Case 2-50 Deciphering Financial Statements (Lockheed Martin Corporation) Locate the 2011 financial statements for Lockheed Martin Corporation on the Internet. Reconstruct the company?s adjusted trial balance as of December 31, 2011.

I've made an attempt, but I really have no clue what I'm doing here. The financial statements are near page 50 in the Lockheed Martin PDF.

Any assistance is greatly appreciated.

Any help would be greatly appreciated.

Lockheed Martin Corporation Trial Balance - December 31, 2011 Cash and cash equivalents Short-term investments Receivables, net Inventories, net Deferred income taxes Other current assets Property, plant and equipment Goodwill Deferred income taxes Other assets Accounts payable Customer advances and amounts in excess of costs incurred Salaries, benefits and payroll taxes Other current liabilities Long-term debt, net Accrued pension liabilities Other postretirement benefit liabilities Other liabilities Common Stock Retained earnings Accumulatd other comprehensive loss Net sales Cost of sales Other income Interest expense Other non-operating income Earnings from continuing operations Income tax expense 3,582 3 6,064 2,481 1,339 625 4,611 10,148 4,388 4,667 2,269 6,399 1,664 1,798 6,460 13,502 1,274 3,541 321 11,937 (11,257) 46,499 42,795 276 354 81,737 5 3,631 964 88,603 -6866 -13732 -3433 L OCKHEED M ARTIN C ORPORATION 2009 A NNUAL R EPORT F-35 Lightning II: The Backbone of Next Generation Tactical Aviation for America and its Allies 2009 FINANCIAL HIGHLIGHTS(a) (In millions, except per share data) Net sales 2009 2008 2007 $45,189 $42,731 $41,862 Operating profit from business segments 5,155 4,970 4,691 Consolidated operating profit 4,466 5,131 4,527 Net earnings 3,024 3,217 3,033 7.78 7.86 7.10 388.9 409.4 427.1 Earnings per diluted share Average diluted common shares outstanding Net cash provided by operating activities Cash dividends per common share $ 3,173 $ 4,421 $ 4,238 2.34 1.83 1.47 2,737 2,229 2,981 35,111 33,439 28,926 Total debt 5,052 3,805 4,407 Stockholders' equity 4,129 2,865 9,805 373 393 409 Cash, cash equivalents and short-term investments Total assets Common shares outstanding at year-end Debt-to-total-capital ratio Return on invested capital(b) 55% 57% 31% 19.9% 21.7% 21.4% NOTES: (a) (b) For additional information, including a discussion of matters affecting the comparability of the information presented above, refer to Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Notes to Consolidated Financial Statements in our 2009 Annual Report on Form 10-K. For additional information concerning return on invested capital, including its definition and use, see Note (f) to the Consolidated Financial DataFive Year Summary in the Annual Report on Form 10-K. DEAR FELLOW STOCKHOLDERS, In the past year the men and women of Lockheed Martin, through their commitment to excellence, delivered solid results and helped our customers achieve some of their most critical missions. In 2009, our sales of $45.2 billion represented a 6 percent increase over 2008, and we generated $3.2 billion in operating cash after making discretionary pension contributions of $1.5 billion. From Left to Right: Linda R. Gooden, Executive Vice President, Information Systems & Global Services; Joanne M. Maguire, Executive Vice President, Space Systems; Christopher E. Kubasik, President and Chief Operating Officer; Robert J. Stevens, Chairman and Chief Executive Officer; Bruce L. Tanner, Executive Vice President and Chief Financial Officer; Marillyn A. Hewson, Executive Vice President, Electronic Systems; Ralph D. Heath, Executive Vice President, Aeronautics. Photograph taken in Lockheed Martin's Center for Leadership Excellence which opened in 2009. LOCKHEED MARTIN CORPORATION 1 2009 ANNUAL REPORT We also repurchased 24.9 million shares of our common stock and paid dividends of $908 million during the year, marking the seventh consecutive year that we increased our dividend payment by more than 10 percent. We made great progress on programs that represent the future of global security, including the critical Joint Strike Fighter/ F-35 and the Littoral Combat Ship (LCS) programs. Our second LCS, USS Fort Worth, is more than 30 percent complete and is being built on time and on cost. And in November, we completed a successful first flight of the first optimized Conventional Take-Off and Landing version of the F-35 Lightning II. We also made important advancements in cyber security, one of the top priorities for our company as well as for every business, government agency, and citizen worldwide. In November, we opened our NexGen Cyber Innovation and Technology Center, a world-class research and development laboratory in which we can collaborate with our partners and customers to stay ahead of those who would attack critical IT infrastructures. In other notable program achievements in 2009 we: Completed the critical design review for the Airborne and Maritime/Fixed Station Joint Tactical Radio Systems (AMF JTRS), an advanced tactical wireless radio system for the U.S. Army, Air Force, and Navy; Completed the critical design review for the Next Generation Identification LOCKHEED MARTIN CORPORATION System, clearing the way for further progress on the FBI's new advancedbiometrics system; Flew the Advanced Composite Cargo Aircraft for the first time, demonstrating that composite technology has the potential to reduce production costs as well as extend aircraft life; Launched the last in a series of eight modernized Global Positioning System (GPS) IIR satellites, known worldwide for serving the navigation needs of both military and civilian users; Conducted reliability tests on the latest production lot of the Joint Air-to-Surface Standoff Missile - in which we exceeded program performance requirements - and completed the sixth flight demonstration test of the Extended Range variant of the missile, which was successful in every test; Conducted the 130th consecutive successful launch since 1989 of our Trident II D-5 fleet ballistic missile, a record unmatched by any other large ballistic missile or space launch vehicle. While we can point proudly to what we accomplished in 2009, we were disappointed by the capping of F-22 production at 187 aircraft, termination of the VH-71 Presidential Helicopter program and the cancellation of the Multiple Kill Vehicle (MKV), the Transformational Communications Satellite (TSAT) and its ground segment (TSAT Mission Operations System). These setbacks, driven largely by shifting customer 2 2009 ANNUAL REPORT priorities and requirements, presented