	from	January	2012	to	March	2013,	and	Vice	President	and	Chief	Information	Officer	from	February	2008	to	January	2012.

# Dale	P.	Bennett	(age	58),	Executive	Vice	President	–	Mission	Systems	and	Training

Mr.	Bennett	has	served	as	Executive	Vice	President	of	Mission	Systems	and	Training	since	December	2012.	He	previously	served	as	President,	Mission	Systems	& Sensors	from	August	2011	to	December	2012;	President,	Global	Training	and	Logistics	from	June	2010	to	July	2011;	and	President,	Simulation,	Training	&	Support from	July	2005	to	May	2010.

# Orlando	P.	Carvalho	(age	56),	Executive	Vice	President	–	Aeronautics

Mr.	Carvalho	has	served	as	Executive	Vice	President	of	Aeronautics	since	March	2013.	He	previously	served	as	Executive	Vice	President	and	General	Manager,	F- 35	Program	from	March	2012	to	March	2013;	Vice	President	and	Deputy,	F-35	Program	from	August	2011	to	March	2012;	President,	Mission	Systems	&	Sensors	from January	2010	to	July	2011;	and	Vice	President	and	General	Manager,	Surface	Systems	Ballistic	Missile	Defense	Programs	from	January	2006	to	January	2010.

# Brian	P.	Colan	(age	54),	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.	He	was previously	employed	by	British	Aerospace	Systems	from	January	2005	to	September	2011,	most	recently	as	Vice	President,	Finance,	Land	Armaments	Operation Group.

# Patrick	M.	Dewar	(age	54),	Executive	Vice	President	–	Lockheed	Martin	International

Mr.	Dewar	has	served	as	Executive	Vice	President	of	Lockheed	Martin	International	since	July	2013.	He	previously	served	as	Senior	Vice	President,	Corporate Strategy	and	Business	Development	from	October	2010	 to	June	2013;	and	Vice	President,	Corporate	International	Business	Development	from	January	2009	 to September	2010.

# Richard	H.	Edwards	(age	58),	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	61),	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	31	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;	Executive	Vice	President	–	Electronic	Systems	from	January	2010	to	November	2012;	and	President, Systems	Integration	–	Owego	from	September	2008	to	December	2009.

# Maryanne	R.	Lavan	(age	55),	Senior	Vice	President,	General	Counsel	and	Corporate	Secretary

Ms.	Lavan	has	served	as	Senior	Vice	President	and	General	Counsel	since	June	2010	and	Corporate	Secretary	since	September	2010.	She	previously	served	as	Vice President,	Internal	Audit	from	February	2007	to	June	2010.

# Kenneth	R.	Possenriede	(age	55),	Vice	President	and	Treasurer

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

# Bruce	L.	Tanner	(age	55),	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.

# Market,	Price	and	Dividend	Information

Our	common	stock	is	traded	on	the	New	York	Stock	Exchange	(NYSE)	under	the	symbol	LMT.	As	of	January	23,	2015,	there	were	32,534	holders	of	record	of	our common	stock.	The	following	table	sets	forth	the	high	and	low	intra-day	trading	prices	of	our	common	stock	as	reported	on	the	NYSE	and	cash	dividends	paid	each quarter	within	the	past	two	years.

|  | Dividends	Paid	Per	Share | Dividends	Paid	Per	Share | Stock	Prices	(High-Low) | Stock	Prices	(High-Low) |
| :--- | :--- | :--- | :--- | :--- |
| Quarter | 2014 | 2013 | 2014 | 2013 |
| \t\t\t\tFirst | $1.33 | $1.15 | $168.41\t\t-\t\t$144.69 | $\t\t96.59\t\t-\t\t$\t\t85.88 |
| \t\t\t\tSecond | 1.33 | 1.15 | 168.87\t\t-\t\t\t\t153.54 | 109.26\t\t-\t\t\t\t\t\t94.00 |
| \t\t\t\tThird | 1.33 | 1.15 | 182.27\t\t-\t\t\t\t156.23 | 131.60\t\t-\t\t\t\t105.54 |
| \t\t\t\tFourth | 1.50 | 1.33 | 198.72\t\t-\t\t\t\t166.28 | 149.99\t\t-\t\t\t\t121.52 |
| \t\t\t\tYear | $5.49 | $4.78 | $198.72\t\t-\t\t$144.69 | $149.99\t\t-\t\t$\t\t85.88 |

# Stock	Performance	Graph

The	following	performance	graph	provides	a	comparison	of	the	cumulative	total	return	to	stockholders	of	our	common	stock,	assuming	reinvestment	of	dividends, with	cumulative	total	returns	for	the	Standard	and	Poor's	(S&P)	500	Index	and	the	S&P	Aerospace	and	Defense	Index	during	the	five	years	ended	December	31,	2014. The	performance	graph	assumes	$100	was	originally	invested	in	each	of	our	common	stock	and	the	indices	on	December	31,	2009.	The	cumulative	total	return	indicated in	the	performance	graph	is	not	a	guarantee	of	future	performance.

The	S&P	Aerospace	and	Defense	Index	is	comprised	of	The	Boeing	Company,	General	Dynamics	Corporation,	Honeywell	International	Inc.,	L-3	Communications Holdings,	Inc.,	Lockheed	Martin	Corporation,	Northrop	Grumman	Corporation,	Precision	Castparts	Corp.,	Raytheon	Company,	Rockwell	Collins,	Inc.,	Textron	Inc.	and United	Technologies	Corporation.

# Purchases	of	Equity	Securities

The	following	table	provides	information	about	our	repurchases	of	our	common	stock	registered	pursuant	to	Section	12	of	the	Securities	Exchange	Act	of	1934 during	the	quarter	ended	December	31,	2014.

|  |  |  | 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\t29,\t2014\t–\tOctober\t26,\t2014 | \t\t\t399,259 | $176.96 | \t\t\t\t397,911 | $3,825 |
| October\t27,\t2014\t–\tNovember\t30,\t2014 | \t\t\t504,300 | $187.74 | \t\t\t\t456,904 | $3,739 |
| December\t1,\t2014\t–\tDecember\t31,\t2014 | \t\t\t365,683 | $190.81 | \t\t\t\t357,413 | $3,671 |
| Total | \t1,269,242(c) | $185.23 | \t\t1,212,228 | $3,671 |

(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	29,	2014	was	the	first	day	of	our	October	2014 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	25,	2014,	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.	We	also	may	make	purchases	under	the	program	pursuant	to	Rule	10b5-1	plans.	The	program	does	not	have	an	expiration date.

(c) During	the	quarter	ended	December	31,	2014,	the	total	number	of	shares	purchased	included	57,014	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.

| (In	millions,	except	per	share	data) | 2014 | 2013 | 2012 | 2011 | 2010 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Operating\tresults |  |  |  |  |  |
| Net\tsales | $45,600 | $45,358 | $47,182 | $46,499 | $45,671 |
| Operating\tprofit\t(a)(b) | 5,592 | 4,505 | 4,434 | 4,020 | 4,105 |
| Net\tearnings\tfrom\tcontinuing\toperations\t(a)(b)(c) | 3,614 | 2,950 | 2,745 | 2,667 | 2,614 |
| Net\tearnings\t(d) | 3,614 | 2,981 | 2,745 | 2,655 | 2,878 |
| Net\tearnings\tfrom\tcontinuing\toperations\tper\tcommon\tshare |  |  |  |  |  |
| Basic\t(a)(b)(c) | 11.41 | 9.19 | 8.48 | 7.94 | 7.18 |
| Diluted\t(a)(b)(c) | 11.21 | 9.04 | 8.36 | 7.85 | 7.10 |
| Net\tearnings\tper\tcommon\tshare |  |  |  |  |  |
| Basic\t(d) | 11.41 | 9.29 | 8.48 | 7.90 | 7.90 |
| Diluted\t(d) | 11.21 | 9.13 | 8.36 | 7.81 | 7.81 |
| Cash\tdividends\tdeclared\tper\tcommon\tshare | $5.49 | $4.78 | $4.15 | $3.25 | $2.64 |
| Balance\tsheet |  |  |  |  |  |
| Cash,\tcash\tequivalents\tand\tshort-term\tinvestments\t(b)(e) | $1,446 | $2,617 | $1,898 | $3,582 | $2,777 |
| Total\tcurrent\tassets | \t 12,329 | \t 13,329 | \t 13,855 | \t 14,094 | \t 12,893 |
| Goodwill | \t 10,862 | \t 10,348 | \t 10,370 | \t 10,148 | 9,605 |
| Total\tassets\t(b) | \t 37,073 | \t 36,188 | \t 38,657 | \t 37,908 | \t 35,113 |
| Total\tcurrent\tliabilities | \t 11,112 | \t 11,120 | \t 12,155 | \t 12,130 | \t 11,401 |
| Long-term\tdebt,\tnet\t(e) | 6,169 | 6,152 | 6,158 | 6,460 | 5,019 |
| Total\tliabilities\t(b) | \t 33,673 | \t 31,270 | \t 38,618 | \t 36,907 | \t 31,616 |
| Stockholders'\tequity\t(b) | 3,400 | 4,918 | 39 | 1,001 | 3,497 |
| Common\tshares\tat\tyear-end | 314 | 319 | 321 | 321 | 346 |
| Cash\tflow\tinformation |  |  |  |  |  |
| Net\tcash\tprovided\tby\toperating\tactivities\t(b)(f) | $3,866 | $4,546 | $1,561 | $4,253 | $3,801 |
| Net\tcash\tused\tfor\tinvesting\tactivities\t(g) | (1,723) | (1,121) | (1,177) | (788) | (533) |
| Net\tcash\tused\tfor\tfinancing\tactivities\t(h) | (3,314) | (2,706) | (2,068) | (2,144) | (3,398) |
| Backlog | $80,547 | $82,600 | $82,300 | $80,700 | $78,400 |

(a) Our	operating	profit,	earnings	and	earnings	per	share	were	affected	by	a	non-cash	goodwill	impairment	charge	of	$119	million	($107	million	or	$.33	per	share,	after	tax) (Note	1)	in	2014;	a	non-cash	goodwill	impairment	charge	of	$195	million	($176	million	or	$.54	per	share,	after	tax)	(Note	1)	and	severance	charges	of	$201	million	($130 million	or	$.40	per	share,	after	tax)	in	2013	(Note	14);	severance	charges	of	$136	million	($88	million	or	$.26	per	share,	after	tax)	in	2011;	and	charges	for	the	Voluntary Executive	Separation	Program	and	facilities	consolidation	totaling	$220	million	($143	million	or	$.38	per	share,	after	tax)	in	2010.

(b) The	impact	of	our	postretirement	benefit	plans	can	cause	our	operating	profit,	earnings,	cash	flows	and	amounts	recorded	on	our	Balance	Sheets	to	fluctuate.	Accordingly, our	earnings	were	affected	by	FAS/CAS	pension	income	of	$376	million	in	2014	and	expense	of	$482	million,	$830	million,	$922	million	and	$454	million	in	2013,	2012, 2011	and	2010.	Our	2014	pension	contributions	of	$2.0	billion,	as	compared	to	$2.25	billion	in	2013,	$3.6	billion	in	2012	and	$2.3	billion	in	2011,	caused	fluctuations	in	our operating	cash	flows	and	cash	balance	between	each	of	those	years.	Fluctuations	in	our	total	assets,	total	liabilities	and	stockholders'	equity	between	years	from	2010	to	2014 primarily	were	due	to	the	annual	measurement	of	the	funded	status	of	our	postretirement	benefit	plans	at	the	end	of	2014,	2013,	2012	and	2011.	See	"Critical	Accounting Policies	-	Postretirement	Benefit	Plans"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	for	more	information.

(c) Our	net	earnings	from	continuing	operations	included	an	$89	million	reduction	in	income	tax	expense	in	2011	through	the	elimination	of	liabilities	for	unrecognized	tax benefits	and	an	increase	in	income	tax	expense	of	$96	million	in	2010	as	a	result	of	health	care	legislation	that	eliminated	the	tax	deduction	for	company-paid	retiree prescription	drug	expenses	to	the	extent	they	are	reimbursed	under	Medicare	Part	D.

(d) Our	net	earnings	were	affected	by	the	items	in	notes	(a),	(b)	and	(c)	above,	as	well	as	items	related	to	discontinued	operations	such	as	a	$184	million	gain	($.50	per	share)	in 2010	on	the	sale	of	Enterprise	Integration	Group	and	$73	million	($.20	per	share)	of	benefits	for	certain	adjustments	related	to	Pacific	Architects	and	Engineers	in	2010.

(e) The	increase	in	our	cash	and	long-term	debt	from	2010	to	2011	was	primarily	due	to	the	issuance	of	$2.0	billion	of	long-term	notes	in	2011,	partially	offset	by	our	redemption of	$584	million	in	long-term	notes	in	2011.

(f) The	fluctuations	in	our	net	cash	provided	by	operating	activities	between	years	from	2011	to	2014	were	due	to	changes	in	working	capital	in	addition	to	our	pension contributions	discussed	in	note	(b)	above.	See	"Liquidity	and	Cash	Flows"	in	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	for more	information.

(g) The	increase	in	our	cash	used	for	investing	activities	in	2014	was	attributable	to	acquisitions	of	businesses	(Note	13).

(h) 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	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	over	the	next	three	years.

We	expect	2015	net	sales	will	decline	in	the	low	single	digit	range	from	2014	levels	as	we	continue	to	see	downward	pressure	from	the	effects	of	U.S.	Government budget	reductions,	primarily	in	our	services	businesses.	We	expect	our	2015	segment	operating	profit	will	decline	in	the	mid	to	high	single	digit	range	from	2014	levels due	to	an	expected	decrease	in	segment	operating	profit	at	all	five	business	segments.	Accordingly,	we	expect	2015	segment	operating	profit	margin	will	be	below	the 2014	levels,	in	the	11.5%	to	12.0%	range.	Our	outlook	for	2015	assumes	the	U.S.	Government	continues	to	support	and	fund	our	key	programs,	consistent	with	the government	fiscal	year	(GFY)	2015	budget.	Changes	in	circumstances	may	require	us	to	revise	our	assumptions,	which	could	materially	change	our	current	estimate	of 2015	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"	section	below.

# Industry	Considerations

# U.S.	Government	Funding	Constraints

The	U.S.	Government,	our	principal	customer,	continues	to	face	significant	fiscal	and	economic	challenges	such	as	financial	deficits,	budget	uncertainty,	increasing debt	levels,	and	an	economy	with	restrained	growth.	To	address	these	challenges,	the	U.S.	Government	continues	to	focus	on	discretionary	spending,	entitlement programs,	taxes,	and	other	initiatives	to	stimulate	the	economy,	create	jobs,	and	reduce	the	deficit.	In	doing	so,	the	Administration	and	Congress	must	balance	decisions regarding	defense,	homeland	security,	and	other	federal	spending	priorities	in	a	constrained	fiscal	environment	largely	imposed	by	the	Budget	Control	Act	of	2011 (Budget	Control	Act).	The	Budget	Control	Act	established	limits	on	discretionary	spending,	which	provided	for	reductions	to	planned	defense	spending	of	$487	billion over	a	10	year	period	that	began	with	GFY	2012	(a	U.S.	Government	fiscal	year	starts	on	October	1	and	ends	on	September	30).	The	Budget	Control	Act	also	provided for	additional	automatic	spending	reductions,	known	as	sequestration,	which	went	into	effect	on	March	1,	2013,	that	would	have	reduced	planned	defense	spending	by an	additional	$500	billion	over	a	nine-year	period	that	began	in	GFY	2013.

In	December	2013,	the	U.S.	Government	enacted	the	Bipartisan	Budget	Act	of	2013	(Bipartisan	Budget	Act),	which	increased	the	limits	on	discretionary	spending for	GFY	2015	among	other	fiscal	changes.	Although	the	Bipartisan	Budget

1	We	define	free	cash	flow	as	cash	from	operations	as	determined	under	U.S.	generally	accepted	accounting	principles	(GAAP),	less	capital	expenditures	as	presented	on	our Statements	of	Cash	Flows.

Act	allows	for	more	certainty	in	the	budget	planning	process	for	GFY	2015,	it	retained	sequestration	cuts	for	GFYs	2016	through	2021,	including	the	across-the-board spending	reduction	methodology	provided	for	in	the	Budget	Control	Act.	As	a	result,	there	remains	uncertainty	regarding	how	sequestration	cuts	beyond	GFY	2015	will be	applied	as	the	DoD	and	other	agencies	may	have	significantly	less	flexibility	in	how	to	apply	budget	cuts	in	future	years.	While	the	defense	budget	sustained	the largest	single	reductions	under	the	Budget	Control	Act,	other	civil	agencies	and	programs	have	also	been	impacted	by	significant	spending	reductions.	In	light	of	the Budget	Control	Act	and	deficit	reduction	pressures,	it	is	likely	that	discretionary	spending	by	the	U.S.	Government	will	remain	constrained	for	a	number	of	years.

On	December	16,	2014,	the	U.S.	Government	passed	the	GFY	2015	omnibus	spending	bill	to	finance	most	federal	activities	through	September	30,	2015,	the	end	of its	current	fiscal	year,	after	operating	under	continuing	resolution	temporary	funding	measures	from	October	1,	2014	to	December	16,	2014.	Currently,	the	Department of	Homeland	Security	remains	funded	through	a	continuing	resolution	until	February	27,	2015.	The	omnibus	spending	bill	provides	for	a	revised	defense	spending	limit of	$585	billion	for	GFY	2015	and	eliminated	much	of	the	uncertainty	and	inefficiency	in	procuring	products	and	services	under	the	continuing	resolution.	Under continuing	resolutions,	partial-year	funding	is	available	at	prior	year	levels,	subject	to	certain	restrictions,	but	new	spending	initiatives	are	not	authorized.

On	February	2,	2015,	the	President	submitted	a	budget	proposal	for	GFY	2016,	which	included	$534	billion	for	defense	spending,	about	$35	billion	more	than	the spending	limits	under	the	Budget	Control	Act.	The	budget	also	provides	for	$51	billion	in	additional	war	spending.	We	anticipate	there	will	continue	to	be	a	significant debate	within	the	U.S.	Government	over	defense	spending	throughout	the	budget	process	for	GFY	2016	and	beyond.	The	outcome	of	these	debates	could	have	long-term consequences	for	our	industry	and	company	as	described	below.	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.

# Potential	Impacts	of	Budget	Reductions

While	recent	budget	actions	provide	a	more	measured	and	strategic	approach	to	addressing	the	U.S.	Government's	fiscal	challenges,	sequestration	remains	a	long- term	concern.	If	not	further	modified,	sequestration	could	have	significant	negative	impacts	on	our	industry	and	company	in	future	periods.	There	may	be	disruption	of ongoing	programs,	impacts	to	our	supply	chain,	contractual	actions	(including	partial	or	complete	terminations),	potential	facilities	closures,	and	thousands	of	personnel reductions	across	the	industry	that	will	severely	impact	advanced	manufacturing	operations	and	engineering	expertise,	and	accelerate	the	loss	of	skills	and	knowledge. Sequestration,	or	other	budgetary	cuts	in	lieu	of	sequestration,	could	have	a	material	negative	effect	on	our	company.

Despite	the	continued	uncertainty	surrounding	U.S.	Government	budgets,	the	investments	and	acquisitions	we	have	made	in	recent	years	have	sought	to	align	our businesses	with	what	we	believe	are	the	most	critical	national	priorities	and	mission	areas.	Additionally,	we	are	seeking	to	lessen	our	dependence	on	contracts	with	the U.S.	Government	by	focusing	on	expanding	into	adjacent	markets	close	to	our	core	capabilities	and	growing	international	sales	but	we	may	not	be	successful	in	this strategy.	The	possibility	remains,	however,	that	our	programs	could	be	materially	reduced,	extended,	or	terminated	as	a	result	of	the	U.S.	Government's	continuing assessment	of	priorities,	changes	in	government	priorities,	or	budget	reductions,	including	sequestration	(particularly	in	those	circumstances	where	sequestration	is implemented	across-the-board	without	regard	to	national	priorities).	Additionally,	decreases	in	production	volume	associated	with	budget	cuts,	including	sequestration, will	increase	unit	costs	making	our	products	less	affordable	for	both	our	U.S.	and	international	customers.	In	particular,	sequestration	may	also	result	in	significant rescheduling	or	termination	activity	with	our	supplier	base.	Such	activity	could	result	in	claims	from	our	suppliers,	which	may	include	the	amount	established	in	any settlement	agreements,	the	costs	of	evaluating	the	supplier	settlement	proposals,	and	the	costs	of	negotiating	settlement	agreements.	Budget	cuts,	including	sequestration, could	result	 in	restructuring	charges,	 impairment	of	assets,	 including	goodwill,	or	other	charges.	We	expect	costs	associated	with	claims	from	our	suppliers	and restructuring	charges	will	be	recovered	from	our	customers.

Generally,	we	expect	that	the	impact	of	budget	reductions	on	our	operating	results	will	lag	in	certain	of	our	businesses	with	longer	cycles	such	as	our	Aeronautics and	Space	Systems	business	segments,	and	our	products	businesses	within	our	MFC	and	MST	business	segments,	due	to	our	production	contract	backlog.	However,	our businesses	with	smaller,	short-term	contracts	are	the	most	susceptible	to	the	impacts	of	budget	reductions,	such	as	our	IS&GS	business	segment	and	certain	services businesses	within	our	MFC	and	MST	business	segments.	We	have	also	experienced	increased	market	pressures	in	these	services	businesses	including	lower	in-theater support	as	troop	levels	are	drawn	down	and	increased	re-competition	on	existing	contracts	coupled	with	the	fragmentation	of	large	contracts	into	multiple	smaller contracts	that	are	awarded	primarily	on	the	basis	of	price.	Additionally,	our	services	businesses	across	most	of	our	business	segments	have	experienced	lower	volume due	to	improved	product	field	performance	that	require	less	service	support.

# Other	Business	Considerations

# International	Business

A	key	component	of	our	strategic	plan	is	to	grow	our	international	sales.	To	accomplish	this	growth,	we	continue	to	focus	on	expanding	our	in-country	presence and	strengthening	our	relationships	internationally	through	partnerships	and	local	production	joint	technology	offices.	Since	2013,	we	have	acquired	Amor	Group,	a United	Kingdom-based	company,	and	we	have	opened	new	in-country	offices	including	Israel,	United	Kingdom,	the	United	Arab	Emirates	(UAE)	and	Saudi	Arabia that	will	enable	development	of	partnerships	to	create	products	and	enhance	our	offerings	in	technology,	aerospace	and	security	sectors.	We	conduct	business	with international	customers	primarily	through	our	Aeronautics,	MFC	and	MST	business	segments.

In	 our	Aeronautics	 business	 segment,	 there	 remains	 strong	 international	 interest	 in	 the	 F-35	 program.	The	 F-35	 program	 includes	 commitments	 from	 eight international	partner	countries	and	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	role	on	the	program	is	growing	as	we	installed	the Autonomic	Logistics	Information	System	Central	Point	of	Entry	kit	at	the	final	assembly	and	checkout	facility	in	Italy.	We	also	delivered	the	first	two	Australian	F-35 aircraft	in	2014.	The	number	of	F-35	aircraft	for	international	customers	in	recent	low-rate	initial	production	(LRIP)	contracts	continues	to	increase,	with	the	recent	LRIP 8	contract	including	aircraft	orders	for	Israel	and	Japan.

Other	areas	of	international	expansion	at	our	Aeronautics	business	segment	include	the	F-16	and	C-130J	programs.	The	award	from	Iraq	in	2013	for	18	additional F-16	aircraft	extends	production	into	2017.	Also,	we	delivered	11	C-130J	Super	Hercules	aircraft	to	various	international	customers	in	2014.

Our	MFC	business	segment	produces	the	Patriot	Advanced	Capability-3	(PAC-3)	and	Terminal	High	Altitude	Area	Defense	(THAAD)	air	and	missile	defense systems,	which	continue	to	generate	significant	international	interest.	The	PAC-3	is	an	advanced	missile	defense	system	designed	to	intercept	incoming	airborne	threats. During	2014,	we	received	an	award	to	provide	PAC-3	missile	defense	equipment	to	Qatar.	Other	international	customers	include	Japan,	Germany,	the	Netherlands, Taiwan,	Kuwait	and	the	UAE.	Other	countries	in	the	Middle	East	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	our	MST	business	segment,	we	continue	 to	experience	 international	 interest	 in	 the	Aegis	Ballistic	Missile	Defense	System.	We	perform	activities	 in	 the development,	production,	ship	integration	and	test	and	lifetime	support	for	ships	of	international	customers	such	as	Japan,	Spain,	Korea	and	Australia.	We	have	an ongoing	program	in	Canada	for	combat	systems	equipment	upgrades	on	13	Halifax-class	frigates.	In	our	Training	and	Logistics	Solutions	portfolio,	we	have	active programs	and	pursuits	in	United	Kingdom,	Saudi	Arabia,	Canada,	Singapore,	Qatar,	and	Australia.	Also,	we	integrate	mission	avionics	on	the	MH-60	program	for Australia	and	Denmark.

# Status	of	the	F-35	Program

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

The	U.S.	Government	continues	to	complete	various	operational	tests,	including	ship	trials,	mission	system	evaluations,	and	weapons	testing,	with	the	F-35	aircraft fleet	recently	surpassing	25,000	flight	hours.	In	November	2014,	the	U.S.	Government	successfully	completed	testing	of	the	carrier	variant	at	sea	aboard	the	USS Nimitz.	Progress	continues	to	be	made	on	the	production	of	aircraft.	As	of	December	31,	2014,	we	have	delivered	109	production	aircraft	to	our	U.S.	and	international partners	including	delivery	of	the	final	LRIP	contract	5	aircraft,	and	have	100	production	aircraft	in	backlog,	including	orders	from	our	international	partners.

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.

# Portfolio	Shaping	Activities

We	continuously	strive	to	strengthen	our	portfolio	of	products	and	services	to	meet	the	current	and	future	needs	of	our	customers.	We	accomplish	this	in	part	by	our independent	research	and	development	activities	and	through	acquisition,	divestiture	and	internal	realignment	activities.	Internal	realignments	are	designed	to	more	fully leverage	existing	capabilities	and	enhance	development	and	delivery	of	products	and	services.

We	selectively	pursue	the	acquisition	of	businesses	and	investments	at	attractive	valuations	that	will	expand	or	complement	our	current	portfolio	and	allow	access to	new	customers	or	technologies.	We	have	made	a	number	of	niche	acquisitions	of	businesses	and	investments	in	affiliates	during	the	past	several	years.	We	also	may explore	the	divestiture	of	businesses.	In	pursuing	our	business	strategy,	we	routinely	conduct	discussions,	evaluate	targets	and	enter	into	agreements	regarding	possible acquisitions,	divestitures,	ventures	and	equity	investments.

