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Item 7. Management’s Discussion and Analysis

2024-01-23 compared with 2023-01-26 · 255 added, 415 removed, 539 unchanged (55% of the section changed)

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We operate in a complex and evolving global security environment.

Our strategy consists of the design and development of platforms and systems that meet the future requirements of 21st Century Security.

Our strategy consists of the design and development of platforms and systems that meet the current needs of our customers and the future requirements of 21st Century Security.

Our vision for 21st Century Security is to accelerate the adoption of advanced networking and leading-edge technologies into our national defense enterprise, while enhancing the performance and value of our platforms and products for our customers.

The aim of 21st Century Security is to integrate new and existing systems across all domains with advanced, open-architecture networking and operational technologies to make forces more agile, adaptive and unpredictable.

21st Century Security is an overarching vision that will guide our investment and strategy and we are also focused on four elements for potential growth in the near to mid-term:

The aim of 21st Century Security is to integrate new and existing systems across all domains with advanced, open-architecture networking and operational technologies to make defense forces more agile, adaptive and unpredictable.

Twenty-first Century Security is an overarching vision that guides our investment and strategy.

We are also focused on four elements for potential growth in the near to mid-term:

current programs of record, classified programs, hypersonics and new awards.

We have multiple programs of record from each business segment that are entering growth stages, including the F-35 sustainment activity (Aeronautics), increased PAC-3 production rates (Missiles and Fire Control), CH-53K heavy lift helicopter (Rotary and Mission Systems), and the modernization and enhancements to the Trident II D5 Fleet Ballistic Missile (Space).

We have multiple programs of record from each business segment that are entering growth stages, including the F-35 sustainment activity (Aeronautics);

increased Patriot Advanced Capability-3 (PAC-3) production rates and increased demand for High Mobility Artillery Rocket System (HIMARS ® ) and Guided Multiple Launch Rocket Systems (GMLRS) (Missiles and Fire Control);

radar surveillance systems and CH-53K King Stallion heavy lift helicopter (Rotary and Mission Systems);

and the modernization and enhancements to the Trident II D5 Fleet Ballistic Missile (FBM) (Space).

We are engaged in significant classified development programs and pending successful achievement of the objectives within those programs, we expect to begin the transition from development to production over the next few years.

We are currently performing on multiple hypersonic programs and following the successful completion of ongoing testing and evaluation activity, multiple programs are expected to enter early production phases between 2023 and 2026.

We are currently performing on multiple hypersonics programs and following the successful completion of ongoing testing and evaluation activity, multiple programs are expected to enter early production phases through 2026.

Finally, we are always in pursuit of new program awards to develop future platforms that enable us to continue to place security capability into the market and expand our global reach.

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We also will continue to evaluate our portfolio and will make strategic acquisitions or divestitures, as appropriate, while deepening our connection to commercial industry through cooperative partnerships, joint ventures and equity investments.

COVID-19 continued to cause business impacts in 2022.

The emergence of the Omicron variant in late 2021 and resulting increase in COVID-19 cases in early 2022 adversely impacted our operations and our supply chain.

Our performance was affected during 2022 by supply chain disruptions and delays, as well as labor challenges associated with employee absences, travel restrictions, site access, quarantine restrictions, remote work, and adjusted work schedules.

The recovery from

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that disruption has been slower than originally anticipated, in particular within our supply chain, and some of those supply chain impacts are expected to continue into 2023.

Attendance for employees required to be onsite fluctuated during 2022 based on COVID-19 developments.

We are actively engaging with our customers and are continuing to take measures to protect the health and safety of our employees.

In our on-going effort to mitigate supply chain risks, we accelerated payments of $1.5 billion to our suppliers as of December 31, 2022, that are due according to contractual terms in future periods, while consistently prioritizing small businesses, which make up over half of our active supply base, as well as at-risk businesses.

Additionally, we have deployed resources at supplier sites to improve oversight and performance.

We will continue to monitor supply chain risks, especially at small and at-risk related suppliers, and may continue to utilize accelerated payments in 2023 on an as needed basis.

The impact of COVID-19 on our operations and financial performance in future periods, including our ability to execute our programs in the expected timeframe, remains uncertain and will depend on a number of factors, including the impact of potential new COVID-19 variants or subvariants, the effectiveness and adoption of COVID-19 vaccines and therapeutics, 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.

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.

During 2022, we have experienced impacts to our labor rates and suppliers have signaled inflation related cost pressures, which will flow through to our costs and pricing.

Although inflation did not significantly impact our financial results in 2022, 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.

For new contract proposals, we are factoring into our pricing heightened levels of inflation based on accepted DoD escalation indices and other assumptions, and in some cases seeking the inclusion of economic price adjustment (EPA) clauses, which would permit, subject to the particular contractual terms, cost adjustments in fixed-price contracts for unexpected inflation.

In addition, inflation and the increases in the cost of borrowing from rising interest rates could constrain the overall purchasing power of our customers for our products and services, in particular in the near term to the extent inflation assumptions are less than current inflationary pressures.

Rising interest rates will also increase our borrowing costs on new debt and could affect the fair value of our investments.

While rising interest rates reduce the measure of our gross pension obligations, they can also lead to decline in pension plan assets with offsetting impacts on our net pension liability.

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.

Conflict in Ukraine

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

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

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

government to Ukraine has created U.S.

government demand to replenish U.S.

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

We are beginning to see 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 are evaluating capacity at our operations and the supply chain to anticipate potential demand and enable us to deliver critical capabilities.

In addition, the U.S.

Government and other nations have implemented broad economic sanctions and export controls targeting Russia, which combined with the conflict have the potential to indirectly disrupt our supply chain and access to certain resources.

We have not, however, experienced significant adverse impacts to date and we will continue to monitor for any impacts and seek to mitigate disruption that may arise.

The conflict also has increased the threat of malicious cyber activity from nation states and other actors.

We have taken steps designed to enhance our defensive posture against tactics and techniques associated with this increased threat.

Portfolio Shaping Activities

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We selectively pursue the acquisition of businesses, investments and ventures at attractive valuations that will expand or complement our current portfolio and allow access to new customers or technologies.

We also may explore the divestiture of

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businesses, investments or ventures that no longer meet our needs or strategy or that could perform better outside of our organization or with a different owner.

We also may explore the divestiture of businesses, investments or ventures that no longer meet our needs or strategy or that could perform better outside of our organization or with a different owner.

In pursuing our business strategy, we routinely conduct discussions, evaluate targets and enter into agreements regarding possible acquisitions, divestitures, joint ventures and equity investments.

Renationalization of the Atomic Weapons Establishment Program

On June 30, 2021, the UK Ministry of Defence terminated the contract to operate the UK’s nuclear deterrent program and assumed control of the entity that manages the program (referred to as the renationalization of the Atomic Weapons Establishment (AWE program)).

Accordingly, the AWE program’s ongoing operations, including the entity that manages the program, are no longer included in our financial results as of that date.

Therefore, during 2021, AWE only generated sales of $885 million and operating profit of $18 million, which are included in Space’s financial results for the year ended December 31, 2021.

During the year ended December 31, 2020, AWE generated sales of $1.4 billion and operating profit of $35 million, which are included in Space’s financial results for 2020.

Government Funding

On March 28, 2022 the Administration submitted to Congress the President’s Fiscal Year (FY) 2023 budget request, which proposed $813.4 billion in total national defense spending, of which $773 billion was for the base budget of the Department of Defense (DoD).

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 FY 2023 Omnibus Appropriations Act also provided separate and additional funding of $47 billion for Ukraine, the fourth supplemental since March of 2022, bringing the total amount of supplemental funding authority provided to $113 billion.

The President’s FY 2024 budget request is anticipated to be submitted to Congress in March 2023, initiating the FY 2024 defense authorization and appropriations legislative process.

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.

Budget Environment

With nearly three quarters of our sales from the U.S.

Government, U.S.

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

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 included $886 billion for National Defense, of which $842 billion is for the Department of Defense (DoD) base budget.

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

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

The legislation suspended the debt ceiling until January 1, 2025, and, among other provisions, capped 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.

If a continuing resolution is enacted and still in effect and Congress does not pass all twelve defense and non-defense discretionary appropriations bills by April 30, 2024, the FRA will result in a decrease in government spending for FY 2024 by one percent from FY 2023 enacted levels.

The House and Senate continue the legislative process on the FY 2024 budget.

On December 22, 2023, the President signed the FY 2024 National Defense Authorization Act (NDAA) into law.

The NDAA authorizes funding at the FRA cap of $886 billion for National Defense.

On January 19, 2024, the President signed a continuing resolution that extends funding of four appropriations bills to March 1, 2024 and the remaining eight to March 8, 2024.

This will provide Congress additional time to enact all twelve FY 2024 appropriations bills based on the overarching U.S.

Government spending agreement reached by House and Senate leaders on January 7, 2024 which comports with the FRA cap of $886 billion for National Defense in FY 2024.

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

However, the logistical and political challenges, especially in the U.S.

House of Representatives, are complex and add funding risk.

Under the continuing resolution, funding at amounts consistent with appropriated levels for FY 2023 are available, subject to certain restrictions, but new contract and program starts are not authorized.

We expect our key programs will continue to be supported and funded under the continuing resolution.

However, during periods covered by continuing resolutions, we may experience delays in new awards of our products and services, and those delays may adversely affect our results of operations.

On October 20, 2023, the President submitted a $106 billion supplemental funding request to Congress for assistance to Ukraine, Israel and the Indo-Pacific;

restock of capacity transfers to Ukraine and Israel;

border security.

Congress has not yet acted on this request, which is part of the broader debate on FY 2024 U.S.

Government funding and border security policy.

Supplemental and emergency funding are not subject to the FRA cap.

If enacted, this would provide a partial relief valve for DoD funding limits under the FRA or other limiting scenarios such as a prolonged continuing resolution.

If Congress is not able to enact FY 2024 appropriations bills or extend the continuing resolution, the U.S.

Government will enter a whole or partial shutdown.

The impact of any government shutdown is uncertain.