real challenges to the business and drove layoffs of 4,150 employees in 2009. During the year, we also demonstrated our long-standing commitment to leadership development with the opening of our Center for Leadership Excellence on our Headquarters campus in Bethesda, Md. Recognizing our progressive stance in this arena, Fortune Magazine named Lockheed Martin among the top 25 companies for leaders in 2009. We continue to be extremely proud of our employees, not only for their skills and capabilities, but also for their character and integrity. As in years past, our employees continued to show extraordinary generosity, both in the time they devote to their communities and in their financial contributions. Collectively, in 2009, our employees volunteered 1.4 million hours of service in their communities and gave more than $22 million to charitable causes of their choice. Combined with the Corporation's philanthropic donations of $24 million, Lockheed Martin provided powerful support to worthy causes around the world. Looking Ahead in 2010 We have opened this year with a firm resolve to keep Lockheed Martin on a steady path to financial vitality, agility in the marketplace, and an unyielding standard of performance excellence. Along with our industry peers, we face significant challenges in 2010. Our LOCKHEED MARTIN CORPORATION customers are asking us to do more, and do it more affordably, as they experience greater fiscal pressure and growing mission requirements. We have responded by putting strategies in place to meet their needs, enhance our competitiveness, and sustain growth. Consequently, our goals for 2010 are clear: Contain program costs; Shorten cycle times; Drive innovation and flexibility into our products; and Deliver on our commitments. To help meet these goals and further strengthen our business, we have made organizational and executive management changes. Among those changes, we appointed Christopher E. Kubasik as President and Chief Operating Officer. Chris brings a broad range of skills and experience to the job, having served previously as our Chief Financial Officer and as Executive Vice President of the Electronic Systems business area. He understands our customers' changing environment and will lead our operations with an uncompromising commitment to perform on all programs. We appointed Marillyn A. Hewson to succeed Chris as Executive Vice President of Electronic Systems. With a 26-year record of distinguished achievement at Lockheed Martin, Marillyn brings outstanding leadership and deep 3 2009 ANNUAL REPORT knowledge of the industry to her new position. We recently reorganized our Electronic Systems business area to more closely align our capabilities with our customers' needs, improve the affordability of our offerings, and sharpen the focus of our efforts to capture new business. We also named John T. Lucas as Senior Vice President of Human Resources. John has more than 25 years of human resources leadership experience in the manufacturing, pharmaceutical, and technology industries. He is bringing new insights and approaches to our efforts to attract, retain and grow the very best workforce possible. Despite the challenging business conditions, we are highly confident and optimistic about our future. Several factors contribute to our optimism: Engineering development on the F-35 is 86 percent complete and yielding outstanding results in early ground and flight tests compared to legacy aircraft. We have had some cost growth and schedule delays, which we are addressing aggressively. In February, U.S. Defense Secretary Robert Gates announced a restructuring of the program that withholds $614 million in progress payments until we demonstrate improved performance. The restructuring also adds one year to the program's development phase and reduces the government's planned 2010 purchase by nine aircraft, for a total commitment of 43 for the year with the opportunity for more, depending on our performance. We are making excellent progress toward meeting all of our LOCKHEED MARTIN CORPORATION customers' expectations on this vital program and do not expect a substantial setback. Later this year, the U.S. Navy is expected to choose between the Lockheed Martin-designed LCS and a competing design as the basis for up to 51 future ships. USS Freedom, our first LCS, deployed in February - two years early - and interdicted a vessel carrying illicit drugs in its first week of operations. Sales of the C-130J, our advanced, versatile airlifter, are robust in both the domestic and international markets. Our PAC-3, Terminal High Altitude Area Defense, and Aegis programs are performing superbly, and are the cornerstone of effective missile defense worldwide. We foresee increased demand for classified satellites and additional orders for Advanced Extremely High Frequency and Space-Based Infrared System spacecraft. We also anticipate strong international growth over the next several years. As a leader in providing global security solutions, we see growing demand for our products and services as governments around the world face increasingly complex threats. Consequently, we are expanding our international presence through mutually beneficial partnerships with governments and industry worldwide. Our goal is to grow international sales from the current 14 percent to at least 20 percent of our business over the next five years. 4 2009 ANNUAL REPORT The Global Security Mission Every day the men and women of Lockheed Martin are reminded of the vital importance of the work they do in support of our customers' global security mission. We are increasingly called upon to apply innovation, technology, and talent to the emerging and complex threats we all face in the new reality of the global security environment. We support governments in humanitarian and peacekeeping operations, the efficient delivery of services to their citizens, and in their efforts to build the institutional mechanisms that promote stability, peace, and economic development. The Lockheed Martin team never loses sight of those who depend on us. We know that, in many cases, it is our dedication to excellence that means the difference between liberty and terrorism ... between peace and war ... between life and death. LOCKHEED MARTIN CORPORATION All of us are constantly mindful of that monumental responsibility, and we are proud to serve. February 25, 2010 Robert J. Stevens Chairman and Chief Executive Officer Special note: We would like to express our thanks to our Lead Director, James R. Ukropina, and to Frank Savage, both of whom will retire from the Board this year. We are extremely grateful for their valuable contributions to Lockheed Martin. The independent directors of our Board have elected Douglas H. McCorkindale as our new Lead Director, effective April 22, 2010. 