What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-19 compared with 2023-04-18 · 229 added, 173 removed, 292 unchanged (58% of the section changed)

8 unchanged sentences

and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S.

During the quarter ended March 26, 2023, 73% of our $15.1 billion in net sales were from the U.S.

During the six months ended June 25, 2023, 74% of our $31.8 billion in net sales were from the U.S.

Government, either as a prime contractor or as a subcontractor (including 64% from the Department of Defense (DoD)), 25% were from international customers (including foreign military sales (FMS) contracted through the U.S.

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government spending levels, particularly defense spending, and timely funding thereof can affect our financial performance over the short and long term.

On December 29, 2022, the President signed the FY 2023 Omnibus Appropriations Act into law, which provides $858 billion in total national defense funding, of which $816.7 billion is for the DoD base budget.

This reflects a $44.6 billion increase over the FY 2023 request for national defense spending, and a $43.7 billion increase for the DoD.

The President’s Fiscal Year (FY) 2024 budget request was submitted to Congress on March 9, 2023, initiating the FY 2024 defense authorization and appropriations legislative process.

The request includes $886 billion for National Defense, of which $842 billion is for the DoD base budget.

In addition to the FY 2024 budget process, Congress will have to contend with the legal limit on U.S.

debt, commonly known as the debt ceiling.

The current statutory limit of $31.4 trillion was reached in January, requiring the Treasury Department to take accounting measures to continue normally financing U.S.

government obligations while avoiding exceeding the debt ceiling.

It is expected, however, the U.S.

government will exhaust these measures by June 2023.

If the debt ceiling is not raised, the U.S.

government may not be able to fulfill its funding obligations and there could be significant disruption to all discretionary programs and wider financial and economic repercussions.

The federal budget and debt ceiling are expected to continue to be the subject of considerable congressional debate.

Although we believe DoD, intelligence and homeland security programs will continue to receive consensus support for increased funding and would likely receive priority if this scenario came to fruition, the effect on individual programs or Lockheed Martin cannot be predicted at this time.

On June 3, 2023, the President signed H.R.

3746 “The Fiscal Responsibility Act” (FRA) into law.

The legislation suspends the debt ceiling until January 1, 2025, and, among other provisions, caps national defense spending at $886 billion for FY 2024 (President’s Budget Request level) and $895 billion for FY 2025.

Supplemental funding legislation is not subject to the budget caps.

Additionally, the FRA will result in a decrease in government spending for FY 2024 by one percent from FY 2023 enacted levels if Congress does not pass all twelve defense and non-defense discretionary appropriations bills by the end of 2023 and, as a result, a continuing resolution is in effect on or after January 1, 2024.

Three of the four congressional defense committees have reported their versions of the FY 2024 defense bill for consideration by their respective full chambers and the remaining committee could act by the end of July 2023.

As noted above, the FRA spending cap limits the ability of the defense committees to support significant increases in program funding without supplemental or emergency funding designations.

Overall congressional sentiment remains strong for supporting the National Defense Strategy and defense spending.

However, we anticipate that the federal budget will continue to be subject to debate and compromise shaped by, among other things, heightened political tensions, the global security environment, inflationary pressures and macroeconomic conditions.

The result may be shifting funding priorities, which could have material impacts on defense spending broadly and our programs in particular.

See also the discussion of U.S.

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Russia’s invasion of Ukraine has significantly elevated global geopolitical tensions and security concerns.

As a result, we have received increased interest for certain of our products and services as countries seek to improve their security posture.

As a result, we have received increased interest for certain of our products and services as countries seek to improve their security posture and continue to engage in contract discussions.

In addition, security assistance provided by the U.S.

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Government demand to replenish U.S.

stockpiles, resulting in additional and potential future orders for our products.

We have seen this interest result in initiation of new contract discussions.

However, given the long-cycle nature of our business and current industry capacity, we do not expect a significant increase in near term sales from new contracts in response to the conflict.

We continue to evaluate capacity at our operations and the supply chain to anticipate potential demand and enable us to deliver critical capabilities.

COVID-19 has previously impacted our operational and financial performance and its impact in future periods, including our ability to execute our programs in the expected timeframe, remains uncertain and will depend on future COVID-19 related developments, including the impact of COVID-19 infection or potential new variants or subvariants, and supplier impacts and related government actions to prevent and manage disease spread.

The long-term impacts of COVID-19 on government budgets and other funding priorities, including international priorities, that impact demand for our products and services also are difficult to predict, but could negatively affect our future results and performance.

stockpiles, resulting in additional and potential future orders for our products, including for the ramp-up in production capacity for certain products.

given the long-cycle nature of our business and current industry capacity, we do not expect a significant increase in 2023 sales from new contracts in response to the conflict.

We continue to work with the U.S.

Government and our supply chain to evaluate increases in capacity at certain of our operations to anticipate potential demand and enable us to deliver critical capabilities.

Our business and financial performance may also be affected by general economic conditions.

Heightened levels of inflation and the potential worsening of macro-economic conditions present risks for Lockheed Martin, our suppliers and the stability of the broader defense industrial base.

Supply chains continue to recover from global disruptions experienced over the last few years.

We continue working to minimize supply chain challenges, including performance and shortages, as these challenges may adversely impact our performance and our financial results.

In addition, heightened levels of inflation and the potential worsening of macro-economic conditions present risks for Lockheed Martin, our suppliers and the stability of the broader defense industrial base.

We have been experiencing impacts to our labor rates and suppliers have signaled inflation related cost pressures, which will continue to flow through to our costs and pricing.

Although inflation did not significantly impact our financial results in the first quarter of 2023, if inflation remains at current levels for an extended period, or increases, and we are unable to successfully mitigate the impact, our costs are likely to increase, resulting in pressure on our profits, margins and cash flows, particularly for existing fixed-price contracts.

Inflation can also constrain the overall purchasing power of our customers for our products and services potentially impacting future orders.

In addition, some suppliers are reducing the typical duration of pricing validity in their proposals to us, which can be operationally challenging and increase the risk of cost volatility.

Although inflation did not significantly impact our financial results in the second quarter of 2023, if we continue to experience high rates of inflation, and we are unable to successfully mitigate the impact, our costs are likely to increase, resulting in pressure on our profits, margins and cash flows, particularly for existing fixed-price contracts.

Inflation and higher interest rates can also constrain the overall purchasing power of our customers for our products and services potentially impacting future orders.

We remain committed to our ongoing efforts to increase the efficiency of our operations and improve the cost competitiveness and affordability of our products and services, which may, in part, offset cost increases from inflation.