# Acquisitions

In	2014,	we	paid	$898	million	for	acquisitions	of	businesses	and	investments	in	affiliates,	net	of	cash	acquired,	primarily	related	to	the	acquisitions	of	Systems Made	Simple,	Zeta	Associates,	Inc.	(Zeta)	and	Industrial	Defender,	Inc.	(Industrial	Defender).	Systems	Made	Simple	provides	solutions	that	leverage	information technology	in	the	healthcare	domain	to	improve,	increase,	enable	and	ensure	the	exchange	and	interoperability	of	information	between	patients,	providers	and	payers	and has	 been	 included	 in	 our	 IS&GS	 business	 segment.	 Zeta	 designs	 systems	 that	 enable	 collection,	 processing,	 safeguarding	 and	 dissemination	 of	 information	 for intelligence	and	defense	communities	and	has	been	included	in	our	Space	Systems	business	segment.	Industrial	Defender	is	a	provider	of	cyber	security	solutions	for control	systems	in	the	oil	and	gas,	utility	and	chemical	industries	and	has	been	included	in	our	IS&GS	business	segment.

In	2013,	we	paid	$269	million	for	acquisitions	of	businesses	and	investments	in	affiliates,	net	of	cash	acquired,	primarily	related	to	the	acquisition	of	Amor	Group, a	United	Kingdom-based	company	specializing	in	information	technology,	civil	government	services	and	the	energy	market.	This	acquisition	is	aligned	with	our	strategy to	grow	international	sales	and	has	been	included	in	our	IS&GS	business	segment.

In	 2012,	 we	 paid	 $259	 million	 for	 acquisitions	 of	 businesses	 and	 investments	 in	 affiliates,	 net	 of	 cash	 acquired,	 primarily	 related	 to	 the	 acquisitions	 of Chandler/May,	Inc.	(Chandler/May),	CDL	Systems	Ltd.	(CDL)	and	Procerus	Technologies,	L.C.	(Procerus).	These	companies	specialize	in	the	design,	development, manufacturing,	control	and	support	of	advanced	unmanned	systems,	which	expand	our	offerings	in	support	of	our	customers'	increased	emphasis	on	advanced	unmanned systems	and	are	consistent	with	our	strategy	to	maintain	a	portfolio	of	advanced	technology	options.	These	companies	are	part	of	our	MST	business	segment	where	they have	been	integrated	into	our	portfolio	of	unmanned	systems	and	technologies	to	align	their	product	and	service	offerings	to	the	U.S.	Army.	For	additional	information, see	"Note	13	–	Acquisitions	and	Divestitures"	of	our	consolidated	financial	statements.

# 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):

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $45,600 | $\t45,358 | $\t47,182 |
| Cost\tof\tsales | (40,345) | (41,171) | (42,986) |
| Gross\tprofit | 5,255 | 4,187 | 4,196 |
| Other\tincome,\tnet | 337 | 318 | 238 |
| Operating\tprofit | 5,592 | 4,505 | 4,434 |
| Interest\texpense | (340) | (350) | (383) |
| Other\tnon-operating\tincome,\tnet | 6 | — | 21 |
| Earnings\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes | 5,258 | 4,155 | 4,072 |
| Income\ttax\texpense | (1,644) | (1,205) | (1,327) |
| Net\tearnings\tfrom\tcontinuing\toperations | 3,614 | 2,950 | 2,745 |
| Net\tearnings\tfrom\tdiscontinued\toperations | — | 31 | — |
| Net\tearnings | $\t\t\t3,614 | $\t\t\t2,981 | $2,745 |
| Diluted\tearnings\tper\tcommon\tshare |  |  |  |
| Continuing\toperations | $\t\t\t11.21 | $\t\t\t\t\t9.04 | $8.36 |
| Discontinued\toperations | — | .09 | — |
| Total\tdiluted\tearnings\tper\tcommon\tshare | $\t\t\t11.21 | $\t\t\t\t\t9.13 | $8.36 |

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	our	Aeronautics,	MFC,	MST	and Space	Systems	business	segments	and	most	of	our	service	sales	are	generated	in	our	IS&GS	and	MFC	business	segments.	Our	consolidated	net	sales	were	as	follows	(in millions):

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Products | $36,093 | $35,691 | $37,817 |
| Services | 9,507 | 9,667 | 9,365 |
| Total\tnet\tsales | $45,600 | $45,358 | $47,182 |

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	following	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

Our	product	sales	represent	about	80%	of	our	total	sales	for	both	2014	and	2013.	Product	sales	increased	$402	million,	or	1%,	in	2014	compared	to	2013.	Higher product	sales	of	about	$815	million	at	Aeronautics	and	approximately	$280	million	at	MFC	were	partially	offset	by	lower	product	sales	of	about	$570	million	at	IS&GS and	approximately	$125	million	at	Space	Systems.	The	increase	in	product	sales	at	Aeronautics	was	attributable	to	higher	volume	on	F-35	production	contracts

and	sustainment	activities,	increased	aircraft	deliveries	(F-16	program)	and	increased	risk	retirements	(F-22	program).	Product	sales	at	MFC	increased	as	a	result	of increased	volume	on	air	and	missile	defense	systems	programs	(primarily	THAAD),	and	increased	deliveries	on	fire	control	programs	(including	the	Apache	Fire	Control System	(Apache)).	Lower	product	sales	at	IS&GS	were	primarily	due	to	the	wind-down	or	completion	of	certain	programs,	driven	by	reductions	in	direct	warfighter support	and	defense	budgets	tied	to	command	and	control	programs.	The	decline	at	Space	Systems	was	due	 to	 lower	volume	for	government	satellite	programs (primarily	Advanced	Extremely	High	Frequency	(AEHF),	Global	Positioning	System	III	(GPS-III),	and	Mobile	User	Objective	System	(MUOS)),	partially	offset	by	the Orion	program	due	to	increased	volume	(primarily	the	first	unmanned	test	flight	of	the	Orion	Multi-Purpose	Crew	Vehicle	(MPCV)).

Our	product	sales	represent	about	80%	of	our	total	sales	for	both	2013	and	2012.	Product	sales	decreased	$2.1	billion,	or	6%,	in	2013	compared	to	2012	primarily due	to	lower	volume	and	deliveries.	Product	sales	decreased	about	$915	million	at	Aeronautics	primarily	due	to	fewer	aircraft	deliveries	(primarily	F-16	and	C-130)	and lower	volume	and	risk	retirements	on	F-22	due	to	completion	of	aircraft	deliveries	in	2012,	partially	offset	by	increased	volume	and	risk	retirements	on	F-35	production contracts	and	increased	aircraft	deliveries	on	the	C-5	program;	about	$750	million	at	IS&GS	for	various	programs	due	to	lower	volume	(such	as	Next	Generation Identification	(NGI)	and	En	Route	Automation	Modernization	(ERAM)	programs);	about	$440	million	at	MST	due	to	fewer	deliveries	(primarily	PTDS	as	final surveillance	system	deliveries	occurred	during	the	second	quarter	of	2012)	and	lower	volume	(primarily	integrated	warfare	systems	and	sensors	programs);	and	about $405	million	at	Space	Systems	due	to	lower	volume	(primarily	commercial	satellites	and	the	Orion	program)	partially	offset	by	increased	volume	(primarily	various government	satellite	programs).	The	decreases	were	partially	offset	by	higher	product	sales	of	about	$380	million	at	MFC	due	to	increased	volume	and	risk	retirements (primarily	THAAD	and	deliveries	of	PAC-3).

# Service	Sales

Our	service	sales	represent	about	20%	of	our	total	sales	for	2014	and	2013.	Service	sales	decreased	$160	million,	or	2%,	in	2014	compared	to	2013.	The	decreases were	primarily	due	to	lower	service	sales	at	MFC	of	about	$355	million	due	to	various	technical	services	programs	as	a	result	of	decreased	volume	reflecting	market pressures,	and	lower	service	sales	at	Aeronautics	of	about	$20	million	attributable	to	decreased	sustainment	activities.	These	decreases	were	partially	offset	by	higher service	sales	at	Space	Systems	of	about	$230	million	primarily	for	commercial	space	transportation	programs	due	to	launch-related	activities.

Our	service	sales	represent	about	20%	of	our	total	sales	for	2013	and	2012.	Service	sales	increased	$302	million,	or	3%,	in	2013	compared	to	2012.	Service	sales increased	about	$270	million	at	IS&GS	primarily	due	to	the	start-up	of	certain	programs	(such	as	the	Defense	Information	Systems	Agency	–	Global	Information	Grid Services	Management-Operations	(DISA	GSM-O)	and	the	National	Science	Foundation	Antarctic	Support);	and	about	$85	million	at	Aeronautics	primarily	due	to increased	sustainment	activities	(primarily	F-16).	The	increases	were	partially	offset	by	lower	service	sales	of	about	$80	million	at	MFC	for	various	technical	services programs	due	to	lower	volume,	partially	offset	by	various	fire	control	programs	(primarily	Special	Operations	Forces	Contractor	Logistics	Support	Services	(SOF CLSS))	due	to	higher	volume.	Service	sales	for	2013	were	comparable	to	2012	at	both	MST	and	Space	Systems.

# 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):

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Cost\tof\tsales\t–\tproducts | $(31,965) | $(31,346) | $(33,495) |
| %\tof\tproduct\tsales | 88.6% | 87.8% | 88.6% |
| Cost\tof\tsales\t–\tservices | (8,393) | (8,588) | (8,383) |
| %\tof\tservice\tsales | 88.3% | 88.8% | 89.5% |
| Goodwill\timpairment\tcharges | (119) | (195) | — |
| Severance\tcharges | — | (201) | (48) |
| Other\tunallocated,\tnet | 132 | (841) | (1,060) |
| Total\tcost\tof\tsales | $(40,345) | $(41,171) | $(42,986) |

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	$619	million,	or	2%,	in	2014	compared	to	2013.	Product	costs	increased	about	$815	million	at	Aeronautics,	approximately	$320	million	at MFC	and	about	$85	million	at	MST.	Increases	in	product	costs	at	Aeronautics	and	MFC	were	primarily	due	to	the	reasons	for	higher	product	sales	at	each	respective business	segment	described	above,	and	net	warranty	reserve	adjustments	recorded	in	2014	at	MFC	(including	Joint	Air-to-Surface	Standoff	Missile	(JASSM),	and Guided	Multiple	Launcher	Rocker	Systems	(GMLRS)).	The	increase	at	MST	was	primarily	due	to	the	settlements	of	contract	cost	matters	on	certain	programs	in	the prior	year	(including	a	portion	of	the	terminated	presidential	helicopter	program)	that	were	not	repeated	in	2014	and	higher	reserves	recorded	on	certain	training	and logistics	solutions	programs	during	2014.	These	increases	in	product	costs	were	partially	offset	by	decreases	of	about	$475	million	at	IS&GS	and	$130	million	at	Space Systems,	primarily	due	to	the	reasons	for	lower	product	sales	at	each	respective	business	segment	described	above.	The	0.8%	increase	in	product	costs	as	a	percentage	of product	sales	in	2014	compared	to	2013	was	primarily	due	to	the	items	increasing	product	costs	at	MFC	and	MST	mentioned	above,	and	decreased	risk	retirements	at Aeronautics	(primarily	F-16).

Product	costs	decreased	$2.1	billion,	or	6%,	in	2013	compared	to	2012	primarily	due	to	lower	volume	and	deliveries.	Product	costs	decreased	about	$770	million	at Aeronautics	due	to	fewer	aircraft	deliveries	(primarily	F-16	and	C-130)	and	lower	volume	(primarily	F-22),	partially	offset	by	increased	volume	for	F-35	production contracts,	increased	aircraft	deliveries	and	the	impact	of	reducing	the	profit	booking	rate	in	the	third	quarter	of	2013	for	the	C-5	program	and	lower	risk	retirements	on various	programs	(primarily	C-130);	about	$685	million	at	IS&GS	for	various	programs	primarily	due	to	decreased	volume;	about	$570	million	at	MST	primarily	due	to fewer	deliveries	and	net	increased	risk	retirements	for	the	PTDS	program	and	various	integrated	warfare	systems	and	sensors	programs	and	for	the	favorable	resolution of	certain	contract	cost	matters	(including	the	terminated	presidential	helicopter	program);	and	about	$315	million	at	Space	Systems	due	to	lower	volume	(primarily commercial	satellites	and	the	Orion	program).	The	decreases	were	partially	offset	by	higher	product	costs	of	about	$190	million	at	MFC	due	to	increased	volume (primarily	THAAD	and	deliveries	of	PAC-3),	partially	offset	by	various	other	programs	due	increased	risk	retirements	(primarily	fire	control	programs).	The	0.8% decrease	in	product	costs	as	a	percentage	of	product	sales	in	2013	compared	to	2012	was	primarily	due	to	higher	risk	retirements	(primarily	at	MFC	and	MST)	and	the favorable	resolution	of	contractual	matters	at	MST.

# Service	Costs

Service	costs	decreased	$195	million,	or	2%,	in	2014	compared	to	2013.	Lower	service	costs	of	about	$325	million	at	MFC	and	approximately	$40	million	at Aeronautics	were	partially	offset	by	an	increase	in	service	costs	of	approximately	$225	million	at	Space	Systems.	The	decrease	at	MFC	was	attributable	to	lower	volume for	various	technical	services	programs.	The	decline	at	Aeronautics	was	mostly	attributable	to	decreased	sustainment	activities.	The	increase	at	Space	Systems	was primarily	attributable	to	commercial	space	transportation	programs	due	to	launch-related	activities.	The	0.5%	decrease	in	service	costs	as	a	percentage	of	service	sales	in 2014	compared	to	2013	was	primarily	due	to	items	decreasing	service	costs	at	MFC.

Service	costs	increased	$205	million,	or	2%,	in	2013	compared	to	2012.	Most	of	our	service	costs	are	in	the	IS&GS	and	MFC	business	segments.	The	increase	in service	costs	was	primarily	attributable	to	higher	service	costs	at	our	IS&GS	and	Aeronautics	business	segments	partially	offset	by	lower	service	costs	at	our	MFC business	segment.	Service	costs	increased	about	$245	million	at	IS&GS	primarily	due	to	the	start-up	of	various	programs.	Service	costs	increased	about	$40	million	at Aeronautics	primarily	due	to	increased	sustainment	activities	(primarily	F-16).	Service	costs	decreased	about	$75	million	at	MFC	primarily	due	to	lower	volume	of various	technical	services	programs,	partially	offset	by	higher	volume	from	various	fire	control	programs	(primarily	SOF	CLSS).	The	0.7%	decrease	in	service	costs	as	a percentage	of	service	sales	in	2013	compared	to	2012	was	primarily	due	to	higher	risk	retirements	on	sustainment	contracts	at	Aeronautics.

# Goodwill	Impairment	Charges

In	the	fourth	quarters	of	2014	and	2013,	we	recorded	non-cash	goodwill	impairment	charges	of	$119	million	and	$195	million,	which	reduced	our	net	earnings	by $107	million	($.33	per	share)	and	$176	million	($.54	per	share).	For	additional	information,	see	the	"Critical	Accounting	Policies	–	Goodwill"	section	below	and	"Note	1 –	Significant	Accounting	Policies"	of	our	consolidated	financial	statements.

# Restructuring	Charges

During	2013,	we	recorded	charges	related	to	certain	severance	actions	totaling	$201	million	of	which	$83	million,	$37	million	and	$81	million	related	to	our IS&GS,	MST	and	Space	Systems	business	segments.	These	charges	reduced	our	net	earnings	by	$130	million	($.40	per	share)	and	primarily	related	to	a	plan	we committed	to	in	November	2013	to	close	and	consolidate	certain	facilities	and	reduce	our	total	workforce	by	approximately	4,000	positions	within	our	IS&GS,	MST	and Space	Systems	business	segments.	These	charges	also	include	$30	million	related	to	certain	severance	actions	at	our	IS&GS	business	segment	that	occurred	in	the	first quarter	of	2013,	which	were	subsequently	paid	in	2013.

The	November	2013	plan	resulted	from	a	strategic	review	of	facility	capacity	and	future	workload	projections	for	these	businesses	and	is	intended	to	better	align our	organization	and	cost	structure	and	improve	the	affordability	of	our	products	and	services	given	the	changes	in	U.S.	Government	spending	as	well	as	the	rapidly changing	competitive	and	economic	landscape.	Upon	separation,	terminated	employees	receive	lump-sum	severance	payments	primarily	based	on	years	of	service.	As of	December	31,	2014,	we	have	paid	approximately	$107	million	in	severance	payments	associated	with	this	action,	of	which	approximately	$92	million	was	paid	during the	year	ended	December	31,	2014.	The	remaining	severance	payments	are	expected	to	be	paid	through	the	middle	of	2015.

We	also	expect	to	incur	total	accelerated	costs	(e.g.,	accelerated	depreciation	expense	related	to	long-lived	assets	at	the	sites	to	be	closed)	and	incremental	costs (e.g.,	relocation	of	equipment	and	other	employee	related	costs)	of	approximately	$15	million,	$50	million	and	$175	million	at	our	IS&GS,	MST	and	Space	Systems business	segments	through	the	completion	of	this	plan	in	2015.	As	of	December	31,	2014,	we	have	incurred	total	accelerated	and	incremental	costs	of	approximately $110	million,	most	of	which	was	incurred	during	the	year	ended	December	31,	2014.	The	accelerated	and	incremental	costs	are	recorded	as	incurred	in	cost	of	sales	on our	Statements	of	Earnings	and	included	in	the	respective	business	segment's	results	of	operations.	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,	with	the	impact	included	in	the	respective	business	segment's results	of	operations.	Of	the	total	accelerated	and	incremental	costs	to	be	incurred	mentioned	above,	we	have	recovered	approximately	$50	million	in	2014	and	expect	to recover	approximately	$50	million	in	2015.	Also,	we	expect	the	restructuring	charges	will	reduce	our	2015	cash	flow	from	operations	by	approximately	$170	million, mostly	due	to	expected	incremental	costs	in	2015.

During	2012,	we	recorded	charges	related	to	certain	severance	actions	totaling	$48	million	of	which	$25	million	related	to	our	Aeronautics	business	segment	and $23	million	related	to	the	reorganization	of	our	former	Electronic	Systems	business	segment.	These	charges	reduced	our	net	earnings	by	$31	million	($.09	per	share)	and consisted	of	severance	costs	associated	with	the	elimination	of	certain	positions	through	either	voluntary	or	involuntary	actions.	These	severance	actions	resulted	from cost	reduction	initiatives	to	better	align	our	organization	with	changing	economic	conditions.	Upon	separation,	terminated	employees	received	lump-sum	severance payments	primarily	based	on	years	of	service,	all	of	which	were	paid	in	2013.

# 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	$132	million	of	income	for	2014,	compared	to	$841	million	and	$1.1	billion	of	expense	in	2013	and	2012.

The	fluctuation	between	each	respective	period	was	primarily	attributable	to	the	change	in	the	FAS/CAS	pension	adjustment	to	income	of	$376	million	for	2014 compared	to	expense	of	$482	million	and	$830	million	for	2013	and	2012,	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	were	attributable	to	various	items	impacting	the	calculations of	financial	accounting	standards	(FAS)	pension	expense	and	U.S.	Government	Cost	Accounting	Standards	(CAS)	pension	cost.	FAS	pension	expense	in	2014	was	less than	2013	and	2012	due	to	higher	discount	rates	used	to	calculate	our	qualified	defined	benefit	obligations	and	net	periodic	benefit	cost.	Additionally,	beginning	in	the quarter	ended	September	28,	2014,	FAS	pension	expense	was	reduced	by	the	June	2014	plan	amendments	to	certain	of	our	defined	benefit	pension	plans	to	freeze	future retirement	benefits,	partially	offset	by	the	impact	of	using	new	longevity	(also	known

as	mortality)	assumptions	(Note	9).	The	higher	CAS	pension	cost	in	2014	compared	to	2013	and	2012	reflects	the	impact	of	phasing	in	CAS	Harmonization,	partially offset	by	the	effect	of	higher	interest	rates	required	by	the	Highway	and	Transportation	Funding	Act	of	2014	(HATFA),	which	was	enacted	on	August	8,	2014.	See "Critical	Accounting	Policies	–	Postretirement	Benefit	Plans"	for	a	discussion	of	HATFA	and	CAS	Harmonization	and	the	impact	on	our	CAS	pension	cost.

# Other	Income,	Net

Other	income,	net	primarily	includes	our	share	of	earnings	or	losses	from	equity	method	investees.	Other	income,	net	for	2014	was	$337	million,	compared	to	$318 million	in	2013	and	$238	million	in	2012.	The	changes	between	years	primarily	were	due	to	fluctuations	in	earnings	from	equity	method	investees	in	our	Aeronautics and	Space	Systems	business	segments,	as	discussed	in	the	"Business	Segment	Results	of	Operations"	section	below.

# Interest	Expense

Interest	expense	for	2014	was	$340	million,	compared	to	$350	million	in	2013	and	$383	million	in	2012.	The	decrease	from	2012	to	2013	was	primarily	attributable to	lower	interest	rates	on	our	outstanding	debt	from	the	debt	exchange	that	occurred	in	December	2012.

# Other	Non-Operating	Income,	Net

Other	non-operating	income,	net	in	2014	was	comparable	to	2013.	Other	non-operating	income,	net	decreased	$21	million	from	2012	to	2013	primarily	due	to	a gain	from	the	sale	of	an	investment	in	2012.

# Income	Tax	Expense

Our	effective	income	tax	rate	from	continuing	operations	was	31.3%	for	2014,	29.0%	for	2013	and	32.6%	for	2012.	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 retroactive	reinstatement	of	the	research	and	development	(R&D)	tax	credit,	which	were	partially	offset	by	the	unfavorable	impacts	of	the	non-cash	goodwill	impairment charges	in	2014	and	2013.

The	U.S.	manufacturing	deduction	benefit	for	2014	and	2013	reduced	our	effective	tax	rate	by	approximately	two	percentage	points	as	compared	to	2012.	The decrease	between	years	occurred	because	our	tax-deductible	discretionary	pension	contributions	of	$2.5	billion	in	2012,	which	reduced	U.S.	manufacturing	deduction benefits	by	$59	million	($.18	per	share),	were	significantly	higher	than	in	2014	and	2013.

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.	In	2013,	the	R&D	tax	credit	was	temporarily	reinstated	for	two	years,	retroactive	to	the	beginning	of	2012.	As	a	result,	the	effective	income	tax	rate	for	2013 reflects	the	credit	for	all	of	2013	and	2012,	which	reduced	our	effective	tax	rate	by	1.8	percentage	points.	Since	the	R&D	tax	credit	again	expired	on	December	31,	2014, this	benefit	will	not	be	incorporated	into	the	Corporation's	2015	outlook	or	results	unless	and	until	legislation	is	enacted.

A	limited	amount	of	the	non-cash	goodwill	impairment	charges	will	be	deductible	for	tax	purposes.	Accordingly,	the	non-cash	goodwill	impairment	charges increased	our	effective	income	tax	rates	by	0.6	percentage	point	for	2014	and	1.2	percentage	points	for	2013	(Note	1).

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,	2014	and	2013	were	$5.5	billion	and	$3.9	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	25%	had	been	enacted	at	December	31,	2014,	our	net	deferred	tax assets	would	have	been	reduced	by	$1.6	billion	and	we	would	have	recorded	a	corresponding	one-time,	non-cash	increase	in	income	tax	expense	of	$1.6	billion.	This additional	expense	would	be	less	if	the	legislation	phased	in	the	tax	rate	reduction	or	if	the	final	rate	was	higher	than	25%.	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	$3.6	billion	($11.21	per	share)	in	2014,	$3.0	billion	($9.04	per	share)	in	2013	and	$2.7	billion	($8.36	per share)	in	2012.	Both	net	earnings	from	continuing	operations	and	earnings	per	share	were	affected	by	the	factors	mentioned	above.	Earnings	per	share	also	benefited from	a	net	decrease	of	approximately	five	million	common	shares	outstanding	from	December	31,	2013	to	December	31,	2014	as	a	result	of	share	repurchases,	which were	partially	offset	by	share	issuance	under	our	stock-based	awards	and	certain	defined	contribution	plans.

# Net	Earnings	from	Discontinued	Operations

Net	earnings	from	discontinued	operations	for	2013	include	a	benefit	of	$31	million	resulting	from	the	resolution	of	certain	tax	matters	related	to	a	business	sold prior	to	2013.

# Business	Segment	Results	of	Operations

We	operate	in	five	business	segments:	Aeronautics,	IS&GS,	MFC,	MST	and	Space	Systems.	We	organize	our	business	segments	based	on	the	nature	of	the products	and	services	offered.	Net	sales	of	our	business	segments	exclude	intersegment	sales	as	these	activities	are	eliminated	in	consolidation.

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	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	goodwill impairments	(Note	1)	and	significant	severance	actions	(Note	14);	gains	or	losses	from	divestitures	(Note	13);	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	2014,	we	have	FAS/CAS	pension	income	and,	conversely,	to	the	extent	FAS	pension expense	exceeds	CAS	pension	cost,	which	occurred	for	2013	and	2012,	we	have	FAS/CAS	pension	expense.

The	operating	results	in	the	following	tables	exclude	businesses	included	in	discontinued	operations	(Note	13)	for	all	years	presented.	Summary	operating	results	for each	of	our	business	segments	were	as	follows	(in	millions):

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Net\tsales |  |  |  |
| Aeronautics | $14,920 | $14,123 | $14,953 |
| Information\tSystems\t&\tGlobal\tSolutions | 7,788 | 8,367 | 8,846 |
| Missiles\tand\tFire\tControl | 7,680 | 7,757 | 7,457 |
| Mission\tSystems\tand\tTraining | 7,147 | 7,153 | 7,579 |
| Space\tSystems | 8,065 | 7,958 | 8,347 |
| Total\tnet\tsales | $45,600 | $45,358 | $47,182 |
| Operating\tprofit |  |  |  |
| Aeronautics | $1,649 | $1,612 | $1,699 |
| Information\tSystems\t&\tGlobal\tSolutions | 699 | 759 | 808 |
| Missiles\tand\tFire\tControl | 1,358 | 1,431 | 1,256 |
| Mission\tSystems\tand\tTraining | 843 | 905 | 737 |
| Space\tSystems | 1,039 | 1,045 | 1,083 |
| Total\tbusiness\tsegment\toperating\tprofit | 5,588 | 5,752 | 5,583 |
| Unallocated\titems |  |  |  |
| FAS/CAS\tpension\tadjustment |  |  |  |
| FAS\tpension\texpense\t(a) | (1,144) | (1,948) | (1,941) |
| Less:\tCAS\tpension\tcost\t(b) | 1,520 | 1,466 | 1,111 |
| FAS/CAS\tpension\tincome\t(expense)\t(c) | 376 | (482) | (830) |
| Goodwill\timpairment\tcharges\t(d) | (119) | (195) | — |
| Severance\tcharges\t(e) | — | (201) | (48) |
| Stock-based\tcompensation | (164) | (189) | (167) |
| Other,\tnet | (89) | (180) | (104) |
| Total\tunallocated\titems | 4 | (1,247) | (1,149) |
| Total\tconsolidated\toperating\tprofit | $5,592 | $4,505 | $4,434 |

(a) FAS	pension	expense	in	2014	was	less	than	in	2013	due	to	higher	discount	rates	used	to	calculate	our	qualified	defined	benefit	obligations	and	net	periodic	benefit	cost. Additionally,	beginning	in	the	quarter	ended	September	28,	2014,	FAS	pension	expense	was	reduced	by	the	June	2014	plan	amendments	to	certain	of	our	defined	benefit	pension plans	to	freeze	future	retirement	benefits,	partially	offset	by	the	impact	of	using	new	longevity	assumptions	(Note	9).

