Memorandum

DATE: July 26, 2011
TO: All Lockheed Martin Employees
FROM: Bob Stevens, Chairman and Chief Executive Officer
SUBJECT: Our Second-Quarter Results: Strong Execution in a Challenging Environment

Today we reported second-quarter results that reflect strong execution across the company even as we were taking difficult measures to rightsize our business for the challenging environment we are facing. Thanks to your continued focus on delivering high quality and affordable solutions that provide value to both our customers and our shareholders, we increased sales and earnings from continuing operations, and we were able to increase our guidance for 2011 cash from operations, segment operating profit, and earnings-per-share.

In the second quarter, we continued the positive momentum we established at the beginning of the year. Sales grew 2 percent to $11.6 billion and earnings-per-share rose 11 percent to $2.14. We generated strong cash from operations, returned value to our stockholders through $258 million in dividends and $1 billion in share repurchases, and made pension fund contributions of $325 million.

New business and program milestones during the quarter include a contract agreement with the U.S. Army to begin production of 29 additional Persistent Threat Detection Systems (PTDS) to support coalition forces in Afghanistan; a follow-on award from the U.S. Army for the Guided Multiple Launch Rocket System (GMLRS); the successful launch into orbit of the Space Based Infrared System (SBIRS) spacecraft; the delivery of a Joint Tactical Radio for testing by the U.S. Air Force; plus key deliveries of tactical and transport aircraft to domestic and international governments.

On our largest program, the F-35 Joint Strike Fighter, we achieved multiple noteworthy events and made progress on both the development and production programs. In development, flight test activities continued ahead of plan for all three aircraft variants. We also delivered the final two carrier variant test aircraft to Patuxent River Naval Air Station, and the first full mission simulator to Eglin Air Force Base. In addition, we delivered the first two production aircraft to Edwards Air Force Base to increase the velocity of flight testing there, and we’re readying eight more production F-35s for delivery. Finally, we have submitted our initial proposal for the fifth lot of 32 Low Rate Initial Production aircraft, and we look forward to placing Lot 5 under contract later this year.

You have probably seen news coverage of cost overruns on F-35 Lots 1-3 and a $1 trillion cost for sustainment over the life of the program. It is our understanding that the government estimate of the overrun assumes “worst case” conditions. We are committed to working with our industry team and our customers to reduce this cost pressure as much as possible and deliver a high-performance, effective, affordable solution. Similarly, the government’s estimate for sustainment was based on an early model with many assumptions that we are examining in detail. I have every confidence that we and our customers, working together, will substantially reduce the cost of this sustainability estimate.

Last week, we witnessed with great pride the Space Shuttle Atlantis land successfully for the final time. For 30 years – in partnership with NASA – we have demonstrated a steadfast commitment to excellence on the Space Shuttle program. To all who played a part in the Shuttle, thank you – you helped America explore the last frontier. Now, our nation’s next adventure in space exploration has already begun, and we are once again at the forefront with our Orion Multi-Purpose Crew Vehicle. It’s exciting, because I know we’ll deliver the same amazing results.

While the second quarter demonstrated our resilience to escalating economic and global security pressures, today more than ever before we are under intense pressure to perform flawlessly and deliver value on every program. For the third and fourth quarters, we will continually assess our competitiveness, agree only to cost targets that we can achieve and requirements that are clear, and continue to focus on affordability initiatives wherever and whenever possible. Also, as a number of our programs transition from development to production, we will look to flatten organizations and tighten spans of control. These staffing reductions are the most difficult aspect of running our business, but they are essential in responding to new realities and changing economic conditions. Our common goal must be to align priorities, minimize risks, spark innovation, develop new insights, and most importantly, stay true to our values and commitment to behave ethically always.

In this demanding new reality of expanding global security concerns and constrained economic resources, there is a lot of pressure on our customers, and a lot of pressure on us. It is a time for us to be aligned, and to build effective relationships based on professionalism and respect, because we must work together to meet our nation’s greatest challenges – victory in war, prosperity in peace, exploring our universe, and effective government services for our citizens. It requires a highly collaborative environment, where true innovation occurs, where insight is developed, where knowledge is gained, and reasonable risks are shared.

I am confident that we will succeed, because I know the quality of your character and I see the results of your performance daily. Thank you for a strong second quarter, and thank you for your commitment to never forget who we work for.