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Our consolidated results of operations were as follows (in millions, except per share data):

Quarters Ended

2023 March 27,

Quarters Ended Six Months Ended

2023 June 26,

2022 June 25,

2023 June 26,

Net sales $ 16,693 $ 15,446 $ 31,819 $ 30,410

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Gross profit 2,090 1,956 4,136 3,865

Other (expense) income, net (9) 24

Other income, net 45 7 36 31

Operating profit 2,135 1,963 4,172 3,896

Interest expense (223) (141) (425) (276)

Non-service FAS pension income 110 140

Other non-operating income, net 49 123

Non-service FAS pension income (expense) 111 (1,331) 221 (1,191)

Other non-operating (expense) income, net (17) (161) 32 (38)

Earnings before income taxes 2,006 330 4,000 2,391

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Diluted earnings per common share $ 6.63 $ 1.16 $ 13.24 $ 7.62

Certain amounts reported in other (expense) income, net, including our share of earnings or losses from equity method investees, are included in the operating profit of our business segments.

Certain amounts reported in other income, net, including our share of earnings or losses from equity method investees, are included in the operating profit of our business segments.

Accordingly, such amounts are included in the discussion of our business segment results of operations.

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Our consolidated net sales were as follows (in millions):

Quarters Ended

2023 March 27,

Quarters Ended Six Months Ended

2023 June 26,

2022 June 25,

2023 June 26,

Products $ 13,758 $ 12,761 $ 26,284 $ 25,255

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Product Sales

Product sales during the quarter ended March 26, 2023 were comparable to the same period in 2022 as higher product sales of $375 million at Space were mostly offset by lower product sales of $260 million at Aeronautics and $85 million at MFC.

Higher product sales at Space was due to higher development volume for classified programs and higher development volume for Next Generation Interceptor (NGI).

Lower product sales at Aeronautics were due to lower volume on F-35 production contracts, partially offset by higher volume on classified contracts.

Lower product sales at MFC were due to lower volume for Guided Multiple Launch Rocket Systems (GMLRS).

Product sales increased $1.0 billion, or 8%, during the quarter ended June 25, 2023 compared to the same period in 2022.

The increase was primarily attributable to higher product sales of $840 million at Aeronautics due to higher volume on F-35 production contracts.

Product sales increased $1.0 billion, or 4%, during the six months ended June 25, 2023 compared to the same period in 2022.

The increase was primarily attributable to higher product sales of $670 million at Space and $580 million at Aeronautics.

Higher product sales at Space were due to higher development volume for Next Generation Interceptor (NGI) and classified programs.

Higher product sales at Aeronautics were due to higher volume on classified and F-35 production contracts.

Service Sales

Service sales increased $130 million, or 5%, during the quarter ended March 26, 2023 compared to the same period in 2022.

The increase is primarily attributable to higher sales of approximately $130 million at Aeronautics due to higher volume on F-35 sustainment contracts.

Service sales increased $250 million, or 9%, during the quarter ended June 25, 2023 compared to the same period in 2022.

The increase was primarily attributable to higher sales of approximately $170 million at Aeronautics due to higher volume on F-35 sustainment contracts.

Service sales increased $380 million, or 7%, during the six months ended June 25, 2023 compared to the same period in 2022.

The increase was primarily attributable to higher sales of approximately $300 million at Aeronautics due to higher volume on F-35 sustainment contracts.

Cost of Sales

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Our consolidated cost of sales were as follows (in millions):

Quarters Ended (a)

2023 March 27,

Quarters Ended Six Months Ended (a)

2023 June 26,

2022 June 25,

2023 June 26,

Cost of sales – products $ (12,238) $ (11,339) $ (23,389) $ (22,446)

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Total cost of sales $ (14,603) $ (13,490) $ (27,683) $ (26,545)

(a) Effective January 1, 2023, the company reclassed intangible asset amortization expense out of the business segment operating profit and into the unallocated items line item to better align with how management views and manages the business.

(a) Effective January 1, 2023, we reclassified intangible asset amortization expense out of the business segment operating profit and into the unallocated items line item to better align with how management views and manages the business.

See “Note 1 - Basis of Presentation” included in our Notes to Consolidated Financial Statements for further information regarding the impact of this change on our current and prior period segment operating profit.

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Product Costs

Product costs during the quarter ended March 26, 2023 were comparable to the same period in 2022 as higher product costs of $305 million at Space were offset by lower product costs of $240 million at Aeronautics and $75 million at MFC.

Higher product costs at Space were due to higher development volume for classified programs and higher development volume for NGI.

Lower product costs at Aeronautics were due to lower volume on F-35 production contracts, partially offset by higher volume on classified contracts.

Lower product costs at MFC were due to lower volume for GMLRS.

Product costs increased $899 million, or 8%, during the quarter ended June 25, 2023 compared to the same period in 2022.

The increase was primarily attributable to higher product costs of $740 million at Aeronautics due to higher volume on F-35 production contracts.

Product costs increased $943 million, or 4%, during the six months ended June 25, 2023 compared to the same period in 2022.

The increase was primarily attributable to higher product costs of $575 million at Space and $500 million at Aeronautics.

Higher product costs at Space were due to higher development volume for NGI and classified programs.

Higher product costs at Aeronautics were due to higher volume on classified and F-35 production contracts.

Service Costs

Service costs increased $117 million, or 5%, during the quarter ended March 26, 2023 compared to the same period in 2022.

The increase was primarily attributable to higher product costs of approximately $115 million at Aeronautics due to higher volume on F-35 sustainment contracts.

Service costs increased $286 million, or 12%, during the quarter ended June 25, 2023 compared to the same period in 2022.

The increase was primarily attributable to higher service costs of approximately $170 million at Aeronautics due to higher volume on F-35 sustainment contracts.

Service costs increased $403 million, or 9%, during the six months ended June 25, 2023 compared to the same period in 2022.

The increase was primarily attributable to higher service costs of approximately $285 million at Aeronautics due to higher volume on F-35 sustainment contracts.

Other Unallocated, Net

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These items are not allocated to the business segments and, therefore, are not allocated to cost of sales for products or services.

Other unallocated, net reduced cost of sales by $355 million during the quarter ended March 26, 2023, compared to $219 million during the quarter ended March 27, 2022.

Other unallocated, net was higher primarily due

to gains during the quarter ended March 26, 2023, compared to losses during the same period in 2022 for the fair value of assets and liabilities related to deferred compensation plans.

Other (Expense) Income, Net

Other (expense) income, net, primarily includes earnings generated by equity method investees.

Other expense, net was $9 million during the quarter ended March 26, 2023, compared to other income, net of $24 million during the quarter ended March 27, 2022.

