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Item 7. Management’s Discussion and Analysis

2024-02-08 compared with 2023-02-07 · 151 added, 169 removed, 345 unchanged (48% of the section changed)

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GLOBAL EVENTS

The coronavirus (COVID-19) pandemic has caused significant disruptions to national and global economies and government activities since March 2020.

During this time, we have continued to conduct our operations while responding to the pandemic with actions to mitigate adverse consequences to our employees, business, supply chain and customers.

In February 2022, Russian forces invaded Ukraine.

In response, the United States and several other countries imposed economic and trade sanctions, export controls and other restrictions (collectively, global sanctions) targeting Russia and Belarus.

The coronavirus (COVID-19) pandemic caused significant disruptions to national and global economies and government activities, including supply chain and staffing challenges.

Additionally, in response to the Russian invasion of Ukraine, the United States and several other countries imposed economic and trade sanctions, export controls and other restrictions (collectively, global sanctions) targeting Russia and Belarus.

The conflict and these sanctions have caused some disruptions to global economies and some global businesses, including heightened cybersecurity risks, increased energy costs and foreign currency exchange rate fluctuations, as well as exacerbated existing supply chain challenges and inflationary pressures.

In our Aerospace segment, we continue to see strong order activity as we emerge from the impacts of the COVID-19 pandemic.

However, this segment is the most impacted relatively by the global sanctions, particularly our aircraft services business in Europe, which we have offset to date through additional services revenue in other regions.

Across the aerospace industry, the global sanctions impact sales to certain individuals and entities and exports of associated aircraft parts and related services.

Within our defense segments, the COVID-19 pandemic created some staffing and supply chain challenges, particularly in our Marine Systems (especially in the submarine supply chain) and Technologies segments.

The Russia-Ukraine conflict could continue to impact future U.S.

government defense spending due to the heightened national security threat and the need to replenish stockpiles that have been reduced in support of Ukraine.

Internationally, many countries in the region have expressed a renewed commitment to defense-related spending.

As a result, we have seen signals of additional demand for our products and services.

Lastly, the impact of the war between Israel and Hamas continues to evolve.

The disruptions caused by these events continue to impact global economies and businesses.

The primary impact to our business is supply chain challenges, including inflationary pressures.

In our Aerospace segment, supply chain challenges have paced our ability to ramp up production in response to strong customer demand for our aircraft and have caused out-of-sequence manufacturing, which increases costs and decreases operational efficiency.

This includes the Israel-Hamas war’s impact on our Israel-based supplier of mid-cabin aircraft.

Within our defense segments, the COVID-19 pandemic resulted in supply chain challenges and impacted the regional availability of skilled labor, which we continue to experience, particularly in our Marine Systems segment.

The Russia-Ukraine conflict and increased threat environment has created additional demand for our products and services, particularly in our Combat Systems segment.

Any longer-term impact of these global events to our business is currently unknown due to the uncertainty around duration and their broader impact.

For additional information, see the Risk Factors in Part I, Item 1A.

The Review of Operating Segments includes information on these global events for the affected segments.

With approximately 70% of our revenue from the U.S.

government, government spending levels — particularly defense spending — influence our financial performance.

On December 29, 2022, the fiscal

year (FY) 2023 defense appropriations bill was signed into law.

It totaled approximately $798 billion, representing an increase of approximately 10% over the enacted FY 2022 spending level.

The Congress has not yet passed a defense appropriations bill for the government’s current fiscal year.

However, the government has been operating under a continuing resolution (CR) that provides funding for some federal agencies through March 1, 2024, and other federal agencies through March 8, 2024.

When the government operates under a CR, all programs of record are funded at the prior year’s appropriated levels until the current year appropriations bill is signed into law.

Therefore, the U.S.

Department of Defense (DoD) is prohibited

from starting new programs or increasing funding on existing programs unless there is an exception for the program included in the CR.

The current CR included an exception allowing the DoD to obligate funds for the construction of the second submarine under the existing Columbia-class submarine program.

We do not anticipate the current CR having a material impact on our results of operations, financial condition or cash flows.

However, the impact to our business from an extended CR or government shutdown that may result from any continuing delay by Congress to pass a new defense appropriations bill would depend on the duration and government implementation of the CR or shutdown.

The long-term outlook for our U.S.

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In our Aerospace segment, we expect our investment in the development of new aircraft products and technologies to support the segment’s long-term growth.

Similarly, we believe the aircraft services business will be a source of steady revenue growth as the global business jet fleet continues to grow.

Similarly, we believe our aircraft services business will be a source of steady revenue growth as the global business jet fleet continues to grow.

RESULTS OF OPERATIONS

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In the defense segments, revenue on long-term government contracts is recognized generally over time as the work progresses, either as products are produced or as services are rendered.

Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at

completion to measure progress toward satisfying our performance obligations.

Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations.

Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.

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◦ Operating earnings of $4.2 billion with sequential growth throughout the year

◦ Record-high diluted earnings per share of $12.19, up 5.5% from 2021

◦ Record-high cash provided by operating activities of $4.7 billion, or 142% of net earnings

• Record-high backlog of $91.1 billion increased $3.5 billion, or 4%, from 2021, driven by significant order activity during the year supporting our long-term growth expectations:

◦ Outstanding Gulfstream aircraft order activity, including orders across all aircraft models

• Record-high year-end backlog of $93.6 billion increased $2.5 billion, or 2.7%, from 2022, driven by significant order activity during the year supporting our long-term growth expectations:

◦ Strong Gulfstream aircraft order activity, including orders across all aircraft models

◦ Several significant contract awards received in our defense segments, including $3 billion of combined awards from the U.S.

Navy for advance procurement and other work for the Columbia-class submarine program

Navy for advance procurement and other work for the Virginia-class submarine program

Year Ended December 31 2023 2022 Variance

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Operating margin 10.0 % 10.7 %

Our consolidated revenue increased in 2022 from growth in U.S.

Navy ship construction in our Marine Systems segment and aircraft services activity in our Aerospace segment.

Operating earnings increased

in 2022 due primarily to strong operating performance in our Aerospace segment, while we managed through the impacts of supply chain challenges and inflationary pressure across the business.

Our consolidated revenue increased in 2023 driven by growth in each of our defense segments, particularly submarine construction and engineering in our Marine Systems segment.

Operating margin decreased in 2023 due primarily to supply-chain cost pressure in our Marine Systems segment and lower-margin artillery facilities expansion work in our Combat Systems segment.

REVIEW OF OPERATING SEGMENTS

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Total increase $ 54

Revenue was up in our Aerospace segment driven by an increase in demand for aircraft services, particularly maintenance work, and increased activity at our fixed-base operator (FBO) facilities due to growing global air travel.

Aircraft services revenue was higher in 2023 due to an increase in demand for maintenance work based on established maintenance cycles, a larger installed base of aircraft, and strong customer flight activity.

Aircraft manufacturing revenue decreased in 2023 due primarily to fewer deliveries of our large-cabin aircraft resulting from supply chain constraints.

The increase in the segment’s operating earnings in 2023 consisted of the following:

Aircraft manufacturing $ 123

Aircraft services $ 36

Aircraft manufacturing 7

G&A/other expenses 9

Total increase $ 52

Aircraft manufacturing operating earnings were up in 2022 due to a favorable mix of aircraft deliveries and ongoing improvements in manufacturing efficiency.

Earnings in 2022 were somewhat impacted by customer accommodations associated with a G500/G600 airworthiness directive while 2021 earnings included mark-to-market adjustments related to aircraft that were in the G500 test program.

In 2022, operating earnings from aircraft services were up due to higher volume and favorable cost performance.

These increases were offset partially by higher G&A/other expenses due primarily to increased R&D expenses associated with ongoing product development efforts.

Aircraft services operating earnings were up in 2023 due to higher volume and a favorable mix of services.

While aircraft manufacturing operating earnings in 2023 reflected the impact of higher production costs resulting from supply chain challenges, 2022 earnings were impacted to a greater extent by customer accommodation costs associated with a G500/G600 airworthiness directive.

G&A expenses decreased in 2023, offset partially by increased R&D expenses associated with ongoing product development efforts, particularly those related to the G700 certification.

In total, the Aerospace segment’s operating margin increased 50 basis points in 2023 to 13.7%.

We expect the Aerospace segment’s 2023 revenue to increase to approximately $10.4 billion due to an increase in new aircraft deliveries to 145.

We expect the Aerospace segment’s 2024 revenue to increase to approximately $12 billion due to an increase in new aircraft deliveries to approximately 160, including the entry into service of the new G700 aircraft.

We expect the segment’s operating margin to be approximately 15%.

This outlook assumes the certification and entry into service of the new G700 aircraft.

MARINE SYSTEMS

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The increase in the Marine Systems segment’s revenue in 2023 consisted of the following:

Navy ship construction $ 577

Navy ship engineering, repair and other services $ 784

Navy ship construction 637

Total increase $ 1,421

Revenue from U.S.

Navy ship construction was up across our shipyards in 2022 due to increased volume on the Columbia-class submarine program, the John Lewis-class (T-AO-205) fleet replenishment oiler program and the Arleigh Burke-class (DDG-51) destroyer program.

These increases were offset partially by lower submarine engineering volume.

Overall, the Marine Systems segment’s operating margin decreased 20 basis points in 2022 due to program mix and supply chain impacts to the Virginia-class submarine schedule, offset partially by improved performance at NASSCO.