However, if a government shutdown were to occur and were to continue for an extended period, we could be at risk of reduced orders, program cancellations, schedule delays, production halts and other disruptions and nonpayment, which could adversely affect our results of operations.

Further, if any one of the 12 appropriations bills is under a continuing resolution as of April 30, 2024, USG funding levels will reset to FY 2023 enacted levels minus 1% for the remainder of FY 2024 or until all 12 appropriations are enacted.

We anticipate 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.

Geopolitical and Economic Environment

We operate in a complex and evolving global security environment and our business is affected by geopolitical issues.

Russia’s invasion of Ukraine significantly elevated global geopolitical tensions and security concerns resulting in increased

interest for certain of our products and services as countries seek to improve their security posture.

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

Government and its allies to Ukraine has created U.S.

Government and allied demand to replenish U.S.

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

Although we received new orders in 2023 attributable to a response to the conflict and continue to expect to receive them over the next several years, given the long-cycle nature of our business and current industry capacity, the orders did not result in a significant increase in 2023 sales.

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 is also affected by general economic conditions.

Supply chain disruptions persist, and we continue to experience supply chain challenges, including supplier shortages and performance issues, which have delayed certain customer deliveries and adversely impacted our performance and our 2023 financial results.

Although we continue working to minimize the impact of supply chain challenges, many of these challenges are industry wide or caused by geopolitical events that are outside of our control.

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.

Certain costs, including rising labor rates and supplier costs, on several of our programs have increased as a result of inflation, and put pressure on achieving our expected margins on the programs.

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.

If we continue to experience high rates of inflation, and we are unable to successfully mitigate the impact, our future profits, margins and cash flows, particularly for existing fixed-price contracts, may be adversely affected.

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

International Business

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In 2023, international customers accounted for 31% of MFC’s net sales.

Our MFC business segment continues to generate significant international interest, most notably in the air and missile defense product line, which produces the Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD) systems.

Fourteen nations have chosen PAC-3 Cost Reduction Initiative (CRI) and PAC-3 Missile Segment Enhancement (MSE) to provide missile defense capabilities.

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Our MFC business segment continues to generate significant international interest, most notably in the air and missile defense product line, which produces the PAC-3 and Terminal High Altitude Area Defense (THAAD) systems.

Fifteen nations have chosen PAC-3 Cost Reduction Initiative (CRI) and PAC-3 Missile Segment Enhancement (MSE) to provide missile defense capabilities.

Additionally, we continue to see international demand for our tactical and strike missile products, where we received orders for precision fires systems from Germany and Taiwan and for Long Range Anti-Ship Missiles (LRASM) from Australia.

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We have active development, production and sustainment support of the S-70 Black Hawk and MH-60 Seahawk helicopters to international customers, including India, Philippines, Australia, Republic of Korea, Thailand, the Kingdom of Saudi Arabia and Greece.

Additionally, in December 2021, the Israeli Ministry of Defense signed a Letter of Offer and Acceptance (LOA) to procure 12 CH-53K King Stallion heavy lift helicopters, of which the first four were awarded in 2022.

Additionally, in December 2021, the Israeli Ministry of Defense signed a Letter of Offer and Acceptance (LOA) to procure 12 CH-53K King Stallion heavy lift helicopters, with the first four awarded in 2022 and the remaining awarded in 2023.

Commercial aircraft are sold to international customers to support search and rescue missions as well as VIP and offshore oil and gas transportation.

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as well as interest from other countries.

We saw strong international demand for the F-35 in 2022.

During the first quarter of 2022, Finland became the seventh FMS customer to join the program.

During the second quarter of 2022, the Government of Canada selected Lockheed Martin and the F-35 as the preferred bidder to move into the Finalization Phase of the competitive process to replace its fighter fleet.

As a result of the Finalization Phase, the Government of Canada recently announced in January 2023 their commitment to purchase 88 F-35 aircraft.

During the third quarter of 2022, the Swiss government signed a Letter of Offer and Acceptance for the procurement of 36 F-35 aircraft and became the eighth FMS customer to join the program.

During the fourth quarter of 2022, the German government signed a Letter of Offer and Acceptance for the procurement of 35 F-35 aircraft and became the ninth FMS customer to join the program.

During the fourth quarter of 2022, we finalized the F-35 Low Rate Initial Production (LRIP) Lots 15-17 production contract with the U.S.

Government for up to 398 aircraft.

The agreement includes 145 aircraft for Lot 15, 127 for Lot 16 and up to 126 for a Lot 17 contract option.

In 2022 we delivered 141 aircraft and had a backlog of 345 production aircraft, including orders from our international partner countries and FMS customers.

Since program inception we have delivered 894 production F-35 aircraft to U.S.

We continue to see strong international demand for the F-35.

The Government of Canada announced in January 2023 its commitment to purchase 88 F-35 aircraft.

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 September 2023, the Israel Defense Ministry submitted an official letter of request to advance Israel’s procurement of a third F-35 squadron, increasing its total quantity of aircraft from 50 to 75.

Also in September 2023, the U.S.

Department of State formally approved the sale of up to 25 more F-35s to South Korea, beyond the currently approved purchase of 40 aircraft.

In November 2023, the Government of Romania submitted an official letter of request for a Letter of Offer and Acceptance to the U.S.

Government for 32 F-35 aircraft.

During 2023, we delivered 98 aircraft and had a backlog of 373 aircraft.

Since program inception through the end of 2023, we delivered 992 production F-35 aircraft to U.S.

and international customers, including 710 F-35A variants, 197 F-35B variants, and 85 F-35C variants, demonstrating the F-35 program’s continued progress and longevity.

COVID-19 and other impacts experienced by the F-35 enterprise have continued to impact our near-term production plans.

At the end of 2022, there was an issue with the Government Furnished Equipment (GFE) engine that resulted in a pause in flight operations and 2022 aircraft deliveries were impacted.

The delivery pause continues as flight operations remain on hold and concurrently, GFE engine deliveries have been suspended.

We will have greater clarity if changes to our 2023 aircraft delivery expectation are required once the pause in flight operations and the GFE engine delivery suspension have been resolved.

As of January 2023, we plan on producing 147-153 aircraft in 2023 and 2024, and 2023 deliveries will be determined pending the resumption of engine deliveries and other factors.

We anticipate annual deliveries of 156 aircraft in 2025 and for the foreseeable future.

Regarding the F-35 Technology Refresh 3 (TR-3) status, a second quarter 2024 customer acceptance of delivery software remains our target;

however, we believe the third quarter 2024 may be a more likely scenario for TR-3 software acceptance.

Additionally, we remain focused on receiving the necessary hardware from our suppliers to deliver this critical combat capability for the F-35.

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.

Areas of focus 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.

At December 31, 2023, our backlog was $160.6 billion compared with $150.0 billion at December 31, 2022.

Backlog is converted into sales in future periods as work is performed or deliveries are made.

We expect to recognize approximately 37%

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of our backlog over the next 12 months and approximately 61% over the next 24 months as revenue, with the remainder recognized thereafter.

We expect to recognize approximately 36% of our backlog over the next 12 months and approximately 62% over the next 24 months as revenue, with the remainder recognized thereafter.

Our backlog includes both funded (firm orders for our products and services for which funding has been both authorized and appropriated by the customer) and unfunded (firm orders for which funding has not been appropriated) amounts.

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Consequently, the results of operations of a particular year, or year-to-year comparisons of sales and profits, may not be indicative of future operating results.

The following discussions of comparative results among years should be reviewed in this context.

The following discussions of comparative results should be reviewed in this context.

All per share amounts cited in these discussions are presented on a “per diluted share” basis, unless otherwise noted.

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Gross profit 8,479 8,287 9,061

Other income (expense), net 61 62 (10)

Other income, net 28 61 62

Operating profit 8,507 8,348 9,123

Interest expense (916) (623) (569)

Non-service FAS pension (expense) income (971) (1,292) 219

Other non-operating (expense) income, net (74) 288 (37)

Earnings from continuing operations before income taxes 6,680 7,550 8,235

Non-service FAS pension income (expense) 443 (971) (1,292)

Other non-operating income (expense), net 64 (74) 288

Earnings before income taxes 8,098 6,680 7,550

Income tax expense (1,178) (948) (1,235)

Net earnings from continuing operations 5,732 6,315 6,888

Net loss from discontinued operations — — (55)

Net earnings $ 6,920 $ 5,732 $ 6,315

Diluted earnings (loss) per common share

Continuing operations $ 21.66 $ 22.76 $ 24.50

Discontinued operations — — (0.20)

Total diluted earnings per common share $ 21.66 $ 22.76 $ 24.30

Diluted earnings per common share $ 27.55 $ 21.66 $ 22.76

Certain amounts reported in other income (expense), 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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We generate sales from the delivery of products and services to our customers.

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The following discussion of material changes in our consolidated net sales should be read in tandem with the subsequent discussion of changes in our consolidated cost of sales and our business segment results of operations because changes in our sales are typically accompanied by a corresponding change in our cost of sales due to the nature of the percentage-of-completion cost-to-cost method.

Overall, our sales were negatively affected in 2022 because of supply chain impacts.

Product Sales

Product sales decreased $1.0 billion, or 2%, in 2022 as compared to 2021.

The decrease is primarily attributable to lower product sales of approximately $670 million at RMS mostly due to lower production volume on Black Hawk and lower net sales for training and logistics solutions (TLS) programs due to the delivery of an international pilot training system in the first quarter of 2021;

about $315 million at Space primarily due to the renationalization of AWE on June 30, 2021, partially offset by higher development volume (Next Generation Interceptor (NGI));

and approximately $220 million at MFC primarily due to lower volume on Terminal High Altitude Area Defense (THAAD) and air dominance weapon systems.

These decreases were partially offset by higher product sales of about $240 million at Aeronautics mostly due to higher volume on classified contracts that were partially offset by lower volume on F-35 contracts.

Product sales increased $799 million, or 1%, in 2023 as compared to 2022.

The increase was primarily attributable to higher product sales of approximately $940 million at Space mostly due to ramp up in the Next Generation Interceptor (NGI) development program and higher volume in the Fleet Ballistic Missile (FBM) program.