Other expense, net during the quarter ended March 26, 2023 included lower earnings generated by our equity method investment in ULA due to lower launch volume and an increase in new product development costs.

Other unallocated, net reduced cost of sales by $277 million and $632 million during the quarter

and six months ended June 25, 2023, compared to $205 million and $424 million during the quarter and six months ended June 26, 2022.

The increase in other unallocated, net was primarily due to gains in the fair value of assets and liabilities related to deferred compensation plans during the quarter and six months ended June 25, 2023, compared to losses in the same periods in 2022.

Other Income, Net

Other income, net, primarily includes earnings generated by equity method investees.

Other income, net was $45 million and $36 million during the quarter and six months ended June 25, 2023, compared to $7 million and $31 million during the quarter and six months ended June 26, 2022.

Other income, net during the quarter ended June 25, 2023 includes higher earnings generated by certain of our equity method investments, including United Launch Alliance (ULA) which was due to launch mix.

Other income, net during the six months ended June 25, 2023 includes other corporate income items, none of which were individually significant, partially offset by lower earnings generated by our equity method investment in ULA due to lower launch volume and an increase in new product development costs.

Interest Expense

Interest expense during the quarter ended March 26, 2023 was $202 million, compared to $135 million during the quarter ended March 27, 2022.

The increase in interest expense in 2023 resulted primarily from the issuance of notes in October of 2022.

Interest expense during the quarter and six months ended June 25, 2023 was $223 million and $425 million, compared to $141 million and $276 million during the quarter and six months ended June 26, 2022.

The increase in interest expense in 2023 resulted primarily from the issuance of senior unsecured notes in October 2022 and May 2023.

Non-Service FAS Pension Income

Non-service FAS pension income was $110 million during the quarter ended March 26, 2023, compared to $140 million during the quarter ended March 27, 2022.

The decrease was primarily due to higher interest cost and lower plan assets and associated expected return.

See “Note 6 - Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements for additional information.

Other Non-operating Income, Net

Other non-operating income, net primarily includes gains or losses related to changes in the fair value of investments or gains or losses upon sale of investments.

During the quarter ended March 26, 2023, other non-operating income, net was $49 million compared to $123 million during the quarter ended March 27, 2022.

The decrease during the quarter ended March 26, 2023 was primarily due to lower gains for the fair value of certain investments.

Non-service FAS pension income was $111 million and $221 million during the quarter and six months ended June 25, 2023, compared to expense of $1.3 billion and $1.2 billion during the quarter and six months ended June 26, 2022.

Non-service FAS pension expense for the quarter and six months ended June 26, 2022 includes a noncash, non-operating pension settlement charge of $1.5 billion ($1.2 billion, or $4.33 per share, after-tax), related to the transfer of $4.3 billion of our gross defined benefit pension obligations and related plan assets to an insurance company.

Other Non-operating (Expense) Income, Net

Other non-operating (expense) income, net primarily includes gains or losses related to changes in the fair value of early-stage company investments or gains or losses upon sale of these investments.

During the quarter ended June 25, 2023, other non-operating expense, net was $17 million compared to $161 million during the quarter ended June 26, 2022.

During the six months ended June 25, 2023, other non-operating income, net was $32 million compared to other non-operating expense, net of $38 million during the six months ended June 26, 2022.

Other non-operating (expense) income, net for the quarter and six months ended June 25, 2023 includes lower losses related to fair value adjustments of early-stage company investments and lower debt transaction costs.

See “Note 10 - Other” included in our Notes to Consolidated Financial Statements for additional information.

Income Tax Expense

Our effective income tax rate was 15.3% for the quarter ended March 26, 2023 and 15.9% for the quarter ended March 27, 2022.The rates for both periods benefited from research and development tax credits, tax deductions for foreign derived intangible income, dividends paid to our defined contribution plans with an employee stock ownership plan feature, and employee equity awards.

The rate for the first quarter of 2023 was lower than the first quarter of 2022 primarily due to increased research and development tax credits.

Our effective income tax rates were 16.2% and 15.8% for the quarter and six months ended June 25, 2023 and 6.4% and 14.6% for the quarter and six months ended June 26, 2022.

The rate for the second quarter of 2022 was lower than the second quarter of 2023 primarily due to lower earnings before income taxes resulting from a noncash, non-operating pension settlement charge of $1.5 billion, which reduced the tax expense by approximately $314 million.

The rates for all periods benefited from research and development tax credits, tax deductions for foreign derived intangible income, and dividends paid to our defined contribution plans with an employee stock ownership plan feature.

Changes in U.S.

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The cash tax impact will continue over the five-year amortization period but will decrease over the period and be immaterial by 2027.

As of December 31, 2022, our liabilities associated with uncertain tax positions were $1.6 billion.

For the quarter ended March 26, 2023, our liabilities associated with uncertain tax positions increased to $1.9 billion with a corresponding increase to net deferred tax assets primarily as a result of the provision described above from the Tax Cuts and Jobs Act of 2017.

We are regularly under audit or examination by tax authorities, including foreign tax authorities (including in, amongst others, Australia, Canada, India, Italy, Japan, Poland, and the United Kingdom).

The final determination of tax audits and any related litigation could similarly result in unanticipated increases in our tax expense and affect profitability and cash flows.

On August 16, 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 were immaterial to our financial results, financial position and cash flows.

We reported net earnings of $1.7 billion ($6.61 per share) during the quarter ended March 26, 2023, compared to $1.7 billion ($6.44 per share) during the quarter ended March 27, 2022.

Net earnings and earnings per share for the quarter ended March 26, 2023 were affected by the factors mentioned above.

Earnings per share also benefited from a net decrease of approximately 13.5 million weighted average common shares outstanding during the quarter ended March 26, 2023, compared to the same periods in 2022.

We reported net earnings of $1.7 billion ($6.63 per share) and $3.4 billion ($13.24 per share) during the quarter and six months ended June 25, 2023, compared to $309 million ($1.16 per share) and $2.0 billion ($7.62 per share) during the quarter and six months ended June 26, 2022.

Net earnings and earnings per share for the quarter and six months ended June 25, 2023 were affected by the factors mentioned above.

Earnings per share also benefited from a net decrease of approximately 13.1 million and 13.3 million weighted average common shares outstanding during the quarter and six months ended June 25, 2023, compared to the same periods in 2022.

The reduction in weighted average common shares was a result of share repurchases, partially offset by share issuance under our stock-based awards and certain defined contribution plans.

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Government under the applicable U.S.

Government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance such as a portion of management and administration costs, legal fees and settlements, stock-based compensation expense, changes in the fair value of assets and liabilities for deferred compensation plans, retiree benefits, significant severance charges, significant asset impairments, gains or losses from divestitures, intangible asset amortization expense, and other miscellaneous corporate activities.