(b) The	higher	CAS	pension	cost	reflects	the	impact	of	phasing	in	CAS	Harmonization,	partially	offset	by	the	effect	of	higher	interest	rates	required	by	the	HATFA,	enacted	on August	8,	2014.	See	"Critical	Accounting	Policies	–	Postretirement	Benefit	Plans"	for	a	discussion	of	HATFA	and	CAS	Harmonization	and	the	impact	on	our	CAS	pension	cost.

(c) We	expect	FAS/CAS	pension	income	in	2015	of	about	$475	million	as	further	discussed	in	the	"Critical	Accounting	Policies	–	Postretirement	Benefit	Plans"	section	below.

(d) We	 recognized	 non-cash	 goodwill	 impairment	 charges	 related	 to	 the	 Technical	 Services	 reporting	 unit	 within	 our	 MFC	 business	 segment	 in	 2014	 and	 2013.	 For	 more information,	see	"Note	1	–	Significant	Accounting	Policies"	of	our	consolidated	financial	statements.

(e) See	"Note	14	–	Restructuring	Charges"	of	our	consolidated	financial	statements	for	information	on	charges	related	to	certain	severance	actions	at	our	business	segments	and Corporate	Headquarters.	Severance	charges	for	initiatives	that	are	not	significant	are	included	in	business	segment	operating	profit.

The	following	segment	discussions	also	include	information	relating	to	backlog	for	each	segment.	Backlog	was	approximately	$80.5	billion,	$82.6	billion	and $82.3	billion	at	December	31,	2014,	2013	and	2012.	These	amounts	included	both	funded	backlog	(firm	orders	for	which	funding	has	been	both	authorized	and appropriated	by	the	customer	–	Congress	in	the	case	of	U.S.	Government	agencies)	and	unfunded	backlog	(firm	orders	for	which	funding	has	not	yet	been	appropriated). Backlog	does	not	include	unexercised	options	or	task	orders	to	be	issued	under	indefinite-delivery,	indefinite-quantity	contracts.	Funded	backlog	was	approximately $56.5	billion	at	December	31,	2014.

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	 and	 insurance recoveries.	 Unfavorable	 items	 may	 include	 the	 adverse	 resolution	 of	 contractual	 matters;	 certain	 asset	 impairments;	 restructuring	 charges,	 except	 for	 significant severance	actions	as	mentioned	above	which	are	excluded	from	segment	operating	results;	and	reserves	for	disputes.	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	$1.8	billion,	$2.1	billion	and	$1.9	billion	for

2014,	2013	and	2012.	The	decrease	in	our	consolidated	net	adjustments	for	2014	compared	to	2013	was	primarily	due	to	a	decrease	in	profit	booking	rate	adjustments	at our	Aeronautics,	MFC	and	MST	business	segments.	The	increase	in	our	consolidated	net	adjustments	for	2013	as	compared	to	2012	was	primarily	due	to	an	increase	in profit	booking	rate	adjustments	at	our	MST	and	MFC	business	segments	and,	to	a	lesser	extent,	the	increase	in	the	favorable	resolution	of	contractual	matters	for	the corporation.	The	consolidated	net	adjustments	for	2014	are	inclusive	of	approximately	$650	million	in	unfavorable	items,	which	include	reserves	recorded	on	certain training	and	logistics	solutions	programs	at	MST	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.	The	consolidated	net	adjustments	for	2013	and	2012	are	inclusive	of	approximately	$600	million	and	$500 million	in	unfavorable	items,	which	include	a	significant	profit	reduction	on	the	F-35	development	contract	in	both	years,	as	well	as	a	significant	profit	reduction	on	the C-5	program	in	2013,	each	as	described	in	our	Aeronautics	business	segment's	results	of	operations	discussion	below.

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

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $14,920 | $14,123 | $14,953 |
| Operating\tprofit | 1,649 | 1,612 | 1,699 |
| Operating\tmargins | 11.1% | 11.4% | 11.4% |
| Backlog\tat\tyear-end | $27,600 | $28,000 | $30,100 |

Aeronautics'	net	sales	for	2014	increased	$797	million,	or	6%,	compared	to	2013.	The	increase	was	primarily	attributable	to	higher	net	sales	of	approximately	$790 million	for	F-35	production	contracts	due	to	increased	volume	and	sustainment	activities;	about	$55	million	for	the	F-16	program	due	to	increased	deliveries	(17	aircraft delivered	in	2014	compared	to	13	delivered	in	2013)	partially	offset	by	contract	mix;	and	approximately	$45	million	for	the	F-22	program	due	to	increased	risk retirements.	The	increases	were	partially	offset	by	lower	net	sales	of	approximately	$55	million	for	the	F-35	development	contract	due	to	decreased	volume,	partially offset	by	the	absence	in	2014	of	the	downward	revision	to	the	profit	booking	rate	that	occurred	in	2013;	and	about	$40	million	for	the	C-130	program	due	to	fewer deliveries	(24	aircraft	delivered	in	2014	compared	to	25	delivered	in	2013)	and	decreased	sustainment	activities,	partially	offset	by	contract	mix.

Aeronautics'	operating	profit	for	2014	increased	$37	million,	or	2%,	compared	to	2013.	The	increase	was	primarily	attributable	to	higher	operating	profit	of approximately	$85	million	for	the	F-35	development	contract	due	to	the	absence	in	2014	of	the	downward	revision	to	the	profit	booking	rate	that	occurred	in	2013;	about $75	million	for	the	F-22	program	due	to	increased	risk	retirements;	approximately	$50	million	for	the	C-130	program	due	to	increased	risk	retirements	and	contract	mix, partially	offset	by	fewer	deliveries;	and	about	$25	million	for	the	C-5	program	due	to	the	absence	in	2014	of	the	downward	revisions	to	the	profit	booking	rate	that occurred	in	2013.	The	increases	were	partially	offset	by	lower	operating	profit	of	approximately	$130	million	for	the	F-16	program	due	to	decreased	risk	retirements, partially	offset	by	increased	deliveries;	and	about	$70	million	for	sustainment	activities	due	to	decreased	risk	retirements	and	volume.	Operating	profit	was	comparable for	F-35	production	contracts	as	higher	volume	was	offset	by	lower	risk	retirements.

Adjustments	not	related	to	volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	were	approximately	$105	million	lower	for	2014	compared	to 2013.

Aeronautics'	net	sales	for	2013	decreased	$830	million,	or	6%,	compared	to	2012.	The	decrease	was	primarily	attributable	to	lower	net	sales	of	approximately	$530 million	for	the	F-16	program	due	to	fewer	aircraft	deliveries	(13	aircraft	delivered	in	2013	compared	to	37	delivered	in	2012)	partially	offset	by	aircraft	configuration mix;	about	$385	million	for	the	C-130	program	due	to	fewer	aircraft	deliveries	(25	aircraft	delivered	in	2013	compared	to	34	in	2012)	partially	offset	by	increased sustainment	activities;	approximately	$255	million	for	the	F-22	program,	which	includes	about	$205	million	due	to

decreased	production	volume	as	final	aircraft	deliveries	were	completed	during	the	second	quarter	of	2012	and	$50	million	from	the	favorable	resolution	of	a	contractual matter	during	the	second	quarter	of	2012;	and	about	$270	million	for	various	other	programs	(primarily	sustainment	activities)	due	to	decreased	volume.	The	decreases were	partially	offset	by	higher	net	sales	of	about	$295	million	for	F-35	production	contracts	due	to	increased	production	volume	and	risk	retirements;	approximately $245	million	for	the	C-5	program	due	to	increased	aircraft	deliveries	(six	aircraft	delivered	in	2013	compared	to	four	in	2012)	and	other	modernization	activities;	and about	$70	million	for	the	F-35	development	contract	due	to	increased	volume.

Aeronautics'	operating	profit	for	2013	decreased	$87	million,	or	5%,	compared	to	2012.	The	decrease	was	primarily	attributable	to	lower	operating	profit	of	about $85	million	for	the	F-22	program,	which	includes	approximately	$50	million	from	the	favorable	resolution	of	a	contractual	matter	in	the	second	quarter	of	2012	and about	$35	million	due	to	decreased	risk	retirements	and	production	volume;	approximately	$70	million	for	the	C-130	program	due	to	lower	risk	retirements	and	fewer deliveries	partially	offset	by	increased	sustainment	activities;	about	$65	million	for	the	C-5	program	due	to	the	inception-to-date	effect	of	reducing	the	profit	booking rate	in	the	third	quarter	of	2013	and	lower	risk	retirements;	approximately	$35	million	for	the	F-16	program	due	to	fewer	aircraft	deliveries	partially	offset	by	increased sustainment	activity	and	aircraft	configuration	mix.	The	decreases	were	partially	offset	by	higher	operating	profit	of	approximately	$180	million	for	F-35	production contracts	due	to	increased	risk	retirements	and	volume.	Operating	profit	was	comparable	for	the	F-35	development	contract	and	included	adjustments	of	approximately $85	million	to	reflect	the	inception-to-date	impacts	of	the	downward	revisions	to	the	profit	booking	rate	in	both	2013	and	2012.	Adjustments	not	related	to	volume, including	net	profit	booking	rate	adjustments	and	other	matters,	were	approximately	$75	million	lower	for	2013	compared	to	2012.

Backlog	decreased	slightly	in	2014	compared	to	2013	primarily	due	to	lower	orders	on	F-16	and	F-22	programs.	Backlog	decreased	in	2013	compared	to	2012 mainly	due	to	lower	orders	on	F-16,	C-5	and	C-130	programs,	partially	offset	by	higher	orders	on	the	F-35	program.

# Trends

We	expect	Aeronautics'	2015	net	sales	to	be	comparable	or	slightly	behind	2014	due	to	a	decline	in	F-16	deliveries	as	well	as	a	decline	in	F-35	development activity,	partially	offset	by	an	increase	in	production	contracts.	Operating	profit	is	also	expected	to	decrease	in	the	low	single	digit	range,	due	primarily	to	contract	mix, resulting	in	a	slight	decrease	in	operating	margins	between	years.

Our	IS&GS	business	segment	provides	advanced	technology	systems	and	expertise,	integrated	information	technology	solutions	and	management	services	across	a broad	spectrum	of	applications	for	civil,	defense,	intelligence	and	other	government	customers.	IS&GS	has	a	portfolio	of	many	smaller	contracts	as	compared	to	our other	 business	 segments.	 IS&GS	 has	 been	 impacted	 by	 the	 continued	 downturn	 in	 certain	 federal	 agencies'	 information	 technology	 budgets	 and	 increased	 re- competition	on	existing	contracts	coupled	with	the	fragmentation	of	large	contracts	into	multiple	smaller	contracts	that	are	awarded	primarily	on	the	basis	of	price. IS&GS'	operating	results	included	the	following	(in	millions):

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $7,788 | $8,367 | $8,846 |
| Operating\tprofit | 699 | 759 | 808 |
| Operating\tmargins | 9.0% | 9.1% | 9.1% |
| Backlog\tat\tyear-end | $8,700 | $8,300 | $8,700 |

IS&GS'	net	sales	decreased	$579	million,	or	7%,	for	2014	compared	to	2013.	The	decrease	was	primarily	attributable	to	lower	net	sales	of	about	$645	million	for 2014	due	to	the	wind-down	or	completion	of	certain	programs,	driven	by	reductions	in	direct	warfighter	support	(including	JIEDDO	and	PTDS)	and	defense	budgets tied	to	command	and	control	programs;	and	approximately	$490	million	for	2014	due	to	a	decline	in	volume	for	various	ongoing	programs,	which	reflects	lower	funding levels	and	programs	impacted	by	in-theater	force	reductions.	The	decreases	were	partially	offset	by	higher	net	sales	of	about	$550	million	for	2014	due	to	the	start-up	of new	programs,	growth	in	recently	awarded	programs	and	integration	of	recently	acquired	companies.

IS&GS'	operating	profit	decreased	$60	million,	or	8%,	for	2014	compared	to	2013.	The	decrease	was	primarily	attributable	to	the	activities	mentioned	above	for sales,	lower	risk	retirements	and	reserves	recorded	on	an	international	program,	partially	offset	by	severance	recoveries	related	to	the	restructuring	announced	in November	2013	of	approximately	$20	million	for	2014.	Adjustments	not	related	to	volume,	including	net	profit	booking	rate	adjustments,	were	approximately	$30 million	lower	for	2014	compared	to	2013.

IS&GS'	net	sales	decreased	$479	million,	or	5%,	for	2013	compared	to	2012.	The	decrease	was	attributable	to	lower	net	sales	of	about	$495	million	due	to decreased	volume	on	various	programs	(command	and	control	programs	for	classified	customers,	NGI	and	ERAM	programs);	and	approximately	$320	million	due	to	the completion	of	certain	programs	(such	as	Total	Information	Processing	Support	Services,	the	Transportation	Worker	Identification	Credential	and	the	Outsourcing Desktop	Initiative	for	NASA).	The	decrease	was	partially	offset	by	higher	net	sales	of	about	$340	million	due	to	the	start-up	of	certain	programs	(such	as	the	DISA GSM-O	and	the	National	Science	Foundation	Antarctic	Support).

IS&GS'	operating	profit	decreased	$49	million,	or	6%,	for	2013	compared	to	2012.	The	decrease	was	primarily	attributable	to	lower	operating	profit	of	about	$55 million	due	to	certain	programs	nearing	the	end	of	their	life	cycles,	partially	offset	by	higher	operating	profit	of	approximately	$15	million	due	to	the	start-up	of	certain programs.	Adjustments	not	related	to	volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	were	comparable	for	2013	compared	to	2012.

Backlog	increased	in	2014	compared	to	2013	primarily	due	to	several	multi-year	international	awards	and	various	U.S.	multi-year	extensions.	This	increase was	partially	offset	by	declining	activities	on	various	direct	warfighter	support	and	command	and	control	programs	impacted	by	defense	budget	reductions.	Backlog decreased	in	2013	compared	to	2012	primarily	due	to	lower	orders	on	several	programs	(such	as	ERAM	and	NGI),	higher	sales	on	certain	programs	(the	National Science	Foundation	Antarctic	Support	and	the	DISA	GSM-O)	and	declining	activities	on	several	smaller	programs	primarily	due	to	the	continued	downturn	in	federal information	technology	budgets.

We	expect	IS&GS'	net	sales	to	decline	in	2015	in	the	low	to	mid	single	digit	percentage	range	as	compared	to	2014,	primarily	driven	by	the	continued	downturn	in federal	information	technology	budgets,	an	increasingly	competitive	environment,	including	the	disaggregation	of	existing	contracts,	and	new	contract	award	delays, partially	offset	by	increased	sales	resulting	from	acquisitions	that	occurred	during	the	year.	Operating	profit	is	expected	to	decline	in	the	low	double	digit	percentage range	in	2015	primarily	driven	by	volume	and	an	increase	in	intangible	amortization	from	2014	acquisition	activity,	resulting	in	2015	margins	that	are	lower	than	2014 results.

Our	MFC	business	segment	provides	air	and	missile	defense	systems;	tactical	missiles	and	air-to-ground	precision	strike	weapon	systems;	logistics	and	other technical	services;	fire	control	systems;	mission	operations	support,	readiness,	engineering	support	and	integration	services;	and	manned	and	unmanned	ground	vehicles. MFC's	major	programs	include	PAC-3,	THAAD,	Multiple	Launch	Rocket	System,	Hellfire,	JASSM,	Javelin,	Apache,	Sniper ®,	Low	Altitude	Navigation	and	Targeting Infrared	for	Night	(LANTIRN®)	and	SOF	CLSS.	MFC's	operating	results	included	the	following	(in	millions):

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $7,680 | $7,757 | $7,457 |
| Operating\tprofit | 1,358 | 1,431 | 1,256 |
| Operating\tmargins | 17.7% | 18.4% | 16.8% |
| Backlog\tat\tyear-end | $13,600 | $15,000 | $14,700 |

MFC's	net	sales	for	2014	decreased	$77	million,	or	1%,	compared	to	2013.	The	decrease	was	primarily	attributable	to	lower	net	sales	of	approximately	$385	million for	technical	services	programs	due	to	decreased	volume	reflecting	market	pressures;	and	about	$115	million	for	tactical	missile	programs	due	to	fewer	deliveries (primarily	High	Mobility	Artillery

Rocket	System	and	Army	Tactical	Missile	System).	The	decreases	were	partially	offset	by	higher	net	sales	of	approximately	$180	million	for	air	and	missile	defense programs	primarily	due	to	increased	volume	for	THAAD;	about	$115	million	for	fire	control	programs	due	to	increased	deliveries	(including	Apache);	and	about	$125 million	for	various	other	programs	due	to	increased	volume.

MFC's	operating	profit	for	2014	decreased	$73	million,	or	5%,	compared	to	2013.	The	decrease	was	primarily	attributable	to	lower	operating	profit	of	about	$45 million	for	technical	services	programs	due	to	decreased	volume	and	reserves	recorded	on	certain	programs;	about	$20	million	for	tactical	missile	programs	due	to	net warranty	reserve	adjustments	for	various	programs	(including	JASSM	and	GMLRS)	and	fewer	deliveries;	and	approximately	$45	million	for	various	other	programs	due to	lower	risk	retirements.	The	decreases	were	partially	offset	by	higher	operating	profit	of	approximately	$20	million	for	air	and	missile	defense	programs	due	to increased	volume	(primarily	THAAD	and	PAC-3);	and	about	$15	million	for	fire	control	programs	due	to	increased	deliveries	(primarily	Apache),	partially	offset	by lower	risk	retirements	(primarily	Sniper®).	Adjustments	not	related	to	volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	were	approximately	$100 million	lower	for	2014	compared	to	2013.

MFC's	net	sales	for	2013	increased	$300	million,	or	4%,	compared	to	2012.	The	increase	was	primarily	attributable	to	higher	net	sales	of	approximately	$450 million	for	air	and	missile	defense	programs	(THAAD	and	PAC-3)	due	to	increased	production	volume	and	deliveries;	about	$70	million	for	fire	control	programs	due	to net	increased	deliveries	and	volume;	and	approximately	$55	million	for	tactical	missile	programs	due	to	net	increased	deliveries.	The	increases	were	partially	offset	by lower	net	sales	of	about	$275	million	for	various	technical	services	programs	due	to	lower	volume	driven	by	the	continuing	impact	of	defense	budget	reductions	and related	competitive	pressures.	The	increase	for	fire	control	programs	was	primarily	attributable	to	increased	deliveries	on	the	Sniper®	and	LANTIRN®	programs, increased	volume	on	the	SOF	CLSS	program,	partially	offset	by	lower	volume	on	Longbow	Fire	Control	Radar	and	other	programs.	The	increase	for	tactical	missile programs	was	primarily	attributable	to	increased	deliveries	on	JASSM	and	other	programs,	partially	offset	by	fewer	deliveries	on	GMLRS	and	Javelin	programs.

MFC's	 operating	 profit	 for	 2013	 increased	 $175	 million,	 or	 14%,	 compared	 to	 2012.	The	 increase	 was	 primarily	 attributable	 to	 higher	 operating	 profit	 of approximately	$85	million	for	air	and	missile	defense	programs	(THAAD	and	PAC-3)	due	to	increased	risk	retirements	and	volume;	about	$85	million	for	fire	control programs	(Sniper®,	LANTIRN®	and	Apache)	due	to	increased	risk	retirements	and	higher	volume;	and	approximately	$75	million	for	tactical	missile	programs	(Hellfire and	various	programs)	due	to	increased	risk	retirements.	The	increases	were	partially	offset	by	lower	operating	profit	of	about	$45	million	for	the	resolution	of contractual	matters	in	the	second	quarter	of	2012;	and	approximately	$15	million	for	various	technical	services	programs	due	to	lower	volume	partially	offset	by increased	risk	retirements.	Adjustments	not	related	to	volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	were	approximately	$100	million	higher for	2013	compared	to	2012.

Backlog	decreased	in	2014	compared	to	2013	primarily	due	to	lower	orders	on	THAAD,	fire	control	systems	programs	and	technical	services	programs,	partially offset	by	higher	orders	on	certain	tactical	missile	programs	and	PAC-3.	Backlog	increased	in	2013	compared	to	2012	mainly	due	to	higher	orders	on	the	THAAD program	and	lower	sales	volume	compared	to	new	orders	on	certain	fire	control	systems	programs	in	2013,	partially	offset	by	lower	orders	on	technical	services programs	and	certain	tactical	missile	programs.

We	expect	MFC's	net	sales	to	decline	in	the	mid	single	digit	percentage	range	in	2015	as	compared	to	2014,	primarily	due	to	a	decline	in	the	services	business	as	a result	of	the	increased	competitive	environment	and	a	slight	decline	in	our	Air	and	Missile	Defense	business,	specifically	THAAD	and	PAC-3	volume.	Operating	profit is	expected	to	decrease	in	the	high	single	digit	percentage	range,	driven	by	reduced	volume	and	fewer	risk	retirements	in	2015	compared	to	2014.	Accordingly,	operating profit	margin	is	expected	to	decline	from	2014	levels.

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

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $7,147 | $7,153 | $7,579 |
| Operating\tprofit | 843 | 905 | 737 |
| Operating\tmargins | 11.8% | 12.7% | 9.7% |
| Backlog\tat\tyear-end | $11,700 | $10,800 | $10,700 |

MST's	net	sales	for	2014	were	comparable	to	2013.	Net	sales	decreased	by	approximately	$85	million	for	undersea	systems	programs	due	to	decreased	volume	and deliveries;	and	about	$55	million	related	to	the	settlements	of	contract	cost	matters	on	certain	programs	(including	a	portion	of	the	terminated	presidential	helicopter program)	in	2013	that	were	not	repeated	in	2014.	The	decreases	were	offset	by	higher	net	sales	of	approximately	$80	million	for	integrated	warfare	systems	and	sensors programs	due	to	increased	volume	(primarily	Space	Fence);	and	approximately	$40	million	for	training	and	logistics	solutions	programs	due	to	increased	deliveries (primarily	Close	Combat	Tactical	Trainer).

MST's	 operating	 profit	 for	 2014	 decreased	 $62	 million,	 or	 7%,	 compared	 to	 2013.	 The	 decrease	 was	 primarily	 attributable	 to	 lower	 operating	 profit	 of approximately	$120	million	related	to	the	settlements	of	contract	cost	matters	on	certain	programs	(including	a	portion	of	the	terminated	presidential	helicopter	program) in	2013	that	were	not	repeated	in	2014;	and	approximately	$45	million	due	to	higher	reserves	recorded	on	certain	training	and	logistics	solutions	programs.	The decreases	were	partially	offset	by	higher	operating	profit	of	approximately	$45	million	for	performance	matters	and	reserves	recorded	in	2013	that	were	not	repeated	in 2014;	and	about	$60	million	for	various	programs	due	to	increased	risk	retirements	(including	MH-60	and	radar	surveillance	programs).	Adjustments	not	related	to volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	were	approximately	$50	million	lower	for	2014	compared	to	2013.

MST's	net	sales	for	2013	decreased	$426	million,	or	6%,	compared	to	2012.	The	decrease	was	primarily	attributable	to	lower	net	sales	of	approximately	$275 million	for	various	ship	and	aviation	systems	programs	due	to	lower	volume	(primarily	PTDS	as	final	surveillance	system	deliveries	occurred	during	the	second	quarter of	2012);	about	$195	million	for	various	integrated	warfare	systems	and	sensors	programs	(primarily	Naval	systems)	due	to	lower	volume;	approximately	$65	million	for various	training	and	logistics	programs	due	to	lower	volume;	and	about	$55	million	for	the	Aegis	program	due	to	lower	volume.	The	decreases	were	partially	offset	by higher	net	sales	of	about	$155	million	for	the	LCS	program	due	to	increased	volume.

MST's	 operating	 profit	 for	 2013	 increased	 $168	 million,	 or	 23%,	 compared	 to	 2012.	The	 increase	 was	 primarily	 attributable	 to	 higher	 operating	 profit	 of approximately	$120	million	related	to	the	settlement	of	contract	cost	matters	on	certain	programs	(including	a	portion	of	the	terminated	presidential	helicopter	program); about	$55	million	for	integrated	warfare	systems	and	sensors	programs	(primarily	radar	and	Halifax	class	modernization	programs)	due	to	increased	risk	retirements;	and approximately	$30	million	for	undersea	systems	programs	due	to	increased	risk	retirements.	The	increases	were	partially	offset	by	lower	operating	profit	of	about	$55 million	 for	 training	 and	 logistics	 programs,	 primarily	 due	 to	 the	 recording	 of	 approximately	 $30	 million	 of	 charges	 mostly	 related	 to	 lower-of-cost-or-market considerations;	and	about	$25	million	for	ship	and	aviation	systems	programs	(primarily	PTDS)	due	to	lower	risk	retirements	and	volume.	Operating	profit	related	to	the LCS	program	was	comparable.	Adjustments	not	related	to	volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	were	approximately	$170	million higher	for	2013	compared	to	2012.

Backlog	increased	in	2014	compared	to	2013	primarily	due	to	higher	orders	on	new	program	starts	(such	as	Space	Fence).	Backlog	increased	slightly	in	2013 compared	to	2012	mainly	due	to	higher	orders	and	lower	sales	on	integrated	warfare	system	and	sensors	programs	(primarily	Aegis)	and	lower	sales	on	various	service programs,	partially	offset	by	lower	orders	on	ship	and	aviation	systems	(primarily	MH-60).

We	expect	MST's	2015	net	sales	to	be	comparable	to	2014	net	sales,	with	the	increased	volume	from	new	program	starts,	specifically	Space	Fence	and	the	Combat Rescue	and	Presidential	Helicopter	programs,	offset	by	a	decline	in	volume	due	to	the	wind-down	or	completion	of	certain	programs.	Operating	profit	is	expected	to decline	in	the	mid	single	digit	percentage	range	from	2014	levels,	driven	by	a	reduction	in	expected	risk	retirements	in	2015.	Accordingly,	operating	profit	margin	is expected	to	slightly	decline	from	2014	levels.

Our	Space	Systems	business	segment	is	engaged	in	the	research	and	development,	design,	engineering	and	production	of	satellites,	strategic	and	defensive	missile systems	and	space	transportation	systems.	Space	Systems	is	also	responsible	for	various	classified	systems	and	services	in	support	of	vital	national	security	systems. Space	Systems'	major	programs	 include	 the	Space	Based	Infrared	System	(SBIRS),	AEHF,	GPS-III,	Geostationary	Operational	Environmental	Satellite	R-Series (GOES-R),	MUOS,	Trident	II	D5	Fleet	Ballistic	Missile	(FBM)	and	Orion.	Operating	profit	for	our	Space	Systems	business	segment	includes	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):

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $8,065 | $7,958 | $8,347 |
| Operating\tprofit | 1,039 | 1,045 | 1,083 |
| Operating\tmargins | 12.9% | 13.1% | 13.0% |
| Backlog\tat\tyear-end | $18,900 | $20,500 | $18,100 |

Space	Systems'	net	sales	for	2014	increased	$107	million,	or	1%,	compared	to	2013.	The	increase	was	primarily	attributable	to	higher	net	sales	of	approximately $340	million	for	the	Orion	program	due	to	increased	volume	(primarily	the	first	unmanned	test	flight	of	the	Orion	MPCV);	and	about	$145	million	for	commercial	space transportation	programs	due	to	launch-related	activities.	The	increases	were	offset	by	lower	net	sales	of	approximately	$335	million	for	government	satellite	programs due	to	decreased	volume	(primarily	AEHF,	GPS-III	and	MUOS);	and	about	$45	million	for	various	other	programs	due	to	decreased	volume.

