Memorandum

DATE:             July 18, 2012
TO:                 All U.S. Employees
FROM:           Bob Stevens, Chairman and Chief Executive Officer
                       Chris Kubasik, Vice Chairman, President and Chief Operating Officer

SUBJECT: Straight Talk On Sequestration

Over the past several months, you may have seen news coverage about our position on a federal law passed last year and the negative effects it will have on our nation and our industry.  And in the weeks ahead, you will hear more from us on this subject.  It’s called sequestration.

Under the Budget Control Act (BCA) of 2011, the Department of Defense committed to reduce spending by $487 billion over the next 10 years, with $47 billion of that occurring in this year’s budget.

Like every company in our industry, we feel the effects of those reductions, but we understand the fiscal pressures our nation faces and we are doing our part.

However, there is a provision in the BCA known as sequestration, which was originally designed as a mechanism to force bipartisan cooperation on deficit spending and debt reduction – a process that failed.  As a result, sequestration now requires $1.2 trillion in automatic cuts in U.S. government discretionary spending beginning January 2, 2013.  Half that total is expected to come from defense spending; the rest from other domestic spending, including education and infrastructure.  This would result in $492 billion in reductions for defense over the next nine years in addition to the $487 billion mentioned above.

We believe sequestration is the single greatest challenge facing our company and our industry. Defense Secretary Leon Panetta has said sequestration will have catastrophic consequences for our nation’s defense because it was developed without consideration for national security strategy, force structure, technology needs or operational reality.  We agree, and we have candidly and publicly voiced our concerns with our government customers, members of Congress, and our industry partners.  

With little guidance from the government on the specifics of sequestration, it is difficult to determine the impact of these cuts on our employees, programs and suppliers.  We do know, however, that we have responsibilities under the federal Worker Adjustment and Retraining Notification (WARN) Act to provide 60 days’ notice to employees of a facility closure or major layoff.  New York law requires 90 days’ notice.  As we continue our analysis, we see that these laws could result in the need to issue conditional WARN notices to a substantial number of our employees, starting late in the third quarter.

We know this is unsettling information and you are probably asking, “Will I be affected?”  Our very rough estimate of the number of employees who could be affected, based on the limited information available to us from the government, is about 10,000.  We’d prefer to give you more clarity and details, and we will, just as soon as we get specific guidance from the government.

Until then, we ask that you remain focused on our global security mission.  We know that you care deeply about the work you do in support of our nation and our customers, and we ask that you continue to help us meet our commitments to our customers as the sequestration debate plays out.  At the same time, we will continue doing everything we can to encourage government leaders to find a better solution to the nation’s fiscal challenges than sequestration.

At Lockheed Martin, we have a seasoned leadership team and a strong strategy focused on growing our company in core, adjacent and international markets that is reliant on our continued strong performance.  And we have you, the best employees in the business.  As we embark on our second century as a successful enterprise supporting the U.S. government and our allies, we are committed to making sure our company, our industry, and our nation remain strong and vital.

One way we’ll do that is by continuing to voice our concerns about sequestration at every opportunity.  If you would like to find out more about the effort to stop sequestration, visit the Aerospace Industries Association's Stop Sequestration website.

Thank you, as always, for your commitment to Lockheed Martin, our customers and our nation.  Even with the challenges we face, our customers need us to focus with the full concentration and complete dedication that have been hallmarks of your work.  We have great confidence in our future success because of our confidence in you.

Editor’s Note:  Bob Stevens is testifying before the U.S. House of Representatives’ Armed Services Committee today on the impact of sequestration.  You can see Bob’s statement for the record here.