Excluded items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit.

Government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance.

See “Note 3 - Information on Business Segments – unallocated items”.

Sales and operating profit for each of our business segments were as follows (in millions):

Quarters Ended

2023 March 27,

Quarters Ended Six Months Ended

2023 June 26,

2022 June 25,

2023 June 26,

Aeronautics $ 6,875 $ 5,862 $ 13,144 $ 12,263

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Effective January 1, 2023, we no longer consider amortization expense related to purchased intangible assets when evaluating the operating performance of our business segments.

As a result, intangible asset amortization expense, which was previously included in segment operating profit, is now reported in unallocated items within total consolidated operating profit.

This change has been applied to the accompanying amounts above, including the amounts for 2022.

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Our consolidated financial statements must present pension and other postretirement benefit plan income calculated in accordance with Financial Accounting Standards (FAS) requirements under U.S.

The operating portion of the total FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension income and total CAS pension cost.

The non-service FAS pension income components are included in non-service FAS pension income in our consolidated statements of earnings.

As a result, to the extent that CAS pension cost exceeds the service cost component of FAS pension income, we have a favorable FAS/CAS pension operating adjustment.

The total FAS/CAS pension adjustments, including the service and non-service cost components of FAS pension income for our qualified defined benefit pension plans, were as follows (in millions):

Quarters Ended

2023 March 27,

Total FAS income and CAS cost

FAS pension income $ 94 $ 116

The operating portion of the total FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension income (expense) and total CAS pension cost.

The non-service FAS pension income (expense) components are included in non-service FAS pension income (expense) in our consolidated statements of earnings.

As a result, to the extent that CAS pension cost exceeds the service cost component of FAS pension income (expense) we have a favorable FAS/CAS pension operating adjustment.

The total FAS/CAS pension adjustments, including the service and non-service cost components of FAS pension income (expense) for our qualified defined benefit pension plans, were as follows (in millions):

Quarters Ended Six Months Ended

2023 June 26,

2022 June 25,

2023 June 26,

Total FAS income (expense) and CAS cost

FAS pension income (expense) $ 95 $ (1,355) $ 189 $ (1,239)

CAS pension cost 432 449 863 899

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Total FAS/CAS pension operating adjustment 416 425 831 851

Non-service FAS pension income 110 140

Non-service FAS pension income (expense) 111 (1,331) 221 (1,191)

Total FAS/CAS pension adjustment $ 527 $ (906) $ 1,052 $ (340)

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Unfavorable items may include the adverse resolution of contractual matters;

COVID-19 impacts or supply chain disruptions;

supply chain disruptions;

restructuring charges (except for significant severance actions, which are excluded from segment operating results);

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and losses on sales of certain assets.

Our consolidated net profit booking rate adjustments increased segment operating profit by approximately $415 million during the quarter ended March 26, 2023 and $405 million during the quarter ended March 27, 2022.

Our consolidated net profit booking rate adjustments increased segment operating profit by approximately $365 million and $780 million during the quarter and six months ended June 25, 2023 and $455 million and $860 million during the quarter and six months ended June 26, 2022.

We periodically experience performance issues and record losses for certain programs.

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We have contracted with the Canadian Government for the Canadian Maritime Helicopter Program at our RMS business segment that provides for design, development, and production of CH-148 aircraft (the Original Equipment contract), which is a military variant of the S-92 helicopter, and for logistical support to the fleet (the In Service Support contract) over an extended time period.

The program has experienced performance issues, including delays in the final aircraft deliveries from the original contract requirement, and the Royal Canadian Air Force’s flight hours have been less than originally anticipated, which has impacted program revenues and the recovery of our costs under this program.

Future sales and recovery of existing and future costs under the program are highly dependent upon achieving a certain number of flight hours, which are uncertain and dependent on aircraft availability and performance, and the availability of Canadian government resources.

We are currently in discussions with the Canadian Government to potentially restructure certain contractual terms and conditions that may be beneficial to both parties.

Future performance issues or changes in our estimates due to revised contract scope or customer requirements may affect our ability to recover our costs and may result in a loss that could be material to our operating results.

We have incurred significant costs and recognized the related sales, which are currently included in contract assets on the balance sheet.

Such assets are recovered based on flight hours.

Future sales and recovery of costs under the program are highly dependent upon achieving a certain number of flight hours, which are uncertain and dependent on aircraft availability and performance, and the availability of Canadian government resources.

During the second quarter of 2023, due to increases in estimated costs for the production and lower than planned revenues for the logistical support program considering recent discussions with the customer and subsequent analysis, we recognized a loss of $100 million ($75 million, or $0.29 per share, after tax) on the program.

Future performance issues or changes in our estimates due to the outcome of any restructuring discussions, including revised contract scope or customer requirements may further affect our ability to recover our costs or our assessment of the likelihood of cost recovery and may result in additional losses that could be material to our operating results.

We also have a number of contracts with Türkish industry for the Türkish Utility Helicopter Program (TUHP), which anticipates co-production with Türkish industry for production of T70 helicopters for use in Türkiye, as well as the related provision of Türkish goods and services under buy-back or offset obligations, to include the future sales of helicopters built in Türkiye for sale globally.

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Government imposed certain sanctions on Türkish entities and persons that have affected our ability to perform under the TUHP contracts and we have provided force majeure notices under the affected contracts.

The TUHP contracts may be restructured or terminated, either in whole or in part, which could result in a further reduction in sales, the imposition of penalties or assessment of damages, and increased unrecoverable costs, which could have an adverse effect on our financial results.

The TUHP contracts may be restructured or terminated, either in whole or in part, or we could elect to pursue other relief or remedies, which could result in a further reduction in sales, the imposition of penalties or assessment of damages, and increased unrecoverable costs, which could have an adverse effect on our financial results.

Our MFC business segment was previously awarded a competitively bid classified contract, which includes multiple phases of the program.

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Summary operating results for our Aeronautics business segment were as follows (in millions):

Quarters Ended

2023 March 27,

Quarters Ended Six Months Ended

2023 June 26,

2022 June 25,

2023 June 26,

Net sales $ 6,875 $ 5,862 $ 13,144 $ 12,263

1 unchanged sentence

Operating margin 10.4 % 10.5 % 10.6 % 10.5 %

Aeronautics’ net sales in the quarter ended March 26, 2023 decreased $132 million, or 2%, compared to the same period in 2022.

The decrease was primarily attributable to lower net sales of $335 million for the F-35 program due to lower volume on production contracts.