We expect the Marine Systems segment’s 2023 revenue to remain steady at approximately $10.9 billion.

Operating margin is expected to be approximately 8.1% driven by program mix across our shipyards and ongoing supply chain challenges.

Navy ship construction and engineering was up in 2023 due primarily to increased volume on the Columbia-class submarine program.

The Marine Systems segment’s operating margin decreased 110 basis points in 2023 due to supply chain impacts to the Virginia-class submarine schedule and cost growth on the Arleigh Burke-class (DDG-51) guided-missile destroyer program.

We expect the Marine Systems segment’s 2024 revenue to increase to approximately $12.8-12.9 billion with operating margin of approximately 7.6%.

COMBAT SYSTEMS

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Operating Results

The change in the Combat Systems segment’s revenue in 2022 consisted of the following:

The increase in the Combat Systems segment’s revenue in 2023 consisted of the following:

International military vehicles $ 474

military vehicles 282

Weapons systems and munitions 430

Total decrease $ (43)

Revenue from international military vehicles was down in 2022, but this decrease was offset largely by increased revenue from U.S.

Stryker wheeled combat vehicles, particularly the maneuver short-range air defense (M-SHORAD) variant.

The strengthening of the U.S.

dollar against the euro and British pound has negatively impacted the Combat Systems segment’s results in 2022, specifically the translation of our international revenue from local currencies into U.S.

Had foreign exchange rates in 2022 held constant from 2021, the Combat Systems segment’s revenue would have increased 2.1% in 2022 compared to 2021.

The Combat Systems segment’s operating margin increased 20 basis points compared with 2021 driven by favorable contract mix and strong operating performance.

We expect the Combat Systems segment’s 2023 revenue to be approximately $7.3 billion with operating margin of approximately 14.7%.

military vehicles 56

Total increase $ 960

Revenue from international military vehicles increased in 2023 due to higher volume on several wheeled and tracked vehicle contracts, including the sale of the Abrams main battle tank to U.S.

allies and partners.

Weapons systems and munitions revenue was up due to increased demand and facility expansion efforts associated with increased artillery production.

Revenue from U.S.

military vehicles increased due primarily to higher volume on the U.S.

Army’s M10 Booker combat vehicle program (formerly known as Mobile Protected Firepower).

The Combat Systems segment’s operating margin decreased 80 basis points compared with 2022 driven primarily by lower-margin artillery facilities expansion work.

We expect the Combat Systems segment’s 2024 revenue to increase to approximately $8.5 billion with operating margin of approximately 14.4%.

Year Ended December 31 2023 2022 Variance

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The increase in the Technologies segment’s revenue in 2023 consisted of the following:

IT services $ 126

Information technology (IT) services $ 264

C5ISR* solutions 166

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* Command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance

The group’s revenue was up despite continued delays in customer order activity as revenue from IT services increased on several programs, particularly with the group’s federal civilian customers.

This increase was offset partially by decreased revenue from C5ISR solutions due to supply chain disruptions.

The Technologies segment’s operating margin decreased 40 basis points compared with 2021 due primarily to the mix of service activity and product volume.

We expect the Technologies segment’s 2023 revenue to be between $12.5 and $12.6 billion with operating margin of around 9.5% driven by a shift in the mix of IT service activity and hardware volume.

The Technologies segment’s revenue was up due primarily to strong demand for IT services and the acquisition of a C5ISR solutions business in 2022.

Overall, the segment’s margin decreased 50 basis points compared with 2022 due to program mix.

We expect the Technologies segment’s 2024 revenue to increase to $13 billion with operating margin of around 9.5%.

Corporate operating costs totaled $160 in 2023 and $118 in 2022 and consisted primarily of equity-based compensation expense.

The increase was due primarily to accelerated recognition of equity-based compensation expense.

Corporate operating costs are expected to be approximately $125 in 2024.

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Ship construction $ 637

Other, net 17

Military vehicle production 503

Weapons systems and munitions 430

Total increase $ 1,573

Ship construction revenue increased due to higher volume on the Columbia-class submarine, T-AO-205 oiler and DDG-51 destroyer programs.

In 2022, the primary driver of the increase in product operating costs was the change in volume described above.

Ship construction revenue increased due primarily to higher volume on the Columbia-class submarine program.

Military vehicle production revenue was up due primarily to higher volume on several international wheeled and tracked vehicle contracts.

Weapons systems and munitions revenue was up due to increased demand and facility expansion efforts associated with increased artillery

In 2023, product operating costs increased at a higher rate than revenue due to supply chain impacts and cost growth within our Marine Systems segment.