5 2009 ANNUAL REPORT CORPORATE DIRECTORY (As of February 25, 2010) BOARD OF DIRECTORS E. C. \"Pete\" Aldridge Jr. Former Under Secretary of Defense Nolan D. Archibald Chairman, President and Chief Executive Officer The Black & Decker Corporation David B. Burritt Vice President and Chief Financial Officer Caterpillar Inc. James O. Ellis Jr. President and Chief Executive Officer Institute of Nuclear Power Operations Gwendolyn S. King President Podium Prose (A Washington, D.C. - based Speaker's Bureau) James M. Loy Senior Counselor The Cohen Group Douglas H. McCorkindale Retired Chairman Gannett Co., Inc. Joseph W. Ralston Vice Chairman The Cohen Group Frank Savage Chief Executive Officer Savage Holdings LLC James M. Schneider Chairman Horizon Bank, SSB Anne Stevens Former Chief Executive Officer Carpenter Technology Corporation Robert J. Stevens Chairman and Chief Executive Officer Lockheed Martin Corporation James R. Ukropina Chief Executive Officer Directions LLC (A Management and Consulting Firm) EXECUTIVE OFFICERS Mark R. Bostic Acting Vice President and Controller James B. Comey Senior Vice President and General Counsel Linda R. Gooden Executive Vice President Information Systems & Global Services Ralph D. Heath Executive Vice President Aeronautics Marillyn A. Hewson Executive Vice President Electronic Systems Christopher E. Kubasik President and Chief Operating Officer John C. McCarthy Vice President and Treasurer Robert J. Stevens Chairman and Chief Executive Officer Bruce L. Tanner Executive Vice President and Chief Financial Officer Joanne M. Maguire Executive Vice President Space Systems LOCKHEED MARTIN CORPORATION 6 2009 ANNUAL REPORT United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2009 Commission file number 1-11437 LOCKHEED MARTIN CORPORATION (Exact name of registrant as specified in its charter) Maryland 52-1893632 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 6801 Rockledge Drive, Bethesda, Maryland 20817-1877 (301/897-6000) (Address and telephone number of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered Common Stock, $1 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No ' Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ' No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ' Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No ' Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of \"large accelerated filer,\" \"accelerated filer\" and \"smaller reporting company\" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer ' Non-accelerated filer ' Smaller reporting company ' Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act). Yes ' No State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. Approximately $30.9 billion as of June 28, 2009. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common Stock, $1 par value, 375,428,680 shares outstanding as of January 31, 2010. DOCUMENTS INCORPORATED BY REFERENCE Portions of Lockheed Martin Corporation's 2010 Definitive Proxy Statement are incorporated by reference in Part III of this Form 10-K. LOCKHEED MARTIN CORPORATION FORM 10-K For the Fiscal Year Ended December 31, 2009 CONTENTS Part I Item 1 Item 1A Item 1B Item 2 Item 3 Item 4 Item 4(a) Page Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 10 17 18 18 19 19 Part II Item 5 Item 6 Item 7 Item 7A Item 8 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . Financial Section Roadmap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industry Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discussion of Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity and Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Structure and Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractual Commitments and Off-Balance Sheet Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition and Divestiture Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quantitative and Qualitative Disclosure of Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recent Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management's Report on the Financial Statements and Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, Regarding Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on the Audited Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Other Income (Expense), Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Information on Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 21 24 26 26 27 31 38 39 46 48 49 51 52 53 53 53 54 54 55 56 57 58 59 60 61 61 65 66 66 LOCKHEED MARTIN CORPORATION FORM 10-K For the Fiscal Year Ended December 31, 2009 CONTENTS (continued) Part II (continued) Page 5. Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. Postretirement Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. Stock-Based Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. Legal Proceedings, Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. Acquisitions and Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15. Fair Value Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16. Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17. Summary of Quarterly Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 71 71 71 73 74 81 81 84 87 88 89 90 90 90 90 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 92 Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibits 93 97 Item 9 Item 9A Item 9B Part III Item 10 Item 11 Item 12 Item 13 Item 14 92 92 92 Part IV 3 PART I ITEM 1. BUSINESS General Lockheed Martin Corporation is a global security company that is principally engaged in the research, design, development, manufacture, integration, and sustainment of advanced technology systems and products. We also provide a broad range of management, engineering, technical, scientific, logistic, and information services. We serve both domestic and international customers with products and services that have defense, civil, and commercial applications, with our principal customers being agencies of the U.S. Government. We were formed in 1995 by combining the businesses of Lockheed Corporation and Martin Marietta Corporation. We are a Maryland corporation. In 2009, 85% of our net sales were made to the U.S. Government, either as a prime contractor or as a subcontractor. Each of our business segments is heavily dependent on sales to the U.S. Government. Our U.S. Government sales were made to both Department of Defense (DoD) and non-DoD agencies. Sales to foreign governments (including foreign military sales funded, in whole or in part, by the U.S. Government) amounted to 13% of net sales in 2009, while 2% of our net sales were made to commercial and other customers. Our principal executive offices are located at 6801 Rockledge Drive, Bethesda, Maryland 20817-1877. Our telephone number is (301) 897-6000. Our website home page on the Internet is www.lockheedmartin.com. We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K. Throughout this Form 10-K, we incorporate by reference information from parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC allows us to disclose important information by referring to it in this manner, and you should review that information. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statement for our annual shareholders' meeting, as well as any amendments to those reports, available free of charge through our website as soon as reasonably practical after we electronically file that material with, or furnish it to, the SEC. You can learn more about us by reviewing our SEC filings. Our SEC filings can be accessed through the investor relations page of our website, www.lockheedmartin.com/investor. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, and other information regarding SEC registrants, including Lockheed Martin Corporation. Business Segments We operate in four principal business segments: Aeronautics, Electronic Systems, Information Systems & Global Services, and Space Systems. For more information concerning our segment presentation, including comparative segment sales, operating profits, and related financial information for 2009, 2008, and 2007, see Note 4 - Information on Business Segments beginning on page 66 of this Form 10-K. Aeronautics 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. In 2009, net sales at Aeronautics of $12.2 billion represented 27% of our total net sales. Aeronautics has three principal lines of business, and the percentage that each contributed to its 2009 net sales was: Combat Aircraft 72% Air Mobility 13% 15% Other Aeronautics Programs 4 Our customers include the military services and various government agencies of the United States and allied countries around the world. In 2009, U.S. Government customers accounted for approximately 83% of the segment's net sales. Combat Aircraft Our Combat Aircraft business designs, develops, produces, and provides systems support for fighter aircraft. Our major fighter aircraft programs include: The F-35 Lightning II Joint Strike Fighter - international multi-role, stealth fighter; The F-22 Raptor - air dominance and multi-mission stealth fighter; and The F-16 Fighting Falcon - low-cost, combat-proven, international multi-role fighter. The F-35 program continued work on development and Low Rate Initial Production (LRIP) aircraft during 2009. Given the size of the F-35 program, we anticipate that there will be a number of studies released related to the program schedule and production quantities as part of the normal DoD, Congressional, and international partners' oversight and budgeting process. Production of the F-22 will be completed in 2012, with on-going modernization and sustainment activities continuing thereafter. We continue to produce F-16 aircraft for foreign governments under both foreign military and direct commercial sales. Air Mobility In Air Mobility, we design, develop, produce, and provide full system support and sustainment of tactical and strategic airlift aircraft. Our major programs include production, support, and sustainment of the C-130J Super Hercules, upgrade and support of the legacy C-130 Hercules worldwide fleet, support of the existing C-5A/B/C Galaxy fleet, and modification of Galaxy aircraft to the modernized C-5M Super Galaxy configuration. Other Aeronautics Programs (Including Advanced Research and Development) We are involved in advanced development programs incorporating innovative design and rapid prototype applications. Our Advanced Development Programs (ADP) organization, known as the Skunk Works, is focused on future systems including unmanned aerial vehicles and next generation capabilities for long-range strike, intelligence, surveillance, reconnaissance/battle space awareness, and air mobility. We continue to explore technology advancement and insertion in existing aircraft, such as the F-35, F-22, F-16, and C-130. We also are involved in numerous network enabled activities that allow separate systems to work together to increase effectiveness, and continue to invest in new technologies to maintain and enhance competitiveness in military aircraft design and development. Global Sustainment As part of each of our Aeronautics lines of business, we provide a full range of logistics support, sustaining engineering, aviation upgrades, modifications, and maintenance, repair, and overhaul (MRO) for all of our lines of aircraft, including the F-35, the F-22, the F-16, the C-130, the C-5, the P-3 Orion maritime patrol aircraft, and the U-2 Dragon Lady high-altitude reconnaissance aircraft. As the original equipment manufacturer for numerous platforms, we are focused on expanding our global sustainment services, which is an increasingly important portion of the Aeronautics business. Electronic Systems Our Electronic Systems segment manages complex programs and designs, develops, and integrates hardware and software solutions to ensure the mission readiness of armed forces and government agencies worldwide. Major lines of business include: air and missile defense; tactical missiles; weapon fire control systems; surface ship and submarine combat systems, anti-submarine and undersea warfare systems; land, sea-based, and airborne radars; surveillance and reconnaissance systems; simulation and training systems; and integrated logistics and sustainment services. 