This decrease was partially offset by higher sales of $135 million on classified programs due to higher volume and $70 million for the F-16 program due to higher production and sustainment volume.

Aeronautics’ operating profit in the quarter ended March 26, 2023 was comparable to the same period in 2022.

Operating profit for the F-35 program was comparable as lower volume on production contracts was mostly offset by contract mix.

Operating profit for the F-16 program was comparable as higher volume on production and sustainment contracts was offset by higher unfavorable profit adjustments on a production contract and sustainment contracts.

Total net profit booking rate adjustments were approximately $15 million lower in t he first quarter of 2023 compared to the same period in 2022 .

Aeronautics’ net sales during the quarter ended June 25, 2023 increased $1.0 billion, or 17%, compared to the same period in 2022.

The increase was primarily attributable to higher net sales of $735 million for the F-35 program due to higher volume on production contracts partially driven by lower volume in the second quarter of 2022 due to the impact of the delays in receiving additional contractual authorization and funding under the Lots 15-17 contract and higher volume on sustainment contracts;

higher net sales of $100 million on classified programs due to higher volume;

and higher net sales of $90 million for the C-130 program due to higher volume on sustainment contracts.

Aeronautics’ operating profit during the quarter ended June 25, 2023 increased $105 million, or 17%, compared to the same period in 2022.

The increase was primarily attributable to higher operating profit of $75 million for the F-35 program due to higher volume on production contracts;

and higher operating profit of $20 million on classified programs due to lower unfavorable profit adjustments.

Total net profit booking rate adjustments in the second quarter of 2023 were comparable to the same period in 2022 .

Aeronautics’ net sales in the six months ended June 25, 2023 increased $881 million, or 7%, compared to the same period in 2022.

The increase was primarily attributable to higher net sales of $400 million for the F-35 p rogram due to higher volume on sustainment, development and production contracts;

higher net sales of $235 million on classified programs due to higher volume;

and higher net sales of $130 million for the F-16 program due to higher production volume.

Aeronautics’ operating profit in the six months ended June 25, 2023 increased $101 million , or 8%, compared to the same period in 2022.

The increase was primarily attributable to higher operating profit of $70 million for the F-35 program due to higher volume and contract mix on production and development contracts, partially offset by lower favorable profit adjustments on sustainment contracts;

and higher operating profit of $25 million on classified programs due to higher volume.

Total net profit booking rate adjustments were $15 million lower in the six months ended June 25, 2023 compared to the same period in 2022 .

Missiles and Fire Control

Summary operating results for our MFC business segment were as follows (in millions):

Quarters Ended

2023 March 27,

Quarters Ended Six Months Ended

2023 June 26,

2022 June 25,

2023 June 26,

Net sales $ 2,755 $ 2,747 $ 5,143 $ 5,199

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Operating margin 13.5 % 15.2 % 14.5 % 15.4 %

MFC’s net sales in the quarter ended March 26, 2023 decreased $64 million, or 3%, compared to the same period in 2022.

The decrease was primarily attributable to lower net sales of $85 million for sensors and global sustainment programs as net sales for the first quarter of 2022 reflect the impact of a favorable profit adjustment on an international program as a result of a requirements modification that did not recur in the first quarter of 2023;

and lower net sales of $60 million for tactical and strike missile programs due to lower volume (Guided Multiple Launch Rocket Systems (GMLRS)).

These decreases were partially offset by higher net sales of $70 million for integrated air and missile defense programs due to the impact of higher net favorable profit adjustments (Patriot Advanced Capability-3 (PAC-3)).

MFC’s operating profit in the quarter ended March 26, 2023 decreased $8 million, or 2%, compared to the same period in 2022.

MFC’s net sales during the quarter ended June 25, 2023 were comparable to the same period in 2022.

Higher net sales of $20 million for tactical and strike missile programs due to higher volume (Precision Strike Missile (PrSM)) was offset by lower net sales of $20 million for integrated air and missile defense programs due to lower volume (Terminal High Altitude Area Defense (THAAD)).

MFC’s operating profit during the quarter ended June 25, 2023 decreased $47 million, or 11%, compared to the same period in 2022.

The decrease was primarily attributable to lower operating profit of $25 million for sensors and global sustainment programs due to lower net favorable profit adjustments (Sniper Advanced Targeting Pod (SNIPER ® ) and Infrared Search and Track (IRST21 ® ));

and lower operating profit of $20 million for tactical and strike missile programs due to lower net favorable profit adjustments (High Mobility Artillery Rocket System (HIMARS) and Joint Air-to-Surface Standoff Missile (JASSM)).

Total net profit booking rate adjustments were $55 million lower in the second quarter of 2023 compared to the same period in 2022.

MFC’s net sales in the six months ended June 25, 2023 decreased $56 million, or 1%, compared to the same period in 2022 .

The decrease was primarily attributable to lower net sales of $100 million for sensors and global sustainment programs as net sales for the first quarter of 2022 reflect the impact of a favorable profit adjustment on an international program as a result of a requirements modification that did not recur in 2023.

This decrease was partially offset by higher net sales of $50 million for integrated air and missile defense programs due to higher volume and the impact of higher net favorable profit adjustments (Patriot Advanced Capability-3 (PAC-3)).

MFC’s operating profit in the six months ended June 25, 2023 decreased $55 million, or 7%, compared to the same period in 2022 .

The decrease was primarily attributable to lower operating profit of $110 million for sensors and global sustainment programs due to the favorable profit adjustment on an international program in the first quarter of 2022 as described above.

This decrease was partially offset by higher operating profit of $60 million for integrated air and missile defense programs due to the impact of higher net favorable profit adjustments (PAC-3).

In addition, operating margin was positively impacted when compared to the first quarter of 2022 due to contract mix at tactical and strike missiles.

Total net profit booking rate adjustments were approximately $25 million lower in the first quarter of 2023 compared to the same period in 2022 .

This decrease was partially offset by higher operating profit of $50 million for integrated air and missile defense programs due to higher volume (PAC-3) and higher net favorable profit adjustments (PAC-3 and THAAD).

Total net profit booking rate adjustments were approximately $80 million lower in the six months ended June 25, 2023 compared to the same period in 2022 .

Rotary and Mission Systems

On December 5, 2022, the U.S.

Army selected Sikorsky’s competitor in the Future Long Range Assault Aircraft Competition, a component of its Future Vertical Lift initiative to replace a portion of its assault and utility helicopter fleet.

On December 28, 2022, Sikorsky, on behalf of Team DEFIANT, filed a protest with the U.S.

Government Accountability Office (GAO) challenging the U.S.

Army’s decision, and on April 6, 2023 the GAO issued a decision denying the protest.