Space	Systems'	operating	profit	for	2014	was	comparable	to	2013.	Operating	profit	decreased	by	approximately	$20	million	for	government	satellite	programs	due to	lower	volume	(primarily	AEHF	and	GPS-III),	partially	offset	by	increased	risk	retirements	(primarily	MUOS);	and	about	$20	million	due	to	decreased	equity	earnings for	joint	ventures.	The	decreases	were	offset	by	higher	operating	profit	of	approximately	$30	million	for	the	Orion	program	due	to	increased	volume.	Operating	profit was	reduced	by	approximately	$40	million	for	charges,	net	of	recoveries,	related	to	the	restructuring	action	announced	in	November	2013.	Adjustments	not	related	to volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	were	approximately	$10	million	lower	for	2014	compared	to	2013.

Space	Systems'	net	sales	for	2013	decreased	$389	million,	or	5%,	compared	to	2012.	The	decrease	was	primarily	attributable	to	lower	net	sales	of	approximately $305	million	for	commercial	satellite	programs	due	to	fewer	deliveries	(zero	delivered	during	2013	compared	to	two	for	2012);	and	about	$290	million	for	the	Orion program	due	to	lower	volume.	The	decreases	were	partially	offset	by	higher	net	sales	of	approximately	$130	million	for	government	satellite	programs	due	to	net increased	volume;	and	about	$65	million	for	strategic	and	defensive	missile	programs	(primarily	FBM)	due	to	increased	volume	and	risk	retirements.	The	increase	for government	satellite	programs	was	primarily	attributable	to	higher	volume	on	AEHF	and	other	programs,	partially	offset	by	lower	volume	on	GOES-R,	MUOS	and SBIRS	programs.

Space	Systems'	operating	profit	for	2013	decreased	$38	million,	or	4%,	compared	to	2012.	The	decrease	was	primarily	attributable	to	lower	operating	profit	of approximately	$50	million	for	the	Orion	program	due	to	lower	volume	and	risk	retirements	and	about	$30	million	for	government	satellite	programs	due	to	decreased risk	retirements,	which	were	partially	offset	by	higher	equity	earnings	from	joint	ventures	of	approximately	$35	million.	The	decrease	in	operating	profit	for	government satellite	programs	was	primarily	attributable	to	lower	risk	retirements	for	MUOS,	GPS	III	and	other	programs,	partially	offset	by	higher	risk	retirements	for	the	SBIRS and	AEHF	programs.	Operating	profit	for	2013	included	about	$15	million	of	charges,	net	of	recoveries,	related	to	the	November	2013	restructuring	plan.	Adjustments not	related	to	volume,	including	net	profit	booking	rate	adjustments	and	other	matters,	were	approximately	$15	million	lower	for	2013	compared	to	2012.

# Equity	earnings

Total	equity	earnings	recognized	by	Space	Systems	(primarily	ULA	in	2014	and	2013)	represented	approximately	$280	million	and	$300	million,	or	27%	and	29% of	this	business	segment's	operating	profit	during	2014	and	2013.	During	2012,	total	equity	earnings	recognized	by	Space	Systems	from	ULA,	United	Space	Alliance and	the	U.K.	Atomic	Weapons	Establishment	joint	venture	represented	approximately	$265	million,	or	24%,	of	this	business	segment's	operating	profit.

Backlog	decreased	in	2014	compared	to	2013	primarily	due	to	lower	orders	and	higher	sales	on	the	Orion	program,	partially	offset	by	higher	orders	on	SBIRS. Backlog	increased	in	2013	compared	to	2012	mainly	due	to	higher	orders	on	the	Orion	program,	partially	offset	by	lower	orders	on	government	satellite	programs (primarily	AEHF).

We	expect	Space	Systems'	net	sales	to	decline	in	the	mid	single	digit	percentage	range	in	2015	as	compared	to	2014;	primarily	due	to	lower	delivery	based	sales	in 2015.	Operating	profit	is	expected	to	decline	in	the	low-double	digit	percentage	range,	primarily	driven	by	lower	equity	earnings	in	2015	compared	to	2014.	As	a	result, operating	profit	margin	is	expected	to	decline	between	the	years.

# Liquidity	and	Cash	Flows

We	have	a	balanced	cash	deployment	strategy	to	enhance	stockholder	value	and	position	ourselves	to	take	advantage	of	new	business	opportunities	when	they	arise. Consistent	with	that	strategy,	we	have	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,	acquisitions,	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	2014.	First,	we	increased	our	quarterly	dividend	rate	by	13%	to	$1.50	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	$3.7	billion	as	of	December	31,	2014.	Further,	based	on	our	current	cash	projections,	in	October	2014	we	announced	a	new	cash	deployment initiative	in	which	we	plan	to	reduce	our	total	outstanding	share	count	to	below	300	million	shares	over	the	next	three	years,	market	conditions	and	our	fiduciary obligations	permitting.

We	have	accessed	the	capital	markets	on	limited	occasions,	as	needed	or	when	opportunistic.	We	expect	our	cash	from	operations	will	continue	to	be	sufficient	to support	our	operations	and	anticipated	capital	expenditures	for	the	foreseeable	future.	As	mentioned	in	the	"Capital	Resources"	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.	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	2014,	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	2014	and	those	planned	for	2015	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.	In	addition,	we	have projects	underway	to	modernize	certain	of	our	facilities,	inclusive	of	our	efforts	to	consolidate	and	reduce	leased	facilities.	We	also	incur	capital	expenditures	for information	technology	to	support	programs	and	general	enterprise	information	technology	infrastructure,	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):

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | $2,617 | $1,898 | $3,582 |
| Operating\tactivities |  |  |  |
| Net\tearnings | 3,614 | 2,981 | 2,745 |
| Non-cash\tadjustments | 876 | 1,570 | 2,133 |
| Changes\tin\tworking\tcapital | (372) | (98) | (1,061) |
| Other,\tnet | (252) | 93 | (2,256) |
| Net\tcash\tprovided\tby\toperating\tactivities | 3,866 | 4,546 | 1,561 |
| Net\tcash\tused\tfor\tinvesting\tactivities | (1,723) | (1,121) | (1,177) |
| Net\tcash\tused\tfor\tfinancing\tactivities | (3,314) | (2,706) | (2,068) |
| Net\tchange\tin\tcash\tand\tcash\tequivalents | (1,171) | 719 | (1,684) |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $1,446 | $2,617 | $1,898 |

# Operating	Activities

Net	cash	provided	by	operating	activities	decreased	$680	million	in	2014	compared	to	2013	primarily	due	to	higher	tax	payments,	net	of	refunds	received	and increases	in	working	capital.	Our	federal	and	foreign	income	tax	payments,	net	of	refunds	received,	were	approximately	$760	million	higher	in	2014	due	to	an	increase in	net	income	and	lower	refunds	received	in	2014	(attributable	to	timing	of	discretionary	pension	contributions	made	during	the	fourth	quarter	of	2012).	The	decrease	of $274	million	in	cash	provided	by	working	capital	(defined	as	receivables	and	inventories	less	accounts	payable	and	customer	advances	and	amounts	in	excess	of	costs incurred)	was	primarily	attributed	to	lower	cash	receipts	related	to	accounts	receivable,	primarily	timing	on	the	F-35	production	contracts	(including	amounts	received	in 2013	from	resolving	U.S.	Government	contractual	withholds	that	were	not	repeated	in	2014).	Partially	offsetting	the	decreases	in	operating	cash	flows	were	lower pension	contributions	in	2014.	We	made	$2.0	billion	in	contributions	to	our	qualified	defined	benefit	pension	plans	in	2014,	compared	to	$2.25	billion	in	2013.	See "Critical	Accounting	Policies	–	Postretirement	Benefit	Plans"	(under	the	caption	"Funding	Considerations")	for	discussion	of	future	postretirement	benefit	plan	funding.

Net	cash	provided	by	operating	activities	increased	$3.0	billion	in	2013	as	compared	to	2012	primarily	due	to	lower	pension	contributions,	a	lower	increase	in working	capital,	a	tax	refund	in	2013	as	discussed	below	and	improved	operating	results.	We	made	$2.25	billion	in	contributions	to	our	qualified	defined	benefit	pension plans	during	2013,	compared	to	$3.6	billion	during	2012.	The	$1.0	billion	decline	in	the	growth	of	working	capital	(defined	as	receivables	and	inventories	less	accounts payable	and	customer	advances	and	amounts	in	excess	of	costs	incurred)	was	attributable	to	higher	cash	receipts	related	to	accounts	receivable,	primarily	on	F-35 production	contracts	(including	amounts	from	resolving	U.S.	Government	contractual	withholds).	Partially	offsetting	the	improved	accounts	receivable	collections	were higher	payments	to	suppliers,	primarily	on	F-35	production	contracts.	In	addition,	there	was	lower	growth	in	inventories	in	2013	as	compared	to	2012	primarily	due	to the	timing	of	advance	payments	applied	to	inventory.	We	made	tax	payments,	net	of	refunds	received,	of	$787	million	during	2013,	compared	to	$890	million	during 2012.

# Investing	Activities

Net	cash	used	for	investing	activities	increased	$602	million	in	2014	compared	to	2013	primarily	due	to	increased	acquisition	activities	in	2014.	Acquisition activities	include	both	the	acquisition	of	businesses	and	investments	in	affiliates.	We	paid	$898	million	in	2014	for	acquisition	activities,	primarily	related	to	the acquisitions	of	Zeta,	Systems	Made	Simple,	and	Industrial	Defender	(Note	13).	In	2013,	we	paid	$269	million	for	acquisition	activities,	primarily	related	 to	 the acquisition	of	Amor	Group	(Note	13).	In	2012,	we	paid	$259	million	for	acquisition	activities,	primarily	related	to	the	acquisitions	of	Chandler/May,	CDL	and	Procerus (Note	13).	Capital	expenditures	amounted	to	$845	million	in	2014,	$836	million	in	2013	and	$942	million	in	2012.

# Financing	Activities

Net	cash	used	for	financing	activities	increased	$608	million	in	2014	compared	to	2013	primarily	due	to	decreased	proceeds	from	stock	option	exercises	in	2014, higher	dividends	paid	and	increased	repurchases	of	common	stock,	partially	offset	by	the	repayment	of	long-term	notes	in	2013.

We	paid	dividends	totaling	$1.8	billion	($5.49	per	share)	in	2014,	$1.5	billion	($4.78	per	share)	in	2013	and	$1.4	billion	($4.15	per	share)	in	2012.	We	have increased	our	quarterly	dividend	rate	in	each	of	the	last	three	years,	including	a	13%	increase	in	the	quarterly	dividend	rate	in	the	fourth	quarter	of	2014.	We	declared quarterly	dividends	of	$1.33	per	share	during	each	of	the	first	three	quarters	of	2014	and	$1.50	per	share	for	the	last	quarter;	$1.15	per	share	during	each	of	the	first	three quarters	of	2013	and	$1.33	per	share	for	the	last	quarter;	and	$1.00	per	share	during	each	of	the	first	three	quarters	of	2012	and	$1.15	per	share	for	the	last	quarter.

Cash	received	from	the	issuance	of	our	common	stock	in	connection	with	employee	stock	option	exercises	during	2014,	2013	and	2012	totaled	$308	million,	$827 million	and	$440	million.	The	exercises	resulted	in	the	issuance	of	3.7	million	shares,	10.0	million	shares	and	6.7	million	shares	of	our	common	stock.

In	2013,	we	repaid	$150	million	of	long-term	notes	with	a	fixed	interest	rate	of	7.38%	due	to	their	scheduled	maturities.	In	2012,	we	paid	$225	million	to	complete an	exchange	of	debt	due	to	the	low	interest	rate	environment.

# Capital	Structure,	Resources	and	Other

At	December	31,	2014,	we	held	cash	and	cash	equivalents	of	$1.4	billion.	As	of	December	31,	2014,	approximately	$500	million	of	our	cash	and	cash	equivalents was	held	outside	of	the	U.S.	by	foreign	subsidiaries.	Although	those	balances	are	generally	available	to	fund	ordinary	business	operations	without	legal	or	other restrictions,	a	significant	portion	is	not	immediately	available	to	fund	U.S.	operations	unless	repatriated.	Our	intention	is	to	permanently	reinvest	earnings	from	our foreign	subsidiaries.	While	we	do	not	intend	to	do	so,	if	this	cash	had	been	repatriated	at	the	end	of	2014,	we	estimate	that	about	$55	million	of	U.S.	federal	income	tax would	have	been	due	after	considering	foreign	tax	credits.

Our	outstanding	debt,	net	of	unamortized	discounts,	amounted	to	$6.2	billion	and	mainly	is	in	the	form	of	publicly-issued	notes	that	bear	interest	at	fixed	rates.	As of	December	31,	2014,	we	were	in	compliance	with	all	covenants	contained	in	our	debt	and	credit	agreements.

In	August	2014,	we	entered	into	a	new	$1.5	billion	revolving	credit	facility	with	a	syndicate	of	banks	and	concurrently	terminated	our	existing	$1.5	billion revolving	credit	facility	which	was	scheduled	to	expire	in	August	2016.	The	new	credit	facility	expires	in	August	2019.	We	may	request	and	the	banks	may	grant,	at their	discretion,	an	increase	to	the	new	credit	facility	up	to	an	additional	$500	million.	The	credit	facility	also	includes	a	sublimit	of	up	to	$300	million	available	for	the issuance	of	letters	of	credit.	There	were	no	borrowings	outstanding	under	the	new	credit	facility	through	December	31,	2014.	Borrowings	under	the	new	credit	facility would	be	unsecured	and	bear	interest	at	rates	based,	at	our	option,	on	a	Eurodollar	Rate	or	a	Base	Rate,	as	defined	in	the	new	credit	facility.	Each	bank's	obligation	to make	loans	under	the	new	credit	facility	is	subject	to,	among	other	things,	our	compliance	with	various	representations,	warranties	and	covenants,	including	covenants limiting	our	ability	and	certain	of	our	subsidiaries'	ability	to	encumber	assets	and	a	covenant	not	to	exceed	a	maximum	leverage	ratio,	as	defined	in	the	new	credit facility.	The	leverage	ratio	covenant	excludes	the	adjustments	recognized	in	stockholders'	equity	related	to	postretirement	benefit	plans.	As	of	December	31,	2014,	we were	in	compliance	with	all	covenants	contained	in	the	credit	facility,	as	well	as	in	our	debt	agreements.

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

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

Our	stockholders'	equity	was	$3.4	billion	at	December	31,	2014,	a	decrease	of	$1.5	billion	from	December	31,	2013.	The	decrease	was	due	to	the	re-measurements of	our	postretirement	benefit	plans	of	$2.9	billion,	primarily	due	to	a	decrease	in	the	discount	rate,	which	was	partially	offset	by	the	amortization	of	$706	million	in	2014 postretirement	benefit	plan	expense;	the	repurchase	of	11.5	million	common	shares	for	$1.9	billion;	and	dividends	declared	of	$1.8	billion	during	the	year.	These decreases	were	partially	offset	by	net	earnings	of	$3.6	billion	and	employee	stock	activity	of	$799	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	$1.1	billion	recorded	as	a	reduction	of	retained	earnings.

# Contractual	Commitments	and	Off-Balance	Sheet	Arrangements

At	December	31,	2014,	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 |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Less\tThan | Years | Years | After |
|  | Total | 1\tYear | 2\tand\t3 | 4\tand\t5 | 5\tYears |
| Long-term\tdebt\t(a) | \t$7,028 | \t\t\t\t$— | $952 | \t\t$900 | $5,176 |
| Interest\tpayments | 5,529 | 347 | 632 | 603 | 3,947 |
| Other\tliabilities | 2,811 | 307 | 468 | 364 | 1,672 |
| Operating\tlease\tobligations | 856 | 228 | 314 | 164 | 150 |
| Purchase\tobligations: |  |  |  |  |  |
| Operating\tactivities | 33,424 | 15,173 | \t 12,514 | 5,136 | 601 |
| Capital\texpenditures | 248 | 172 | 74 | 1 | 1 |
| Total\tcontractual\tcash\tobligations | \t$49,896 | \t\t\t\t$16,227 | $14,954 | \t\t$7,168 | $11,547 |

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

Amounts	related	to	other	liabilities	represent	the	contractual	obligations	for	certain	long-term	liabilities	recorded	as	of	December	31,	2014.	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	$32.0	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.	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	are 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,	2014,	the	remaining	obligations	under	our	outstanding	offset	agreements	totaled	$13.1	billion,	which	primarily	relate	to	our	Aeronautics,	MFC	and MST	business	segments,	some	of	which	extend	through	2027.	To	the	extent	we	have	entered	into	purchase	obligations	at	December	31,	2014	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	$1.3	billion	at	December	31,	2014,	in	the	event	we	fail	to	perform	in	accordance	with	offset	requirements.	While	historically	we	have	not	been	required	to pay	material	penalties,	resolution	of	offset	requirements	are	often	the	result	of	negotiations	and	subjective	judgments.

In	connection	with	our	50%	ownership	interest	of	ULA,	we	and	The	Boeing	Company	(Boeing)	have	each	received	distributions	from	ULA,	including	distributions of	$527	million	that	we	and	Boeing	have	each	received	(since	ULA's	formation	in	December	2006)	which	are	subject	to	agreements	between	us,	Boeing	and	ULA, whereby,	if	ULA	does	not	have	sufficient	cash	resources	or	credit	capacity	to	make	required	payments	under	the	inventory	supply	agreement	it	has	with	Boeing,	both	we and	Boeing	would	provide	to	ULA,	in	the	form	of	an	additional	capital	contribution,	the	level	of	funding	required	for	ULA	to	make	those	payments.	Any	such	capital contributions	would	not	exceed	the	amount	of	the	distributions	subject	to	the	agreements.	Based	on	current	expectations	of	ULA's	cash	flow	needs,	we	currently	believe that	ULA	should	have	sufficient	operating	cash	flows	and	credit	capacity,	including	access	to	its	$560	million	revolving	credit	agreement	from	third-party	financial institutions,	to	meet	its	obligations	such	that	we	would	not	be	required	to	make	a	contribution	under	these	agreements.

In	addition,	both	we	and	Boeing	have	cross-indemnified	each	other	for	guarantees	by	us	and	Boeing	of	the	performance	and	financial	obligations	of	ULA	under certain	launch	service	contracts.	We	believe	ULA	will	be	able	to	fully	perform	its	obligations,	as	it	has	done	through	December	31,	2014,	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,	2014,	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) | $1,265 | $\t\t\t941 | $144 | $120 | $\t\t60 |
| Surety\tbonds | 348 | 348 | — | — | — |
| Guarantees | 774 | 22 | 111 | 127 | 514 |
| Total\tcommitments | $2,387 | $1,311 | $255 | $247 | $574 |

(a) Approximately	$710	million	of	standby	letters	of	credit	in	the	"Less	Than	1	Year"	category	are	expected	to	renew	for	additional	periods	until	completion	of	the	contractual obligation.

At	December	31,	2014,	third-party	guarantees	totaled	$774	million,	of	which	approximately	85%	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,	2014,	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	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.	We	record	sales	for	both	products	and	services	under	cost-reimbursable,	fixed-price	and	time-and-materials	contracts.

# Contract	Types

# Cost-reimbursable	contracts

Cost-reimbursable	contracts,	which	accounted	for	about	40%	of	our	total	net	sales	in	2014	and	45%	of	our	total	net	sales	in	2013	and	2012,	provide	for	the	payment of	allowable	costs	incurred	during	performance	of	the	contract	plus	a	fee,	up	to	a	ceiling	based	on	the	amount	that	has	been	funded.	We	generate	revenue	under	two general	types	of	cost-reimbursable	contracts:	cost-plus-award-fee/incentive	fee	which	represent	a	substantial	majority	of	our	cost-reimbursable	contracts;	and	cost-plus- fixed-fee	contracts.

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

# Fixed-price	and	other	contracts

Under	fixed-price	contracts,	which	accounted	for	about	55%	of	our	total	net	sales	in	2014	and	50%	of	our	total	net	sales	in	2013	and	2012,	we	agree	to	perform	the specified	work	for	a	pre-determined	price.	To	the	extent	our	actual	costs	vary	from	the	estimates	upon	which	the	price	was	negotiated,	we	will	generate	more	or	less profit	or	could	incur	a	loss.	Some	fixed-price	contracts	have	a	performance-based	component	under	which	we	may	earn	incentive	payments	or	incur	financial	penalties based	on	our	performance.

Under	time-and-materials	contracts,	which	accounted	for	about	5%	of	our	total	net	sales	in	2014,	2013	and	2012,	we	are	paid	a	fixed	hourly	rate	for	each	direct labor	hour	expended	and	we	are	reimbursed	for	allowable	material	costs	and	allowable	out-of-pocket	expenses.	To	the	extent	our	actual	direct	labor	and	associated	costs vary	in	relation	to	the	fixed	hourly	billing	rates	provided	in	the	contract,	we	will	generate	more	or	less	profit	or	could	incur	a	loss.

# Percentage-of-Completion	Method	of	Accounting

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.

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	 and	 insurance recoveries.	Unfavorable	items	may	include	the	adverse	resolution	of	contractual	matters;	certain	asset	impairments;

restructuring	charges,	except	for	significant	severance	actions	as	mentioned	above	which	are	excluded	from	segment	operating	results;	and	reserves	for	disputes. Segment	operating	profit	and	items	such	as	risk	retirements,	reductions	of	profit	booking	rates	or	other	matters	are	presented	net	of	state	income	taxes.

# Services	Method	of	Accounting

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

# Other	Contract	Accounting	Considerations

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

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

# Postretirement	Benefit	Plans

# Overview

Many	of	our	employees	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	9).	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	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	will	be	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.

As	a	result	of	these	plan	amendments,	we	were	required	to	re-measure	the	assets	and	benefit	obligations	for	the	affected	defined	benefit	pension	plans	in	June	2014. We	also	elected	to	re-measure	the	assets	and	benefit	obligations	of	substantially

all	other	defined	benefit	pension	plans	in	June	2014	to	align	the	measurement	date	across	substantially	all	of	our	defined	benefit	pension	plans.	As	a	result	of	the	re- measurements,	in	June	2014	we	recorded	a	net	increase	of	$1.1	billion	to	our	qualified	defined	benefit	pension	obligations	and	a	net	increase	of	$79	million	to	our nonqualified	defined	benefit	pension	obligations,	which	combined	resulted	in	a	corresponding	increase	of	$735	million	to	other	comprehensive	loss	during	2014,	net	of $402	million	of	tax	benefits.

Additionally,	in	recent	years,	we	have	taken	other	actions	to	mitigate	the	effect	of	our	defined	benefit	pension	plans	on	our	financial	results,	including	no	longer offering	a	defined	benefit	pension	plan	to	non-union	represented	employees	hired	after	December	2005	and	negotiating	similar	changes	with	various	labor	organizations such	that	new	union	represented	employees	do	not	participate	in	our	defined	benefit	pension	plans.	Further,	during	2014,	lump-sum	settlement	payments	of	$427	million were	made	from	the	defined	benefit	pension	trust	to	certain	former	employees	who	had	not	commenced	receiving	their	vested	benefit	payments	and	the	corresponding benefit	obligation	was	reduced	by	$529	million.

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,	rates	of	return	on	plan	assets	and	other	actuarial	assumptions	including	participant	longevity	estimates,	expected	rates	of increase	in	future	compensation	levels	through	December	31,	2015	for	our	non-union	plans,	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	plan	amendment	(as described	above),	settlement	or	curtailment.	The	amounts	we	record	are	measured	using	actuarial	valuations,	which	are	dependent	upon	key	assumptions	such	as discount	rates,	employee	turnover,	participant	longevity,	the	expected	rates	of	increase	in	future	compensation	levels	through	December	31,	2015	for	our	non-union plans,	the	expected	long-term	rate	of	return	on	plan	assets	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	utilized	a	discount	rate	of	4.00%	when	calculating	our	benefit	obligations	related	to	our	defined	benefit	pension	plans	at	December	31,	2014,	compared	to 4.75%	at	December	31,	2013	and	4.00%	at	December	31,	2012.	We	utilized	a	discount	rate	of	3.75%	when	calculating	our	benefit	obligations	related	to	our	retiree medical	plans	at	December	31,	2014,	compared	to	4.50%	at	December	31,	2013	and	3.75%	at	December	31,	2012.	We	evaluate	several	data	points	in	order	to	arrive	at an	appropriate	discount	rate,	including	results	from	cash	flow	models,	quoted	rates	from	long-term	bond	indices	and	changes	in	long-term	bond	rates	over	the	past	year. As	part	of	our	evaluation,	we	calculate	the	approximate	average	yields	on	corporate	bonds	rated	AA	or	better	selected	to	match	our	projected	postretirement	benefit	plan cash	flows.

Longevity	assumptions	are	used	to	estimate	the	life	expectancy	of	plan	participants	during	which	they	are	expected	to	receive	benefit	payments.	Recent	actuarial studies	indicate	life	expectancies	are	longer	and	would	have	the	resultant	effect	of	increasing	the	total	expected	benefit	payments	to	plan	participants.	Our	benefit obligations	at	December	31,	2014	reflect	the	new	longevity	assumptions	which	had	the	effect	of	increasing	the	qualified	defined	benefit	pension	benefit	obligations	by $3.4	billion.

We	utilized	an	expected	 long-term	rate	of	return	on	plan	assets	of	8.00%	at	December	31,	2014,	consistent	with	 the	rate	used	at	December	31,	2013	and December	31,	2012.	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.	As	a	result,	changes	in	this	assumption	are	less	frequent	than	changes	in	the	discount	rate.

Our	stockholders'	equity	has	been	reduced	cumulatively	by	$11.8	billion	from	the	annual	year-end	measurements	of	the	funded	status	of	postretirement	benefit plans,	inclusive	of	the	$2.9	billion	for	the	2014	remeasurement.	The	cumulative	non-

cash,	after-tax	reduction	primarily	represents	net	actuarial	losses	resulting	from	declines	in	discount	rates	from	6.375%	at	the	end	of	2007	to	4.00%	at	the	end	of	2014 and	investment	losses	incurred	during	2008,	which	will	be	amortized	to	expense	over	the	average	future	service	period	of	employees	expected	to	receive	benefits	under the	plans	of	approximately	10	years.	During	2014,	$706	million	of	these	amounts	was	recognized	as	a	component	of	postretirement	benefit	plans	expense	and	about	$850 million	is	expected	to	be	recognized	as	expense	in	2015.