5 In 2009, net sales of $12.2 billion at Electronic Systems represented 27% of our total net sales. Electronic Systems has three principal lines of business, and the percentage each contributed to its 2009 net sales was: Maritime Systems & Sensors 39% 22% Missiles & Fire Control 39% Platforms & Training U.S. Government customers accounted for approximately 70% of the segment's total net sales in 2009. Maritime Systems & Sensors Maritime Systems & Sensors (MS2) provides ship systems integration, including command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) capability across shore-based command centers; surface ship and submarine combat systems; sea-based missile defense systems; sensors; tactical avionics; port traffic management systems; missile launching systems; aerostat surveillance systems; technologies associated with renewable energy systems; and supply-chain management programs and systems. Core programs include the Aegis Weapon System, which is a fleet defense system and a sea-based element of the U.S. missile defense system, and the Littoral Combat Ship, which is a surface combatant designed to operate in shallow waters. Missiles & Fire Control Missiles & Fire Control (M&FC) develops and produces land-based, air, and theater missile-defense systems, tactical battlefield missiles, electro-optical systems, fire-control and sensor systems, and precision-guided weapons and munitions. We also provide sustainment and logistic services in support of fire control and tactical missile programs. Core programs include the Terminal High Altitude Area Defense (THAAD) system, which is a transportable defensive missile system designed to engage targets both within and outside of the Earth's atmosphere, and the PAC-3 missile, which is an advanced defensive missile designed to intercept incoming airborne threats. Platforms & Training Platforms & Training (P&T) integrates mission-specific applications for fixed- and rotary-wing aircraft, including logistics and sustainment; develops and integrates postal automation and material handling systems; develops tactical wheeled vehicles; and provides simulation, training, and support services. We also manage and operate the Sandia National Laboratories for the U.S. Department of Energy. Effective January 1, 2010, the ground vehicles line of business from the former Systems Integration - Owego, which includes the Joint Light Tactical Vehicle program, was realigned as part of Missiles & Fire Control. Additionally, the remaining Systems Integration - Owego businesses were realigned with the former Maritime Systems & Sensors line of business to form a new line of business, Mission Systems & Sensors. Information Systems & Global Services Our Information Systems & Global Services (IS&GS) segment provides federal services, Information Technology (IT) solutions, and advanced technology expertise across a broad spectrum of applications and customers. IS&GS provides full life-cycle support and highly specialized talent in the areas of software and systems engineering, including capabilities in space, air, and ground systems, and also provides logistics, mission operation support, peacekeeping, and nation-building services for a wide variety of defense and civil government agencies in the U.S. and abroad. IS&GS has a large number of indefinite delivery, indefinite quantity (IDIQ) and task order types of contracts. 6 In 2009, net sales of $12.1 billion at IS&GS represented 27% of our total net sales. IS&GS has three principal lines of business and the percentage that each contributed to its 2009 net sales was: Civil 36% 27% Defense 37% Intelligence In 2009, U.S. Government customers accounted for approximately 94% of the segment's total net sales. Civil Our Civil line of business supports the nation's needs in the areas of human capital, data protection and sharing, financial services, energy and environment, health, security, human exploration, biometrics, and transportation. Its core programs include the Decennial Response Integration System (DRIS 2010) contract, which will provide a multi-channel system for the 2010 U.S. Census data, and En-Route Automation Modernization (ERAM), which is a program to replace the Federal Aviation Administration's infrastructure with a modern automation environment that includes new functions and capabilities. Defense Our Defense line of business provides net-enabled situation awareness, and delivers communications and command and control capabilities through complex mission solutions to defense, National Aeronautics and Space Administration (NASA), National Oceanic and Atmospheric Administration (NOAA), and international customers. Its core programs include the Command and Control, Battle Management, and Communications contract, a program to increase the integration of the Ballistic Missile Defense System, and the Joint Tactical Radio System contract, which provides software programmable tactical radios with voice, data, and video communications to Army, Navy, and Air Force platforms. Intelligence Our Intelligence line of business designs and integrates the complex, global systems that help our customers gather, analyze, and securely distribute critical intelligence data. Its core programs include GeoScout, which is a program to develop advanced intelligence processing, and the FBI's Sentinel IT infrastructure program. Space Systems Space Systems is engaged in the design, research and development, engineering, and production of satellites, strategic and defensive missile systems, and space transportation systems, including activities related to the Space Shuttle and its planned replacement. In 2009, net sales of $8.7 billion at Space Systems represented approximately 19% of our total net sales. Space Systems has three principal lines of business, and the percentage that each contributed to its 2009 net sales was: 67% Satellites Strategic & Defensive Missile Systems 16% 17% Space Transportation Systems In 2009, U.S. Government customers accounted for approximately 97% of the segment's net sales. 7 Satellites Our Satellites business designs, develops, manufactures, and integrates advanced technology satellite systems for government and commercial applications. We are responsible for various classified systems and services in support of vital national security systems. Its core programs include the Space-Based Infrared System (SBIRS) program, which provides the nation with enhanced worldwide detection and tracking capabilities; the Mobile User Objective System (MUOS), which is a next-generation narrow band satellite communication system for the U.S. Navy; the Advanced Extremely High Frequency (AEHF) system, which is the DoD's next generation of highly secure communications satellites; and the Global Positioning Satellite III (GPS III) system, which is the next generation of global positioning satellites. Strategic & Defensive Missile Systems Strategic & Defensive Missile Systems includes missile defense technologies and systems, and fleet ballistic missiles. We have been the sole supplier of strategic fleet ballistic missiles to the U.S. Navy since 1955. The Trident II D5 is the only current submarine-launched intercontinental ballistic missile in production in the United