Service Sales

Service sales decreased $91 million, or 1%, in 2022 as compared to 2021.

The decrease in service sales was primarily due to lower sales of approximately $155 million at MFC primarily due to lower volume on the Special Operations Forces Global Logistics Support Services (SOF GLSS) program.

Service sales increased $788 million, or 7%, in 2023 as compared to 2022.

The increase in service sales was primarily due to higher sales of approximately $600 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):

2022 2021 2020

Cost of sales – products $ (50,206) $ (49,357) $ (50,017)

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Total cost of sales $ (59,092) $ (57,697) $ (57,983)

(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 – Organization and Significant Accounting Policies” 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.

The following discussion of material changes in our consolidated cost of sales for products and services should be read in tandem with the preceding discussion of changes in our consolidated net sales and our business segment results of operations.

Except for potential impacts to our programs resulting from COVID-19, supply chain disruptions and inflation, we have not

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identified any additional developing trends in cost of sales for products and services that would have a material impact on our future operations.

Except for potential impacts to our programs resulting from supply chain disruptions and inflation, we have not identified any additional developing trends in cost of sales for products and services that would have a material impact on our future operations.

Product Costs

Product costs decreased approximately $696 million, or 1%, in 2022 as compared to 2021.

The decrease was primarily attributable to lower product costs of approximately $525 million at RMS mostly due to lower production volume on Black Hawk and the delivery of an international pilot training system in the first quarter of 2021 ;

about $195 million at MFC primarily due to lower volume on air dominance weapon systems and THAAD;

and approximately $165 million at Space primarily due to the renationalization of AWE, partially offset by higher development volume (NGI).

These decreases were partially offset by higher product costs of about $185 million at Aeronautics mostly due to higher volume on classified contracts that were partially offset by lower volume on F-35 contracts.

Product costs increased approximately $849 million, or 2%, in 2023 as compared to 2022.

The increase was primarily attributable to higher product costs of $815 million at Space due to ramp up in the Next Generation Interceptor (NGI) development program and higher volume in the Fleet Ballistic Missile (FBM) program.

Service Costs

Service costs decreased approximately $183 million, or 2%, in 2022 compared to 2021.

The decrease was primarily attributable to lower service costs of approximately $160 million at MFC primarily due to lower volume on the SOF GLSS program.

Service costs increased approximately $775 million, or 8%, in 2023 compared to 2022.

The increase was primarily attributable to higher service costs of approximately $570 million at Aeronautics due to higher volume on F-35 sustainment contracts.

Severance and other charges

During the fourth quarter of 2022, we recorded charges totaling $100 million ($79 million, or $0.31 per share, after-tax) that relate to actions at our RMS business segment, which include severance costs for reduction of positions and asset impairment charges.

After a strategic review of RMS, these actions will improve the efficiency of our operations, better align the organization and cost structure with changing economic conditions, and changes in program lifecycles.

During 2021, we recorded severance and restructuring charges of $36 million ($28 million, or $0.10 per share, after-tax) associated with plans to close and consolidate certain facilities and reduce the total workforce within our RMS business segment.

During the fourth quarter of 2023, we recorded severance and other charges of $92 million ($73 million, or $0.30 per share, after-tax) associated with s everance costs for the planned reduction of certain positions across the corporation and asset impairment charges .

Upon separation, terminated employees will receive lump-sum severance payments primarily based on years of service, the majority of which are expected to be paid over the next several quarters.

This action resulted from a review of our business segments and corporate functions and is intended to improve the efficiency of our operations.

During the fourth quarter of 2022, we recorded severance and other charges totaling $100 million ($79 million, or $0.31 per share, after-tax) related to actions at our RMS business segment, which include severance costs for reduction of positions and asset impairment charges.

After a strategic review of RMS, these actions improved the efficiency of our operations and better aligned the organization and cost structure with changing economic conditions and changes in program lifecycles.

We generally can recover a portion of severance costs through the pricing of our products and services to the U.S.

Government and other customers in future periods, which will be included in our operating results.

Other Unallocated, Net

Other unallocated, net primarily includes the FAS/CAS pension operating adjustment (which represents the difference between CAS pension cost recorded in our business segments’ results of operations and the service cost component of Financial Accounting Standards (FAS) pension expense), stock-based compensation expense, changes in the fair value of investments and liabilities for deferred compensation plans and other corporate costs.

Other unallocated, net primarily includes the FAS/CAS pension operating adjustment (which represents the difference between total CAS pension cost recorded in our business segments’ results of operations and the service cost component of Financial Accounting Standards (FAS) pension expense), stock-based compensation expense, changes in the fair value of assets and liabilities for deferred compensation plans, intangible asset amortization expense and other corporate costs.

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 $1.2 billion in 2023, compared to $1.0 billion in 2022.

Other unallocated, net during 2022 was lower primarily due to a decrease in our FAS/CAS pension operating adjustment due to lower CAS cost from the American Rescue Plan Act of 2021 (ARPA) legislation, declines in the fair value of investments and liabilities for deferred compensation plans, and fluctuations in costs associated with various corporate items, none of which were individually significant.

See “Business Segment Results of Operations” and “Critical Accounting Policies - Postretirement Benefit Plans” discussion below for more information on our pension cost.

Other Income (Expense), Net

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

There were lower losses from the changes in the fair value of assets and liabilities related to deferred compensation plans in 2023 compared to in 2022.

Other Income, Net

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

Other income, net in 2023 was $28 million, compared to $61 million in 2022.

Other income, net in 2023 includes lower earnings generated by our equity method investment in United Launch Alliance (ULA) due to lower launch volume and an increase in new product development costs.

Interest Expense

Interest expense in 2023 was $916 million, compared to $623 million in 2022.

The increase in interest expense in 2022 resulted primarily from the issuance of notes in October of 2022 to fund share repurchases.

See “Capital Structure, Resources and Other” included within “Liquidity and Cash Flows” discussion below and “Note 10 – Debt” included in our Notes to Consolidated Financial Statements for a discussion of our debt.

Non-Service FAS Pension (Expense) Income

Non-service FAS pension expense was $1.0 billion in 2022, compared to $1.3 billion in 2021.

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

See “Capital Structure, Resources and Other” included within the “Liquidity and Cash Flows” discussion below and “Note 10 – Debt” included in our Notes to Consolidated Financial Statements for a discussion of our debt.

Non-Service FAS Pension Income (Expense)

Non-service FAS pension income was $443 million in 2023, compared to non-service FAS pension expense of $971 million in 2022.

Non-service FAS pension expense in 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 in the second quarter of 2022.

Non-service FAS pension expense in 2021 includes a noncash, non-operating pension settlement charge of $1.7 billion ($1.3 billion, or $4.72 per share, after-tax), related to the transfer of $4.9 billion of our

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gross defined benefit pension obligations and related plan assets to an insurance company in the third quarter of 2021.

See “Note 11 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements for additional information.

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 mark-to-market investments.

Other Non-operating Income (Expense), Net

Other non-operating income (expense), 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.

See “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for additional information.

Other non-operating expense, net in 2022 was $74 million, compared to other non-operating income, net of $288 million in 2021.

The decrease in 2022 was primarily due to decreases in the fair value of certain mark-to-market investments.

Other non-operating income, net in 2023 was $64 million, compared to other non-operating expense, net of $74 million in 2022.

Other non-operating income (expense), net in 2023 includes higher interest income as a result of the higher rate environment we are seeing on a macro-economic scale and lower losses related to fair value adjustments of early-stage company investments.

Income Tax Expense

Our effective income tax rate was 14.5% for 2023 and 14.2% for 2022.

The rate for 2022 was lower than the rate for 2021 primarily due to increased research and development tax credits.

The rates for both 2022 and 2021 benefited from tax deductions for foreign derived intangible income, dividends paid to the company's defined contribution plans with an employee stock ownership plan feature, and employee equity awards.

The rates for all 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.

Changes in U.S.

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In addition to future changes in tax laws, the amount of net deferred tax assets will change periodically based on several factors, including the measurement of our postretirement benefit plan obligations, actual cash contributions to our postretirement benefit plans and the change in the amount or reevaluation of uncertain tax positions.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for tax purposes.

This provision resulted in a cash tax liability for the 2022 tax year of approximately $660 million.

Our net deferred tax assets increased in 2022 by approximately $660 million as a result as well.

This provision is expected to increase our 2023 cash tax liability by approximately $575 million.

The actual impact on 2023 cash tax liability will depend on the amount of research and development expenses paid or incurred in 2023 among other factors.

While the largest impact of this provision will be to 2022 cash tax liability, the impact will continue over the five-year amortization period, but will decrease over the period and be immaterial in year six.

As of December 31, 2021, our liabilities associated with uncertain tax positions were not material.

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

See “Note 9 – Income Taxes” included in our Notes to Consolidated Financial Statements for additional information.

On September 8, 2023, the IRS released Notice 2023-63 providing interim guidance on research and development capitalization.

Based on our analysis, the Notice confirms that certain expenditures incurred in the performance of cost-type contracts are not required to be capitalized.

As a result, there has been a decrease to our uncertain tax position.

IRS indicated in the Notice that it intends to issue proposed regulations consistent with the guidance set forth in the Notice.

For the 2023 tax year, research and development capitalization resulted in a cash tax liability of approximately $560 million and our net deferred tax assets increased by a similar amount.

While the largest impact of this provision was to the 2022

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

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 we expect to be immaterial to our financial results, financial position and cash flows.

The Organization for Economic Co-operation and Development (OECD) has a framework to implement a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds (referred to as Pillar 2), with certain aspects of Pillar 2 effective January 1, 2024 and other aspects effective January 1, 2025.

While it is uncertain whether the U.S.

will enact legislation to adopt Pillar 2, certain countries in which we operate have adopted legislation, and other countries are in the process of introducing legislation to implement Pillar 2.

We do not expect Pillar 2 to have a material impact on our effective tax rate or our consolidated results of operation, financial position, and cash flows.