The	discount	rate	and	long-term	rate	of	return	on	plan	assets	assumptions	we	select	at	the	end	of	each	year	are	based	on	our	best	estimates	and	judgment.	A	change of	plus	or	minus	25	basis	points	in	the	4.00%	discount	rate	assumption	at	December	31,	2014,	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	2014	by	approximately	$1.5	billion,	which	would	result	in	an	after-tax	increase or	decrease	in	stockholders'	equity	at	the	end	of	the	year	of	approximately	$1.0	billion.	If	the	4.00%	discount	rate	at	December	31,	2014	that	was	used	to	compute	the expected	2015	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	2015	would	be	lower	or	higher	by	approximately	$125	million.	If	the	8.00%	expected	long-term	rate	of	return	on	plan assets	assumption	at	December	31,	2014	that	was	used	to	compute	the	expected	2015	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	 2015	 would	 be	 lower	 or	 higher	 by approximately	$85	million.

# Funding	Considerations

We	made	contributions	related	to	our	qualified	defined	benefit	pension	plans	of	$2.0	billion	in	2014,	$2.25	billion	in	2013	and	$3.6	billion	in	2012,	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.	This	ERISA	funded	status	is	calculated	on	a	different	basis	than	under	GAAP.	In	July	2012, the	U.S.	Government	passed	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.	As	a	result	of	MAP-21	there	was	an	increase	in	the interest	rate	assumption,	which	in	turn	lowered	the	minimum	funding	requirements.	The	impact	of	MAP-21	decreased	each	year	and	was	scheduled	to	phase	out	by 2016.	On	August	8,	2014,	the	HATFA	was	enacted,	which	extends	the	methodology	put	in	place	by	MAP-21	to	calculate	the	interest	rate	assumption	so	that	the	impact will	begin	to	decrease	in	2018	and	phase	out	by	2021.	Accordingly,	the	HATFA	has	the	effect	of	lowering	our	minimum	funding	requirements	during	the	affected periods	from	what	they	otherwise	would	have	been	had	the	MAP-21	methodology	not	been	extended.	The	ERISA	funded	status	of	our	qualified	defined	benefit	pension plans	was	about	94%	and	93%	as	of	December	31,	2014	and	2013.	The	GAAP	funded	status	of	our	qualified	defined	benefit	pension	plans	was	about	76%	and	78% funded	at	December	31,	2014	and	2013.

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	$1.5	billion	in	both	2014	and	2013	and	$1.1	billion	in	2012	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	over	years	2014	through	2017,	primarily	due	to	the	liability	measurement	transition	period	included	in	the	amended rule.	The	enactment	of	the	HATFA	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,	2014,	our	prepayment credits	were	approximately	$10.8	billion,	inclusive	of	the	impacts	of	HATFA,	as	compared	to	$9.6	billion	at	December	31,	2013.	The	prepayment	balance	will	increase or	decrease	based	on	our	actual	investment	return	on	plan	assets.

We	do	not	plan	to	make	contributions	to	our	qualified	defined	benefit	pension	plans	in	2015	through	2017	because	none	are	required	using	current	assumptions. However,	we	anticipate	recovering	approximately	$1.6	billion	of	CAS	pension	cost	in	2015	and	our	CAS	recoveries	in	2016	and	2017	to	be	sequentially	higher	than	in 2015	as	we	begin	to	recover	the	$10.8	billion	of	prepayment	credits	at	December	31,	2014	under	the	CAS	rules.

We	expect	our	2015	FAS	pension	expense	 to	be	$1.1	billion,	which	 is	 less	 than	our	2014	FAS	pension	expense	of	$1.2	billion,	primarily	due	 to	 the	plan amendments	announced	in	June	2014,	offset	by	the	impact	of	the	new	longevity	assumptions	and	the	decline	in	the	discount	rate.	Also,	we	expect	FAS/CAS	pension income	in	2015	of	about	$475	million,	as	compared	to	FAS/CAS	pension	income	of	$376	million	in	2014,	primarily	due	to	higher	CAS	pension	costs	due	to	CAS Harmonization.	FAS/CAS	pension	income	is	expected	to	increase	sequentially	from	2015	at	an	approximate	50%	rate	annually	in	2016	and	2017.

# Environmental	Matters

We	are	a	party	to	various	agreements,	proceedings	and	potential	proceedings	for	environmental	cleanup	issues,	including	matters	at	various	sites	where	we	have been	designated	a	potentially	responsible	party	(PRP)	by	the	U.S.	Environmental	Protection	Agency	(EPA)	or	by	a	state	agency.	At	December	31,	2014	and	2013,	the total	amount	of	liabilities	recorded	on	our	Balance	Sheet	for	environmental	matters	was	$965	million	and	$997	million.	We	have	recorded	receivables	totaling	$836 million	and	$863	million	at	December	31,	2014	and	2013	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	remediation	activities	at	environmental	sites	where	formal	agreements	either	do	not	exist	or	do	not	quantify	the	extent	and	timing	of	our	obligation. Environmental	cleanup	activities	usually	span	many	years,	which	makes	estimating	the	costs	more	judgmental	due	to,	for	example,	changing	remediation	technologies. To	determine	the	costs	related	to	cleanup	sites,	we	have	to	assess	the	extent	of	contamination,	effects	on	natural	resources,	the	appropriate	technology	to	be	used	to accomplish	the	remediation	and	evolving	regulatory	environmental	standards.

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

On	July	1,	2014,	a	regulation	became	effective	in	California	setting	the	maximum	level	of	the	contaminant	hexavalent	chromium	in	drinking	water	at	10	parts	per billion	(ppb).	In	May	2014,	the	Manufacturers	and	Technology	Association	filed	a	suit	alleging	the	10	ppb	threshold	is	lower	than	is	required	to	protect	public	health and	thus	imposes	unjustified	costs	on	the	regulated	community.	We	cannot	predict	the	outcome	of	this	suit	or	whether	other	challenges	may	be	advanced	by	the regulated	community	or	environmental	groups	which	had	sought	a	significantly	higher	and	lower	standard,	respectively.	If	the	new	standard	remains	at	10	ppb,	it	will	not have	a	material	impact	on	our	existing	remediation	costs	in	California.	In	addition,	California	is	reevaluating	its	existing	drinking	water	standard	with	respect	to	a	second contaminant,	perchlorate,	and	the	U.S.	EPA	is	also	considering	whether	to	regulate	perchlorate	and	hexavalent	chromium	in	drinking	water.	If	substantially	lower standards	are	adopted,	in	either	California	or	at	the	federal	level,	for	perchlorate	or,	if	the	U.S.	EPA	were	to	adopt	a	standard	for	hexavalent	chromium	lower	than	10 ppb,	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	and	our	history	of	receiving	reimbursement	of	such	costs.

As	disclosed	above,	we	may	record	changes	in	the	amount	of	environmental	remediation	liabilities	as	a	result	of	our	quarterly	reviews	of	the	status	of	our environmental	remediation	sites,	which	would	result	in	a	change	to	the	corresponding	environmental	receivable	and	a	charge	to	earnings.	For	example,	if	we	were	to determine	that	the	liabilities	should	be	increased	by	$100	million,	the	corresponding	receivables	would	be	increased	by	approximately	$87	million,	with	the	remainder recorded	as	a	charge	to	earnings.	This	allocation	is	determined	annually,	based	upon	our	existing	and	projected	business	activities	with	the	U.S.	Government.

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

Our	goodwill	balances	were	$10.9	billion	and	$10.3	billion	at	December	31,	2014	and	2013.	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.

When	testing	goodwill	for	impairment,	we	initially	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	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	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	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.	Corporate	allocations	include	our	postretirement	benefit	plans	liabilities,	as	determined	in	accordance	with	CAS,	in	order	to	align	the	basis of	the	carrying	values	with	the	determination	of	the	fair	values	of	our	reporting	units,	which	are	measured	using	CAS	pension	cost.	CAS	pension	cost	is	recovered through	the	pricing	of	our	products	and	services	on	U.S.	Government	contracts	and,	therefore,	affects	the	fair	value	of	each	reporting	unit.	The	amount	of	CAS	pension liability	allocated	to	each	reporting	unit	is	significantly	influenced	by	a	number	of	factors,	including	the	discount	rate	used	to	estimate	the	obligation.	On	August	8,	2014, the	HATFA	was	enacted,	which	extended	the	pension	interest	rate	relief	of	the	prior	MAP-21.	As	a	result,	the	interest	rate	used	to	calculate	CAS	pension	costs	recovered under	our	contracts	with	the	U.S.	Government	increased	with	the	resulting	effect	of	decreasing	the	amount	of	CAS	pension	liability	allocated	to	each	reporting	unit, contributing	to	an	increase	in	the	carrying	value	of	each	reporting	unit.

In	the	fourth	quarter	of	2014,	we	performed	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	MFC	business segment.	Technical	Services,	for	which	we	recorded	a	$195	million	goodwill	impairment	in	2013,	experienced	further	declines	in	fair	value	during	2014.	Technical Services	which	typically	has	smaller	customer	contracts	of	a	shorter	duration,	has	been	adversely	impacted	by	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.	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.

We	continue	to	experience	uncertainty	in	our	business	environment	due	to	significant	fiscal	and	economic	challenges	facing	the	U.S.	Government,	our	primary customer,	as	well	as	market	pressures.	While	initiatives	such	as	the	Bipartisan	Budget	Act	provide	a	more	measured	and	strategic	approach	to	addressing	the	U.S. Government's	fiscal	challenges,	budget	reductions,	including	sequestration,	remain	a	long-term	concern	as	the	Bipartisan	Budget	Act	retained	sequestration	cuts	for GFYs	2016	through	2021	and	the	across-the-board	spending	reduction	methodology	provided	for	in	the	Budget	Control	Act.	Generally,	our	businesses	with	smaller, short-term	contracts	are	the	most	susceptible	to	the	impacts	of	budget	reductions,	such	as	our	Civil	reporting	unit	within	our	IS&GS	business	segment,	Technical Services	reporting	unit	within	our	MFC	business	segment	and	certain	services	businesses	within	our	MST	business	segment.	The	Civil	reporting	unit	has	been	impacted by	the	continued	downturn	in	certain	federal	agencies'	information	technology	budgets	and	increased	re-competition	on	existing	contracts	coupled	with	fragmentation	of large	contracts	into	multiple	smaller	contracts	that	are	awarded	primarily	on	the	basis	of	price.

The	carrying	value	of	our	Civil	reporting	unit	included	goodwill	of	$2.2	billion	as	of	December	31,	2014.	Currently,	we	estimate	that	the	fair	value	of	our	Civil reporting	unit	exceeds	its	carrying	value	by	a	margin	of	approximately	15%.	Budget	reductions,	contract	cancellations	and	terminations	or	market	pressures	could	cause our	sales,	earnings	and	cash	flows	to	further	decline	below	our	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	Civil	reporting	unit	is	at	risk	of	a	future	goodwill	impairment should	there	be	further	deterioration	of	projected	cash	flows,	negative	changes	in	market	factors	or	a	significant	increase	in	the	carrying	value	of	this	reporting	unit.

Impairment	assessments	inherently	involve	management	judgments	regarding	a	number	of	assumptions	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.

# Recent	Accounting	Pronouncements

In	May	2014,	the	Financial	Accounting	Standards	Board	(FASB)	issued	a	new	standard	that	will	change	the	way	we	recognize	revenue	and	significantly	expand	the disclosure	requirements	for	revenue	recognition.	Unless	the	FASB	delays	the	effective	date	of	the	new	standard,	it	will	be	effective	for	us	beginning	on	January	1,	2017. See	Note	1	(under	the	caption	"Recent	Accounting	Pronouncements")	for	additional	information	related	to	this	new	standard.

# 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	$7.9	billion	at	December	31,	2014 and	the	outstanding	principal	amount	was	$7.0	billion,	excluding	unamortized	discounts	of	$872	million.	A	10%	change	in	the	level	of	interest	rates	would	not	have	a material	impact	on	the	fair	value	of	our	outstanding	debt	at	December	31,	2014.

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	and	the	Canadian	Dollar.	These	contracts	hedge	forecasted	foreign	currency	transactions in	order	to	mitigate	fluctuations	in	our	earnings	and	cash	flows	associated	with	changes	in	foreign	currency	exchange	rates.	We	designate	foreign	currency	hedges	as cash	flow	hedges.	We	also	are	exposed	to	the	impact	of	interest	rate	changes	primarily	through	our	borrowing	activities.	For	fixed	rate	borrowings,	we	may	use	variable interest	rate	swaps,	effectively	converting	fixed	rate	borrowings	to	variable	rate	borrowings	indexed	to	LIBOR	in	order	to	reduce	the	amount	of	interest	paid.	These swaps	are	designated	as	fair	value	hedges.	For	variable	rate	borrowings,	we	may	use	fixed	interest	rate	swaps,	effectively	converting	variable	rate	borrowings	to	fixed rate	borrowings	in	order	to	mitigate	the	impact	of	interest	rate	changes	on	earnings.	These	swaps	are	designated	as	cash	flow	hedges.	We	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,	2014	and	2013 was	$1.3	billion	and	$1.2	billion.	The	aggregate	notional	amount	of	our	outstanding	foreign	currency	hedges	at	December	31,	2014	and	2013	was	$804	million	and	$1.0 billion.	At	December	31,	2014	and	2013,	the	net	fair	value	of	our	derivative	instruments	was	not	material	(Note	15).	A	10%	appreciation	or	devaluation	of	the	hedged currency	as	compared	to	the	level	of	foreign	exchange	rates	for	currencies	under	contract	at	December	31,	2014	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,	2014,	investments	in the	trust	totaled	$1.1	billion	and	are	reflected	at	fair	value	on	our	Balance	Sheet	in	other	noncurrent	assets.	The	trust	holds	investments	in	marketable	equity	securities and	fixed-income	securities	that	are

exposed	to	price	changes	and	changes	in	interest	rates.	A	portion	of	the	liabilities	associated	with	the	deferred	compensation	plans	supported	by	the	trust	is	also	impacted by	changes	in	the	market	price	of	our	common	stock	and	certain	market	indices.	Changes	in	the	value	of	the	liabilities	have	the	effect	of	partially	offsetting	the	impact	of changes	in	the	value	of	the	trust.	Both	the	change	in	the	fair	value	of	the	trust	and	the	change	in	the	value	of	the	liabilities	are	recognized	on	our	Statements	of	Earnings	in other	unallocated,	net	and	were	not	material	for	the	year	ended	December	31,	2014.

# 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,	2014	and	2013,	and	the	related	consolidated statements	of	earnings,	comprehensive	income,	stockholders'	equity,	and	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2014.	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,	2014	and	2013,	and	the	consolidated	results	of	its	operations	and	its	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2014,	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,	2014,	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,	2015	expressed	an	unqualified	opinion	thereon.

/s/	Ernst	&	Young	LLP

McLean,	Virginia

# Consolidated	Statements	of	Earnings

# (in	millions,	except	per	share	data)

|  | 2014 | Years	Ended	December	31,<br>2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Net\tsales |  |  |  |
| Products | $\t36,093 | $\t35,691 | $\t37,817 |
| Services | 9,507 | 9,667 | 9,365 |
| Total\tnet\tsales | 45,600 | 45,358 | 47,182 |
| Cost\tof\tsales |  |  |  |
| Products | (31,965) | (31,346) | (33,495) |
| Services | (8,393) | (8,588) | (8,383) |
| Goodwill\timpairment\tcharges | (119) | (195) | — |
| Severance\tcharges | — | (201) | (48) |
| Other\tunallocated,\tnet | 132 | (841) | (1,060) |
| Total\tcost\tof\tsales | (40,345) | (41,171) | (42,986) |
| Gross\tprofit | 5,255 | 4,187 | 4,196 |
| Other\tincome,\tnet | 337 | 318 | 238 |
| Operating\tprofit | 5,592 | 4,505 | 4,434 |
| Interest\texpense | (340) | (350) | (383) |
| Other\tnon-operating\tincome,\tnet | 6 | — | 21 |
| Earnings\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes | 5,258 | 4,155 | 4,072 |
| Income\ttax\texpense | (1,644) | (1,205) | (1,327) |
| Net\tearnings\tfrom\tcontinuing\toperations | 3,614 | 2,950 | 2,745 |
| Net\tearnings\tfrom\tdiscontinued\toperations | — | 31 | — |
| Net\tearnings | $3,614 | $2,981 | $2,745 |
| Earnings\tper\tcommon\tshare |  |  |  |
| Basic |  |  |  |
| Continuing\toperations | $11.41 | $9.19 | $8.48 |
| Discontinued\toperations | — | .10 | — |
| Basic\tearnings\tper\tcommon\tshare | $11.41 | $9.29 | $8.48 |
| Diluted |  |  |  |
| Continuing\toperations | $11.21 | $9.04 | $8.36 |
| Discontinued\toperations | — | .09 | — |
| Diluted\tearnings\tper\tcommon\tshare | $11.21 | $9.13 | $8.36 |

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, |
| :--- | :--- | :--- | :--- |
|  | 2014 | 2013 | 2012 |
| Net\tearnings | $3,614 | $\t2,981 | $2,745 |
| Other\tcomprehensive\t(loss)\tincome,\tnet\tof\ttax |  |  |  |
| Postretirement\tbenefit\tplans |  |  |  |
| 2014,\t$(1.6)\tbillion\tin\t2013\tand\t$1.8\tbillion\tin\t2012 | (2,870) | 2,868 | (3,204) |
| Amounts\treclassified\tfrom\taccumulated\tother\tcomprehensive\tloss,\tnet\tof\ttax\texpense\tof\t$386\tmillion\tin\t2014, |  |  |  |
| $555\tmillion\tin\t2013\tand\t$469\tmillion\tin\t2012 | 706 | 1,015 | 858 |
| Other,\tnet | (105) | 9 | 110 |
| Other\tcomprehensive\t(loss)\tincome,\tnet\tof\ttax | (2,269) | 3,892 | (2,236) |
| Comprehensive\tincome | $1,345 | $6,873 | $509 |

# Consolidated	Balance	Sheets

# (in	millions,	except	par	value)

|  | December	31,<br>2014 | 2013 |
| :--- | :--- | :--- |
| Assets |  |  |
| Current\tassets |  |  |
| Cash\tand\tcash\tequivalents | $1,446 | $2,617 |
| Receivables,\tnet | 5,884 | 5,834 |
| Inventories,\tnet | 2,882 | 2,977 |
| Deferred\tincome\ttaxes | 1,451 | 1,088 |
| Other\tcurrent\tassets | 666 | 813 |
| Total\tcurrent\tassets | 12,329 | 13,329 |
| Property,\tplant\tand\tequipment,\tnet | 4,755 | 4,706 |
| Goodwill | 10,862 | 10,348 |
| Deferred\tincome\ttaxes | 4,013 | 2,850 |
| Other\tnoncurrent\tassets | 5,114 | 4,955 |
| Total\tassets | $37,073 | $\t36,188 |
| Liabilities\tand\tstockholders'\tequity |  |  |
| Current\tliabilities |  |  |
| Accounts\tpayable | $1,570 | $1,397 |
| Customer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred | 5,790 | 6,349 |
| Salaries,\tbenefits\tand\tpayroll\ttaxes | 1,826 | 1,809 |
| Other\tcurrent\tliabilities | 1,926 | 1,565 |
| Total\tcurrent\tliabilities | 11,112 | 11,120 |
| Accrued\tpension\tliabilities | 11,413 | 9,361 |
| Other\tpostretirement\tbenefit\tliabilities | 1,102 | 902 |
| Long-term\tdebt,\tnet | 6,169 | 6,152 |
| Other\tnoncurrent\tliabilities | 3,877 | 3,735 |
| Total\tliabilities | 33,673 | 31,270 |
| Stockholders'\tequity |  |  |
| Common\tstock,\t$1\tpar\tvalue\tper\tshare | 314 | 319 |
| Additional\tpaid-in\tcapital | — | — |
| Retained\tearnings | 14,956 | 14,200 |
| Accumulated\tother\tcomprehensive\tloss | (11,870) | (9,601) |
| Total\tstockholders'\tequity | 3,400 | 4,918 |
| Total\tliabilities\tand\tstockholders'\tequity | $37,073 | $ 36,188 |

# Consolidated	Statements	of	Cash	Flows

|  | 2014 | Years	Ended	December	31,<br>2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Operating\tactivities |  |  |  |
| Net\tearnings | $\t3,614 | $\t2,981 | $\t2,745 |
| Adjustments\tto\treconcile\tnet\tearnings\tto\tnet\tcash\tprovided\tby\toperating\tactivities |  |  |  |
| Depreciation\tand\tamortization | 994 | 990 | 988 |
| Stock-based\tcompensation | 164 | 189 | 167 |
| Deferred\tincome\ttaxes | (401) | (5) | 930 |
| Goodwill\timpairment\tcharges | 119 | 195 | — |
| Severance\tcharges | — | 201 | 48 |
| Changes\tin\tassets\tand\tliabilities |  |  |  |
| Receivables,\tnet | 28 | 767 | (460) |
| Inventories,\tnet | 77 | (60) | (422) |
| Accounts\tpayable | 95 | (647) | (236) |
| Customer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred | (572) | (158) | 57 |
| Postretirement\tbenefit\tplans | (880) | (375) | (1,883) |
| Income\ttaxes | 351 | 364 | (535) |
| Other,\tnet | 277 | 104 | 162 |
| Net\tcash\tprovided\tby\toperating\tactivities | 3,866 | 4,546 | 1,561 |
| Investing\tactivities |  |  |  |
| Capital\texpenditures | (845) | (836) | (942) |
| Acquisitions\tof\tbusinesses\tand\tinvestments\tin\taffiliates | (898) | (269) | (259) |
| Other,\tnet | 20 | (16) | 24 |
| Net\tcash\tused\tfor\tinvesting\tactivities | (1,723) | (1,121) | (1,177) |
| Financing\tactivities |  |  |  |
| Repurchases\tof\tcommon\tstock | (1,900) | (1,762) | (990) |
| Proceeds\tfrom\tstock\toption\texercises | 308 | 827 | 440 |
| Dividends\tpaid | (1,760) | (1,540) | (1,352) |
| Repayments\tof\tlong-term\tdebt | — | (150) | — |
| Premium\tpaid\ton\tdebt\texchange | — | — | (225) |
| Other,\tnet | 38 | (81) | 59 |
| Net\tcash\tused\tfor\tfinancing\tactivities | (3,314) | (2,706) | (2,068) |
| Net\tchange\tin\tcash\tand\tcash\tequivalents | (1,171) | 719 | (1,684) |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 2,617 | 1,898 | 3,582 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $\t1,446 | $\t2,617 | $\t1,898 |

# Consolidated	Statements	of	Stockholders'	Equity

|  | Common<br>Stock | Additional<br>Paid-In<br>Capital | Retained<br>Earnings | Other<br>		Comprehensive<br>Loss | Total<br>		Stockholders'<br>Equity |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Balance\tat\tDecember\t31,\t2011 | $321 | $\t\t\t\t— | \t$11,937 | $(11,257) | $\t\t1,001 |
| Net\tearnings | — | — | 2,745 | — | 2,745 |
| Other\tcomprehensive\tloss,\tnet\tof\ttax | — | — | — | (2,236) | (2,236) |
| Repurchases\tof\tcommon\tstock | (11) | (889) | (108) | — | (1,008) |
| Dividends\tdeclared\t($4.15\tper\tshare) | — | — | (1,363) | — | (1,363) |
| Stock-based\tawards\tand\tESOP\tactivity | 11 | 889 | — | — | 900 |
| Balance\tat\tDecember\t31,\t2012 | 321 | — | 13,211 | (13,493) | 39 |
| Net\tearnings | — | — | 2,981 | — | 2,981 |
| Other\tcomprehensive\tincome,\tnet\tof\ttax | — | — | — | 3,892 | 3,892 |
| Repurchases\tof\tcommon\tstock | (16) | (1,294) | (434) | — | (1,744) |
| Dividends\tdeclared\t($4.78\tper\tshare) | — | — | (1,558) | — | (1,558) |
| Stock-based\tawards\tand\tESOP\tactivity | 14 | 1,294 | — | — | 1,308 |
| Balance\tat\tDecember\t31,\t2013 | 319 | — | 14,200 | (9,601) | 4,918 |
| Net\tearnings | — | — | 3,614 | — | 3,614 |
| Other\tcomprehensive\tincome,\tnet\tof\ttax | — | — | — | (2,269) | (2,269) |
| Repurchases\tof\tcommon\tstock | (12) | (792) | (1,096) | — | (1,900) |
| Dividends\tdeclared\t($5.49\tper\tshare) | — | — | (1,762) | — | (1,762) |
| Stock-based\tawards\tand\tESOP\tactivity | 7 | 792 | — | — | 799 |
| Balance\tat\tDecember\t31,\t2014 | $314 | $\t\t\t\t— | \t$14,956 | $(11,870) | $\t\t3,400 |

# 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	and information	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.

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	Statements	of	Earnings	based	on	the	attributes	of	the	underlying	contracts.

Percentage-of-Completion	Method	of	Accounting	–	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	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	and	insurance	recoveries.	Unfavorable	items	may include	the	adverse	resolution	of	contractual	matters;	asset	impairments;	restructuring	charges,	except	for	significant	severance	actions	(such	as	those	mentioned	below	in Note	14)	which	are	excluded	from	segment	operating	results;	and	reserves	for	disputes.	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	$1.8	billion	in	2014,	$2.1	billion	in	2013	and	$1.9	billion	in	2012.	These	adjustments	increased	net	earnings	by	approximately $1.1	billion	($3.55	per	share)	in	2014,	$1.3	billion	($4.09	per	share)	in	2013	and	$1.2	billion	($3.70	per	share)	in	2012.

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

Research	and	development	and	similar	costs	–	Except	for	certain	arrangements	described	below,	we	account	for	independent	research	and	development	costs	as part	of	the	general	and	administrative	costs	that	are	allocated	among	all	of	our	contracts	and	programs	in	progress	under	U.S.	Government	contractual	arrangements	and charged	to	cost	of	sales.	Under	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	$751	million	in	2014,	$697	million	in	2013	and	$616	million	in	2012.	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.

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

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	$739	million	in	2014,	$714	million	in	2013 and	$715	million	in	2012.

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	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,	2014	and	2013,	capitalized	software	totaled	$547	million	and	$653	million,	net	of	accumulated	amortization	of	$1.8	billion	and	$1.6 billion.	No	amortization	expense	is	recorded	until	the	software	is	ready	for	its	intended	use.	Amortization	expense	related	to	capitalized	software	was	$206	million	in 2014,	$228	million	in	2013	and	$217	million	in	2012.

Goodwill	–	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.

When	testing	goodwill	for	impairment,	we	initially	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	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	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	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	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	Missiles	and	Fire Control	(MFC)	business	segment.	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.	This	charge	reduced	our	net	earnings	by	$107	million	($.33	per	share).

During	the	fourth	quarter	of	2013,	due	to	the	continuing	impact	of	defense	budget	reductions	and	related	competitive	pressures	on	the	Technical	Services	business, we	recorded	a	non-cash	goodwill	impairment	charge	of	$195	million.	This	charge	reduced	our	2013	net	earnings	by	$176	million	($.54	per	share).