The increase in service revenue in 2023 consisted of the following:

Ship services $ 784

IT services 264

Aircraft services 220

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Total increase $ 1,292

Aircraft services revenue increased due to additional maintenance work and FBO activity.

Services revenue increased in 2023 due to a higher volume of engineering work on the Columbia-class submarine program, increased demand for IT services and additional aircraft maintenance work.

In 2023, the primary driver of the increase in service operating costs was the change in volume described above.

As a percentage of revenue, G&A expenses were 6.1% in 2022 and 5.8% in 2021, reflecting an increase in equity-based compensation expense.

As a percentage of revenue, G&A expenses decreased to 5.7% in 2023 compared with 6.1% in 2022 due to growth in revenue.

We expect G&A expenses as a percentage of revenue in 2024 to be generally consistent with 2023.

Net other income was $82 in 2023 and $189 in 2022 and represents primarily the non-service components of pension and other post-retirement benefits.

In 2023, we expect net other income to decrease to approximately $80 due to lower pension income.

The decrease in pension income is driven primarily by higher interest rates and a change in investment mix in one of our plans due to its improved funded status.

The decrease in pension income was driven primarily by higher interest rates and a change in investment mix in one of our plans due to its improved funded status.

In 2024, we expect net other income to be approximately $50.

INTEREST, NET

Net interest expense was $364 in 2022 and $424 in 2021, reflecting repayment of our scheduled debt maturities in 2021.

Net interest expense was $343 in 2023 and $364 in 2022, reflecting the repayment of our scheduled debt maturities in 2023 and 2022.

See Note K to the Consolidated Financial Statements in Item 8 for additional information regarding our debt obligations, including interest rates.

We expect 2023 net interest expense to be consistent with 2022.

We expect 2024 net interest expense to be approximately $320.

PROVISION FOR INCOME TAX, NET

Our effective tax rate was 16% in 2022 and 15.9% in 2021.

Our effective tax rate increased to 16.8% in 2023 from 16% in 2022.

For further discussion, including a reconciliation of our effective tax rate from the statutory federal rate, see Note D to the Consolidated Financial Statements in Item 8.

For 2023, we anticipate a slightly higher full-year effective tax rate of approximately 17% due to higher taxes on foreign earnings.

In August 2022, the president signed into law the Inflation Reduction Act of 2022, which contained provisions effective January 1, 2023, including a 15% corporate minimum tax and a 1% excise tax on stock buybacks, both of which we do not expect to have a material impact on our results of operations, financial condition or cash flows.

For 2024, we anticipate a slightly higher full-year effective tax rate of approximately 17.5%.

The increase in our effective tax rate in 2023 and the expected increase in 2024 are due principally to higher taxes on foreign earnings.

BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE

Our total backlog, including funded and unfunded portions, was $91.1 billion on December 31, 2022, up 4% from $87.6 billion at the end of 2021.

Our total backlog is equal to our remaining performance obligations under contracts with customers as discussed in Note B to the Consolidated Financial Statements in Item 8.

Our total backlog, including funded and unfunded portions, was $93.6 billion on December 31, 2023, compared to $91.1 billion at the end of 2022.

Our total backlog is equal to our remaining performance obligations under contracts with customers as discussed in Note B to the Consolidated Financial

Statements in Item 8.

Our total estimated contract value, which combines total backlog with estimated potential contract value, was $132 billion on December 31, 2023.

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The Aerospace segment ended 2023 with backlog of $20.5 billion, up 4.8% from $19.5 billion at year-end 2022.

Orders in 2022 reflected strong demand across our product and services portfolio, including orders for all models of Gulfstream aircraft.

Orders in 2023 reflected strong demand across our portfolio of products and services, including orders for all models of Gulfstream aircraft.

The segment’s book-to-bill ratio (orders divided by revenue) was 1.2-to-1 in 2023.

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The total backlog in our defense segments represents the estimated remaining sales value of work to be performed under firm contracts.

The funded portion of total backlog includes items that have been authorized and appropriated by the U.S.

Congress and funded by customers, as well as commitments by international customers that are approved and funded similarly by their governments.

The funded portion of total backlog includes items that have been authorized and appropriated by the Congress and funded by customers, as well as commitments by international customers that are approved and funded similarly by their governments.

The unfunded portion of total backlog includes the amounts we believe are likely to be funded, but there is no guarantee that future budgets and appropriations will provide the same funding level currently anticipated for a given program.

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Total backlog in our defense segments was $73.2 billion on December 31, 2023, compared with $71.6 billion at year-end 2022.

In 2022, the total book-to-bill ratio in our defense segments was 1-to-1.

In 2023, the total book-to-bill ratio in our defense segments was slightly above 1-to-1.

Estimated potential contract value in our defense segments was $37.9 billion on December 31, 2023, compared with $35.9 billion at year-end 2022.