We reported net earnings of $6.9 billion ($27.55 per share) in 2023 and $5.7 billion ($21.66 per share) in 2022.

Both net earnings and earnings per share in 2022 were affected by the factors mentioned above.

Net earnings and earnings per share in 2023 were affected by the factors mentioned above.

Earnings per share also benefited from a net decrease of approximately 13.4 million weighted average common shares outstanding in 2023, compared to 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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Business Segment Results of Operations

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We organize our business segments based on the nature of products and services offered.

Net sales and operating profit of our business segments exclude intersegment sales, cost of sales, and profit as these activities are eliminated in consolidation and not included in management’s evaluation of performance of each segment.

Net sales and operating profit of our business segments exclude intersegment sales, cost of sales and profit as these activities are eliminated in consolidation and thus are not included in management’s evaluation of performance of each segment.

Business segment operating profit includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments.

United Launch Alliance (ULA), results of which are included in our Space business segment, is our largest equity method investee.

Business segment operating profit also excludes the FAS/CAS pension operating adjustment described below, a portion of corporate costs not considered allowable or allocable to contracts with the U.S.

Business segment operating profit excludes the FAS/CAS pension operating adjustment described below, a portion of corporate costs not considered allowable or allocable to contracts with the U.S.

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, environmental costs, changes in the fair value of certain mark-to-market investments, stock-based compensation expense, changes in the fair value of investments and liabilities for deferred compensation plans, retiree benefits, significant severance actions, significant asset impairments, gains or losses from divestitures, 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 1 – Organization and Significant Accounting Policies” for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.

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Summary operating results for each of our business segments were as follows (in millions):

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

2023 2022 2021

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FAS/CAS pension operating adjustment 1,660 1,709 1,960

Intangible asset amortization expense (247) (248) (285)

Severance and other charges (a)

(92) (100) (36)

Other, net (b)

(480) (180) (357)

Other, net (203) (480) (180)

Total unallocated, net 1,118 881 1,459

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(a) See “Consolidated Results of Operations – Severance and Other Charges” discussion above for information on charges related to certain severance and other actions across our organization.

(b) Other, net in 2020 includes a noncash impairment charge of $128 million recognized on our investment in the international equity method investee, Advanced Military Maintenance, Repair and Overhaul Center (AMMROC).

(See “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for more information).

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

This change has been applied to the accompanying amounts above, including the amounts for 2022 and 2021.

We also included supplemental tables under the caption Pro Forma Business Segment Summary Operating Results in our earnings release included as exhibit 99.1 to our Current Report on Form 8-K filed January 24, 2023, which provide unaudited pro forma financial information reflecting the impact of the change in presentation as-if it had been applicable for the quarters and year to date periods in 2022 and 2021.

The supplemental tables, the earnings release and the Current Report on Form 8-K are not, and shall not be deemed to be, incorporated by reference herein.

Our business segments’ results of operations include pension expense only as calculated under U.S.

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Government contracts and, therefore, recognize CAS pension cost in each of our business segment’s net sales and cost of sales.

Our consolidated financial statements must present pension and other postretirement benefit plan (expense) 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 (expense) income and total CAS pension cost.

The non-service FAS pension (expense) income components are included in non-service FAS pension (expense) 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 (expense) income, we have a favorable FAS/CAS pension operating adjustment.

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

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 (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):

2023 2022 2021

Total FAS (expense) income and CAS cost

FAS pension (expense) income $ (1,058) $ (1,398) $ 118

Total FAS income (expense) and CAS cost

FAS pension income (expense) $ 378 $ (1,058) $ (1,398)

CAS pension cost 1,725 1,796 2,066

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Total FAS/CAS pension operating adjustment 1,660 1,709 1,960

Non-service FAS pension (expense) income (971) (1,292) 219

Non-service FAS pension income (expense) 443 (971) (1,292)

Total FAS/CAS pension adjustment $ 2,103 $ 738 $ 668

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Profit booking rates may increase during the performance of the contract if we successfully retire risks related to the technical,

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schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract.

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Volume changes in segment operating profit are typically based on the current profit booking rate for a particular contract.

In addition, comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts for which we recognize revenue over time using the percentage-of-completion cost-to-cost method to measure progress towards completion.

Comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts.

Increases in the profit booking rates, typically referred to as favorable profit adjustments, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract.

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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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Our consolidated net profit booking rate adjustments increased segment operating profit by approximately $1.6 billion in 2023 and $1.8 billion in 2022.

The consolidated net profit booking rate adjustments in 2022 compared to 2021 decreased primarily due to decreases in profit booking rate adjustments at Space, RMS and MFC offset by an increase in Aeronautics.

The consolidated net adjustments for 2022 and 2021 are inclusive of approximately $780 million and $900 million in unfavorable items, which include reserves for a classified program at Aeronautics, various programs at RMS and a ground solutions program at Space.

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

For further discussion on programs at Aeronautics and RMS, see “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for more information.

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We have contracted with the Canadian Government for the Canadian Maritime Helicopter Program at our RMS business segment that provide 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 to date 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 could be adversely impacted by 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 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.

Government has imposed certain sanctions on Türkish entities and persons that has affected our ability to perform under contracts supporting the Türkish Utility Helicopter Program.

As a result of the sanctions, we have provided force majeure notices under the affected contracts and these 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.

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

For further discussions, see “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for more information.

Our Aeronautics business segment is engaged in the research, design, development, manufacture, integration, sustainment, support and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies.

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Aeronautics’ net sales in 2023 increased $487 million, or 2%, compared to 2022.

Net sales increased by approximately $375 million on classified contracts primarily due to higher volume;

about $80 million for the F-22 program due to higher net favorable profit adjustments;

and approximately $55 million for the F-16 program due to higher volume on production contracts that was partially offset by lower volume on sustainment contracts and unfavorable profit adjustments on a production contract and modernization contracts.

These increases were partially offset by a decrease of about $310 million for the F-35 program due to lower volume and favorable profit adjustments on sustainment and production contracts that were partially offset by higher volume on development contracts.

Aeronautics’ operating profit in 2022 increased $67 million, or 2%, compared to 2021.

Operating profit increased approximately $145 million on classified contracts primarily due to lower unfavorable profit adjustments on a classified program ($45 million in 2022 compared to $225 million in 2021) that were partially offset by lower favorable profit adjustments;

and about $100 million for the F-22 program due to higher net favorable profit adjustments.

These increases were partially offset by lower operating profit of approximately $110 million for the F-16 program due to unfavorable profit adjustments in 2022 on a production contract and modernization contracts;

and about $80 million for the F-35 program due to lower net favorable profit adjustments on production and sustainment contracts and volume on sustainment contracts.

Net favorable profit booking rate adjustments were $30 million higher in 2022 compared to 2021.

Backlog increased in 2022 compared to 2021 primarily due to the delay of F-35 Lot 15 award from 2021 to 2022 and the award of the F-35 Lot 16 contract in December 2022.

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Net sales increased by approximately $540 million for the ramp up on classified programs and $230 million on the F-16 program related to the ramp up in

These increases were partially offset by lower net sales of $400 million on the F-35 program due to lower volume on production contracts partially offset by higher volume on sustainment and development contracts.

Aeronautics’ operating profit in 2023 decreased $42 million, or 1%, compared to 2022.

The decrease was primarily attributable to lower operating profit of $100 million on the F-22 program due to lower net favorable profit adjustments and $95 million on the F-35 program due to lower net favorable profit adjustments on production contracts.

These decreases were partially offset by higher operating profit of $115 million on classified programs due to higher net favorable profit adjustments and the impact of the higher sales as discussed above.

Total net profit booking rate adjustments were $180 million lower in 2023 compared to 2022.

Backlog increased in 2023 compared to 2022 primarily due to higher orders on classified and C-130 programs.

Missiles and Fire Control

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and energy management solutions.

MFC’s major programs include PAC‑3, THAAD, Multiple Launch Rocket System (MLRS), Hellfire, Joint Air-to-Surface Standoff Missile (JASSM), Apache fire control system, Sniper Advanced Targeting Pod (SNIPER ® ), Infrared Search and Track (IRST21 ® ) and Special Operations Forces Global Logistics Support Services (SOF GLSS).

MFC’s major programs include PAC‑3, Terminal High Altitude Area Defense (THAAD), Multiple Launch Rocket System (MLRS), Precision Strike Missile (PrSM), Joint Air-to-Surface Standoff Missile (JASSM), Long-Range Anti-Ship Missile (LRASM), Hellfire, Apache fire control system, Sniper Advanced Targeting Pod (SNIPER ® ), Infrared Search and Track (IRST21 ® ), Special Operations Forces Global Logistics Support Services (SOF GLSS), hypersonics programs and Javelin.

MFC’s operating results included the following (in millions):

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MFC’s net sales in 2023 decreased $64 million, or 1% compared to 2022.

The decrease was primarily attributable to lower net sales of approximately $280 million for sensors and global sustainment programs due to lower volume on SOF GLSS as a result of changes in mission requirements and lower volume on SNIPER ® ;

and about $60 million for integrated air and missile defense programs due to lower volume (THAAD) and lower net favorable profit adjustments (PAC-3) that were partially offset by higher volume (PAC-3).

Net sales for tactical and strike missile programs were comparable as higher volume (PrSM) was offset by lower volume (air dominance weapon systems).

Net sales decreased $165 million for integrated air and missile defense programs due primarily to supplier cost timing on PAC-3 and $115 million for sensors and global sustainment programs due primarily to the absence in 2023 of the impact of a favorable profit adjustment on an international program in 2022.

These decreases were partially offset by higher net sales of $145 million for tactical and strike missile programs primarily due to production ramp up on JASSM, LRASM, and precision fires programs.

MFC’s operating profit in 2023 decreased $96 million, or 6%, compared to 2022.

The decrease was primarily attributable to lower operating profit of approximately $85 million for integrated air and missile defense programs due to lower net favorable profit adjustments for the PAC-3 program and an unfavorable profit adjustment of about $40 million on an air and missile defense development program.