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,	the	expected	rates	of	increase	in	future compensation	levels	through	December	31,	2015	for	our	non-union	plans,	health	care	cost	trend	rates	and	employee	turnover,	each	as	appropriate	based	on	the	nature	of the	plans.	We	recognize	on	a	plan-by-plan	basis	the	funded	status	of	our	postretirement	benefit	plans	under	GAAP	as	either	an	asset	recorded	within	other	noncurrent assets	or	a	liability	recorded	within	noncurrent	liabilities	on	our	Balance	Sheets.	There	is	a	corresponding	non-cash	adjustment	to	accumulated	other	comprehensive	loss, net	of	tax	benefits	recorded	as	deferred	tax	assets,	in	stockholders'	equity.	The	GAAP	funded	status	is	measured	as	the	difference	between	the	fair	value	of	the	plan's assets	and	the	benefit	obligation	of	the	plan.	The	funded	status	under	the	Employee	Retirement	Income	Security	Act	of	1974	(ERISA),	as	amended	by	the	Pension Protection	Act	of	2006	(PPA),	is	calculated	on	a	different	basis	than	under	GAAP.

Environmental	matters	–	We	record	a	liability	for	environmental	matters	when	it	is	probable	that	a	liability	has	been	incurred	and	the	amount	can	be	reasonably estimated.	The	amount	of	liability	recorded	is	based	on	our	estimate	of	the	costs	to	be	incurred	for	remediation	at	a	particular	site.	We	do	not	discount	the	recorded liabilities,	as	the	amount	and	timing	of	future	cash	payments	are	not	fixed	or	cannot	be	reliably	determined.	Our	environmental	liabilities	are	recorded	on	our	Balance Sheets	within	other	liabilities,	both	current	and	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	 and	 our	 history	 of	 receiving	 reimbursement	 of	 such	 costs.	 We	 include	 the	 portion	 of	 those environmental	costs	expected	to	be	allocated	to	our	non-U.S.	Government	contracts,	or	that	is	determined	to	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	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,	2014	and	2013,	the	fair	value	of	our	trading	securities	totaled	$1.1	billion	and	$1.0	billion	and	was	included	in	other	noncurrent	assets	on	our	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 2014,	2013	and	2012	were	$65	million,	$64	million	and	$67	million.	Gains	and	losses	on	these	investments	are	included	in	other	unallocated,	net	within	cost	of	sales	on our	Statements	of	Earnings	in	order	to	align	the	classification	of	changes	in	the	market	value	of	investments	held	for	the	plan	with	changes	in	the	value	of	the corresponding	plan	liabilities.

Equity	method	investments	–	Investments	where	we	have	the	ability	to	exercise	significant	influence,	but	do	not	control,	are	accounted	for	under	the	equity method	of	accounting	and	are	included	in	other	noncurrent	assets	on	our	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 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,	2014	and 2013,	our	equity	method	investments	totaled	$971	million	and	$914	million,	which	primarily	are	composed	of	our	Space	Systems	business	segment's	investment	in United	Launch	Alliance	(ULA),	as	further	described	in	Note	12,	and	our	Aeronautics	business	segment's	investment	in	Advanced	Military	Maintenance,	Repair	and Overhaul	Center.	Our	share	of	net	earnings	related	to	our	equity	method	investees	was	$342	million	in	2014,	$321	million	in	2013	and	$277	million	in	2012,	of	which approximately	$280	million,	$300	million	and	$265	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,	2014	and	2013	was	$1.3	billion	and	$1.2	billion.	The	aggregate	notional	amount	of	our outstanding	foreign	currency	hedges	at	December	31,	2014	and	2013	was	$804	million	and	$1.0	billion.	Derivative	instruments	did	not	have	a	material	impact	on	net earnings	and	comprehensive	income	during	2014,	2013	and	2012.	Substantially	all	of	our	derivatives	are	designated	for	hedge	accounting.	See	Note	15	for	more information	on	the	fair	value	measurements	related	to	our	derivative	instruments.

Recent	Accounting	Pronouncements	–	In	May	2014,	the	Financial	Accounting	Standards	Board	(FASB)	issued	a	new	standard	that	will	change	the	way	we recognize	revenue	and	significantly	expand	the	disclosure	requirements	for	revenue	arrangements.	Unless	the	FASB	delays	the	effective	date	of	the	new	standard,	it	will be	effective	for	us	beginning	on	January	1,	2017	and	may	be	adopted	either	retrospectively	or	on	a	modified	retrospective	basis	whereby	the	new	standard	would	be applied	to	new	contracts	and	existing	contracts	with	remaining	performance	obligations	as	of	the	effective	date,	with	a	cumulative	catch-up	adjustment	recorded	to beginning	retained	earnings	at	the	effective	date	for	existing	contracts	with	remaining	performance	obligations.	Early	adoption	is	not	permitted.	We	are	currently evaluating	the	methods	of	adoption	allowed	by	the	new	standard	and	the	effect	the	standard	is	expected	to	have	on	our	consolidated	financial	statements	and	related disclosures.	As	the	new	standard	will	supersede	substantially	all	existing	revenue	guidance	affecting	us	under	GAAP,	it	could	impact	revenue	and	cost	recognition	on thousands	of	contracts	across	all	our	business	segments,	in	addition	to	our	business	processes	and	our	information	technology	systems.	As	a	result,	our	evaluation	of	the effect	of	the	new	standard	will	extend	over	future	periods.

# Note	2	–	Earnings	Per	Share

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

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Weighted\taverage\tcommon\tshares\toutstanding\tfor\tbasic\tcomputations | \t316.8 | \t320.9 | \t323.7 |
| Weighted\taverage\tdilutive\teffect\tof\tequity\tawards | 5.6 | 5.6 | 4.7 |
| Weighted\taverage\tcommon\tshares\toutstanding\tfor\tdiluted\tcomputations | \t322.4 | \t326.5 | \t328.4 |

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.

The	computation	of	diluted	earnings	per	common	share	excluded	2.4	million	and	8.0	million	stock	options	for	the	years	ended	December	31,	2013	and	2012 because	their	inclusion	would	have	been	anti-dilutive,	primarily	due	to	their	exercise	prices	exceeding	the	average	market	prices	of	our	common	stock	during	the respective	periods.	There	were	no	anti-dilutive	equity	awards	for	the	year	ended	December	31,	2014.

# Note	3	–	Information	on	Business	Segments

We	operate	in	five	business	segments:	Aeronautics,	Information	Systems	&	Global	Solutions	(IS&GS),	MFC,	Mission	Systems	and	Training	(MST)	and	Space Systems.	We	organize	our	business	segments	based	on	the	nature	of	the	products	and	services	offered.	The	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.

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

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

•	 Mission	Systems	and	Training	–	Provides	ship	and	submarine	mission	and	combat	systems;	mission	systems	and	sensors	for	rotary	and	fixed-wing	aircraft;	sea	and land-based	missile	defense	systems;	radar	systems;	the	Littoral	Combat	Ship;	simulation	and	training	services;	and	unmanned	systems	and	technologies.

•Space	Systems	–	Engaged	in	the	research	and	development,	design,	engineering	and	production	of	satellites,	strategic	and	defensive	missile	systems	and	space transportation	systems.	Space	Systems	is	also	responsible	for	various	classified	systems	and	services	in	support	of	vital	national	security	systems.	Operating	profit	for our	Space	Systems	business	segment	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	(Note	13)	from	their	respective dates	of	acquisition.	The	business	segment	operating	results	in	the	following	tables	exclude	businesses	included	in	discontinued	operations	(Note	13)	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	because	the	operating	activities	of	the	equity method	investees	are	closely	aligned	with	the	operations	of	our	business	segments.	Operating	profit	of	our	business	segments	excludes	the	FAS/CAS	pension	adjustment described	below;	expense	for	stock-based	compensation;	the	effects	of	items	not	considered	part	of	management's	evaluation	of	segment	operating	performance,	such	as charges	related	to	goodwill	impairments	(Note	1)	and	significant	severance	actions	(Note	14);	gains	or	losses	from	divestitures	(Note	13);	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	(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.	As	a	result,	to	the	extent	that CAS	pension	cost	exceeds	FAS	pension	expense,	which	occurred	for	2014,	we	have	FAS/CAS	pension	income	and,	conversely,	to	the	extent	FAS	pension	expense exceeds	CAS	pension	cost,	which	occurred	for	2013	and	2012,	we	have	FAS/CAS	pension	expense.

# Selected	Financial	Data	by	Business	Segment

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

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Net\tsales |  |  |  |
| Aeronautics | $14,920 | $14,123 | $14,953 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 7,788 | 8,367 | 8,846 |
| Missiles\tand\tFire\tControl | 7,680 | 7,757 | 7,457 |
| Mission\tSystems\tand\tTraining | 7,147 | 7,153 | 7,579 |
| Space\tSystems | 8,065 | 7,958 | 8,347 |
| Total\tnet\tsales | $45,600 | $45,358 | $47,182 |
| Operating\tprofit |  |  |  |
| Aeronautics | $1,649 | $1,612 | $1,699 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 699 | 759 | 808 |
| Missiles\tand\tFire\tControl | 1,358 | 1,431 | 1,256 |
| Mission\tSystems\tand\tTraining | 843 | 905 | 737 |
| Space\tSystems | 1,039 | 1,045 | 1,083 |
| Total\tbusiness\tsegment\toperating\tprofit | 5,588 | 5,752 | 5,583 |
| Unallocated\titems |  |  |  |
| FAS/CAS\tpension\tadjustment |  |  |  |
| FAS\tpension\texpense\t(a) | (1,144) | (1,948) | (1,941) |
| Less:\tCAS\tpension\tcost\t(b) | 1,520 | 1,466 | 1,111 |
| FAS/CAS\tpension\tincome\t(expense) | 376 | (482) | (830) |
| Goodwill\timpairment\tcharges\t(c) | (119) | (195) | — |
| Severance\tcharges\t(d) | — | (201) | (48) |
| Stock-based\tcompensation | (164) | (189) | (167) |
| Other,\tnet | (89) | (180) | (104) |
| Total\tunallocated\titems | 4 | (1,247) | (1,149) |
| Total\tconsolidated\toperating\tprofit | $5,592 | $4,505 | $4,434 |

(b) The	higher	CAS	pension	cost	reflects	 the	 impact	of	phasing	 in	 CAS	 Harmonization,	 partially	 offset	 by	 the	 effect	 of	 higher interest	 rates	 required	 by the	 Highway	 and Transportation	Funding	Act	of	2014	(HATFA),	enacted	on	August	8,	2014.

(c) We	recognized	non-cash	goodwill	impairment	charges	related	to	the	Technical	Services	reporting	unit	within	our	MFC	business	segment	in	2014	and	2013.	See	Note	1	for	more information.

(d) See	Note	14	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.

# Selected	Financial	Data	by	Business	Segment	(continued)

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Intersegment\tsales |  |  |  |
| Aeronautics | $99 | $195 | $197 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 665 | 687 | 838 |
| Missiles\tand\tFire\tControl | 336 | 273 | 298 |
| Mission\tSystems\tand\tTraining | \t 1,224 | 991 | 908 |
| Space\tSystems | 119 | 101 | 107 |
| Total\tintersegment\tsales | $2,443 | $2,247 | $2,348 |
| Depreciation\tand\tamortization |  |  |  |
| Aeronautics | $322 | $318 | $311 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 91 | 94 | 92 |
| Missiles\tand\tFire\tControl | 99 | 98 | 104 |
| Mission\tSystems\tand\tTraining | 158 | 174 | 179 |
| Space\tSystems | 217 | 199 | 191 |
| Total\tbusiness\tsegment\tdepreciation\tand\tamortization | 887 | 883 | 877 |
| Corporate\tactivities | 107 | 107 | 111 |
| Total\tdepreciation\tand\tamortization | $994 | $990 | $988 |
| Capital\texpenditures |  |  |  |
| Aeronautics | $283 | $271 | $271 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 35 | 64 | 78 |
| Missiles\tand\tFire\tControl | 142 | 128 | 128 |
| Mission\tSystems\tand\tTraining | 157 | 132 | 158 |
| Space\tSystems | 162 | 170 | 167 |
| Total\tbusiness\tsegment\tcapital\texpenditures | 779 | 765 | 802 |
| Corporate\tactivities | 66 | 71 | 140 |
| Total\tcapital\texpenditures | $845 | $836 | $942 |

# Net	Sales	by	Customer	Category

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

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| U.S.\tGovernment |  |  |  |
| Aeronautics | $10,704 | $11,025 | $11,587 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 6,951 | 7,768 | 8,340 |
| Missiles\tand\tFire\tControl | 5,223 | 5,177 | 5,224 |
| Mission\tSystems\tand\tTraining | 5,395 | 5,370 | 5,685 |
| Space\tSystems | 7,817 | 7,833 | 7,952 |
| Total\tU.S.\tGovernment\tnet\tsales | $36,090 | $37,173 | $38,788 |
| International\t(a) |  |  |  |
| Aeronautics | $4,183 | $3,078 | $3,323 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 630 | 399 | 380 |
| Missiles\tand\tFire\tControl | 2,443 | 2,546 | 2,208 |
| Mission\tSystems\tand\tTraining | 1,694 | 1,672 | 1,826 |
| Space\tSystems | 65 | 73 | 319 |
| Total\tinternational\tnet\tsales | $9,015 | $7,768 | $8,056 |
| U.S.\tCommercial\tand\tOther |  |  |  |
| Aeronautics | $33 | $20 | $43 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 207 | 200 | 126 |
| Missiles\tand\tFire\tControl | 14 | 34 | 25 |
| Mission\tSystems\tand\tTraining | 58 | 111 | 68 |
| Space\tSystems | 183 | 52 | 76 |
| Total\tU.S.\tcommercial\tand\tother\tnet\tsales | $495 | $417 | $338 |
| Total\tnet\tsales | $45,600 | $45,358 | $47,182 |

(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	17%,	16%	and	14%	of	our	total	net	sales	during	2014,	2013	and	2012.

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

|  | 2014 | 2013 |
| :--- | :--- | :--- |
| Assets\t(a) |  |  |
| Aeronautics | $6,021 | $5,821 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 6,228 | 5,798 |
| Missiles\tand\tFire\tControl | 4,050 | 4,159 |
| Mission\tSystems\tand\tTraining | 6,277 | 6,512 |
| Space\tSystems | 3,914 | 3,522 |
| Total\tbusiness\tsegment\tassets | \t 26,490 | \t 25,812 |
| Corporate\tassets\t(b) | \t 10,583 | \t 10,376 |
| Total\tassets | $37,073 | $36,188 |
| Goodwill |  |  |
| Aeronautics | $150 | $146 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 4,310 | 3,942 |
| Missiles\tand\tFire\tControl | 2,165 | 2,288 |
| Mission\tSystems\tand\tTraining | 3,237 | 3,264 |
| Space\tSystems | 1,000 | 708 |
| Total\tgoodwill\t(c) | $10,862 | $10,348 |
| Customer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred |  |  |
| Aeronautics | $2,191 | $2,433 |
| Information\tSystems\t&amp;\tGlobal\tSolutions | 376 | 322 |
| Missiles\tand\tFire\tControl | 1,825 | 1,942 |
| Mission\tSystems\tand\tTraining | 1,069 | 1,188 |
| Space\tSystems | 329 | 464 |
| Total\tcustomer\tadvances\tand\tamounts\tin\texcess\tof\tcosts\tincurred | $5,790 | $6,349 |

(a) We	have	no	significant	long-lived	assets	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.

(c) During	2014,	goodwill	increased	$681	million	due	to	acquisitions	primarily	consisting	of	Zeta	Associates,	Inc.	(Zeta)	at	our	Space	Systems	business	segment	and	Systems	Made Simple	and	Industrial	Defender,	Inc.	(Industrial	Defender)	at	our	IS&GS	business	segment	(Note	13)	and	also	decreased	by	$119	million	due	to	a	non-cash	impairment	charge related	to	our	MFC	business	segment	(Note	1).	During	2013,	the	decrease	in	goodwill	was	primarily	due	to	a	non-cash	impairment	charge	of	$195	million	related	to	our	MFC business	segment	(Note	1),	partially	offset	by	the	acquisition	of	Amor	Group	Ltd.	(Amor)	at	our	IS&GS	business	segment	(Note	13).	Total	accumulated	goodwill	impairment loss	as	of	the	beginning	of	2014	was	$195	million	and	related	entirely	to	our	MFC	business	segment.

# Note	4	–	Receivables,	net

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

|  | 2014 | 2013 |
| :--- | :--- | :--- |
| U.S.\tGovernment |  |  |
| Amounts\tbilled | $1,434 | $1,275 |
| Unbilled\tcosts\tand\taccrued\tprofits | 4,577 | 4,767 |
| Less:\tcustomer\tadvances\tand\tprogress\tpayments | (1,012) | (1,008) |
| Total\tU.S.\tGovernment\treceivables,\tnet | 4,999 | 5,034 |
| Other\tgovernments\tand\tcommercial |  |  |
| Amounts\tbilled | 466 | 391 |
| Unbilled\tcosts\tand\taccrued\tprofits | 672 | 600 |
| Less:\tcustomer\tadvances | (253) | (191) |
| Total\tother\tgovernments\tand\tcommercial\treceivables,\tnet | 885 | 800 |
| Total\treceivables,\tnet | $5,884 | $5,834 |

We	expect	to	bill	substantially	all	of	the	December	31,	2014	unbilled	costs	and	accrued	profits	during	2015.

# Note	5	–	Inventories,	net

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

|  | 2014 | 2013 |
| :--- | :--- | :--- |
| Work-in-process,\tprimarily\trelated\tto\tlong-term\tcontracts\tand\tprograms\tin\tprogress | $6,728 | $7,073 |
| Less:\tcustomer\tadvances\tand\tprogress\tpayments | (4,701) | (4,834) |
|  | 2,027 | 2,239 |
| Other\tinventories | 855 | 738 |
| Total\tinventories,\tnet | $2,882 | $2,977 |

Work-in-process	 inventories	 at	 December	 31,	 2014	 and	 2013	 included	 general	 and	 administrative	 costs	 of	 $698	 million	 and	 $630	 million.	 General	 and administrative	costs	incurred	and	recorded	in	inventories	totaled	$2.6	billion	in	2014	and	$2.4	billion	in	both	2013	and	2012	and	general	and	administrative	costs	charged to	cost	of	sales	from	inventories	totaled	$2.6	billion	in	2014	and	$2.4	billion	in	both	2013	and	2012.

# Note	6	–	Property,	Plant	and	Equipment,	net

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

|  | 2014 | 2013 |
| :--- | :--- | :--- |
| Land | $99 | $99 |
| Buildings | 5,724 | 5,602 |
| Machinery\tand\tequipment | 7,036 | 7,043 |
| Construction\tin\tprogress | 636 | 622 |
|  | \t 13,495 | \t 13,366 |
| Less:\taccumulated\tdepreciation\tand\tamortization | (8,740) | (8,660) |
| Total\tproperty,\tplant\tand\tequipment,\tnet | $4,755 | $4,706 |

# Note	7	–	Income	Taxes

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

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Federal\tincome\ttax\texpense\t(benefit): |  |  |  |
| Current | $2,020 | $1,204 | $387 |
| Deferred | (387) | 3 | 925 |
| Total\tfederal\tincome\ttax\texpense | \t 1,633 | \t 1,207 | \t 1,312 |
| Foreign\tincome\ttax\texpense\t(benefit): |  |  |  |
| Current | 24 | 6 | 14 |
| Deferred | (13) | (8) | 1 |
| Total\tforeign\tincome\ttax\texpense\t(benefit) | 11 | (2) | 15 |
| Total\tincome\ttax\texpense | $1,644 | $1,205 | $1,327 |

State	income	taxes	are	included	in	our	operations	as	general	and	administrative	costs	and,	under	U.S.	Government	regulations,	are	allowable	costs	in	establishing prices	for	the	products	and	services	we	sell	to	the	U.S.	Government.	Therefore,	a	substantial	portion	of	state	income	taxes	is	included	in	our	net	sales	and	cost	of	sales. As	a	result,	the	impact	of	certain	transactions	on	our	operating	profit	and	of	other	matters	presented	in	these	financial	statements	is	disclosed	net	of	state	income	taxes. Our	total	net	state	income	tax	expense	was	$207	million	in	2014,	$121	million	for	2013	and	$183	million	for	2012.

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

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Income\ttax\texpense\tat\tthe\tU.S.\tfederal\tstatutory\ttax\trate | $1,840 | $1,454 | $1,425 |
| U.S.\tmanufacturing\tdeduction\tbenefit | (127) | (100) | (29) |
| Research\tand\tdevelopment\ttax\tcredit | (66) | (96) | — |
| Tax\tdeductible\tdividends | (82) | (77) | (73) |
| Goodwill\timpairment\t–\tnon-deductible\tportion | 30 | 50 | — |
| Other,\tnet | 49 | (26) | 4 |
| Income\ttax\texpense | $1,644 | $1,205 | $1,327 |

Our	tax-deductible	pension	contributions	were	significantly	higher	in	2012	than	in	2013	or	2014	and,	accordingly,	our	U.S.	manufacturing	deduction	for	2012	was significantly	reduced.

We	recognized	tax	benefits	of	$66	million	in	2014	and	$96	million	in	2013	from	U.S.	research	and	development	(R&D)	tax	credits,	including	benefits	attributable	to prior	periods.	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.	In	2013,	the	R&D	tax	credit	was	temporarily	reinstated	for	two	years,	retroactive	to	the	beginning	of	2012.	As	a	result,	income	tax	expense for	2013	reflects	the	credit	for	all	of	2013	and	2012,	which	reduced	income	tax	expense	by	approximately	$76	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.

A	limited	amount	of	the	non-cash	goodwill	impairment	charges	will	be	deductible	for	tax	purposes.	Accordingly,	the	2014	and	2013	non-cash	goodwill	impairment charges	(Note	1)	of	$119	million	and	$195	million	increased	our	2014	and	2013	effective	tax	rates.

We	participate	in	the	IRS	Compliance	Assurance	Process	program.	The	IRS	examination	of	the	year	2012	was	completed	in	the	fourth	quarter	of	2013.	The examinations	of	the	years	2013	and	2014	remain	under	review.	We	also	resolved	certain	issues	in	our	2009	tax	return	with	the	IRS	Appeals	Division	in	2012.	The resolution	of	these	examinations	and	issues	did	not	have	a	material	impact	on	our	effective	tax	rates.

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

|  | 2014 | 2013 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets\trelated\tto: |  |  |
| Accrued\tcompensation\tand\tbenefits | $965 | $918 |
| Pensions\t(a) | \t 4,317 | \t 3,198 |
| Other\tpostretirement\tbenefit\tobligations | 386 | 316 |
| Contract\taccounting\tmethods | 989 | 721 |
| Foreign\tcompany\toperating\tlosses\tand\tcredits | 59 | 52 |
| Other | 198 | 223 |
| Valuation\tallowance\t(b) | (9) | (8) |
| Deferred\ttax\tassets,\tnet | \t 6,905 | \t 5,420 |
| Deferred\ttax\tliabilities\trelated\tto: |  |  |
| Goodwill\tand\tpurchased\tintangibles | 454 | 410 |
| Property,\tplant\tand\tequipment | 514 | 575 |
| Exchanged\tdebt\tsecurities\tand\tother\t(c) | 485 | 502 |
| Deferred\ttax\tliabilities | \t 1,453 | \t 1,487 |
| Net\tdeferred\ttax\tassets\t(d) | $5,452 | $3,933 |

(a) The	increase	in	2014	was	primarily	due	to	using	a	lower	discount	rate	for	the	annual	measurement	adjustment	related	to	our	postretirement	benefit	plans	(Note	9).

(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.

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

As	of	December	31,	2014	and	2013,	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	2011,	other	than	with	respect	to	refunds.

U.S.	income	taxes	and	foreign	withholding	taxes	have	not	been	provided	on	earnings	of	$291	million,	$222	million	and	$211	million	that	have	not	been	distributed by	our	non-U.S.	companies	as	of	December	31,	2014,	2013	and	2012.	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	$55 million	in	2014,	$50	million	in	2013	and	$45	million	in	2012.

Our	federal	and	foreign	income	tax	payments,	net	of	refunds	received,	were	$1.5	billion	in	2014,	$787	million	in	2013	and	$890	million	in	2012.	Our	2014	and 2013	net	payments	reflect	a	$200	million	and	$550	million	refund	from	the	IRS	primarily	attributable	to	our	tax-deductible	discretionary	pension	contributions	during the	fourth	quarters	of	2013	and	2012,	and	our	2012	net	payments	reflect	a	$153	million	refund	from	the	IRS	related	to	a	2011	capital	loss	carryback.

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

|  | 2014 | 2013 |
| :--- | :--- | :--- |
| Notes\twith\trates\tfrom\t2.13%\tto\t6.15%,\tdue\t2016\tto\t2042 | $5,642 | $5,642 |
| Notes\twith\trates\tfrom\t7.00%\tto\t7.75%,\tdue\t2016\tto\t2036 | 916 | 916 |
| Other\tdebt | 483 | 476 |
| Total\tlong-term\tdebt | \t 7,041 | \t 7,034 |
| Less:\tunamortized\tdiscounts | (872) | (882) |
| Total\tlong-term\tdebt,\tnet | $6,169 | $6,152 |

In	August	2014,	we	entered	into	a	new	$1.5	billion	revolving	credit	facility	with	a	syndicate	of	banks	and	concurrently	terminated	our	existing	$1.5	billion revolving	credit	facility	which	was	scheduled	to	expire	in	August	2016.	The	new	credit	facility	expires	August	2019	and	we	may	request	and	the	banks	may	grant,	at their	discretion,	an	increase	to	the	new	credit	facility	of	up	to	an	additional	$500	million.	The	credit	facility	also	includes	a	sublimit	of	up	to	$300	million	available	for the	issuance	of	letters	of	credit.	There	were	no	borrowings	outstanding	under	the	new	facility	through	December	31,	2014.	Borrowings	under	the	new	credit	facility would	be	unsecured	and	bear	interest	at	rates	based,	at	our	option,	on	a	Eurodollar	Rate	or	a	Base	Rate,	as	defined	in	the	new	credit	facility.	Each	bank's	obligation	to make	loans	under	the	credit	facility	is	subject	to,	among	other	things,	our	compliance	with	various	representations,	warranties	and	covenants,	including	covenants limiting	our	ability	and	certain	of	our	subsidiaries'	ability	to	encumber	assets	and	a	covenant	not	to	exceed	a	maximum	leverage	ratio,	as	defined	in	the	credit	facility. The	leverage	ratio	covenant	excludes	the	adjustments	recognized	in	stockholders'	equity	related	to	postretirement	benefit	plans.	As	of	December	31,	2014,	we	were	in compliance	with	all	covenants	contained	in	the	credit	facility,	as	well	as	in	our	debt	agreements.

We	have	agreements	in	place	with	financial	institutions	to	provide	for	the	issuance	of	commercial	paper.	There	were	no	commercial	paper	borrowings	outstanding during	2014	or	2013.	If	we	were	to	issue	commercial	paper,	the	borrowings	would	be	supported	by	the	credit	facility.

In	April	2013,	we	repaid	$150	million	of	long-term	notes	with	a	fixed	interest	rate	of	7.38%	due	to	their	scheduled	maturities.	During	the	next	five	years,	we	have scheduled	long-term	debt	maturities	of	$952	million	due	in	2016	and	$900	million	due	in	2019.	Interest	payments	were	$326	million	in	2014,	$340	million	in	2013	and $378	million	in	2012.	All	of	our	existing	unsecured	and	unsubordinated	indebtedness	rank	equally	in	right	of	payment.