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The Marine Systems segment’s backlog consists of very long-term submarine and surface ship construction programs, as well as numerous engineering and repair contracts.

The segment’s book-to-bill ratio was 1.1-to-1 in 2022, resulting in backlog growth of 1.9% from year-end 2021 to $45.7 billion.

The segment’s estimated potential contract value was $3.7 billion on December 31, 2022, compared with $4.3 billion at year-end 2021.

The segment’s backlog and estimated potential contract value remained steady compared with year-end 2022.

Significant contract awards in the Marine Systems segment during 2023 include:

• $5.4 billion from the Navy for the Columbia-class submarine program for advance procurement and advance construction of critical components and material to support follow-on submarines, efforts to support continuous missile tube production, enhancements to develop the submarine industrial base, and sustained class maintenance and support.

The awards also include options totaling $585 of additional potential contract value.

• $2 billion from the Navy for long-lead materials and construction of an additional Expeditionary Sea Base (ESB) auxiliary support ship and two additional T-AO-205 oilers.

The awards also include a $715 option for an additional T-AO-205 oiler.

• $1.2 billion from the Navy to provide maintenance, modernization and repair services for the DDG-51 destroyer, Wasp-class amphibious assault ship and Los Angeles-class submarine programs.

• $580 from the Navy for lead yard services, development studies and design efforts for Virginia-class submarines.

The awards also include options totaling $320 of additional potential contract value.

• $235 from the Navy to provide engineering, technical, design and planning yard support services for operational strategic and attack submarines.

• $170 from the Navy for advanced nuclear plant studies (ANPS) in support of the Columbia-class submarine program.

• $145 from the Navy to provide ongoing planning and lead yard services for the DDG-51 destroyer program.

• $1.7 billion from the U.S.

Navy for lead yard services, development studies and design efforts, procurement and delivery of initial spare parts to support maintenance availabilities for Virginia-class submarines.

• $300 for advanced nuclear plant studies (ANPS) in support of the Columbia-class submarine program.

The contracts, including options, have a maximum potential value of $1.5 billion.

• $1.3 billion from the Navy for long-lead materials and advance construction for Block V and long-lead materials for Block VI Virginia-class submarines.

• $720 from the Navy to provide maintenance and modernization services for the DDG-51 destroyer, San Antonio-class amphibious transport dock and Wasp-class amphibious assault ship programs.

The awards including options have a maximum potential value of $1.2 billion.

• $735 from the Navy for construction of an additional John Lewis-class (T-AO-205) fleet replenishment oiler.

• $95 from the Navy to provide maintenance and support non-nuclear maintenance on submarines based at the New London Naval Submarine Support Facility in Connecticut.

The awards have a maximum potential value of $460.

• A contract from the Navy to provide ongoing lead yard services for the DDG-51 program.

The contract including options has a maximum potential value of $420.

• $220 from the Navy to provide in-service support of systems and components on the USS Jimmy Carter (SSN 23).

• A contract from the Navy for the construction of three Flight III DDG-51 destroyers.

The following represents the Marine Systems segment’s total estimated contract value by major program on December 31, 2023:

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Significant contract awards in the Combat Systems segment during 2023 include:

• $1 billion for various munitions and ordnance with additional option value of $465.

• $410 from the U.S.

Army to begin low-rate initial production (LRIP) of the Mobile Protected Firepower (MPF) vehicle.

The contract has a maximum potential value of $1.1 billion.

• A contract worth up to $1.1 billion to produce Abrams main battle tanks in the system enhancement package version 3 (SEPv3) configuration for Poland.

• $770 from the Army for Abrams main battle tank upgrades, engineering and logistics support services, and system and sustainment technical support services.

• $1.7 billion for various munitions and ordnance.

The awards have a maximum potential value of $3.2 billion.

• $1 billion from the U.S.

Army to establish additional capacity for 155mm projectile metal parts and M795 load, assemble and pack (LAP) production and artillery propellant.

The contracts, including follow-on production, have a maximum potential value of $2.4 billion.

• $920 from the Army for Stryker vehicle upgrades, spare parts, and inventory management and support services.

• $440 from the Army to produce Stryker M-SHORAD vehicles.

• $355 to produce Abrams main battle tanks in the SEPv3 configuration for Australia.

• $320 to upgrade Ulan tracked vehicles for Austria.

• $230 to produce Piranha armored combat vehicles for Switzerland.

• $60 to produce M3 amphibious bridge systems for an international customer.

The contract has a maximum potential value of $210.

• $695 from the Army to advance to the detailed design and prototype build and test phases of the XM30 Mechanized Infantry Combat Vehicle (MICV) competition, formerly known as the Optionally Manned Fighting Vehicle (OMFV).