We are not pursuing further litigation in this matter.

Sikorsky remains one of two competitors for the other component of the Future Vertical Lift initiative, the Future Attack Reconnaissance Aircraft competition.

Summary operating results for our RMS business segment were as follows (in millions):

Quarters Ended

2023 March 27,

Quarters Ended Six Months Ended

2023 June 26,

2022 June 25,

2023 June 26,

Net sales $ 3,897 $ 4,012 $ 7,407 $ 7,564

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Operating margin 11.6 % 11.5 % 10.9 % 11.5 %

RMS’ net sales in the quarter ended March 26, 2023 decreased $42 million, or 1%, compared to the same period in 2022.

RMS’ net sales during the quarter ended June 25, 2023 decreased $115 million, or 3%, compared to the same period in 2022.

The decrease was primarily attributable to lower net sales of $145 million for Sikorsky helicopter programs due to lower production volume (Black Hawk).

and lower net sales of $60 million for various C6ISR (command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance) programs due to lower volume.

These decreases were partially offset by higher net sales of $85 million for integrated warfare systems and sensors (IWSS) programs due to higher volume (Aegis and TPY-4 programs).

RMS’ operating profit in the quarter ended March 26, 2023 decreased $56 million, or 14%, compared to the same period in 2022.

The decrease was primarily attributable to lower operating profit of $65 million for Sikorsky helicopter programs due to lower production volume, net favorable profit adjustments, and contract mix on the Black Hawk program and unfavorable profit adjustments (CH-53K).

Total net profit booking rate adjustments were $35 million lower in the first quarter of 2023 compared to the same period in 2022.

This decrease was partially offset by higher net sales of $60 million for integrated warfare systems and sensors (IWSS) programs due to higher volume (Aegis, Defense of Guam, and TPY-4 programs).

RMS’ operating profit during the quarter ended June 25, 2023 decreased $7 million, or 2%, compared to the same period in 2022.The decrease was primarily attributable to lower operating profit of $60 million for Sikorsky helicopter programs due to an unfavorable profit adjustment of $100 million on the Canadian Maritime Helicopter Program (CMHP) as a result of increased costs and lower than planned revenues and lower production volume (Black Hawk), partially offset by higher equity earnings and higher net favorable profit adjustments (Seahawk).

This decrease was partially offset by higher operating profit of $75 million for IWSS programs primarily due to a favorable profit adjustment of $65 million as a

result of a positive resolution of a contractual matter on an international surveillance and control program.

Additionally, the decreases in net profit booking rate adjustments and volume as described above were partially offset by contract mix.

Total net profit booking rate adjustments were $40 million lower in the second quarter of 2023 compared to the same period in 2022.

RMS’ net sales in the six months ended June 25, 2023 decreased $157 million, or 2%, compared to the same period in 2022.

The decrease was primarily attributable to lower net sales of $220 million for Sikorsky helicopter programs due to lower production volume (Black Hawk);

and lower net sales of $80 million for various C6ISR programs due to lower volume.

These decreases were partially offset by higher net sales of $145 million for IWSS programs due to higher volume (Aegis, Defense of Guam, and TPY-4 programs).

RMS’ operating profit in the six months ended June 25, 2023 decreased $63 million, or 7%, compared to the same period in 2022.

The decrease was primarily attributable to lower operating profit of $125 million for Sikorsky helicopter programs due to an unfavorable profit adjustment of $100 million on CMHP as described above and lower production volume on the Black Hawk program;

and lower operating profit of $35 million for TLS programs due to lower favorable profit adjustments.

These decreases were partially offset by higher operating profit of $90 million for IWSS programs primarily due to a favorable profit adjustment of $65 million on an international surveillance and control program as described above.

Total net profit booking rate adjustments were $75 million lower in the six months ended June 25, 2023 compared to the same period in 2022.

Summary operating results for our Space business segment were as follows (in millions):

Quarters Ended

2023 March 27,

Quarters Ended Six Months Ended

2023 June 26,

2022 June 25,

2023 June 26,

Net sales $ 3,166 $ 2,825 $ 6,125 $ 5,384

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Operating margin 9.9 % 9.6 % 9.7 % 9.6 %

Space’s net sales in the quarter ended March 26, 2023 increased $400 million, or 16%, compared to the same period in 2022.

The increase was primarily attributable to higher net sales of $185 million for strategic and missile defense programs due to higher development volume (Next Generation Interceptor (NGI));

higher net sales of $170 million for national security space programs due to higher development volume (classified programs) and the impact of higher net favorable profit adjustments (Next Generation Overhead Persistent Infrared geosynchronous satellites (Next Gen OPIR) and classified programs);

Space’s net sales during the quarter ended June 25, 2023 increased $341 million, or 12%, compared to the same period in 2022.

The increase was primarily attributable to higher net sales of $150 million for strategic and missile defense programs due to higher development volume (NGI);

higher net sales of $120 million for national security space programs due to higher development volume (classified and Transport Layer programs);

and higher net sales of $65 million for commercial civil space programs due to higher volume (Orion).

Space’s operating profit in the quarter ended March 26, 2023 increased $32 million, or 13%, compared to the same period in 2022.

The increase was primarily attributable to higher operating profit of $70 million for national security space programs due to the impact of higher net favorable profit adjustments (Next Gen OPIR and classified programs).

This increase was partially offset by $45 million of lower equity earnings from the company's investment in United Launch Alliance (ULA) due to lower launch volume and an increase in new product development costs.

Total net profit booking rate adjustments were $85 million higher in the first quarter of 2023 compared to the same period in 2022 .

Total equity (losses)/earnings (primarily ULA) represented approximately $(15) million, or (5)%, of Space's operating profit in the first quarter of 2023, compared to approximately $30 million, or 12% in the first quarter of 2022 .

Space’s operating profit during the quarter ended June 25, 2023 increased $41 million, or 15%, compared to the same period in 2022.

The increase was primarily attributable to higher operating profit of $25 million for commercial civil space programs due to higher net favorable profit adjustments and higher volume (Orion);

and higher operating profit of $15 million for higher equity earnings from the company's investment in ULA due to launch mix.

Total net profit booking rate adjustments in the second quarter of 2023 were comparable to the same period in 2022.

Space’s net sales in the six months ended June 25, 2023 increased $741 million, or 14%, compared to the same period in 2022.

The increase was primarily attributable to higher net sales of $335 million for strategic and missile defense programs due to higher development volume (NGI);

higher net sales of $290 million for national security space programs due to higher development volume (classified and Transport Layer programs);

and higher net sales of $120 million for commercial civil space programs due to higher volume (Orion).