# Note	9	–	Postretirement	Plans

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

Many	of	our	employees	are	covered	by	qualified	defined	benefit	pension	plans	and	we	provide	certain	health	care	and	life	insurance	benefits	to	eligible	retirees (collectively,	postretirement	benefit	plans).	We	also	sponsor	nonqualified	defined	benefit	pension	plans	to	provide	for	benefits	in	excess	of	qualified	plan	limits.	Non- union	represented	employees	hired	after	December	2005	do	not	participate	in	our	qualified	defined	benefit	pension	plans,	but	are	eligible	to	participate	in	a	qualified

defined	contribution	plan	in	addition	to	our	other	retirement	savings	plans.	They	also	have	the	ability	to	participate	in	our	retiree	medical	plans,	but	we	do	not	subsidize the	cost	of	their	participation	in	those	plans	as	we	do	with	employees	hired	before	January	1,	2006.	Over	the	last	few	years,	we	have	negotiated	similar	changes	with 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.	Currently,	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	will	be	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.

We	have	made	contributions	to	trusts	established	to	pay	future	benefits	to	eligible	retirees	and	dependents,	including	Voluntary	Employees'	Beneficiary	Association trusts	and	401(h)	accounts,	the	assets	of	which	will	be	used	to	pay	expenses	of	certain	retiree	medical	plans.	We	use	December	31	as	the	measurement	date.	Benefit obligations	as	of	the	end	of	each	year	reflect	assumptions	in	effect	as	of	those	dates.	Net	periodic	benefit	cost	is	based	on	assumptions	in	effect	at	the	end	of	the respective	preceding	year.

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

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

|  | Qualified	Defined | Qualified	Defined |  | Retiree	Medical	and | Retiree	Medical	and |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Benefit\tPension\tPlans\t(a) | Benefit\tPension\tPlans\t(a) | Benefit\tPension\tPlans\t(a) | Life\tInsurance\tPlans | Life\tInsurance\tPlans |  |
|  | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 |
| Service\tcost | $903 | $1,142 | $1,055 | $\t\t\t22\t\t\t\t\t\t\t$\t\t\t27\t\t\t\t\t\t\t$\t\t\t28 | $\t\t\t22\t\t\t\t\t\t\t$\t\t\t27\t\t\t\t\t\t\t$\t\t\t28 | $\t\t\t22\t\t\t\t\t\t\t$\t\t\t27\t\t\t\t\t\t\t$\t\t\t28 |
| Interest\tcost | 1,912 | 1,800 | 1,884 | 123 | 116 | 131 |
| Expected\treturn\ton\tplan\tassets | (2,693) | (2,485) | (2,187) | (146) | (145) | (131) |
| Recognized\tnet\tactuarial\tlosses | 1,173 | 1,410 | 1,116 | 23 | 44 | 32 |
| Amortization\tof\tnet\tprior\tservice\t(credit)\tcost | (151) | 81 | 73 | 4 | (17) | (12) |
| Total\tnet\tperiodic\tbenefit\tcost | $\t1,144 | $\t1,948 | $\t1,941 | $26\t\t\t\t\t\t\t$ | 25\t\t\t\t\t\t\t$ | 48 |

(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	Statements	of	Earnings.	The	FAS/CAS	pension	adjustment,	which	was	income	of	$376	million	in	2014	and	expense	of	$482	million	in	2013	and $830	million	in	2012,	effectively	adjusts	the	amount	of	CAS	pension	cost	in	the	business	segment	operating	profit	so	that	pension	expense	recorded	on	our	Statements	of Earnings	is	equal	to	FAS	pension	expense.

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 | Pension\tPlans | Life\tInsurance\tPlans | Life\tInsurance\tPlans |
|  | \t\t\t\t\t\t2014 | \t\t\t\t\t\t2013 | \t\t\t\t\t\t2014 | \t\t\t\t\t\t2013 |
| Change\tin\tbenefit\tobligation |  |  |  |  |
| Beginning\tbalance | \t$\t\t42,161 | \t$46,017 | \t $\t2,823 | $3,184 |
| Service\tcost | 903 | 1,142 | 22 | 27 |
| Interest\tcost | 1,912 | 1,800 | 123 | 116 |
| Benefits\tpaid\t(a) | (2,399) | (2,023) | (352) | (353) |
| Actuarial\tlosses\t(gains) | 4,493 | (4,882) | (40) | (319) |
| New\tlongevity\tassumptions | 3,390 | — | 266 | — |
| Plan\tamendments\t(b) | (4,578) | 107 | 5 | — |
| Medicare\tPart\tD\tsubsidy | — | — | 26 | 10 |
| Participants'\tcontributions | — | — | 161 | 158 |
| Ending\tbalance | \t$\t\t45,882 | \t$42,161 | \t $\t3,034 | $2,823 |
| Change\tin\tplan\tassets |  |  |  |  |
| Beginning\tbalance\tat\tfair\tvalue | \t$\t\t33,010 | \t$30,924 | \t $\t1,921 | $1,964 |
| Actual\treturn\ton\tplan\tassets | 2,062 | 1,859 | 126 | 44 |
| Benefits\tpaid\t(a) | (2,399) | (2,023) | (352) | (353) |
| Company\tcontributions | 2,000 | 2,250 | 50 | 98 |
| Medicare\tPart\tD\tsubsidy | — | — | 26 | 10 |
| Participants'\tcontributions | — | — | 161 | 158 |
| Ending\tbalance\tat\tfair\tvalue | \t$\t\t34,673 | \t$33,010 | \t $\t1,932 | $1,921 |
| Unfunded\tstatus\tof\tthe\tplans | \t$(11,209) | \t $(9,151) | \t$(1,102) | $\t(902) |

(a) Benefits	paid	 in	2014	for	qualified	defined	benefit	pension	plans	 include	$427	million	 in	 the	form	of	 lump-sum	settlement	payments	 to	former	employees	who	had	not commenced	receiving	their	vested	benefit	payments.	The	corresponding	benefit	obligation	that	was	released	was	$529	million.	The	settlement	payments	had	no	impact	on	our 2014	FAS	pension	expense	and	CAS	pension	cost.

(b) The	June	2014	plan	amendment	which	resulted	in	freezing	the	pay-based	component	of	the	formula	used	to	determine	retirement	benefits	under	the	affected	plans	reduced	our qualified	defined	benefit	pension	obligations	by	$4.6	billion,	which	resulted	in	a	corresponding	reduction,	net	of	tax,	in	the	accumulated	other	comprehensive	loss	(AOCL) component	of	stockholders'	equity.	This	amount	is	being	recognized	as	a	reduction	of	net	periodic	benefit	cost	(i.e.,	amortization	of	net	prior	service	credit)	over	the	estimated remaining	service	period	of	the	covered	employees,	which	is	approximately	10	years	and	began	in	the	third	quarter	of	2014.

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

|  | Qualified	Defined	Benefit | Qualified	Defined	Benefit | Retiree	Medical	and | Retiree	Medical	and |
| :--- | :--- | :--- | :--- | :--- |
|  | Pension\tPlans | Pension\tPlans | Life\tInsurance\tPlans | Life\tInsurance\tPlans |
|  | \t\t\t\t\t\t\t\t2014 | 2013 | \t\t\t\t\t\t2014 | \t2013 |
| Prepaid\tpension\tasset | $204 | $\t\t\t\t210 | $— | $— |
| Accrued\tpostretirement\tbenefit\tliabilities | (11,413) | (9,361) | (1,102) | (902) |
| Accumulated\tother\tcomprehensive\tloss\t(pre-tax)\trelated\tto: |  |  |  |  |
| Net\tactuarial\tlosses | 20,794 | 13,453 | 741 | 516 |
| Prior\tservice\t(credit)\tcost | (3,985) | 443 | 14 | 13 |
| Total\t(a) | $16,809 | \t$13,896 | $755 | $529 |

(a) Accumulated	other	comprehensive	loss	related	to	postretirement	benefit	plans,	after	tax,	of	$11.8	billion	and	$9.6	billion	at	December	31,	2014	and	2013	(Note	10)	includes $16.8	billion	($10.8	billion	after	tax)	and	$13.9	billion	($9.0	billion	after	tax)	for	qualified	defined	benefit	pension	plans,	$755	million	($488	million	after	tax)	and	$529	million ($342	million	after	tax)	for	retiree	medical	and	life	insurance	plans	and	$692	million	($460	million	after	tax)	and	$508	million	($328	million	after	tax)	for	other	plans.

The	accumulated	benefit	obligation	(ABO)	for	all	qualified	defined	benefit	pension	plans	was	$45.2	billion	and	$37.5	billion	at	December	31,	2014	and	2013,	of which	$45.0	billion	and	$37.3	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,	2014	and	2013	is	as follows	(in	millions):

|  | 2014 | 2013 |
| :--- | :--- | :--- |
| Plans\twhere\tABO\twas\tin\texcess\tof\tplan\tassets |  |  |
| Projected\tbenefit\tobligation | \t\t$45,741 | $\t41,984 |
| Less:\tfair\tvalue\tof\tplan\tassets | 34,328 | 32,623 |
| Unfunded\tstatus\tof\tplans\t(a) | (11,413) | (9,361) |
| Plans\twhere\tABO\twas\tless\tthan\tplan\tassets |  |  |
| Projected\tbenefit\tobligation | 141 | 177 |
| Less:\tfair\tvalue\tof\tplan\tassets | 345 | 387 |
| Funded\tstatus\tof\tplans\t(b) | \t\t$204 | $210 |

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

(b) Represent	prepaid	pension	assets,	which	are	included	on	our	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	 both December	31,	2014	and	2013	were	$1.1	billion	and	$1.0	billion,	which	also	represent	the	plans'	unfunded	status.	We	have	set	aside	certain	assets	totaling	$397	million and	$373	million	as	of	December	31,	2014	and	2013	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,	2014	and	2013	were	$662	million	and	$480	million.	The	unrecognized	prior	service	credit	at	December	31,	2014	was $121	million	and	at	December	31,	2013	was	not	material.	The	expense	associated	with	these	plans	totaled	$115	million	in	2014,	$108	million	in	2013	and	$107	million in	2012.	We	also	sponsor	a	small	number	of	other	postemployment	plans	and	foreign	benefit	plans.	The	aggregate	liability	for	the	other	postemployment	plans	was	$88 million	and	$108	million	as	of	December	31,	2014	and	2013.	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,	2014,	2013	and	2012	(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 |  |
|  | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 |
|  | Gains\t(losses) | Gains\t(losses) |  |  | (Gains)\tlosses |  |
| Actuarial\tgains\tand\tlosses |  |  |  |  |  |  |
| Qualified\tdefined\tbenefit\tpension\tplans | $(5,505)\t\t\t\t\t\t$2,751\t\t\t\t\t\t\t$(2,933) | $(5,505)\t\t\t\t\t\t$2,751\t\t\t\t\t\t\t$(2,933) | $(5,505)\t\t\t\t\t\t$2,751\t\t\t\t\t\t\t$(2,933) | $758\t\t\t\t\t$ | 911\t\t\t\t\t\t\t$721 | 911\t\t\t\t\t\t\t$721 |
| Retiree\tmedical\tand\tlife\tinsurance\tplans | (160) | 140 | (104) | 15 | 28 | 21 |
| Other\tplans | (245) | 46 | (98) | 33 | 34 | 77 |
|  | (5,910) | \t 2,937 | (3,135) | 806 | 973 | \t 819 |
|  |  | Credit\t(cost) |  |  | (Credit)\tcost |  |
| Prior\tservice\tcredit\tand\tcost |  |  |  |  |  |  |
| Qualified\tdefined\tbenefit\tpension\tplans | 2,959 | (69) | (73) | (98) | 53 | 47 |
| Retiree\tmedical\tand\tlife\tinsurance\tplans | (3) | — | 4 | 3 | (11) | (8) |
| Other\tplans | 84 | — | — | (5) | — | — |
|  | 3,040 | (69) | (69) | (100) | 42 | 39 |
|  | $(2,870)\t\t\t\t\t\t$2,868\t\t\t\t\t\t\t$(3,204) | $(2,870)\t\t\t\t\t\t$2,868\t\t\t\t\t\t\t$(3,204) | $(2,870)\t\t\t\t\t\t$2,868\t\t\t\t\t\t\t$(3,204) | $\t\t706\t\t\t\t\t\t\t$1,015\t\t\t\t\t\t\t$858 | $\t\t706\t\t\t\t\t\t\t$1,015\t\t\t\t\t\t\t$858 | $\t\t706\t\t\t\t\t\t\t$1,015\t\t\t\t\t\t\t$858 |

We	expect	that	approximately	$1.3	billion,	or	about	$850	million	net	of	tax,	of	actuarial	losses	and	prior	service	credit	related	to	postretirement	benefit	plans included	in	accumulated	other	comprehensive	loss	at	the	end	of	2014	to	be	recognized

in	net	periodic	benefit	cost	during	2015.	Of	this	amount,	$1.2	billion,	or	$781	million	net	of	tax,	primarily	relates	to	actuarial	losses	associated	with	our	qualified	defined benefit	plans	and	is	included	in	our	expected	2015	pension	expense	of	$1.1	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 | Qualified	Defined	Benefit | Retiree	Medical	and | Retiree	Medical	and |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Pension\tPlans |  | Life\tInsurance\tPlans | Life\tInsurance\tPlans |  |
|  | 2014 | 2013 | 2012 | 2014 | 2013 | 2012 |
| Discount\trate | \t4.00% | \t4.75% | \t4.00% | \t 3.75% | \t 4.50% | \t3.75% |
| Expected\tlong-term\trate\tof\treturn\ton\tassets | \t8.00% | \t8.00% | \t8.00% | \t 8.00% | \t 8.00% | \t8.00% |
| Rate\tof\tincrease\tin\tfuture\tcompensation\tlevels | \t4.30% | \t4.30% | \t4.30% |  |  |  |
| Health\tcare\ttrend\trate\tassumed\tfor\tnext\tyear |  |  |  | \t 8.50% | \t 8.75% | \t9.00% |
| Ultimate\thealth\tcare\ttrend\trate |  |  |  | \t 5.00% | \t 5.00% | \t5.00% |
| Year\tthat\tthe\tultimate\thealth\tcare\ttrend\trate\tis\treached |  |  |  | \t2029 | \t2029\t\t\t\t\t\t\t\t \t2029 | \t2029\t\t\t\t\t\t\t\t \t2029 |

The	decrease	in	the	discount	rate	from	December	31,	2013	to	December	31,	2014	resulted	in	an	increase	in	the	projected	benefit	obligations	of	our	qualified	defined benefit	pension	plans	of	approximately	$4.8	billion	at	December	31,	2014.	The	increase	in	the	discount	rate	from	December	31,	2012	to	December	31,	2013	resulted	in	a decrease	in	the	projected	benefit	obligations	of	our	qualified	defined	benefit	pension	plans	of	approximately	$4.4	billion	at	December	31,	2013.

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 | \t\t0-20% |
| Equity | 15-65% |
| Fixed\tincome | 10-60% |
| Alternative\tinvestments: |  |
| Private\tequity\tfunds | \t\t0-15% |
| Real\testate\tfunds | \t\t0-10% |
| Hedge\tfunds | \t\t0-20% |
| Commodities | \t\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	Balance	Sheets.	The	following	table	presents	the	fair	value	of	the	assets	(in	millions) of	our	qualified	defined	benefit	pension	plans	and	retiree	medical	and	life	insurance	plans	by	asset	category	and	their	level	within	the	fair	value	hierarchy,	which	has three	levels	based	on	the	reliability	of	the	inputs	used	to	determine	fair	value.	Level	1	refers	to	fair	values	determined	based	on	quoted	prices	in	active	markets	for identical	assets,	Level	2	refers	to	fair	values	estimated	using	significant	other	observable	inputs	and	Level	3	includes	fair	values	estimated	using	significant	unobservable inputs.

|  |  | December	31,	2014 | December	31,	2014 |  |  | December	31,	2013 | December	31,	2013 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Total | Level\t1 | Level\t2 | Level\t3 | Total | Level\t1 | Level\t2 | Level\t3 |
| Cash\tand\tcash\tequivalents\t(a) | $2,968 | $2,968 | $\t\t\t\t\t— | $\t\t\t\t\t— | $2,176 | $2,176 | $\t\t\t\t\t— | $\t\t\t\t\t— |
| Equity\t(a): |  |  |  |  |  |  |  |  |
| U.S.\tequity\tsecurities | 6,431 | 6,363 | 67 | 1 | 5,368 | 5,274 | 94 | — |
| International\tequity\tsecurities | 5,566 | 5,525 | 31 | 10 | 5,008 | 4,912 | 89 | 7 |
| Commingled\tequity\tfunds | 6,078 | 2,047 | 4,031 | — | 6,037 | 1,212 | 4,825 | — |
| Fixed\tincome\t(a): |  |  |  |  |  |  |  |  |
| Corporate\tdebt\tsecurities | 4,242 | — | 4,201 | 41 | 2,986 | — | 2,943 | 43 |
| U.S.\tGovernment\tsecurities | 4,579 | — | 4,579 | — | 6,553 | — | 6,553 | — |
| U.S.\tGovernment-sponsored\tenterprise\tsecurities | 613 | — | 613 | — | 1,451 | — | 1,451 | — |
| Other\tfixed\tincome\tinvestments | 1,807 | 39 | 1,759 | 9 | 1,388 | — | 1,293 | 95 |
| Alternative\tinvestments: |  |  |  |  |  |  |  |  |
| Private\tequity\tfunds | 2,952 | — | — | 2,952 | 2,601 | — | — | 2,601 |
| Real\testate\tfunds | 762 | — | 33 | 729 | 601 | — | 29 | 572 |
| Hedge\tfunds | 570 | — | 66 | 504 | 551 | — | 46 | 505 |
| Commodities\t(a) | 2 | 2 | — | — | 156 | 156 | — | — |
| Total | $36,570 | $16,944 | \t$15,380 | $4,246 | $34,876 | $13,730 | \t$17,323 | $3,823 |
| Receivables,\tnet | 35 |  |  |  | 55 |  |  |  |
| Total | $36,605 |  |  |  | $34,931 |  |  |  |

(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,	2014	and	2013.	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.

As	of	December	31,	2014	and	2013,	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	2014	and	2013	in	the	fair	value	of	plan	assets	categorized	as	Level	3	in	the	preceding	table	(in	millions):

|  | Private | Real |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | \t\tEquity | \t\tEstate | \t\tHedge |  |  |
|  | \t\tFunds | \t\tFunds | \t\tFunds | \t\tOther | \t\tTotal |
| Balance\tat\tJanuary\t1,\t2013 | $2,461 | $504 | $\t806 | $131 | $3,902 |
| Actual\treturn\ton\tplan\tassets: |  |  |  |  |  |
| Realized\tgains,\tnet | 144 | 43 | 21 | 4 | 212 |
| Unrealized\tgains,\tnet | 42 | 19 | 104 | 1 | 166 |
| Purchases,\tsales\tand\tsettlements,\tnet | (46) | (3) | (394) | 2 | (441) |
| Transfers\tinto\t(out\tof)\tLevel\t3,\tnet | — | 9 | (32) | 7 | (16) |
| Balance\tat\tDecember\t31,\t2013 | $2,601 | $572 | $\t505 | $145 | $3,823 |
| Actual\treturn\ton\tplan\tassets: |  |  |  |  |  |
| Realized\tgains,\tnet | 182 | 43 | 34 | 1 | 260 |
| Unrealized\tgains\t(losses),\tnet | 38 | 22 | (11) | (21) | 28 |
| Purchases,\tsales\tand\tsettlements,\tnet | 131 | 92 | (24) | 8 | 207 |
| Transfers\tout\tof\tLevel\t3,\tnet | — | — | — | (72) | (72) |
| Balance\tat\tDecember\t31,\t2014 | $2,952 | $729 | $\t504 | $\t\t61 | $4,246 |

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

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

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

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.

Private	equity	funds,	real	estate	funds	and	hedge	funds	are	valued	using	the	NAV	based	on	valuation	models	of	underlying	securities	which	generally	include significant	unobservable	inputs	that	cannot	be	corroborated	using	verifiable	observable	market	data.	Valuations	for	private	equity	funds	and	real	estate	funds	are determined	by	the	general	partners.	Depending	on	the	nature	of	the	assets,	the	general	partners	may	use	various	valuation	methodologies,	including	the	income	and market	approaches	in	their	models.	The	market	approach	consists	of	analyzing	market	transactions	for	comparable	assets	while	the	income	approach	uses	earnings	or	the net	present	value	of	estimated	future	cash	flows	adjusted	for	liquidity	and	other	risk	factors.	Hedge	funds	are	valued	by	independent	administrators	using	various	pricing sources	and	models	based	on	the	nature	of	the	securities.	Private	equity	funds,	real	estate	funds	and	hedge	funds	are	generally	categorized	as	Level	3	as	we	cannot	fully redeem	our	investment	in	the	near-term.

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

# 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.	In	2014,	we	made	contributions	of	$2.0	billion	related	to	our	qualified	defined	benefit	pension	plans.	We	do	not	plan	to	make contributions	to	our	qualified	defined	benefit	pension	plans	in	2015	through	2017	because	none	are	required	using	current	assumptions.

The	following	table	presents	estimated	future	benefit	payments,	which	reflect	expected	future	employee	service,	as	of	December	31,	2014	(in	millions):

|  | 2015 | 2016 | 2017 | 2018 | 2019 | 2020	-	2024 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Qualified\tdefined\tbenefit\tpension\tplans | $2,070 | $2,150 | $2,230 | $2,320 | $2,420 | $13,430 |
| Retiree\tmedical\tand\tlife\tinsurance\tplans | 190 | 200 | 200 | 210 | 210 | 1,020 |

# 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	$385	million	in	2014,	$383	million	in	2013	and $380	million	in	2012,	the	majority	of	which	were	funded	in	our	common	stock.	Our	defined	contribution	plans	held	approximately	41.7	million	and	44.7	million	shares of	our	common	stock	as	of	December	31,	2014	and	2013.

# Note	10	–	Stockholders'	Equity

At	December	31,	2014	and	2013,	our	authorized	capital	was	composed	of	1.5	billion	shares	of	common	stock	and	50	million	shares	of	series	preferred	stock.	Of	the 316	million	shares	of	common	stock	issued	and	outstanding	as	of	December	31,	2014,	314	million	shares	were	considered	outstanding	for	Balance	Sheet	presentation purposes;	the	remaining

shares	were	held	in	a	separate	trust.	Of	the	321	million	shares	of	common	stock	issued	and	outstanding	as	of	December	31,	2013,	319	million	shares	were	considered outstanding	for	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,	2014	or	2013.

# Repurchases	of	Common	Stock

During	2014,	we	repurchased	11.5	million	shares	of	our	common	stock	for	$1.9	billion.	During	2013	and	2012,	we	paid	$1.8	billion	and	$990	million	to	repurchase 16.2	million	and	11.1	million	shares	of	our	common	stock.	We	reduced	stockholders'	equity	by	$1.7	billion	and	$1.0	billion	which	represents	the	16.0	million	and 11.3	million	shares	of	common	stock	we	committed	to	repurchase	during	2013	and	2012.	Of	the	shares	we	committed	to	during	2012,	a	portion	settled	in	cash	during January	2013.

In	September	2014,	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	$3.7	billion	as	of	December	31,	2014.	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	$1.1	billion	and	$434	million	recorded	as	a	reduction	of	retained	earnings	in	2014	and	2013.

# 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,\t2011\t(a) | $\t(11,186) | $\t(71) | \t$\t(11,257) |
| Other\tcomprehensive\t(loss)\tincome\tbefore\treclassifications | (3,204) | 105 | (3,099) |
| Amounts\treclassified\tfrom\tAOCL |  |  |  |
| Recognition\tof\tnet\tactuarial\tlosses | 819 | — | 819 |
| Amortization\tof\tnet\tprior\tservice\tcosts | 39 | — | 39 |
| Other | — | 5 | 5 |
| Total\treclassified\tfrom\tAOCL | 858 | 5 | 863 |
| Total\tother\tcomprehensive\t(loss)\tincome | (2,346) | 110 | (2,236) |
| Balance\tat\tDecember\t31,\t2012\t(a) | (13,532) | 39 | (13,493) |
| Other\tcomprehensive\tincome\tbefore\treclassifications | 2,868 | 11 | 2,879 |
| Amounts\treclassified\tfrom\tAOCL |  |  |  |
| Recognition\tof\tnet\tactuarial\tlosses | 973 | — | 973 |
| Amortization\tof\tnet\tprior\tservice\tcosts | 42 | — | 42 |
| Other | — | (2) | (2) |
| Total\treclassified\tfrom\tAOCL | 1,015 | (2) | 1,013 |
| Total\tother\tcomprehensive\tincome | 3,883 | 9 | 3,892 |
| Balance\tat\tDecember\t31,\t2013\t(a) | (9,649) | 48 | (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) | $\t(11,813) | $\t(57) | \t$\t(11,870) |

(a) AOCL	related	to	postretirement	benefit	plans	is	shown	net	of	tax	benefits	at	December	31,	2014,	2013	and	2012	of	$6.4	billion,	$5.3	billion	and	$7.4	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	7 and	Note	9	for	more	information	on	our	income	taxes	and	postretirement	benefit	plans.

# Note	11	–	Stock-Based	Compensation

During	2014,	2013	and	2012,	we	recorded	non-cash	stock-based	compensation	expense	totaling	$164	million,	$189	million	and	$167	million,	which	is	included	as a	component	of	other	unallocated,	net	on	our	Statements	of	Earnings.	The	net	impact	to	earnings	for	the	respective	years	was	$107	million,	$122	million	and	$108 million.

As	of	December	31,	2014,	we	had	$91	million	of	unrecognized	compensation	cost	related	to	nonvested	awards,	which	is	expected	to	be	recognized	over	a	weighted average	period	of	1.6	years.	We	received	cash	from	the	exercise	of	stock	options	totaling	$308	million,	$827	million	and	$440	million	during	2014,	2013	and	2012.	In addition,	our	income	tax	liabilities	for	2014,	2013	and	2012	were	reduced	by	$215	million,	$158	million,	$96	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,	2014,	inclusive	of	the	shares	reserved	for	outstanding	stock	options,	RSUs	and	PSUs,	we	had	19	million	shares	reserved	for	issuance	under	the plans.	At	December	31,	2014,	7.8	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	during	2014:

|  | Number | Weighted	Average |
| :--- | :--- | :--- |
|  | of\tRSUs | Grant-Date\tFair |
|  | (In\tthousands) | Value\tPer\tShare |
| Nonvested\tat\tDecember\t31,\t2011 | 4,302 | $\t\t78.25 |
| Granted | 1,987 | 81.93 |
| Vested | (1,299) | 80.64 |
| Forfeited | (168) | 79.03 |
| Nonvested\tat\tDecember\t31,\t2012 | 4,822 | $\t\t79.10 |
| Granted | 1,356 | 89.24 |
| Vested | (2,093) | 79.26 |
| Forfeited | (226) | 81.74 |
| Nonvested\tat\tDecember\t31,\t2013 | 3,859 | $\t\t82.42 |
| Granted | 745 | 146.85 |
| Vested | (2,194) | 87.66 |
| Forfeited | (84) | 91.11 |
| Nonvested\tat\tDecember\t31,\t2014 | 2,326 | $\t\t97.80 |

RSUs	are	valued	based	on	the	fair	value	of	our	common	stock	on	the	date	of	grant.	Employees	who	are	granted	RSUs	receive	the	right	to	receive	shares	of	stock after	completion	of	the	vesting	period;	however,	the	shares	are	not	issued	and	the	employees	cannot	sell	or	transfer	shares	prior	to	vesting	and	have	no	voting	rights	until the	RSUs	vest,	generally	three	years	from	the	date	of	the	award.	Employees	who	are	granted	RSUs	receive	dividend-equivalent	cash	payments	only	upon	vesting.	For these	RSU	awards,	the	grant-date	fair	value	is	equal	to	the	closing	market	price	of	our	common	stock	on	the	date	of	grant	less	a	discount	to	reflect	the	delay	in	payment of	dividend-equivalent	cash	payments.	We	recognize	the	grant-date	fair	value	of	RSUs,	less	estimated	forfeitures,	as	compensation	expense	ratably	over	the	requisite service	period,	which	beginning	with	the	RSUs	granted	in	2013	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,	2014	and	2013,	there	were	6.3	million (weighted	average	exercise	price	of	$84.62)	and	10.2	million	(weighted	average	exercise	price	of	$83.65)	stock	options	outstanding.	Stock	options	outstanding	at December	31,	2014	have	a	weighted	average	remaining	contractual	life	of	approximately	four	years	and	an	aggregate	intrinsic	value	of	$681	million.	Of	the	stock options	outstanding,	5.6	million	(weighted	average	exercise	price	of	$84.96)	have	vested	as	of	December	31,	2014	and	those	stock	options	have	a	weighted	average remaining	contractual	life	of	approximately	four	years	and	an	aggregate	intrinsic	value	of	$601	million.	There	were	3.7	million	(weighted	average	exercise	price	of $82.13)	stock	options	exercised	during	2014.	We	did	not	grant	stock	options	to	employees	during	2014	and	2013.

The	following	table	pertains	to	stock	options	granted	in	2012,	in	addition	to	stock	options	that	vested	and	were	exercised	in	2014,	2013	and	2012	(in	millions, except	for	weighted-average	grant-date	fair	value	of	stock	options	granted):

|  | 2014 | 2013 | 2012 |
| :--- | :--- | :--- | :--- |
| Weighted\taverage\tgrant-date\tfair\tvalue\tof\tstock\toptions\tgranted | $ — | $ — | $10.57 |
| Grant-date\tfair\tvalue\tof\tall\tstock\toptions\tthat\tvested | 18 | 40 | 47 |
| Intrinsic\tvalue\tof\tall\tstock\toptions\texercised | \t 297 | \t 293 | 162 |

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	January	2014,	we	granted	certain	employees	PSUs	with	an	aggregate	target	award	of	approximately	0.2	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,	2014	through	December	31,	2016.	About	half	of	the	PSUs	were valued	at	$146.85	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	$134.15	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	12	–	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	relief.	We	believe	the	probability	is	remote	that	the	outcome	of	each	of	these	matters, including	the	legal	proceedings	mentioned	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,	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	for	contingencies	where	there	is	at	least	a	reasonable	possibility	that	a	loss	may	have	been incurred.	We	have	a	thorough	process	to	determine	an	estimate	of	the	reasonably	possible	loss	or	range	of	loss	before	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

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	on	December	5,	2014,	after	a	five-week	bench	trial	and	the	filing	of	post-trial	pleadings	by	the	parties.	We	expect	a	decision	in	the second	or	third	quarter	of	2015.

On	August	28,	2003,	the	U.S.	Department	of	Justice	(DOJ)	filed	complaints	in	partial	intervention	in	two	lawsuits	filed	under	the	civil	qui	tam	provisions	of	the False	Claims	Act	in	the	U.S.	District	Court	for	the	Western	District	of	Kentucky,	United	States	ex	rel.	Natural	Resources	Defense	Council,	et	al.,	v.	Lockheed	Martin Corporation,	et	al.,	and	United	States	ex	rel.	John	D.	Tillson	v.	Lockheed	Martin	Energy	Systems,	Inc.,	et	al.	The	DOJ	alleges	that	we	committed	violations	of	the Resource	Conservation	and	Recovery	Act	at	the	Paducah	Gaseous	Diffusion	Plant	by	not	properly	handling,	storing	and	transporting	hazardous	waste	and	that	we violated	the	False	Claims	Act	by	misleading	Department	of	Energy	officials	and	state	regulators	about	the	nature	and	extent	of	environmental	noncompliance	at	the plant.	The	complaint	does	not	allege	a	specific	calculation	of	damages.	In	April	2013,	the	parties	attended	a	settlement	conference	ordered	by	the	magistrate	judge.	The conference	focused	on	the	parties'	sharply	differing	views	of	the	merits	of	the	case	and	did	not	significantly	contribute	to	our	understanding	of	the	damages	sought.	The parties	participated	in	confidential	mediation	pursuant	to	Federal	Rule	of	Civil	Procedure	Rule	408	in	December	2014.	The	plaintiffs	made	settlement	demands	at	this mediation	but	these	were	not	tied	to	any	theory	of	damages,	were	not	apportioned	between	the	False	Claims	Act	and	Resource	Conservation	and	Recovery	Act allegations	(as	to	which	our	defenses	differ)	and	did	not	provide	insight	into	what	damages	plaintiffs	would	seek	to	prove	if	this	matter	proceeds	to	trial.	Consequently, we	continue	to	be	unable	to	estimate	the	reasonably	possible	loss	or	range	of	loss,	which	could	be	incurred	if	the	plaintiffs	were	to	prevail,	but	we	believe	we	have substantial	defenses.	We	anticipate	filing	motions	for	summary	judgment	in	the	second	quarter	of	2015.

We	are	involved	in	environmental	proceedings	and	potential	proceedings	relating	to	soil	and	groundwater	contamination,	disposal	of	hazardous	waste	and	other environmental	matters	at	several	of	our	current	or	former	facilities	or	at	third-party	sites	where	we	have	been	designated	as	a	potentially	responsible	party	(PRP).	A substantial	portion	of	environmental	costs	will	be	included	in	our	net	sales	and	cost	of	sales	in	future	periods	pursuant	to	U.S.	Government	regulations.	At	the	time	a liability	is	recorded	for	future	environmental	costs,	we	record	a	receivable	for	estimated	future	recovery	considered	probable	through	the	pricing	of	products	and	services to	 agencies	 of	 the	 U.S.	 Government,	 regardless	 of	 the	 contract	 form	 (e.g.,	 cost-reimbursable,	 fixed-price).	 We	 continuously	 evaluate	 the	 recoverability	 of	 our environmental	receivables	by	assessing,	among	other	factors,	U.S.	Government	regulations,	our	U.S.	Government	business	base	and	contract	mix	and	our	history	of receiving	reimbursement	of	such	costs.	We	include	the	portion	of	those	environmental	costs	expected	to	be	allocated	to	our	non-U.S.	Government	contracts,	or	that	is determined	to	not	be	recoverable	under	U.S.	Government	contracts,	in	our	cost	of	sales	at	the	time	the	liability	is	established.

At	December	31,	2014	and	2013,	the	aggregate	amount	of	liabilities	recorded	relative	to	environmental	matters	was	$965	million	and	$997	million,	most	of	which are	recorded	in	other	noncurrent	liabilities	on	our	Balance	Sheets.	We	have	recorded	receivables	totaling	$836	million	and	$863	million	at	December	31,	2014	and	2013, most	of	which	are	recorded	in	other	noncurrent	assets	on	our	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).

On	July	1,	2014,	a	regulation	became	effective	in	California	setting	the	maximum	level	of	the	contaminant	hexavalent	chromium	in	drinking	water	at	10	parts	per billion	(ppb).	In	May	2014,	the	Manufacturers	and	Technology	Association	filed	a	suit	alleging	the	10	ppb	threshold	is	lower	than	is	required	to	protect	public	health and	thus	imposes	unjustified	costs	on	the	regulated	community.	We	cannot	predict	the	outcome	of	this	suit	or	whether	other	challenges	may	be	advanced	by	the regulated	community	or	environmental	groups	which	had	sought	a	significantly	higher	and	lower	standard,	respectively.	If	the	new	standard	remains	at	10	ppb,	it	will	not have	a	material	impact	on	our	existing	remediation	costs	in	California.

In	addition,	California	is	reevaluating	its	existing	drinking	water	standard	with	respect	to	perchlorate	and	the	U.S.	Environmental	Protection	Agency	(U.S.	EPA)	is also	considering	whether	to	regulate	perchlorate	and	hexavalent	chromium	in	drinking	water.	If	substantially	lower	standards	are	adopted,	in	either	California	or	at	the federal	level,	for	perchlorate	or,	if	the	U.S.	EPA	were	to	adopt	a	standard	for	hexavalent	chromium	lower	than	10	ppb,	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.

# Operating	Leases

We	rent	certain	equipment	and	facilities	under	operating	leases.	Certain	major	plant	facilities	and	equipment	are	furnished	by	the	U.S.	Government	under	short-term or	cancelable	arrangements.	Our	total	rental	expense	under	operating	leases	was	$258	million,	$315	million	and	$302	million	for	2014,	2013	and	2012.	Future	minimum lease	commitments	at	December	31,	2014	for	long-term	non-cancelable	operating	leases	were	$856	million	($228	million	in	2015,	$181	million	in	2016,	$133	million	in 2017,	$95	million	in	2018,	$69	million	in	2019	and	$150	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	$2.4	billion	each	at	December	31,	2014	and	2013.

At	December	31,	2014	and	2013,	third-party	guarantees	totaled	$774	million	and	$696	million,	of	which	approximately	85%	and	90%	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,	2014,	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.

# United	Launch	Alliance

In	connection	with	our	50%	ownership	interest	of	ULA,	we	and	The	Boeing	Company	(Boeing)	have	each	received	distributions	from	ULA,	including	distributions of	$527	million	that	we	and	Boeing	have	each	received	(since	ULA's	formation	in	December	2006)	which	are	subject	to	agreements	between	us,	Boeing	and	ULA, whereby,	if	ULA	does	not	have

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

Our	50%	ownership	share	of	ULA's	net	assets	exceeded	the	book	value	of	our	investment	by	approximately	$395	million,	which	we	are	recognizing	as	income ratably	over	10	years	through	2016.	This	yearly	amortization	and	our	share	of	ULA's	net	earnings	are	reported	as	equity	in	net	earnings	(losses)	of	equity	investees	in other	income,	net	on	our	Statements	of	Earnings.	Our	investment	in	ULA	totaled	$706	million	and	$685	million	at	December	31,	2014	and	2013.

# Note	13	–	Acquisitions	and	Divestitures

We	paid	$898	million	in	2014	for	acquisitions	of	businesses	and	investments	in	affiliates,	net	of	cash	acquired,	primarily	related	to	the	acquisitions	of	Systems Made	Simple,	Zeta	and	Industrial	Defender.	On	December	1,	2014,	we	completed	the	acquisition	of	all	interests	in	Systems	Made	Simple,	which	provides	solutions	that leverage	information	technology	in	the	healthcare	domain	to	improve,	increase,	enable	and	ensure	the	exchange	and	interoperability	of	information	between	patients, providers,	and	payers	and	has	been	included	in	our	IS&GS	business	segment.	On	August	18,	2014,	we	completed	the	acquisition	of	all	interests	in	Zeta,	which	designs systems	that	enable	collection,	processing,	safeguarding	and	dissemination	of	information	for	intelligence	and	defense	communities,	which	has	been	included	in	our Space	Systems	business	segment.	On	April	7,	2014,	we	completed	the	acquisition	of	all	interest	in	Industrial	Defender,	a	provider	of	cyber	security	solutions	for	control systems	 in	 the	oil	and	gas,	utility	and	chemical	 industries,	which	has	been	 included	 in	our	IS&GS	business	segment.	In	connection	with	 these	acquisitions,	we preliminarily	recorded	goodwill	of	$657	million,	related	to	expected	synergies	from	combining	operations	and	value	of	the	existing	workforce.	The	recorded	goodwill	is not	deductible	for	tax	purposes.	Additionally,	we	recorded	other	intangible	assets	of	$223	million,	primarily	related	to	customer	relationships	and	technologies,	which will	be	amortized	over	a	weighted	average	period	of	eight	years.

We	paid	$269	million	in	2013	for	acquisitions	of	businesses	and	investments	in	affiliates,	net	of	cash	acquired,	primarily	related	to	the	acquisition	of	all	interests	in Amor	Group,	a	United	Kingdom-based	company	specializing	in	information	technology,	civil	government	services	and	the	energy	market	and	has	been	included	in	our IS&GS	business	segment.	In	connection	with	these	acquisitions,	we	recorded	goodwill	of	$175	million,	which	is	not	deductible	for	tax	purposes.	Additionally,	we recorded	other	intangible	assets	of	$34	million,	related	to	customer	relationships	and	technologies,	which	will	be	amortized	over	a	weighted	average	period	of	eight years.

We	 paid	 $259	 million	 in	 2012	 for	 acquisitions	 of	 businesses	 and	 investments	 in	 affiliates,	 net	 of	 cash	 acquired,	 primarily	 related	 to	 the	 acquisitions	 of Chandler/May,	Inc.,	CDL	Systems	Ltd.	and	Procerus	Technologies,	L.C.,	and	each	has	been	included	within	our	MST	business	segment.	These	companies	specialize	in the	design,	development,	manufacturing,	control	and	support	of	advanced	unmanned	systems.	In	connection	with	these	acquisitions,	we	recorded	goodwill	of	$197 million,	of	which	$69	million	will	be	amortized	for	tax	purposes.	Additionally,	we	recorded	other	intangible	assets	of	$41	million,	related	to	technologies	and	customer relationships,	which	will	be	amortized	over	a	weighted	average	period	of	six	years.

# Divestitures

Discontinued	operations	for	2013	included	a	benefit	of	$31	million	resulting	from	the	resolution	of	certain	tax	matters	related	to	a	business	previously	sold	prior	to 2013.

# Note	14	–	Restructuring	Charges

During	2013,	we	recorded	charges	related	to	certain	severance	actions	totaling	$201	million	of	which	$83	million,	$37	million	and	$81	million	related	to	our IS&GS,	MST	and	Space	Systems	business	segments.	These	charges	reduced	our	net

earnings	by	$130	million	($.40	per	share)	and	primarily	related	to	a	plan	we	committed	to	in	November	2013	to	close	and	consolidate	certain	facilities	and	reduce	our total	workforce	by	approximately	4,000	positions	within	our	IS&GS,	MST	and	Space	Systems	business	segments.	These	charges	also	include	$30	million	related	to certain	severance	actions	at	our	IS&GS	business	segment	that	occurred	in	the	first	quarter	of	2013,	which	were	subsequently	paid	in	2013.

The	November	2013	plan	resulted	from	a	strategic	review	of	these	businesses'	facility	capacity	and	future	workload	projections	and	is	intended	to	better	align	our organization	and	cost	structure	and	improve	the	affordability	of	our	products	and	services	given	the	changes	in	U.S.	Government	spending	as	well	as	the	rapidly changing	competitive	and	economic	landscape.	Upon	separation,	terminated	employees	receive	lump-sum	severance	payments	primarily	based	on	years	of	service.	As of	December	31,	2014,	we	have	paid	approximately	$107	million	in	severance	payments	associated	with	this	action,	of	which	approximately	$92	million	was	paid	during the	year	ended	December	31,	2014.	The	remaining	severance	payments	are	expected	to	be	paid	through	the	middle	of	2015.

In	addition	to	the	severance	charges	described	above,	we	expect	to	incur	total	accelerated	costs	(e.g.,	accelerated	depreciation	expense	related	to	long-lived	assets	at the	sites	to	be	closed)	and	incremental	costs	(e.g.,	relocation	of	equipment	and	other	employee	related	costs)	of	approximately	$15	million,	$50	million	and	$175	million at	our	IS&GS,	MST	and	Space	Systems	business	segments	through	the	completion	of	this	plan	in	2015.	As	of	December	31,	2014,	we	have	incurred	total	accelerated and	incremental	costs	of	approximately	$110	million,	most	of	which	was	incurred	during	the	year	ended	December	31,	2014.	The	accelerated	and	incremental	costs	are recorded	as	incurred	in	cost	of	sales	on	our	Statements	of	Earnings	and	included	in	the	respective	business	segment's	results	of	operations.

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.

# Note	15	–	Fair	Value	Measurements

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

|  | Total | December	31,	2014<br>Level	1 | Level	2 | Total | December	31,	2013<br>Level	1 | Level	2 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Assets |  |  |  |  |  |  |
| Equity\tsecurities | $92 | $\t\t92 | $\t\t— | $77 | $\t\t77 | $\t\t— |
| Mutual\tfunds | 696 | 696 | — | 613 | 613 | — |
| U.S.\tGovernment\tsecurities | 136 | — | 136 | 238 | — | 238 |
| Other\tsecurities | 153 | — | 153 | 131 | — | 131 |
| Derivatives | 27 | — | 27 | 28 | — | 28 |
| Liabilities |  |  |  |  |  |  |
| Derivatives | 18 | — | 18 | 23 | — | 23 |

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	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	2014.

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	$7.9	billion	and	$7.4	billion	at	December	31,	2014	and	2013	and	the	outstanding	principal	amount	was	$7.0	billion	at	both	December	31,	2014	and 2013,	excluding	unamortized	discounts	of	$872	million	and	$882	million.	The	estimated	fair	values	of	our	outstanding	debt	were	determined	based	on	quoted	prices	for similar	instruments	in	active	markets	(Level	2).

In	the	fourth	quarters	of	2014	and	2013,	we	recorded	non-cash	goodwill	impairment	charges	of	$119	million	and	$195	million	in	connection	with	our	annual goodwill	impairment	test.	The	fair	value	determination	of	goodwill	was	determined	using	a	combination	of	a	DCF	analysis	and	market-based	valuation	methodologies and	was	classified	as	a	Level	3	fair	value	measurement	due	to	the	significance	of	the	unobservable	inputs	used.	See	Note	1	for	further	information	on	this	non-cash goodwill	impairment	charge	and	our	valuation	methodologies.

# Note	16	–	Summary	of	Quarterly	Information	(Unaudited)

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

|  |  | 2014	Quarters | 2014	Quarters |  |
| :--- | :--- | :--- | :--- | :--- |
|  | First | Second | Third | Fourth |
| Net\tsales | \t$10,650 | \t$11,306 | \t$11,114 | \t$12,530 |
| Operating\tprofit | 1,432 | 1,426 | 1,392 | 1,342 |
| Net\tearnings\t(a) | 933 | 889 | 888 | 904 |
| Basic\tearnings\tper\tshare | 2.92 | 2.81 | 2.81 | 2.87 |
| Diluted\tearnings\tper\tshare | 2.87 | 2.76 | 2.76 | 2.82 |

|  |  | 2013	Quarters | 2013	Quarters | 2013	Quarters |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | First | Second | Third | Third | Fourth |
| Net\tsales | \t$11,070 | \t$11,408 | \t$11,408 | \t$11,347 | \t$11,533 |
| Operating\tprofit | 1,119 | 1,298 | 1,298 | 1,254 | 834 |
| Net\tearnings\tfrom\tcontinuing\toperations\t(b) | 761 | 859 | 859 | 842 | 488 |
| Net\tearnings\tfrom\tdiscontinued\toperations | — | — | — | 31 | — |
| Net\tearnings | 761 | 859 | 859 | 873 | 488 |
| Basic\tearnings\tper\tshare\t(c) | 2.37 | 2.68 | 2.68 | 2.72 | 1.53 |
| Diluted\tearnings\tper\tshare | 2.33 | 2.64 | 2.64 | 2.66 | 1.50 |

(a) The	fourth	quarter	of	2014	included	a	charge	of	$119	million	($107	million	after	tax)	related	to	a	non-cash	goodwill	impairment	charge	(Note	1)	and	a	tax	benefit	of	$45	million due	to	the	retroactive	reinstatement	of	the	R&D	tax	credit	for	2014.

(b) The	first	quarter	of	2013	included	a	tax	benefit	of	$37	million	from	the	R&D	tax	credit	attributable	to	2012	(Note	7)	and	a	charge	of	$30	million	($19	million	after	tax)	related	to certain	severance	actions	(Note	14).	The	fourth	quarter	of	2013	included	charges	of	$195	million	($176	million	after	tax)	related	to	a	non-cash	goodwill	impairment	charge	(Note 1)	and	$171	million	($111	million	after	tax)	related	to	certain	severance	actions	(Note	14).

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

# 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,	2014.	The	evaluation	was	performed	with	the participation	of	senior	management	of	each	business	segment	and	key	Corporate	functions,	under	the	supervision	of	the	Chief	Executive	Officer	(CEO)	and	Chief Financial	Officer	(CFO).	Based	on	 this	evaluation,	 the	CEO	and	CFO	concluded	 that	our	disclosure	controls	and	procedures	were	operating	and	effective	as	of December	31,	2014.

# Management's	Report	on	Internal	Control	Over	Financial	Reporting

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

Our	management	conducted	an	assessment	of	the	effectiveness	of	our	internal	control	over	financial	reporting	as	of	December	31,	2014.	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	has	concluded	that,	as	of	December	31,	2014,	our	internal	control	over	financial	reporting	was	effective.

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

# Changes	in	Internal	Control	Over	Financial	Reporting

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

# Regarding	Internal	Control	Over	Financial	Reporting

We	have	audited	Lockheed	Martin	Corporation's	internal	control	over	financial	reporting	as	of	December	31,	2014,	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.

In	our	opinion,	Lockheed	Martin	Corporation	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	December	31,	2014, based	on	the	COSO	criteria.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	balance	sheets	of Lockheed	Martin	Corporation	as	of	December	31,	2014	and	2013,	and	the	related	consolidated	statements	of	earnings,	comprehensive	income,	stockholders'	equity,	and cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2014	of	Lockheed	Martin	Corporation	and	our	report	dated	February	9,	2015	expressed	an unqualified	opinion	thereon.

McLean,	Virginia February	9,	2015

# 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	2015	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	2015	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	–	Membership	on	Board	Committees"	and	"Committees	of	the	Board	of	Directors	–	Audit	Committee	Report"	in	the	2015	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	2015	Proxy	Statement	and	that	information	is	incorporated	by	reference	in	this	Form	10-K.	The	information	required	by	Items	407(e)(4)	and	(e)(5) of	 Regulation	 S-K	 is	 included	 under	 the	 captions	 "Executive	 Compensation	 –	 Compensation	 Committee	 Interlocks	 and	 Insider	 Participation"	 and	 "Executive Compensation	–	Compensation	Committee	Report"	in	the	2015	Proxy	Statement,	and	that	information	is	furnished	by	incorporation	by	reference	in	this	Form	10-K.

# ITEM	12. Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters.

The	information	required	by	this	Item	12	is	included	under	the	heading	"Security	Ownership	of	Management	and	Certain	Beneficial	Owners"	in	the	2015	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,	2014.

|  | Number	of	securities	to | Weighted-average | available	for	future	issuance |
| :--- | :--- | :--- | :--- |
|  | be\tissued\tupon\texercise | exercise\tprice\tof | under\tequity\tcompensation |
|  | of\toutstanding\toptions, | outstanding\toptions, | plans\t(excluding\tsecurities |
|  | warrants\tand\trights | warrants\tand\trights | reflected\tin\tcolumn\t(a)) |
| Plan\tcategory | (a) | (b) | (c) |
| Equity\tcompensation\tplans\tapproved\tby\tsecurity\tholders\t(1) | 11,138,854 | 84.62 | 7,782,431 |
| Equity\tcompensation\tplans\tnot\tapproved\tby\tsecurity\tholders\t(2) | 1,282,435 | — | 2,493,270 |
| Total | 12,421,289 | 84.62 | 10,275,701 |

(1) Column	(a)	includes,	as	of	December	31,	2014:	3,636,332	shares	that	have	been	granted	as	Restricted	Stock	Units	(RSUs),	1,042,460	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	6,273,012 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 37,840	shares	granted	as	options	and	149,210	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,	2014,	7,314,611	shares	available	for	future	issuance under	the	2011	IPA	Plan	as	options,	stock	appreciation	rights	(SARs),	restricted	stock	awards	(RSAs),	RSUs	or	PSUs	and	467,820	shares	available	for	future	issuance	under	the Directors	Equity	Plan	as	stock	options	and	stock	units.	Of	the	7,314,611	shares	available	for	grant	under	the	2011	IPA	Plan	on	December	31,	2014,	590,505	and	307,094	shares are	issuable	pursuant	to	grants	made	on	January	29,	2015,	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	2015	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	2015	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:

| referenced	below: |  |
| :--- | :--- |
|  | \t\t\t\t\t\t\t\tPage |
| Consolidated\tStatements\tof\tEarnings\t–\tYears\tended\tDecember\t31,\t2014,\t2013\tand\t2012 | 59 |
| Consolidated\tStatements\tof\tComprehensive\tIncome\t–\tYears\tended\tDecember\t31,\t2014,\t2013\tand\t2012 | 60 |
| Consolidated\tBalance\tSheets\t–\tAt\tDecember\t31,\t2014\tand\t2013 | 61 |
| Consolidated\tStatements\tof\tCash\tFlows\t–\tYears\tended\tDecember\t31,\t2014,\t2013\tand\t2012 | 62 |
| Consolidated\tStatements\tof\tStockholders'\tEquity\t–\tYears\tended\tDecember\t31,\t2014,\t2013\tand\t2012 | 63 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 64 |

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	58	and	93	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.

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

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

10.4 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)).

10.15 Forms	of	Long-Term	Incentive	Performance	Award	Agreements	(2010-2012	performance	period),	Forms	of	Stock	Option	Award	Agreements	and	Forms of	Restricted	Stock	Unit	Award	Agreements	under	the	Lockheed	Martin	Corporation	2003	Incentive	Performance	Award	Plan	(incorporated	by	reference to	Exhibit	10.33	to	Lockheed	Martin	Corporation's	Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2009	(File	No.	001-11437)).

10.28 Lockheed	Martin	Corporation	Executive	Severance	Plan,	prior	to	November	1,	2013,	known	as	the	Lockheed	Martin	Corporation	Severance	Benefit	Plan for	Certain	Management	Employees	(incorporated	by	reference	to	Exhibit	10.22	of	the	Corporation's	Annual	Report	on	Form	10-K	for	the	year	ended December	31,	2013),	as	amended	by	Amendment	dated	July	18,	2014	to	Lockheed	Martin	Corporation	Executive	Severance	Plan	(incorporated	by reference	to	Exhibit	10.2	to	Lockheed	Martin	Corporation's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	September	28,	2014).

10.30 Form	of	Restricted	Stock	Unit	Award	Agreement,	Form	of	Long-Term	Incentive	Performance	Award	Agreement	(2015-2017	performance	period),	and Form	of	Performance	Stock	Unit	Award	Agreement	(2015-2017	performance	period)	under	the	Lockheed	Martin	Corporation	2011	Incentive	Performance Award	Plan.

# 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)

By:/s/	Brian	P.	Colan

Brian	P.	Colan

Vice	President,	Controller,	and	Chief	Accounting

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.

By: /s/	Maryanne	R.	Lavan

Maryanne	R.	Lavan

Attorney-in-fact



Question: what was the average weighted average common shares outstanding for diluted computations from 2012 to 2014
Answer: 325.7