The award including options has a maximum potential value of $770.

• $755 from the Army to upgrade Abrams main battle tanks to the system enhancement package version 3 (SEPv3) configuration and provide system and sustainment technical support services for the Abrams program.

• $305 to produce light armored vehicles (LAVs) and provide the associated spares and logistics support services for Colombia.

• $260 from the Army for the second phase of low-rate initial production (LRIP) of the M10 Booker Combat Vehicle.

• $230 to provide maintenance and modernization for the Leopard fleet of vehicles for the Spanish Ministry of Defence.

• $205 to produce Abrams main battle tanks in the SEPv3 configuration for Poland, bringing the total firm backlog for the program to $1.1 billion.

The following represents the Combat Systems segment’s total estimated contract value by market on December 31, 2023:

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In 2023, approximately 80% of the segment’s orders were from additional work on IDIQ contracts or the exercise of options.

The segment’s total estimated contract value remained steady compared with year-end 2021.

The segment’s total estimated contract value was $40.8 billion on December 31, 2023, compared with $39.6 billion at year-end 2022.

Significant contract awards in the Technologies segment during 2023 include:

• An IDIQ contract from the National Geospatial-Intelligence Agency (NGA) to provide hybrid cloud services and IT design, engineering, and operations and sustainment services.

The contract has a maximum potential value of $4.5 billion over 10 years.

• An IDIQ contract to provide full spectrum security support services to protect mission critical infrastructure for the U.S.

The contract has a maximum potential value of $4.5 billion between two awardees.

• $1.4 billion for several key classified contracts.

• An IDIQ contract to provide IT infrastructure and modernization support services for the U.S.

Air Forces in Europe under the Europe-Wide Information Technology and Enterprise Network (EITEN) program.

The contract has a maximum potential value of $910.

• $80 from the U.S.

Environmental Protection Agency for managed application, information, networking, enterprise and security services.

The contract has a maximum potential value of $660.

• An IDIQ contract from the Army to develop and field adversarial electronic warfare threat systems and capabilities in support of the Army’s test and training communities.

The contract has a maximum potential value of $580.

• $375 from the Army for computing and communications equipment under the Common Hardware Systems-5 (CHS-5) program.

• $160 from the U.S.

Space Development Agency to build and operate ground systems for the new low-earth orbit (LEO) satellite network.

The contract has a maximum potential value of $325.

• An IDIQ contract for the development and sustainment of applications and websites for the Administrative Office of the United States Courts (AOUSC).

The contracts have a maximum potential value of $3.1 billion.

• An IDIQ contract from the Indian Health Service (IHS) to modernize its electronic health record (EHR) system.

The contract has a maximum potential value of $2.5 billion.

• $130 to provide flight simulation and training services for the Army.

The contract has a maximum potential value of $1.7 billion.

• An IDIQ contract to provide mission command training and technical support services for the Army.

The contract has a maximum potential value of $975 among multiple awardees.

• $55 to continue infrastructure modernization of the U.S.

Department of Homeland Security’s (DHS) St.

Elizabeth’s Campus in Washington, D.C.

The contract including options has a maximum potential value of $710.

• $95 from U.S.

Special Operations Command (USSOCOM) to provide a full range of activities to support USSOCOM operations, including program management, mission infrastructure and training services.

The contract including options has a maximum potential value of $490.

• An IDIQ contract to provide sustainment services, spare parts and obsolescence risk management services, and system readiness for the Army’s Prophet Enhanced sensor systems.

The contract has a maximum potential value of $480.

• A contract from the Centers for Medicare and Medicaid Services (CMS) to continue operating and modernizing the agency’s Healthcare Integrated General Ledger Accounting System (HIGLAS) application.

The contract including options has a maximum potential value of $450.

The following represents the Technologies segment’s total estimated contract value by customer on December 31, 2023:

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The primary driver of cash inflows in both years was net earnings.

Cash flows in both years were affected positively by an increase in customer deposits driven by Gulfstream aircraft orders.

While cash flows in 2021 were affected positively by a reduction in inventory from the sale of G500 flight-test aircraft in our Aerospace segment, cash flows in 2022 were affected negatively by growth in inventory related to new aircraft models awaiting certification from the U.S.

Cash flows in both periods were affected positively by an increase in customer deposits driven by Gulfstream aircraft orders, offset partially by an increase in inventory due primarily to new aircraft models awaiting certification from the U.S.

Federal Aviation Administration (FAA).

Cash flows in 2023 were also affected positively by a decrease in unbilled receivables due to the receipt of progress payments on large international vehicle contracts in our Combat Systems segment.

INVESTING ACTIVITIES

Cash used by investing activities was $1.5 billion in 2022 and $882 in 2021.

Cash used by investing activities was $941 in 2023 and $1.5 billion in 2022.