This decrease was partially offset by an increase of about $50 million for tactical and strike missile programs due to contract mix and higher net favorable profit adjustments (an international tactical and strike missile program and HIMARS) that were partially offset by an unfavorable profit adjustment of about $25 million on an air-to-ground missile program.

There also were unfavorable profit adjustments of approximately $25 million on an energy program in 2021 that did not recur in 2022.

Operating profit for sensors and global sustainment programs was comparable as both contract mix and the net effect of favorable profit adjustments on an international program in 2022 were offset by the closeout activities related to the Warrior program in 2021 that did not recur in 2022.

Net favorable profit booking rate adjustments were $45 million lower in 2022 compared to 2021.

Backlog increased in 2022 compared to 2021 primarily due to higher orders on precision fires (GMLRS) and THAAD programs.

The decrease was primarily attributable to lower operating profit for tactical and strike missile programs due to $45 million of losses recognized on a classified program.

Total net profit booking rate adjustments were $95 million lower in 2023 compared to 2022.

Backlog increased in 2023 compared to 2022 primarily due to higher orders on PAC-3, LRASM, JASSM and Guided Multiple Launch Rocket Systems (GMLRS) programs.

Rotary and Mission Systems

RMS designs, manufactures, services and supports various military and commercial helicopters, surface ships, sea and land-based missile defense systems, radar systems, sea and air-based mission and combat systems, command and control mission solutions, cyber solutions, and simulation and training solutions.

RMS’ major programs include Aegis Combat System, Littoral Combat Ship (LCS), Multi-Mission Surface Combatant (MMSC), Black Hawk and Seahawk helicopters, CH-53K King Stallion heavy lift helicopter, Combat Rescue Helicopter (CRH), VH-92A helicopter, and the C2BMC program.

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 challenging the U.S.

Army’s decision, and a ruling is expected on or before April 7, 2023 based on the 100-day deadline.

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

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RMS designs, manufactures, services and supports various military and commercial helicopters, surface ships, sea and land-based missile defense systems, radar systems, laser systems, sea and air-based mission and combat systems, command and control mission solutions, cyber solutions, and simulation and training solutions.

RMS’ major programs include Aegis Combat System, Littoral Combat Ship (LCS), Multi-Mission Surface Combatant (MMSC), Black Hawk and Seahawk helicopters,

CH-53K King Stallion heavy lift helicopter, Combat Rescue Helicopter (CRH), VH-92A helicopter, and the C2BMC program.

RMS’ operating results included the following (in millions):

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Backlog at year-end $ 37,726 $ 34,949 $ 33,700

RMS’ net sales in 2022 decreased $641 million, or 4%, compared to 2021.

The decrease was primarily attributable to lower net sales of approximately $280 million for TLS programs primarily due to the delivery of an international pilot training system in the first quarter of 2021 that did not recur in 2022;

about $205 million for various C6ISR programs due to lower volume;

and approximately $170 million for Sikorsky helicopter programs due to lower production volume (Black Hawk) that was partially offset by higher production volume (CH-53K).

RMS’ net sales in 2023 increased $91 million, or 1%, compared to 2022.

Higher net sales of $265 million on IWSS programs due to higher volume on the Aegis program and new program ramp ups within the radar and laser systems portfolios were partially offset by lower net sales of $55 million for Sikorsky helicopter programs due to lower Black Hawk production volume.

RMS’ operating profit in 2023 decreased $41 million, or 2%, compared to 2022.

The decrease was primarily attributable to approximately $70 million for Sikorsky helicopter programs due to lower production volume and net favorable profit adjustments (Black Hawk) that were partially offset by higher net favorable profit adjustments (CRH);

about $50 million for various C6ISR programs due to lower net favorable profit adjustments;

and approximately $15 million for i ntegrated warfare systems and sensors ( IWSS) programs due to lower net favorable profit adjustments (TPQ-53 and Aegis) that were partially offset by $30 million of unfavorable profit adjustments on a ground-based radar program in 2021 that did not recur in 2022.

These decreases were partially offset by an increase of approximately $35 million for TLS programs due to higher net favorable profit adjustments that were partially offset by lower volume due to the delivery of an international pilot training system in the first quarter of 2021 that did not recur in 2022.

Net favorable profit booking rate adjustments were $65 million lower in 2022 compared to 2021.

The decrease was primarily attributable to lower operating profit for Sikorsky helicopter programs primarily due to an unfavorable profit adjustment of $100 million in the second quarter of 2023 on the Canadian Maritime Helicopter Program (CMHP) and lower Black Hawk production volume.

This decrease was partially offset by higher operating profit for IWSS programs primarily due to a favorable profit adjustment of $65 million in the second quarter of 2023 on an international surveillance and control program, along with higher volume on the Aegis program.

Total net profit booking rate adjustments were $100 million lower in 2023 compared to 2022.

Backlog increased in 2023 compared to 2022 primarily due to higher orders on Sikorsky programs.

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Space is also responsible for various classified systems and services in support of vital national security systems.

Space’s major programs include the Trident II D5 Fleet Ballistic Missile (FBM), Orion Multi-Purpose Crew Vehicle (Orion), Space Based Infrared System (SBIRS) and Next Generation Overhead Persistent Infrared (Next Gen OPIR) system, Global Positioning System (GPS) III, hypersonics programs and Next Generation Interceptor (NGI).

Space’s major programs include the Trident II D5 Fleet Ballistic Missile (FBM), Orion Multi-Purpose Crew Vehicle (Orion), Next Generation Overhead Persistent Infrared (Next Gen OPIR) system, Global Positioning System (GPS) III, hypersonics and transport layer programs and Next Generation Interceptor (NGI).

Operating profit for our Space business segment includes our share of earnings for our investment in ULA, which provides expendable launch services to the U.S.

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Backlog at year-end $ 30,456 $ 29,684 $ 25,516

Space’s net sales in 2022 decreased $282 million, or 2%, compared to 2021.

The decrease was primarily attributable to lower net sales of approximately $885 million due to the renationalization of the AWE program on June 30, 2021, which was no longer included in our financial results beginning in the third quarter of 2021;

and about $125 million for commercial civil space programs due to lower volume (Orion).

These decreases were partially offset by higher net sales of about $495 million for strategic and missile defense programs due to higher development volume (NGI);

and about $245 million for national security space programs due to higher development volume (classified programs).

Space’s operating profit in 2022 decreased $89 million, or 8%, compared to 2021.

The decrease was primarily attributable to approximately $85 million for national security space programs primarily due to lower net favorable profit adjustments (classified programs and SBIRS) that were partially offset by lower net unfavorable profit adjustments of $25 million on a

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ground solutions program;

and about $40 million for commercial civil space programs due to lower net favorable profit adjustments (Human Lander System (HLS)) and lower volume (Orion).

These decreases were partially offset by higher equity earnings of approximately $35 million from the company's investment in ULA due to higher launch volume and launch mix;

and about $20 million for strategic and missile defense programs due to higher net favorable profit adjustments (primarily NGI).

Operating profit for the AWE program was comparable as its operating profit in 2021 was mostly offset by accelerated amortization expense for intangible assets as a result of the renationalization.

Net favorable profit booking rate adjustments were $150 million lower in 2022 compared to 2021.

Space’s net sales in 2023 increased $1.1 billion, or 9%, compared to 2022.

The increase was primarily attributable to higher net sales of $620 million for strategic and missile defense programs due to ramp up in the NGI development program and higher volume in the FBM program;

and higher net sales of $225 million for national security space programs due to development ramp up on Transport Layer and classified programs.

Space’s operating profit in 2023 increased $101 million, or 10%, compared to 2022.

The increase was primarily attributable to higher operating profit of $140 million for national security space programs due to the absence of unfavorable profit adjustments in 2023 on a ground solutions program and higher net favorable profit adjustments in classified programs.

This increase was partially offset by $80 million of lower equity earnings resulting from lower launch volume and an increase in new product development costs at ULA.

Total net profit booking rate adjustments were $150 million higher in 2023 compared to 2022.

Equity earnings

Total equity earnings (primarily ULA) represented approximately $20 million and $100 million, or 2% and 9%, of Space’s operating profit during 2023 and 2022.

Backlog increased in 2022 compared to 2021 primarily due to the exercise of the Orion Production Contract option for Artemis VI-VIII in commercial civil space and contract awards in national security space (Southern Positioning Augmentation Network (SouthPan) and classified).

Backlog increased in 2023 compared to 2022 primarily due higher orders for strategic and missile defense programs for NGI development, hypersonics, and Mk21A, partially offset by reductions in the National Security Space portfolio for classified and Next Gen OPIR programs.

Liquidity and Cash Flows

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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.

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.

To date, the effects of COVID-19 have resulted in some negative impacts on our cash flows, partially due to supplier disruptions and delays.

Government has taken certain actions and enacted legislation to mitigate the impacts of COVID-19 on public health, the economy, state and local governments, individuals, and businesses.

Since the pandemic began, Lockheed Martin has remained committed to accelerating payments to the supply chain with a focus on small and at risk businesses.

As of December 31, 2022, we have accelerated $1.5 billion of payments to our suppliers that are due by their terms in future periods.

We will continue to monitor supply chain risks, especially at small and at-risk related suppliers, and may continue to utilize accelerated payments in 2023 on an as needed basis.

In addition, 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

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opportunities when they arise.

Government changes its payment policies.

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.

Consistent with that strategy, we have continued to invest in our business and technologies through capital expenditures, independent research and development, and selective business acquisitions and investments.

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

On October 17, 2022, the Board of Directors authorized an additional $14.0 billion to the program.

During the fourth quarter of 2022, we entered into an accelerated share repurchase (ASR) agreement to repurchase $4.0 billion of our common stock and issued $4.0 billion of senior unsecured notes.

As of December 31, 2022, the total remaining authorization for future common share repurchases under our program was $10.0 billion, which is expected to be utilized over a three-year period.

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

We continue to return cash to stockholders through dividends and share repurchases.

In October 2023, the Board of Directors authorized a fourth quarter dividend payment of $3.15 per share, representing an increase of $0.15 per share over the prior quarterly dividend payment.

The Board of Directors also authorized an increase of $6.0 billion to our share repurchase program.

As of December 31, 2023, the total remaining authorization for future common share repurchases under our program was $10.0 billion.

We expect to fund these future repurchases through a combination of cash on hand and debt.

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

The amount of shares ultimately purchased and the timing of purchases are at the discretion of management and subject to compliance with applicable law and regulation.

We continue to actively manage our debt levels, including maturities and interest rates, as evidenced by the debt transaction in the second quarter of 2022, the proceeds of which were used to refinance certain upcoming debt maturities between 2023 and 2026.

We also actively manage our pension obligations and expect to continue to opportunistically manage our pension liabilities through the purchase of group annuity contracts for portions of our outstanding defined benefit pension obligations using assets from the pension trust as we did in the second quarter of 2022.

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 11 – 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.

Future pension risk transfer transactions could be significant and result in us making additional

contributions to the pension trust and/or require us to recognize noncash, non-operating pension settlement charges in earnings in the applicable reporting period.

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

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Operating Activities

Net cash provided by operating activities decreased $1.4 billion in 2022 compared to 2021.

The decrease was primarily attributable to lower cash at Aeronautics, MFC and RMS.

The decrease at Aeronautics was primarily due to timing of production and billing cycles impacting contract assets (primarily F-35).

The decrease at MFC was primarily due to timing of accounts receivables collections.

The decrease at RMS was primarily due to liquidation of inventories (primarily TLS and Sikorsky helicopter programs) in 2021 that did not recur in 2022.

As of December 31, 2022, we accelerated $1.5 billion of payments to suppliers that were due in the first quarter of 2023, compared to $2.2 billion of payments to suppliers as of December 31, 2021 that were due in the first quarter of 2022.

Net cash provided by operating activities increased $118 million in 2023 compared to 2022.

The increase was primarily due to the timing of production and billing cycles impacting receivables (primarily the F-35 program at Aeronautics) and contract assets (primarily IWSS programs at RMS), partially offset by timing of cash payments for accounts payable across the company.

Our federal and foreign income tax payments, net of refunds, were $1.8 billion in 2023, compared to $1.6 billion in 2022.

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We believe free cash flow is a useful measure for investors because it represents the amount of cash generated from operations after reinvesting in the business and that may be available to return to stockholders and creditors (through dividends, stock repurchases and debt repayments) or available to fund acquisitions and other investments.

The entire amount of free cash flow is not necessarily available for discretionary expenditures, however, because it does not account for certain mandatory expenditures, such as the

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repayment of maturing debt and pension contributions.

The entire amount of free cash flow is not necessarily available for discretionary expenditures, however, because it does not account for certain mandatory expenditures, such as the repayment of maturing debt and pension contributions.

While management believes that free cash flow as a non-GAAP financial measure may be useful in evaluating our financial performance, it should be considered supplemental to, and not a substitute for, financial information prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies.

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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.

We also incur capital expenditures for information technology to support programs and general enterprise information technology infrastructure, inclusive of costs for the development or purchase of internal-use software.

Net cash used for investing activities increased $628 million in 2022 compared to 2021.

The increase in cash used for investing activities is due to an increase in capital expenditures and the receipt of $307 million in 2021 from the sale of our ownership interest in the Advanced Military Maintenance, Repair and Overhaul Center (AMMROC) joint venture.

Capital expenditures totaled $1.7 billion and $1.5 billion in 2022 and 2021.

incur capital expenditures for information technology to support programs and general enterprise information technology infrastructure, inclusive of costs for the development or purchase of internal-use software.

Net cash used for investing activities decreased $95 million in 2023 compared to 2022.

Financing Activities

Net cash used for financing activities decreased $546 million in 2022 compared to 2021, primarily due to repayment of $500 million of long-term notes in 2021.

Net cash used for financing activities increased $261 million in 2023 compared to 2022, primarily due to lower proceeds from issuance of long-term debt, partially offset by lower repayments of long-term debt and decreased repurchases of common stock.

We paid dividends totaling $3.1 billion ($12.15 per share) in 2023 and $3.0 billion ($11.40 per share) in 2022.

We paid quarterly dividends of $3.00 per share during each of the first three quarters of 2023 and $3.15 per share during the fourth quarter of 2023;

We paid quarterly dividends of $2.60 per share during each of the first three quarters of 2021 and $2.80 per share during the fourth quarter of 2021.

$2.80 per share during each of the first three quarters of 2022 and $3.00 per share during the fourth quarter of 2022.

During 2023, we paid $6.0 billion to repurchase 13.4 million shares of our common stock.

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During 2022, we paid $7.9 billion to repurchase 18.3 million shares of our common stock.

In October 2022, we received net proceeds of $3.9 billion from issuance of senior unsecured notes and used the net proceeds from the offering to enter into an ASR agreement to repurchase $4.0 billion of our common stock .

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

During 2023, we received net proceeds of $2.0 billion from issuance of senior unsecured notes.

In May 2022, we received net proceeds of $2.3 billion from issuance of senior unsecured notes and used the net proceeds from the offering to redeem all of the outstanding $500 million Notes due 2023, $750 million Notes due 2025 and used the remaining balance of the net proceeds to redeem $1.0 billion of our outstanding $2.0 billion Notes due 2026.

In September 2021, we repaid $500 million of long-term notes with a fixed interest rate of 3.35% according to their scheduled maturities.

In October 2022, we received net proceeds of $3.9 billion from issuance of senior unsecured notes and used the net proceeds from the offering to enter into an accelerated share repurchase ( ASR) agreement to repurchase $4.0 billion of our common stock.

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

During 2023, we repaid $115 million of long-term notes with a fixed interest rate of 7.00% according to their scheduled maturities.

Capital Structure, Resources and Other

At December 31, 2023, we held cash and cash equivalents of $1.4 billion that were generally available to fund ordinary business operations without significant legal, regulatory, or other restrictions.

Our outstanding debt, net of unamortized discounts and issuance costs, was $15.5 billion as of December 31, 2022 and is in the form of publicly-issued notes that bear interest at fixed rates.

Our total outstanding short-term and long-term debt, net of unamortized discounts and issuance costs, was $17.5 billion as of December 31, 2023 and is in the form of publicly-issued notes that bear interest at fixed rates.

As of December 31, 2023, we were in compliance with all covenants contained in our debt and credit agreements.

See “ Note 10 – Debt ” included in our Notes to Consolidated Financial Statements for more information on our long-term debt and revolving credit facilities.

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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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We may at times refinance existing indebtedness, vary our mix of variable-rate and fixed-rate debt or seek alternative financing sources for our cash and operational needs.

Long-Term Debt

On October 24, 2022, we issued a total of $4.0 billion of senior unsecured notes, consisting of $500 million aggregate principal amount of 4.95% Notes due 2025 (the “2025 Notes”), $750 million aggregate principal amount of 5.10% Notes due 2027 (the “2027 Notes”), $1.0 billion aggregate principal amount of 5.25% Notes due 2033 (the “2033 Notes”), $1.0 billion aggregate principal amount of 5.70% Notes due 2054 (the “2054 Notes”) and $750 million aggregate principal amount of 5.90% Notes due 2063 (the “2063 Notes” and, together with the 2025 Notes, the 2027 Notes, the 2033 Notes and the 2054 Notes, the “October 2022 Notes”).

We will pay interest on the 2025 Notes semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2023.

We will pay interest on the 2033 Notes semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2023.

We will pay interest on each of 2027 Notes, 2054 Notes and 2063 Notes semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2023.

We may, at our option, redeem the October 2022 Notes of any series, in whole or in part, at any time at the redemption prices equal to the greater of 100% of the principal amount of the Notes to be redeemed or an applicable “make-whole” amount, plus accrued and unpaid interest to the date of redemption.

On May 5, 2022, we issued a total of $2.3 billion of senior unsecured notes, consisting of $800 million aggregate principal amount of 3.90% Notes due June 15, 2032 (the “2032 Notes”), $850 million aggregate principal amount of 4.15% Notes due June 15, 2053 (the “2053 Notes”) and $650 million aggregate principal amount of 4.30% Notes due June 15, 2062 (the “2062 Notes” and, together with the 2032 Notes and 2053 Notes, the “May 2022 Notes”) in a registered public offering.

Net proceeds received from the offering were, after deducting pricing discounts and debt issuance costs, which are being amortized and recorded as interest expense over the term of the May 2022 Notes.

We will pay interest on the May 2022 Notes semi-annually in arrears on June 15 and December 15 of each year with the first payment made on June 15, 2022.

We may, at our option, redeem the May 2022 Notes of any series, in whole or in part, at any time and from time to time, at a redemption price equal to the greater of 100% of the principal amount of the May 2022 Notes to be redeemed or an applicable make-whole amount, plus accrued and unpaid interest to the date of redemption.

On May 11, 2022, we used the net proceeds from the May 2022 Notes to redeem all of the outstanding $500 million in aggregate principal amount of our 3.10% Notes due 2023, $750 million in aggregate principal amount of our 2.90% Notes due 2025, and $1.0 billion of our outstanding $2.0 billion in aggregate principal amount of our 3.55% Notes due 2026 at their redemption price.

We paid make-whole premiums of $13.9 million in connection with the early extinguishments of debt.

We incurred losses of $34 million ($26 million, or $0.10 per share, after tax) on these transactions related to early extinguishments of debt, additional interest expense and other related charges, which was recorded in other non-operating (expense) income, net in our consolidated statements of earnings.

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Contractual Commitments

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Our ability to recover investments on our consolidated balance sheet that we make to satisfy offset obligations is generally dependent upon the successful operation of

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ventures that we do not control and may involve products and services that are dissimilar to our business activities.

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(a) Approximately $861 million of standby letters of credit in the “Less Than 1 Year” category are expected to renew for additional periods until completion of the contractual obligation.

At December 31, 2022, third-party guarantees totaled $904 million, of which approximately 71% related to guarantees of contractual performance of joint ventures to which we currently are or previously were a party.

At December 31, 2023, third-party guarantees totaled $1.0 billion, of which approximately 75% related to guarantees of contractual performance of joint ventures to which we currently are or previously were a party.

These amounts represent our estimate of the maximum amounts we would expect to incur upon the contractual non-performance of the joint venture, joint venture partners or divested businesses.

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Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with U.S.

GAAP, which requires us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements.

We employ judgment in making our estimates in consideration of historical experience, currently available information and various other assumptions that we believe to be reasonable under the circumstances.

Actual results could differ from our estimates and assumptions, and any such differences could be material to our consolidated financial statements.

We believe the following accounting policies are critical to the understanding of our consolidated financial statements and require the use of significant management judgment in their application.

For a summary of our significant accounting policies, see “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for additional information.

Contract Accounting / Sales Recognition

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Government) for the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services.

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

For certain contracts that meet the foregoing requirements, primarily international direct commercial sale contracts, we are required to obtain certain regulatory approvals.

In these cases, we recognize revenue when it is probable that we will receive regulatory approvals based upon all known facts and circumstances.

We provide our products and services under fixed-price and cost-reimbursable contracts.

Under fixed-price contracts, we agree to perform the specified work for a pre-determined price.

To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss.

Some fixed-price contracts have a performance-based component under which we may earn incentive payments or incur financial penalties based on our performance.

Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract plus a fee up to a ceiling based on the amount that has been funded.

Typically, we enter into three types of cost-reimbursable contracts:

cost-plus-award-fee, cost-plus-incentive-fee, and cost-plus-fixed-fee.

Cost-plus-award-fee contracts provide for an award fee that varies within specified limits based on the customer’s assessment of our performance against a predetermined set of criteria, such as targets based on cost, quality, technical and schedule criteria.

Cost-plus-incentive-fee contracts provide for reimbursement of costs plus a fee, which is adjusted by a formula based on the relationship of total allowable costs to total target costs (i.e., incentive based on cost) or reimbursement of costs plus an incentive to exceed stated performance targets (i.e.,

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incentive based on performance).

Cost-plus-fixed-fee contracts provide a fixed fee that is negotiated at the inception of the contract and does not vary with actual costs.

We assess each contract at its inception to determine whether it should be combined with other contracts.

When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective.

If combined, we treat the combined contracts as a single contract for revenue recognition purposes.

We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations.

The products and services in our contracts are typically not distinct from one another due to their complex relationships and the significant contract management functions required to perform under the contract.

Accordingly, our contracts are typically accounted for as one performance obligation.

In limited cases, our contracts have more than one distinct performance obligation, which occurs when we perform activities that are not highly complex or interrelated or involve different product lifecycles.

Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded in a given period.

We classify net sales as products or services on our consolidated statements of earnings based on the predominant attributes of the performance obligations.

We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract.

For contracts where a portion of the price may vary (e.g.

awards, incentive fees and claims), we estimate variable consideration at the most likely amount, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur.

We analyze the risk of a significant revenue reversal and if necessary constrain the amount of variable consideration recognized in order to mitigate this risk.

At the inception of a contract we estimate the transaction price based on our current rights and do not contemplate future modifications (including unexercised options) or follow-on contracts until they become legally enforceable.

Contracts are often subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations.

Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract.

Generally, modifications to our contracts are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the context of the contract.

Therefore, such modifications are accounted for as if they were part of the existing contract and recognized as a cumulative adjustment to revenue.

For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the product or service underlying each performance obligation.

The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis (i.e., not bundled with any other products or services).

Our contracts with the U.S.

Government, including FMS contracts, are subject to FAR and the price is typically based on estimated or actual costs plus a reasonable profit margin.

As a result of these regulations, the standalone selling price of products or services in our contracts with the U.S.

Government and FMS contracts are typically equal to the selling price stated in the contract.

Government contracts with multiple performance obligations, we evaluate whether the stated selling prices for the products or services represent their standalone selling prices.

We primarily sell customized solutions unique to a customer’s specifications.

When it is necessary to allocate the transaction price to multiple performance obligations, we typically use the expected cost plus a reasonable profit margin to estimate the standalone selling price of each product or service.

We occasionally sell standard products or services with observable standalone sales transactions.

In these situations, the observable standalone sales transactions are used to determine the standalone selling price.

We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services.

In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service.

Substantially all of our revenue is recognized over time as we perform under the contract because control of the work in process transfers continuously to the customer.

For most contracts with the U.S.

Government and FMS contracts, this continuous transfer of control of the work in process to the customer is supported by clauses in the contract that give the customer ownership of work in process and allow the customer to unilaterally terminate the contract for convenience and pay us for costs incurred plus a reasonable profit.

For most non-U.S.

Government contracts, primarily international direct commercial contracts, continuous transfer of control to our customer is supported because we deliver products that do not have an alternative use to us and if our customer were to terminate the contract for reasons other than our non-performance we would have the right to recover damages which would include, among other potential damages, the right to payment for our work performed to date plus a reasonable profit.

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For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the percentage-of-completion cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts.

Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation(s).

For performance obligations to provide services to the customer, revenue is recognized over time based on costs incurred or the right to invoice method (in situations where the value transferred matches our billing rights) as our customer receives and consumes the benefits.

For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied.

This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point.

For performance obligations to deliver products with continuous control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the percentage of completion cost-to-cost measure of progress.

Significant estimates and assumptions are made in estimating contract sales, costs, and profit.

We estimate profit as the difference between estimated revenues and total estimated costs to complete the contract.

At the outset of a long-term contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract, as well as our ability to earn variable consideration, and assess the effects of those risks on our estimates of sales and total costs to complete the contract.

The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead, general and administrative and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset or localization agreements, required under certain contracts with international customers).

The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract.

Profit booking rates may increase during the performance of the contract if we successfully retire risks related to technical, schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract or may increase the variable consideration we expect to receive on the contract.

Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase or our estimates of variable consideration we expect to receive decrease.

All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate.

We also estimate variable

consideration at the most likely amount, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur.

All of the estimates require significant judgement and are subject to change during the performance of the contract and may affect the profit booking rate.

When estimates of total costs to be incurred on a contract exceed total estimates of the transaction price, a provision for the entire loss is determined at the contract level and is recorded in the period in which the loss is evident, which we refer to as a reach-forward loss.

Comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts for which we recognize revenue over time using the percentage-of-completion cost-to-cost method to measure progress towards completion.

Conversely, conditions on a particular contract may deteriorate, resulting in an increase in the estimated total costs to fulfill the performance obligations and a reduction in the profit booking rate and are typically referred to as unfavorable profit adjustments.

Increases or decreases in profit booking rates are recognized in the current period they are determined and reflect the inception-to-date effect of such changes.

Comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts.

Segment operating profit and margin may also be impacted favorably or unfavorably by other items, which may or may not impact sales.

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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.

For the impacts of changes in estimates and assumptions on our consolidated financial statements, see “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements.

Other Contract Accounting Considerations

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For example, most of the environmental costs we incur for environmental remediation related to sites operated in prior years are allocated to our current operations as general and administrative costs under FAR provisions and supporting advance agreements reached with the U.S.

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We closely monitor compliance with and the consistent application of our critical accounting policies related to contract accounting.

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The GAAP benefit obligation represents the present value of the estimated future benefits we currently expect to pay to plan participants based on past service.

The qualified defined benefit pension plans for salaried employees are fully frozen effective January 1, 2020 and our salaried employees participate in an enhanced defined contribution retirement savings plan.

Similar to recent years, we continue to take actions to mitigate the effect of our defined benefit pension plans on our financial results by reducing the volatility of our pension obligations, including entering into pension risk transfer transactions involving the purchase of group annuity contracts (GACs) for portions of our outstanding defined benefit pension obligations using assets from the pension trust.

During the second quarter of 2022, we purchased GACs to transfer $4.3 billion of gross defined benefit pension obligations and related plan assets to an insurance company for approximately 13,600 U.S.

retirees and beneficiaries.

The GACs were purchased using assets from Lockheed Martin’s master retirement trust and no additional funding contribution was required.

In connection with this transaction, we recognized a noncash, non-operating pension settlement charge of $1.5 billion ($1.2 billion, or $4.33 per share, after-tax) for the affected defined benefit pension plans in the quarter ended June 26, 2022, which represents the accelerated recognition of actuarial losses that were included in the accumulated other comprehensive loss account within stockholders’ equity.

Similarly, in the third quarter of 2021, we purchased GACs to transfer $4.9 billion of gross defined benefit pension obligations and related plan assets to an insurance company for approximately 18,000 U.S.

retirees and beneficiaries.

In connection with this transaction, we recognized a noncash pension settlement charge of $1.7 billion ($1.3 billion, or $4.72 per share, after tax) during the third quarter of 2021.

Inclusive of the transactions described above, since December 2018, Lockheed Martin, through its master retirement trust, has purchased total contracts for approximately $15.9 billion related to our outstanding defined benefit pension obligations eliminating pension plan volatility for approximately 109,000 retirees and beneficiaries and annually required Pension Benefit Guarantee Corporation (PBGC) premiums of approximately $79 million per year.

The qualified defined benefit pension plans for salaried employees are fully frozen effective January 1, 2020 and our salaried employees participate in a defined contribution retirement savings plan.

Similar to recent years, we continue to take actions to mitigate the effect of our defined benefit pension plans on our financial results by reducing the size and volatility of our pension obligations.

From December 2018 and inclusive of the transactions described in “Note 11 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements, we, through our master retirement trust, have transferred approximately $15.9 billion related to our outstanding defined benefit pension obligations to third party insurance companies.

This has eliminated pension plan volatility for approximately 109,000 retirees and beneficiaries and reduced our annually required Pension Benefit Guarantee Corporation (PBGC) premiums by approximately $79 million per year.

We expect to continue to look for opportunities to manage our pension liabilities through additional pension risk transfer transactions in future years.

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We continue to use a single weighted average discount rate approach when calculating our consolidated benefit obligations related to our defined benefit pension plans resulting in 5.00% at December 31, 2023, compared to 5.25% at December 31, 2022.

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We utilized a single weighted average discount rate of 5.00% when calculating our benefit obligations related to our retiree medical and life insurance plans at December 31, 2023, compared to 5.25% at December 31, 2022.

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As part of our evaluation, we calculate the approximate average yields on corporate bonds rated AA or better selected to match our projected postretirement benefit plan cash flows.

The increase in the discount rate from December 31, 2021 to December 31, 2022 resulted in a decrease in the projected benefit obligations of our qualified defined benefit pension plans of approximately $10.2 billion at December 31, 2022.

The decrease in the discount rate from December 31, 2022 to December 31, 2023 resulted in an increase in the projected benefit obligations of our qualified defined benefit pension plans of approximately $765 million at December 31, 2023.

We utilized an expected long-term rate of return on plan assets of 6.50% at both December 31, 2023 and December 31, 2022.

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This assumption is based on several factors including historical market index returns, the anticipated long-term allocation of plan assets, the historical return data for the trust funds, plan expenses and the potential to outperform market index returns.

The difference between the long-term rate of return on plan assets assumption we select and the actual return on plan assets in any given year affects both the funded status of our benefit plans and the calculation of FAS pension expense in subsequent periods.

The difference between the long-term rate of return on plan assets assumption we select and the actual return on plan assets in any given year could be impacted by the timing of market returns, in addition to the timing of benefit payments and significant contributions.

Additionally, the difference between the expected and actual return affects both the funded status of our benefit plans and the calculation of FAS pension expense in subsequent periods.

Although the actual return in any specific year likely will differ from the assumption, the average expected return over a long-term future horizon should be approximately equal to the assumption.

Any variance each year should not, by itself, suggest that the assumption should be changed.

Any variance in a particular year should not, by itself, suggest that the assumption should be changed.

Patterns of variances are reviewed over time, and then combined with expectations for the future.

As a result, changes in this assumption are less frequent than changes in the discount rate.

The actual investment return for our qualified defined benefit plans during 2022 of $(5.9) billion, based on an actual rate of approximately (18)% , reduced plan assets more than the $1.9 billion expected return based on our long-term rate of return assumption.

The actual investment return for our qualified defined benefit plans during 2023 was approximately 7.00% .

Our stockholders’ equity has been reduced cumulatively by $8.7 billion from the annual year-end measurements of the funded status of postretirement benefit plans.

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These cumulative actuarial losses will be amortized to expense using the corridor method, where gains and losses are recognized to the extent they exceed 10% of the greater of plan assets or benefit obligations, over an average period of approximately twenty years as of December 31, 2023.

During 2022, $1.2 billion of these amounts, along with amortization of net prior service credit, were recognized as a component of postretirement benefit plans expense inclusive of the noncash pension settlement charge of $1.2 billion.

During 2023, $149 million of these amounts, along with amortization of net prior service credit, were recognized as a component of postretirement benefit plan expense.

The discount rate and long-term rate of return on plan assets assumptions we select at the end of each year are based on our best estimates and judgment.

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If the 5.00% discount rate at December 31, 2023 that was used to compute the expected 2024 FAS pension income for our qualified defined benefit pension plans had been 25 basis points higher or lower, with all other assumptions held constant, the amount of FAS pension income projected for 2024 would change approximately $5 million.

If the 6.50% expected long-term rate of return on plan assets assumption at December 31, 2022 that was used to compute the expected 2023 FAS pension income for our qualified defined benefit pension plans had been 25 basis points higher or lower, with all other assumptions held constant, the amount of FAS pension income projected for 2023 would be higher or lower by approximately $65 million.

If the 6.50% expected long-term rate of return on plan assets assumption at December 31, 2023 that was used to compute the expected 2024 FAS pension income for our qualified defined benefit pension plans had been 25 basis points higher or lower, with all other assumptions held constant, the amount of FAS

pension income projected for 2024 would be higher or lower by approximately $60 million.

Each year, differences between the actual and expected long-term rate of return on plan assets impacts the measurement of the following year’s FAS pension income.

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Funding of our qualified defined benefit pension plans is determined in a manner consistent with CAS and in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), as amended, along with consideration of CAS and Internal Revenue Code rules.

Our goal has been to fund the pension plans to a level of at least 80%, as determined in accordance with ERISA.

The ERISA funded status of our qualified defined benefit pension plans was approximately 82% and 92% as of December 31, 2022 and 2021;

which is calculated on a different basis than under GAAP and reflects the impact of the American Rescue Plan Act of 2021.

Our goal has been to fund each of our qualified defined benefit pension plans to a level of at least 80% as determined in accordance with ERISA;

which may require the use of different assumptions, such as the discount rate and longevity, than used under GAAP.

All of our qualified defined benefit pension plans had an ERISA funded status of at least 80% as of both December 31, 2023 and 2022.

Contributions to our defined benefit pension plans are recovered over time through the pricing of our products and services on U.S.

Government contracts, including FMS, and are recognized in our cost of sales and net sales.

CAS govern the extent to

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which our pension costs are allocable to and recoverable under contracts with the U.S.

CAS govern the extent to which our pension costs are allocable to and recoverable under contracts with the U.S.

Government, including FMS.

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We are a party to various agreements, proceedings and potential proceedings for environmental remediation issues, including matters at various sites where we have been designated a potentially responsible party (PRP).

At December 31, 2022 and 2021, the total amount of liabilities recorded on our consolidated balance sheet for environmental matters was $696 million and $742 million.

We have recorded assets totaling $618 million and $645 million at December 31, 2022 and 2021 for the portion of environmental costs that are probable of future recovery in pricing of our products and services for agencies of the U.S.

Government, as discussed below.

The amount that is expected to be allocated to our non-U.S.

Government contracts or that is determined to not be recoverable under U.S.

Government contracts is expensed through cost of sales.

We project costs and recovery of costs over approximately 20 years.

We enter into agreements (e.g.

, administrative consent orders, consent decrees) that document the extent and timing of some of our environmental remediation obligations.

We also are involved in environmental remediation activities at sites where formal agreements either do not exist or do not quantify the extent and timing of our obligations.

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As disclosed above, we may record changes in the amount of environmental remediation liabilities as a result of our quarterly reviews of the status of our environmental remediation sites, which would result in a change to the corresponding amount that is probable of future recovery and a charge to earnings.

For example, if we were to determine that the liabilities should be increased by $100 million, the corresponding amount that is probable of future recovery would be increased by approximately $89 million, with the remainder recorded as a charge to earnings.

For example, if we were to determine that the liabilities

should be increased by $100 million, the corresponding amount that is probable of future recovery would be increased by approximately $89 million, with the remainder recorded as a charge to earnings.

This allocation is determined annually, based upon our existing and projected business activities with the U.S.

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In some cases, although a loss may be probable, it is not possible at this time to reasonably estimate the amount of any obligation for remediation activities because of uncertainties (e.g., assessing the extent of the contamination).

During any particular quarter, such uncertainties may be resolved, allowing us to estimate and recognize the initial liability to

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remediate a particular former operating site.

During any particular quarter, such uncertainties may be resolved, allowing us to estimate and recognize the initial liability to remediate a particular former operating site.

The amount of the liability could be material.

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The cash flows employed in the DCF analysis are based on our best estimate of future sales, earnings and cash flows after considering factors such as general market conditions, U.S.

Government budgets, existing firm orders, expected future orders, contracts with suppliers, labor agreements, changes in working capital, long term business plans and recent operating performance.

Government budgets, existing firm orders, expected future orders, contracts with suppliers, labor agreements, changes in

working capital, long term business plans and recent operating performance.

The discount rates utilized in the DCF analysis are based on the respective reporting unit’s weighted average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the respective reporting unit.

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In the fourth quarter of 2023, we performed our annual goodwill impairment test for each of our reporting units.

The results of that test indicated that for each of our reporting units no impairment existed, including Sikorsky.

Based on this, the fair value

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of our Sikorsky reporting unit exceeded its carrying value, which included goodwill of $2.7 billion, by a margin of approximately 40%.

The fair value of both our Sikorsky reporting unit and the indefinite-lived trademark intangible asset can be significantly impacted by its performance, the amount and timing of expected future cash flows, contract terminations, changes in expected future orders, general market pressures, including U.S.

Government budgetary constraints, discount rates, long term growth rates, and changes in U.S.

(federal or state) or foreign tax laws and regulations, or their interpretation and application, including those with retroactive effect, along with other significant judgments.

Based on our assessment of these circumstances, we have determined that goodwill at our Sikorsky reporting unit and the indefinite-lived trademark intangible asset at our Sikorsky reporting unit are at risk for impairment should there be a significant deterioration of projected cash flows of the reporting unit.

We do not currently anticipate any material impairments on our assets as a result of COVID-19 or inflation.

Impairment assessments inherently involve management judgments regarding a number of assumptions such as those described above.

Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of our recorded goodwill, differences in assumptions could have a material effect on the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.

Acquired intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment testing or more frequently if events or change in circumstance indicate that it is more likely than not that the asset is impaired.

Additionally, acquired intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment testing or more frequently if events or change in circumstance indicate that it is more likely than not that the asset is impaired.

This testing compares carrying value to fair value and, when appropriate, the carrying value of these assets is reduced to fair value.

In the fourth quarter of 2022, we performed our annual impairment test, and the results of that test indicated no impairment existed.

Intangibles are amortized to expense over their applicable useful lives, ranging from five to 20 years, based on the nature of the asset and the underlying pattern of economic benefit as reflected by future net cash inflows.

In the fourth quarter of 2023, we performed our annual impairment tests, and the results of those tests indicated no impairment existed.

Finite-lived intangibles are amortized to expense over their applicable useful lives, ranging from five to 20 years, based on the nature of the asset and the underlying pattern of economic benefit as reflected by future net cash inflows.

We perform an impairment test of finite-lived intangibles whenever events or changes in circumstances indicate their carrying value may be impaired.

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If the asset group’s carrying amount exceed the sum of the undiscounted future cash flows, we would determine the fair value of the asset group and record an impairment loss in net earnings.

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Recent Accounting Pronouncements

See “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements (under the caption “Recent Accounting Pronouncements”).

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