States. Under the targets and countermeasures program, we manage missile defense targets hardware and software for the Missile Defense Agency (MDA), providing realistic test environments for the system being developed by the MDA to defend against all classes of ballistic missiles. Space Transportation Systems Space Transportation Systems includes portions of the next generation human space flight system. We lead an industry team supporting NASA in the design, test, build, integration, and operational capability of the Orion crew exploration vehicle, an advanced crew capsule design utilizing state-of-the-art technology that is planned to succeed the Space Shuttle. Through ownership interests in two joint ventures, Space Transportation Systems also includes Space Shuttle processing activities (United Space Alliance) and expendable launch services for the U.S. Government (United Launch Alliance). The Space Shuttle is expected to finish its final flight mission in 2010 and our programs involving its launch and processing activities will end at that time. Competition Our broad portfolio of products and services competes against the products and services of other large aerospace, defense, and information technology companies, as well as numerous smaller competitors (particularly in the IS&GS segment). We often form teams with other companies that are competitors in other areas to provide customers with the best mix of capabilities to address specific requirements. In some instances, which are more prevalent in our IS&GS-Civil line of business, we may also compete with a government-led bidding entity. In some areas of our business, customer requirements are changing to encourage expanded competition, as with the commercial access to space initiative. Principal factors of competition include: technical and management capability; the ability to develop and implement complex, integrated system architectures; affordability; financing and total cost of ownership; release of technology; past performance; and our ability to provide timely solutions. International sales are subject to a wide variety of U.S. Government controls (e.g., export restrictions, market access, technology transfer, industrial cooperation, and contracting practices). In addition, the purchasing government's relationship with the U.S. and its industrial cooperation programs are also important factors in determining the outcome of a competition. It is common for international customers to require contractors to comply with their industrial cooperation regulations, sometimes referred to as offset requirements, and we have undertaken foreign offset agreements as part of securing some international business. For more information concerning offset agreements, see \"Contractual Commitments and Off-Balance Sheet Arrangements\" in Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 49 of this Form 10-K. Patents We routinely apply for and own a substantial number of U.S. and foreign patents related to the products and services our business segments 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 such 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 segments, we do not 8 believe that any existing patent, license, or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on our business taken as a whole. Raw Materials and Seasonality Aspects of our business require relatively scarce raw materials. We historically have been successful in obtaining the raw materials and other supplies needed in our manufacturing processes. We seek to manage raw materials supply risk through long-term contracts and by maintaining a stock of key materials in inventory. Aluminum and titanium are important raw materials used in certain of our Aeronautics and Space Systems programs. Long-term agreements have helped enable a continued supply of aluminum and titanium. Carbon fiber is an important ingredient in the composite material that is used in our Aeronautics programs, such as the F-35. Nicalon fiber also is a key material used on the F-22 aircraft. One type of carbon fiber and the nicalon fiber that we use are currently only available from single-source suppliers. Aluminum lithium, which we use for F-16 structural components, also is currently only available from limited sources. We have been advised by some suppliers that pricing and the timing of availability of materials in some commodities markets can fluctuate widely. These fluctuations may negatively affect price and the availability of certain materials, including titanium. 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 award fees. No material portion of our business is considered to be seasonal. Various factors can affect the distribution of our sales between accounting periods, including the timing of government awards, the availability of government funding, product deliveries, and customer acceptance. Government Contracts and Regulation Our businesses are heavily regulated in most of our fields of endeavor. We deal with numerous U.S. Government agencies and entities, including all of the branches of the U.S. military, NASA, the U.S. Postal Service, the Social Security Administration, and the Departments of Defense, Energy, Justice, Health and Human Services, Homeland Security, State, and Transportation. 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 contract negotiations; impose specific and unique cost accounting practices that may differ from U.S. generally accepted accounting principles (GAAP) and therefore require reconciliation; impose acquisition regulations that define allowable and unallowable costs and otherwise govern our right to reimbursement under certain cost-based U.S. Government contracts; and restrict the use and dissemination of information classified for national security purposes and the export of certain products and technical data. Government contracts are conditioned upon the continuing availability of legislative appropriations. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods become unavailable. Congress usually appropriates funds on a fiscal-year basis even though contract performance may extend over many years. Consequently, at the outset of a program, the contract is usually partially funded, and Congress annually determines if additional funds are to be appropriated to the contract. In addition, significant cost overruns could require a special certification from the Secretary of Defense to Congress to allow work under the contract to continue. The U.S. Government and other governments may terminate any of our government contracts or subcontracts either at their convenience or for default based on performance. A portion of our business is classified by the U.S. Government and cannot be specifically described. The operating results of these classified programs are included in our consolidated financial statements. The business risks associated with classified programs historically have not differed materially from those of our other government programs. 