Our investing activities include cash paid for capital expenditures and business acquisitions;

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The primary use of cash for investing activities in both years was capital expenditures.

Capital expenditures were $1.1 billion in 2022 and $887 in 2021.

Capital expenditures have been at an elevated level the past two years as we continue to invest in our shipyards, particularly for the planned growth in submarine construction.

Other capital expenditures include equipment and facility enhancements to support new and existing programs across our businesses.

We expect capital expenditures to be just below 2.5% of revenue in 2023.

Business Acquisitions.

In 2022, we acquired a provider of mission-critical embedded computing solutions for U.S.

Navy platforms in our Technologies segment.

Capital expenditures were $904 in 2023 and $1.1 billion in 2022.

Capital expenditures include equipment and facility enhancements to support new and existing programs across our businesses.

FINANCING ACTIVITIES

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Our financing activities also include proceeds received from debt and commercial paper issuances and employee stock option exercises.

On March 2, 2022, our board of directors declared an increased quarterly dividend of $1.26 per share, the 25th consecutive annual increase.

Previously, the board had increased the quarterly

dividend to $1.19 per share in March 2021.

Cash dividends paid were $1.4 billion in 2022 and $1.3 billion in 2021.

On March 8, 2023, our board of directors (Board) declared an increased quarterly dividend of $1.32 per share, the 26th consecutive annual increase.

Previously, the Board had increased the quarterly dividend to $1.26 per share in March 2022.

Cash dividends paid were $1.4 billion in 2023 and 2022.

Share Repurchases.

Our board of directors from time to time authorizes management to repurchase outstanding shares of our common stock on the open market.

We paid $1.2 billion and $1.8 billion in 2022 and 2021, respectively, to repurchase our outstanding shares.

On December 31, 2022, 6.7 million shares remained authorized by our board of directors for repurchase, representing 2.4% of our total shares outstanding.

Our Board from time to time authorizes management to repurchase outstanding shares of our common stock on the open market.

We paid $434 and $1.2 billion in 2023 and 2022, respectively, to repurchase our outstanding shares.

On December 31, 2023, 4.7 million shares remained authorized by our Board for repurchase, representing 1.7% of our total shares outstanding.

Debt Issuances and Repayments.

In November 2022, we repaid fixed-rate notes of $1 billion at the scheduled maturity using cash on hand.

Fixed-rate notes of $750 and $500 mature in May 2023 and August 2023, respectively.

In May and August 2023, we repaid fixed-rate notes of $750 and $500, respectively, and in November 2022, we repaid fixed-rate notes of $1 billion, all at their respective scheduled maturities using cash on hand.

Fixed-rate notes of $500 mature in November 2024.

We currently plan to repay these notes at maturity using cash on hand, potentially supplemented by commercial paper or other borrowings.

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generally accepted accounting principles (GAAP), and there are limitations associated with their use.

Our calculation of these metrics may not be completely comparable to similarly titled measures of other companies due to potential differences in the method of calculation.

Our calculation of these metrics may not be completely comparable to similarly titled measures of other companies.

As a result, the use of these metrics should not be considered in isolation from, or as a substitute for, GAAP measures.

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Average invested capital is defined as the sum of the average debt and average shareholders’ equity excluding accumulated other comprehensive loss.

Average debt and average shareholders’ equity excluding accumulated other comprehensive loss are calculated using the respective balances at the end of the preceding year and the respective balances at the end of each of the four quarters of the year presented.

Average debt and average shareholders’ equity excluding accumulated other comprehensive loss are calculated using the

respective balances at the end of the preceding year and the respective balances at the end of each of the four quarters of the year presented.

ROIC excludes goodwill impairments and non-economic accounting changes as they are not reflective of company performance.

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Actual results may differ from these estimates.

We believe our judgment is applied consistently and produces financial information that fairly depicts our results of operations for all periods presented.

believe our judgment is applied consistently and produces financial information that fairly depicts our results of operations for all periods presented.

In our opinion, the following policies are critical and require the use of significant judgment in their application:

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Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.

Contract costs include labor, material, overhead and, when appropriate, G&A expenses.

Most of our revenue recognized at a point in time is for the manufacture of business jet aircraft in our Aerospace segment.

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Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs.

For long-term contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Contract estimates are based on various assumptions to project the outcome of future events that often span several years.

These assumptions include labor productivity and availability;

the complexity of the work to be performed;

the cost and availability of materials;

the performance of subcontractors;

and the availability and timing of funding from the customer.

The nature of our contracts gives rise to several types of variable consideration, including claims, award fees and incentive fees.

We include in our contract estimates additional revenue for contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable.

In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs

incurred, the reasonableness of those costs and the objective evidence available to support the claim.