Space’s operating profit in the six months ended June 25, 2023 increased $73 million, or 14%, compared to the same period in 2022.

The increase was primarily attributable to higher operating profit of $90 million for national security space programs due to higher net favorable profit adjustments (classified programs and Next Gen OPIR);

and higher operating profit of $25 million for commercial civil space programs due to higher net favorable profit adjustments and higher volume (Orion).

These increases were partially offset by $30 million of lower equity earnings from ULA due to lower launch volume and an increase in new product development costs.

Total net profit booking rate adjustments were $90 million higher in the six months ended June 25, 2023 compared to the same period in 2022 .

Total equity earnings (primarily ULA) represented approximately $20 million, or 6%, and $5 million, or 1%, of Space's operating profit during the quarter and six months ended June 25, 2023, compared to approximately $5 million, or 2%, and $35 million, or 7%, during the quarter and six months ended June 26, 2022.

FINANCIAL CONDITION

Liquidity and Cash Flows

At March 26, 2023, we had cash and cash equivalents of $2.4 billion.

At June 25, 2023, we had cash and cash equivalents of $3.7 billion.

Our principal source of liquidity is our cash from operations.

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Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type.

We generally bill and collect cash more frequently under cost-reimbursable contracts, which represented approximately 41% of the sales we recorded during the quarter ended March 26, 2023, as we are authorized to bill as the costs are incurred.

We generally bill and collect cash more frequently under cost-reimbursable contracts, which represented approximately 41% of the sales we recorded during the quarter ended June 25, 2023, as we are authorized to bill as the costs are incurred.

A number of our fixed-price contracts may provide for performance-based payments, which allow us to bill and collect cash as we perform on the contract.

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Our cash flows may be affected if the U.S.

Government changes its payment policies or decides to withhold payments on our billings.

Government changes its payment policies.

For example, the U.S.

Government increased the progress payment rate applicable to us from 80% to 90% at the beginning of the COVID-19 pandemic and a reversal or modification of this policy could affect the timing of our cash flows.

While the impact of policy changes or withholding payments may delay the receipt of cash, the cumulative amount of cash collected during the life of the contract should not vary.

Since the COVID-19 pandemic began, we have remained committed to accelerating payments to the supply chain with a focus on small and at-risk businesses.

We will continue to utilize accelerated payments throughout 2023 on an as needed basis.

Government increased the progress payment rate applicable to us from 80% to 90% at the beginning of the COVID-19 pandemic.

Effective July 2023, this policy was rescinded and all new contracts executed will revert back to the 80% progress payment rate.

Due to our cash deployment practices, we do not anticipate a material impact to our cash flows as a result of this change.

In addition, the U.S.

Government from time to time withholds payments on certain of our billings based on contract terms or regulatory provisions.

Ultimately, the impact of policy changes or withholding payments may delay the receipt of cash, but the cumulative amount of cash collected during the life of the contract should not vary.

Additionally, during the COVID-19 pandemic, we accelerated payments to the supply chain with a focus on small and at-risk businesses.

We will continue to evaluate the use of accelerated payments on an as needed basis.

We have a balanced cash deployment strategy to invest in our business and key technologies to provide our customers with enhanced capabilities, enhance stockholder value, and position ourselves to take advantage of new business opportunities when they arise.

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We have returned cash to stockholders through dividends and share repurchases.

During the quarter ended March 26, 2023, we entered into an accelerated share repurchase (ASR) agreement to repurchase $500 million of our common stock.

As of March 26, 2023, the total remaining authorization for future common share repurchases under our program was $9.5 billion, which is expected to be utilized over a three-year period through 2025.

We expect to fund the repurchases through a combination of cash from operations and the issuance of additional debt.

As of June 25, 2023, the total remaining authorization for future common share repurchases under our program was $8.8 billion, which is expected to be utilized through 2025.

We expect to fund the repurchases with cash from operations.

The stock repurchase program does not have an expiration date and may be amended or terminated by the Board of Directors at any time.

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We continue to actively manage our debt levels, including maturities and interest rates.

We also actively manage our pension obligations and expect to continue to opportunistically manage our pension liabilities through the purchase of group annuity contracts or other actions for portions of our outstanding defined benefit pension obligations using assets

from the pension trust.

See “Note 6 - Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements for additional information.

Future pension risk transfer transactions could also be significant and result in us making additional contributions to the pension trust.

There were no material changes during the quarter ended March 26, 2023 to our contractual commitments as presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2022 Form 10-K that were outside the ordinary course of our business.

There were no material changes during the quarter or six months ended June 25, 2023 to our contractual commitments as presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2022 Form 10-K that were outside the ordinary course of our business.

The following table provides a summary of our cash flow information followed by a discussion of the key elements (in millions):

Quarters Ended

2023 March 27,

Six Months Ended

2023 June 26,

Cash and cash equivalents at beginning of year $ 2,547 $ 3,604

10 unchanged sentences

Operating Activities

Net cash provided by operating activities during the quarter ended March 26, 2023 increased $154 million compared to the same period in 2022.

The increase was primarily due to various changes in working capital, primarily production and billing cycles impacting contract assets and receivables (primarily F-35 program at Aeronautics and missile programs at MFC), partially offset by the timing of cash payments for accounts payable (primarily Aeronautics).

Net cash provided by operating activities during the six months ended June 25, 2023 decreased $77 million compared to the same period in 2022.

T he decrease was primarily due to the timing of federal tax payments, mostly offset by various changes in working capital.

Non-GAAP Financial Measure - Free Cash Flow

6 unchanged sentences

The following table reconciles net cash provided by operating activities to free cash flow (in millions):

Quarters Ended

2023 March 27,

Six Months Ended

2023 June 26,

Cash from operations $ 2,664 $ 2,741

2 unchanged sentences

Investing Activities

Net cash used for investing activities during the quarter ended March 26, 2023 increased $8 million compared to the same period in 2022.

Capital expenditures totaled $294 million and $268 million during the quarters ended March 26, 2023 and March 27, 2022.

Net cash used for investing activities during the six months ended June 25, 2023 increased $10 million compared to the same period in 2022.

Capital expenditures totaled $623 million and $572 million during the six months ended June 25, 2023 and June 26, 2022.

The majority of our capital expenditures are for equipment and facilities infrastructure that generally are incurred to support new and existing programs across all of our business segments.

1 unchanged sentence

Financing Activities

Net cash used for financing activities was $1.4 billion during the quarter ended March 26, 2023, compared to $2.9 billion during the same period in 2022.

During the quarters ended March 26, 2023 and March 27, 2022, we paid dividends totaling $784 million ($3.00 per share) and $767 million ($2.80 per share).

During the quarter ended March 26, 2023, we paid $500 million to repurchase 1.1 million shares of our common stock, of which 0.2 million shares were received upon settlement in April 2023.

Net cash used for financing activities was $945 million during the six months ended June 25, 2023, compared to $4.0 billion during the same period in 2022.

During the six months ended June 25, 2023 and June 26, 2022, we paid dividends totaling $1.5 billion ($6.00 per share) and $1.5 billion ($5.60 per share).

During the six months ended June 25, 2023, we paid $1.3 billion to repurchase 4.2 million shares of our common stock.

See “Note 9 - Stockholders’ Equity” included in our Notes to Consolidated Financial Statements for additional information.

During the quarter ended March 27, 2022, we paid $2.0 billion to repurchase 4.7 million shares of our common stock, of which 0.6 million shares were received upon settlement in April 2022.

During the six months ended June 26, 2022, we paid $2.4 billion to repurchase 7.7 million shares of our common stock.

During the quarter ended June 25, 2023, we received net proceeds of $2.0 billion from issuance of senior unsecured notes.

See “Note 10 - Other” included in our Notes to Consolidated Financial Statements for additional information.

Capital Resources

At March 26, 2023, we held cash and cash equivalents of $2.4 billion that was generally available to fund ordinary business operations without significant legal, regulatory, or other restrictions.

At March 26, 2023, we had a $3.0 billion revolving credit facility (the Revolving Credit Facility) with various banks with an expiration date of August 24, 2027 that is available for general corporate purposes including supporting commercial paper borrowings.

At June 25, 2023, we held cash and cash equivalents of $3.7 billion that was generally available to fund ordinary business operations without significant legal, regulatory or other restrictions.

At June 25, 2023, we had a $3.0 billion revolving credit facility (the Revolving Credit Facility) with various banks with an expiration date of August 24, 2027 that is available for general corporate purposes including supporting commercial paper borrowings.

We may request and the banks may grant, at their discretion, an increase in the borrowing capacity under the Revolving Credit Facility of up to an additional $500 million.

There were no borrowings outstanding under the Revolving Credit Facility at March 26, 2023.

There were no borrowings outstanding under the Revolving Credit Facility at June 25, 2023.

We have agreements in place with financial institutions to provide for the issuance of commercial paper.

The outstanding balance of commercial paper can fluctuate daily and the amount outstanding during the period may be greater than or less than the amount reported at the end of the period.

There were no commercial paper borrowings outstanding as of March 26, 2023 and December 31, 2022.

There were no commercial paper borrowings outstanding as of June 25, 2023 and December 31, 2022.

We may, as conditions warrant, from time to time issue commercial paper backed by our Revolving Credit Facility to manage the timing of cash flows.

However, depending on market conditions, commercial paper may not be available on favorable terms or at all.

Our total outstanding short-term and long-term debt, net of unamortized discounts and issuance costs was $15.6 billion as of March 26, 2023 and is in the form of publicly-issued notes that bear interest at fixed rates.

As of March 26, 2023, we were in compliance with all covenants contained in our debt and credit agreements.

Our total outstanding short-term and long-term debt, net of unamortized discounts and issuance costs was $17.5 billion as of June 25, 2023 and is in the form of publicly-issued notes that bear interest at fixed rates.

The outstanding debt at June 25, 2023 is inclusive of the second quarter 2023 issuance of $2.0 billion in aggregate principal amount of senior unsecured notes.

As of June 25, 2023, we were in compliance with all covenants contained in our debt and credit agreements.

We actively seek to finance our business in a manner that preserves financial flexibility while minimizing borrowing costs to the extent practicable.

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In February 2023, the Government of Singapore announced its intent to exercise an option to purchase an additional eight F-35 aircraft, increasing its total quantity to 12.

In March of 2023, the government of South Korea announced approval to purchase an additional 20 F-35 aircraft, increasing its total quantity to 60.

During the first quarter of 2023, we delivered five aircraft and had a backlog of 340 aircraft.

Deliveries in the quarter were impacted by an issue with the Government Furnished Equipment (GFE) engine that occurred at the end of 2022 and resulted in a pause in flight operations, which prevented aircraft deliveries until flight operations and deliveries resumed in March 2023.

We currently expect that we will deliver fewer than the prior plan of 147-153 aircraft in 2023 due to both software maturation related to the Technology Refresh 3 (TR-3) configuration and hardware delivery timing;

we will provide an updated range pending the results of future flight tests.

Despite the change in the delivery range, currently we do not expect a material impact to our 2023 financial outlook.

Since program inception through the first quarter of 2023, we have delivered 899 production F-35 aircraft to U.S.

In March 2023, the Government of South Korea announced approval to purchase an additional 20 F-35 aircraft, increasing its total quantity to 60.

During the second quarter of 2023, we delivered 45 aircraft and ended the quarter with a backlog of 421 aircraft.

We currently expect to deliver between 100 and 120 aircraft in 2023 driven by the software maturation, acceptance and certification related to the Technology Refresh 3 (TR-3) configuration, and hardware delivery timing.

An extended delay to delivery of TR-3 equipped aircraft will not change the bottom end of the range in 2023 but could cause a further reduction in the Lot 15-17 contract profitability from higher costs and lower performance incentives.

We currently anticipate full recovery of delayed deliveries (primarily in 2024) resulting in 2024 deliveries above the prior expectation of 147-153, and we continue to expect 156 deliveries in 2025 and the foreseeable future.

The supply chain and production system continue to execute at a rate to support future year deliveries.

Since program inception through the second quarter of 2023, we have delivered 944 production F-35 aircraft to U.S.

and international customers, including 683 F-35A variants, 186 F-35B variants, and 75 F-35C variants, demonstrating the F-35 program’s continued progress and longevity.

Given the size and complexity of the F-35 program, we anticipate that there will be continual reviews related to aircraft performance, program, and delivery schedule, cost, and requirements as part of the DoD, Congressional, and international countries’ oversight, and budgeting processes.

Current program challenges include our and our suppliers’ performance (including COVID-19 performance-related challenges), software development, execution of future flight tests and findings resulting from testing and operating the aircraft, the level of cost associated with life cycle operations, sustainment and potential contractual obligations, inflation-related cost pressures, and the ability to improve affordability.

Current program challenges include our and our suppliers’ performance, software development (including, in particular, software maturation related to the TR-3 configuration), execution of future flight tests and findings resulting from testing and operating the aircraft, the level of cost associated with life cycle operations, sustainment and potential contractual obligations, inflation-related cost pressures, and the ability to improve affordability.

Contingencies

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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-Q

Item 2. Management’s Discussion and Analysis