9 Backlog At December 31, 2009, our total negotiated backlog was $78.0 billion compared with $80.9 billion at the end of 2008. Of our total 2009 year-end backlog, approximately $46.0 billion, or 59%, is not expected to be filled within one year. In April 2009, the DoD terminated for convenience two of our significant programs: the VH-71 Presidential Helicopter Replacement program, and the TSAT Mission Operations System (TMOS) contract, representing the ground support infrastructure for the TSAT program. These contract terminations reduced our negotiated backlog by approximately $2.6 billion. Our backlog includes both funded (unfilled firm orders for our products and services for which funding has been both authorized and appropriated by the customer - Congress, in the case of U.S. Government agencies) and unfunded (firm orders for which funding has not been appropriated) amounts. We do not include unexercised options or potential IDIQ orders in our backlog. If any of our contracts were to be terminated by the U.S. Government, our backlog would be reduced by the expected value of the remaining terms of such contracts. Funded backlog was $49.0 billion at December 31, 2009. The backlog for each of our business segments is provided as part of Management's Discussion and Analysis of Financial Condition and Results of Operations - \"Discussion of Business Segments\" beginning on page 39 of this Form 10-K. Research and Development We conduct research and development activities under customer-funded contracts and with our own independent research and development funds. Our independent research and development costs include basic research, applied research, development, systems, and other concept formulation studies. These costs generally are allocated among all contracts and programs in progress under U.S. Government contractual arrangements. Corporation-sponsored product development costs not otherwise allocable are charged to expense when incurred. Under certain arrangements in which a customer shares in product development costs, our portion of the unreimbursed costs is expensed as incurred. Independent research and development costs charged to costs of sales were $750 million in 2009, $719 million in 2008, and $678 million in 2007. See \"Research and development and similar costs\" in Note 1 - Significant Accounting Policies on page 63 of this Form 10-K. Employees At December 31, 2009, we had approximately 140,000 employees, over 90% of whom were located in the U.S. We have a continuing need for numerous skilled and professional personnel to meet contract schedules and obtain new and ongoing orders for our products. The majority of our employees possess a security clearance. The demand for workers with security clearances who have specialized engineering, information technology, and technical skills within the aerospace, defense, and information technology industries is likely to remain high for the foreseeable future, while growth of the pool of trained individuals with those skills has not matched demand. As a result, we are competing with other companies with similar needs in hiring skilled employees. Management considers employee relations to be good. Approximately 15% of our employees are covered by any one of approximately seventy separate collective bargaining agreements with various unions. A number of our existing collective bargaining agreements expire in any given year. Historically, we have been successful in renegotiating expiring agreements without any material disruption of operating activities. Forward-Looking Statements This Form 10-K contains statements that, to the extent they are not recitations of historical fact, constitute forwardlooking statements within the meaning of federal securities law. The words believe, estimate, anticipate, project, intend, expect, plan, outlook, scheduled, forecast, and similar expressions are intended to help identify forward-looking statements. Statements and assumptions with respect to future sales, income and cash flows, program performance, the outcome of litigation, environmental remediation cost estimates, and planned acquisitions or dispositions of assets are examples of forward-looking statements. Numerous factors, including potentially the risk factors described in the following section, could affect our forward-looking statements and actual performance. ITEM 1A. RISK FACTORS An investment in our common stock or debt securities involves risks and uncertainties. Although we attempt to identify, manage, and mitigate risks to our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. You should consider the following factors carefully, in addition to the other information contained in this Form 10-K, before deciding to purchase our securities. 10 Our existing U.S. Government contracts are subject to continued appropriations by Congress and may be terminated or delayed if future funding is not made available. Reduced funding for defense procurement and research and development programs could result in terminated or delayed contracts and adversely affect our ability to grow or maintain our sales and profitability. We rely heavily upon sales to the U.S. Government including both DoD and non-DoD agencies, obtaining 85% of our sales from U.S. Government customers in 2009. Future sales from orders placed under our existing U.S. Government 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. U.S. Government programs in which we participate, or in which we may seek to participate in the future, must compete with other programs for consideration during our nation's budget formulation and appropriation processes, and may be affected by changes in general economic conditions. Budget decisions made in this environment may have long-term consequences for our size and structure and that of the defense industry. We believe that our programs are a high priority for national defense and other imperatives, but there remains the possibility that one or more of our programs will be reduced, extended, or terminated. Reductions in our existing programs, unless offset by other programs and opportunities, could adversely affect our ability to grow our sales and profitability. In this regard, we are pursuing a strategy in which we seek to expand and complement our existing products and services by moving into adjacent businesses in which we believe that our core competencies will enable us to successfully compete. We may seek to move into adjacent businesses through investments, acquisitions, joint ventures, or by developing our internal capabilities. If we are not successful in this effort, we may not be able to grow our sales and profitability at the rates we anticipate or may have deployed financial and management resources sub-optimally. We provide a wide range of defense, homeland security, and information technology products and services to the U.S. Government. Although we believe that this diversity makes it less likely that cuts in any specific contract or program will have a long-term effect on us, termination of multiple or large programs or contracts could adversely affect our business and future financial performance. In addition, termination of large programs or multiple contracts at a particular business site could require us to evaluate the continued viability of operating that site. Changes in global security strategy and planning may affect future procurement priorities and existing programs. We cannot predict whether potential changes in security, defense, and intelligence priorities will afford new or additional opportunities for our businesses in terms of existing, follow-on, or replacement programs, or whether we would have to close existing manufacturing facilities or 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 changes in priorities. See \"Management's Discussion and Analysis of Financial Condition and Results of Operations - Industry Considerations\" beginning on page 27 of this report. We are continuing to invest in business opportunities where we can use our customer knowledge, technical strength, and systems integration capabilities to win new business. Whether we are successful in continuing to grow sales and profits will depend, in large measure, on whether we are able to deliver the best value solutions for our customer. As a U.S. Government contractor, we are subject to a number of procurement rules and regulations. 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, in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties, the termination of our contracts, or debarment from bidding on contracts. In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the U.S. Government may terminate any of our government contracts and subcontracts either at its convenience or for default based on performance. Upon termination for convenience of a fixed-price type contract, we normally are entitled to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-process, and an allowance for profit on the contract or adjustment for loss if completion of performance would have resulted in a loss. Upon termination for convenience of a cost reimbursement 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. Our ability to 11 recover is subject to the U.S. Government's having appropriated sufficient funds to cover the termination costs. 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, many on-going programs do not have sufficient funds appropriated to cover the termination costs were the government to terminate them for convenience. The U.S. Government is not required to appropriate additional funding under these circumstances. 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 addition, our U.S. Government contracts typically span one or more base years and multiple option years. The U.S. Government generally has the right to not exercise option periods and may not exercise an option period if the agency is not satisfied with our performance on the contract. Our business could be adversely affected by a negative audit by the U.S. Government. U.S. Government agencies, including the Defense Contract Audit Agency and various agency Inspectors General, routinely audit and investigate government contractors. These agencies review a contractor's performance under its contracts, cost structure, and compliance with applicable laws, regulations, and standards. The U.S. Government also reviews the adequacy of, and a contractor's compliance with, its internal control systems and policies, including the contractor's management, purchasing, property, estimating, compensation, accounting, and information systems. Any costs found to be misclassified may be subject to repayment. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or prohibition from doing business with the U.S. Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. The nature of our business involves significant risks and uncertainties that may not be covered by indemnity or insurance. Elements of our business provide products and services where insurance or indemnification may not be available, including: Designing, developing, integrating, producing, sustaining, and supporting products using: advanced and unproven technologies; explosive or other inherently dangerous components; systems such as spacecraft, satellites, intelligence systems, and homeland security applications that operate in extreme, high demand, or high risk conditions; Designing, developing, integrating, producing, sustaining, and supporting products to collect, archive, retrieve, fuse, distribute, and analyze various types of information; Deploying employees in countries with unstable or competing governments, in areas subject to peacekeeping or humanitarian missions, in areas of armed conflict, at military installations, or accompanying armed forces in the field; and Training others to operate or repair advanced technology products or provide security or other homeland securityrelated services. Failure of some of these products and services could result in extensive loss of life or property damage. Sometimes these products and services are controversial and our role in providing them could subject us to criticism or harm our reputation. Certain products and services may raise questions with respect to issues of civil liberties, intellectual property, trespass, conversion, and similar concepts. The legal obligations of those working with developing technologies and the resulting products and services may raise issues of first impression, and the legal decisions that do deal with these questions may differ from jurisdiction to jurisdiction on a global basis. Indemnification by the U.S. Government to cover potential claims or liabilities resulting from a failure of technologies dev