We include award fees or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee.

These estimates are based on historical award experience, anticipated performance and our best judgment at the time.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly.

We recognize adjustments in estimated profit on contracts under the cumulative catch-up method.

Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified.

Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.

The aggregate impact of adjustments in contract estimates increased our operating earnings (and diluted earnings per share) by $370 ($1.05) in 2022 and $377 ($1.06) in 2021.

While no adjustment on any one contract was material to the Consolidated Financial Statements in 2022 or 2021, our Marine Systems segment’s 2022 results were affected negatively by supply chain impacts to the Virginia-class submarine schedule, offset partially by improved performance on auxiliary and support ships.

We estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

For discussion of our contract estimates, the assumptions used, and the impact of changes in estimates, see Footnote B to the Consolidated Financial Statements in Item 8.

Consistent with industry practice, we classify assets and liabilities related to long-term contracts as current, even though some of these amounts may not be realized within one year.

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We use both qualitative and quantitative approaches when testing goodwill for impairment.

When determining the approach to be used, we consider the current facts and circumstances of each reporting unit as well as the excess of each reporting unit’s estimated fair value over its carrying value based on our most recent quantitative assessments.

When determining the approach to be used, we consider the current facts and circumstances of each

reporting unit as well as the excess of each reporting unit’s estimated fair value over its carrying value based on our most recent quantitative assessments.

Our qualitative approach evaluates the business environment and various events impacting the reporting unit including, but not limited to, macroeconomic conditions, changes in the business environment and reporting unit-specific events.

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However, if a quantitative assessment is determined to be necessary, we compare the fair value of a reporting unit to its carrying value and, if necessary, recognize an impairment loss for the amount by which the carrying value exceeds the reporting unit’s fair value.

Our estimate of fair value is based primarily on the discounted cash flows of the underlying operations and requires the use of judgment by management.

Our estimate of a reporting unit’s fair value is based primarily on the discounted cash flows of the underlying operations and requires the use of judgment by management.

The process requires numerous assumptions, including the timing of work embedded in our backlog, our performance and profitability under our contracts, our success in securing future business, the appropriate risk-adjusted interest rate used to discount the projected cash flows, and terminal-value growth rates applied to the final year of projected cash flows.

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Our qualitative assessments did not present indicators of impairment for the reporting units.

In the fourth quarter of 2022, we completed a quantitative assessment for our Technologies reporting unit, and the results indicated that no impairment existed.

The Technologies reporting unit’s estimated fair value exceeded its carrying value by approximately 25%.

The fair value of the Technologies reporting unit decreased since our previous quantitative assessment, performed in the fourth quarter of 2020, driven by the negative impact of increased interest rates on our discounted projected cash flows.

As a result, a material decrease in the fair value or increase in carrying value would put the reporting unit at risk of goodwill impairment.

For example, a 50-basis-point increase in interest rates would lower our discounted projected cash flows and negatively impact the fair value of the Technologies reporting unit, reducing the cushion to approximately 15%.

We believe the projections and assumptions we used in estimating fair value are reasonable, but it is possible actual experience could differ.

In the fourth quarter of 2023, we also completed a qualitative assessment for our Technologies reporting unit as its estimated fair value exceeded its carrying value by approximately 25% at the time of our last quantitative assessment in the fourth quarter of 2022.

Interest rates rose over the last year, but the increase was within the tolerances established in our previous quantitative analysis.

Our qualitative assessment this year did not present any other indicators of impairment.

However, if interest rates were to continue to increase without an offsetting increase in future cash flow projections, the estimated fair value of the reporting unit would decrease and could put the reporting unit at risk of goodwill impairment.

Commitments and Contingencies.

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The key assumption is the interest rates used to discount estimated future pension benefits.

We base the discount rates on a current yield curve developed from a portfolio of high-quality, fixed-income investments with maturities consistent with the projected benefit payout period.

The effect of a 25-basis-point increase or decrease in the discount rate assumption on the December 31, 2022, pension benefit obligation is ($319) and $334, respectively.

We base the discount rates on a current yield curve developed from a portfolio of high-quality,

fixed-income investments with maturities consistent with the projected benefit payout period.

The effect of a 25-basis-point increase or decrease in the discount rate assumption on the December 31, 2023, pension benefit obligation is ($317) or $332, respectively.

As described in Note S to the Consolidated Financial Statements in Item 8, our contractual arrangements with the U.S.

government provide for the recovery of benefit costs for our government retirement plans.

We have elected to defer recognition of the benefit costs until such costs can be

allocated to contracts.

We have elected to defer recognition of the benefit costs until such costs can be allocated to contracts.

Therefore, the impact of annual changes in financial reporting assumptions on the retirement benefit cost for these plans does not immediately affect our operating results.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis