What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-01-23 compared with 2023-01-26 · 261 added, 299 removed, 1222 unchanged (31% of the section changed)

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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Revenue recognition based on the percentage of completion method

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Changes to the profit booking rates resulting from changes in estimates could have a material effect on the Corporation’s results of operations.

Auditing the Corporation’s estimate-at-completion analyses used in its revenue recognition process was complex due to the judgment involved in evaluating the significant estimates and assumptions made by management in the creation and subsequent updates to the Corporation’s estimate-at-completion analyses.

Auditing the Corporation’s estimate-at-completion analyses used in its revenue recognition process was complex due to the judgment involved in evaluating the significant estimates and assumptions made by management in the initial development and subsequent updates to the Corporation’s estimate-at-completion analyses.

The estimate-at-completion analyses of each contract consider risks surrounding the Corporation’s ability to achieve the technical, schedule and cost aspects of the contract.

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The discount rate assumption has a significant effect on the measurement of the projected benefit obligation.

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How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant internal controls over management’s measurement and valuation of the defined benefit pension obligation calculations.

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January 23, 2024

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Lockheed Martin Corporation

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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

Earnings (loss) per common share

Continuing operations $ 21.74 $ 22.85 $ 24.60

Discontinued operations — — ( 0.20 )

Basic earnings per common share $ 21.74 $ 22.85 $ 24.40

Continuing operations $ 21.66 $ 22.76 $ 24.50

Discontinued operations — — ( 0.20 )

Diluted earnings per common share $ 21.66 $ 22.76 $ 24.30

Earnings per common share

Basic $ 27.65 $ 21.74 $ 22.85

Diluted $ 27.55 $ 21.66 $ 22.76

The accompanying notes are an integral part of these consolidated financial statements.

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Lockheed Martin Corporation

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

Other comprehensive income (loss), net of tax

Other comprehensive income, net of tax

Postretirement benefit plans

Net actuarial gain (loss) recognized due to plan remeasurements, net of tax of $ 518 million in 2022, $ 925 million in 2021 and $ 292 million in 2020

Net actuarial (loss) gain recognized due to plan remeasurements, net of tax of $ 181 million in 2023, $ 518 million in 2022 and $ 925 million in 2021

( 689 ) 1,873 3,404

Amortization of actuarial losses and prior service credits, net of tax of $ 40 million in 2023, $ 18 million in 2022 and $ 130 million in 2021

( 149 ) 69 477

Pension settlement charge, net of tax of $ 314 million in 2022 and $ 355 million in 2021

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58 ( 115 ) ( 76 )

Other comprehensive income (loss), net of tax 2,983 5,115 ( 567 )

Other comprehensive income, net of tax ( 780 ) 2,983 5,115

Comprehensive income $ 6,140 $ 8,715 $ 11,430

The accompanying notes are an integral part of these consolidated financial statements.

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Lockheed Martin Corporation

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Contract liabilities 9,190 8,488

Current maturities of long-term debt 168 118

Other current liabilities 2,134 2,089

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The accompanying notes are an integral part of these consolidated financial statements.

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Lockheed Martin Corporation

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Stock-based compensation 265 238 227

Equity method investment impairment — — 128

Tax resolution related to former IS&GS business — — 55

Deferred income taxes ( 498 ) ( 757 ) ( 183 )

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The accompanying notes are an integral part of these consolidated financial statements.

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Lockheed Martin Corporation

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Other comprehensive loss, net of tax — — — 5,115 5,115 — 5,115

— — — ( 567 ) ( 567 ) — ( 567 )

Repurchases of common stock ( 9 ) ( 671 ) ( 3,407 ) — ( 4,087 ) — ( 4,087 )

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Stock-based awards, ESOP activity and other 1 544 — — 545 — 545

2 477 — — 479 — 479

Net decrease in noncontrolling interests in subsidiary — — — — — ( 23 ) ( 23 )

— — — — — ( 21 ) ( 21 )

Balance at December 31, 2021 $ 271 $ 94 $ 21,600 $ ( 11,006 ) $ 10,959 $ — $ 10,959

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Stock-based awards, ESOP activity and other 1 501 — — 502 — 502

1 544 — — 545 — 545

Net decrease in noncontrolling interests in subsidiary

— — — — — ( 23 ) ( 23 )

Balance at December 31, 2022 $ 254 $ 92 $ 16,943 $ ( 8,023 ) $ 9,266 $ — $ 9,266

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Stock-based awards, ESOP activity and other 1 479 — — 480 — 480

1 501 — — 502 — 502

Balance at December 31, 2023 $ 240 $ — $ 15,398 $ ( 8,803 ) $ 6,835 $ — $ 6,835

The accompanying notes are an integral part of these consolidated financial statements.

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Lockheed Martin Corporation

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Aeronautics, MFC, RMS and Space.

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.

Basis of presentation – These consolidated financial statements include the accounts of subsidiaries we control and variable interest entities if we are the primary beneficiary.

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We classify all other assets and liabilities based on whether the asset will be realized or the liability will be paid within one year.

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

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

This change has no impact on our consolidated operating results.

Management believes this updated presentation better aligns with how the business is viewed and managed and will provide better insights into business segment performance.

This change has been applied to the amounts in this Form 10-K, including amounts for 2022 and 2021.

See “Note 3 – Information on Business Segments” for further information regarding the impact of this change on our current and prior period segment operating profit.

Use of estimates – We prepare our consolidated financial statements in conformity with U.S.

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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

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target costs (i.e., incentive based on cost) or reimbursement of costs plus an incentive to exceed stated performance targets (i.e., incentive based on performance).

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., 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.

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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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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.

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.

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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

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contract and may affect the profit booking rate.

All of the estimates 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.

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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and losses on sales of certain assets.

Our consolidated net profit booking rate adjustments increased segment operating profit by approximately $ 1.8 billion in 2022, $ 2.0 billion in 2021 and $ 1.8 billion in 2020.

These adjustments increased net earnings by approximately $ 1.4 billion ($ 5.40 per share) in 2022 and $ 1.6 billion ($ 5.81 per share) in 2021 and $ 1.5 billion ($ 5.33 per share) in 2020.

We recognized net sales from performance obligations satisfied in prior periods of approximately $ 2.0 billion in both 2022 and 2020, and $ 2.2 billion in 2021, which primarily relate to changes in profit booking rates that impacted revenue.

Our consolidated net profit booking rate adjustments increased net sales by $ 1.6 billion in 2023, $ 2.0 billion in 2022, and $ 2.2 billion in 2021.

These adjustments increased segment operating profit by approximately $ 1.6 billion ($ 1.3 billion, or $ 4.98 per share, after-tax) in 2023, $ 1.8 billion ($ 1.4 billion, or $ 5.40 per share, after-tax) in 2022 and $ 2.0 billion ($ 1.6 billion, or $ 5.81 per share, after-tax) in 2021.

We have various development programs for new and upgraded products, services, and related technologies which have complex design and technical challenges.

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We have experienced performance issues on a classified fixed-price incentive fee contract that involves highly complex design and systems integration at our Aeronautics business segment and have periodically recognized reach-forward losses.

We continue to monitor the technical requirements, remaining work, schedule, and estimated costs to complete the program.

During the fourth quarter of 2022, we revised our estimated costs to complete the program by reviewing the design and system integration requirements, remaining work, and schedule and recorded an additional charge of approximately $ 20 million.

Based on this and the revised schedule, which was agreed to in 2021, cumulative losses were approximately $ 270 million as of December 31, 2022.

We will continue to monitor our performance, any future changes in scope, and estimated costs to complete the program and may have to record additional losses in future periods if we experience further performance issues, increases in scope, or cost growth, which could be material to our financial results.

In addition, we and our industry team will incur advanced procurement costs (also referred to as pre-contract costs) in order to enhance our ability to achieve the revised schedule and certain milestones.

As of December 31, 2023, cumulative losses remained at approximately $ 270 million.

We will continue to monitor the technical requirements and our performance, the remaining work and any future changes in scope or schedule, and estimated costs to complete the program and may have to record additional losses in future periods if we experience further performance issues, increases in scope, or cost growth, which could be material to our financial results.

In addition, we and our industry team will continue to incur advanced procurement costs (also referred to as pre-contract costs) in order to enhance our ability to achieve the schedule and certain milestones.

We will monitor the recoverability of pre-contract costs, which could be impacted by the customer’s decision regarding future phases of the program.

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As of December 31, 2023, cumulative losses remained at approximately $ 280 million.

We will continue to monitor our performance, any future changes in scope, and estimated costs to complete the program and may have to record additional losses in future

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periods if we experience further performance issues, increases in scope, or cost growth.

However, based on the losses previously recorded and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional losses, if any, would be material to our financial results or financial condition.

However, based on the losses previously recorded, the near completion status of the program, and our current estimate of the sales and costs to complete the

program, at this time we do not anticipate that additional losses, if any, would be material to our financial results or financial condition.

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

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

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

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

Such assets are recovered based on flight hours.

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

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

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

As of December 31, 2023, cumulative losses remained unchanged.

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.

In 2020, the U.S.

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

As of December 31, 2023, we have recorded insignificant losses related to development work for the program.

The TUHP contracts may be negotiated to be restructured or terminated, either in whole or in part and as a result, we could be at risk of recording significant reach-forward losses in future periods.

Additionally, we could elect to pursue other relief or remedies, which could result in a further reduction in sales, the imposition of penalties or assessment of damages, and increased unrecoverable costs, which could be material to our financial results.

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

We are currently performing on a phase which is primarily structured as cost-type.

Additional phases are primarily fixed price and are not currently able to be awarded.

If the additional phases are awarded at later dates, some of which could be within the next twelve months, we expect that those phases would be performed at a loss.

As of December 31, 2023, cumulative losses recognized were approximately $ 45 million.

We will continue to monitor the circumstances on the program and we may be required to recognize a reach-forward loss related to any additional phases at such time that we determine it is probable that they will be awarded.

Any such losses could be material to our financial results.

Research and development and similar costs – We conduct research and development (R&D) activities using our own funds (referred to as company-funded R&D or independent research and development (IR&D)) and under contractual arrangements with our customers (referred to as customer-funded R&D) to enhance existing products and services and to develop future technologies.

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We record interest and penalties related to income taxes as a component of income tax expense on our consolidated statements of earnings.

Interest and penalties were not material during 2022, 2021 or 2020.

In accordance with the regulations that govern cost accounting requirements for government contracts, current state and local income and franchise taxes are generally considered allowable and allocable costs and, consistent with industry practice, are recorded in operating costs and expenses.

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There were no significant impairment losses related to our receivables in 2023, 2022 or 2021.

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Contract assets – Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer.

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Contract assets are classified as current based on our contract operating cycle, and include amounts that may be billed and collected beyond one year due to the long-cycle nature of our contracts.

Contract liabilities – Contract liabilities include advance payments and billings in excess of revenue recognized.

Contract liabilities are classified as current based on our contract operating cycle and reported on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.

Inventories – We record inventories at the lower of cost or estimated net realizable value.

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If events or changes in circumstances indicate that pre-contract costs are no longer recoverable or the utility of our inventories have diminished through damage, deterioration, obsolescence, changes in price or other causes, a loss is recognized in the period in which it occurs.

Contract liabilities – Contract liabilities include advance payments and billings in excess of revenue recognized.

Contract liabilities are classified as current based on our contract operating cycle and reported on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.

Property, plant and equipment – Property, plant and equipment are initially recorded at cost.

The cost of plant and equipment are depreciated generally using accelerated methods during the first half of the estimated useful lives of the assets and the straight-line method thereafter.

The cost of plant and equipment are depreciated generally using accelerated methods during the first half of the estimated useful lives of the assets

and the straight-line method thereafter.

The estimated useful lives of our plant and equipment generally range from 10 to 40 years for buildings and five to 15 years for machinery and equipment.

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The amounts capitalized are included in other noncurrent assets on our consolidated balance sheets and are amortized on a straight-line basis over the estimated useful life of the resulting software, which ranges from two to 15 years.

As of December 31, 2022 and 2021, capitalized software totaled $ 919 million and $ 777 million, net of accumulated amortization of $ 2.6 billion and $ 2.3 billion.

As of December 31, 2023 and 2022, capitalized software totaled $ 1.4 billion and $ 919 million, net of accumulated amortization of $ 2.8 billion and $ 2.6 billion.

No amortization expense is recorded until the software is ready for its intended use.

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Gains and losses on these investments are included in other unallocated, net within cost of sales on our consolidated statements of earnings.

We make investments in certain companies that we believe are advancing or developing new technologies applicable to our business.

These investments may be in the form of common or preferred stock, warrants, convertible debt securities or investments in funds.

Most of the investments are in equity securities without readily determinable fair values, which are measured initially at cost and are then adjusted to fair value only if there is an observable price change or reduced for impairment, if applicable.

Investments with quoted market prices in active markets (Level 1) are recorded at fair value at the

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end of each reporting period.

The carrying amounts of these were $ 589 million and $ 577 million at December 31, 2022 and December 31, 2021 and are included on our consolidated balance sheets within other assets, both current and noncurrent.

During 2022, we recorded $ 114 million ($ 86 million, or $ 0.33 per share, after-tax) of net losses, compared to net gains of $ 265 million ($ 199 million, or $ 0.72 per share, after-tax) during 2021, due to changes in fair value and/or sales of investments which are reflected in the other non-operating income, net account on our consolidated statements of earnings.

We make investments in companies that we believe are advancing or developing new technologies applicable to our business.

These investments are primarily in early-stage companies and may be in the form of common or preferred stock, warrants, convertible debt securities, investments in funds or equity method investments.

Most of these investments are in equity securities without readily determinable fair values (privately held securities), which are measured initially at cost and are then adjusted to fair value only if there is an observable price change or reduced for impairment, if applicable.

The carrying amounts of the investments were $ 581 million and $ 589 million at December 31, 2023 and December 31, 2022 and are included on our consolidated balance sheets within other assets, both current and noncurrent.

Changes in fair value and/or sales of investments are reflected in the other non-operating income, net account on our consolidated statements of earnings.

During 2023 and 2022, we recorded net losses of $ 64 million ($ 48 million, or $ 0.19 per share, after-tax) and $ 114 million ($ 86 million, or $ 0.33 per share, after-tax).

During 2021, we recorded net gains of $ 265 million ($ 199 million, or $ 0.72 per share, after-tax).

Equity method investments – Investments where we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other noncurrent assets on our consolidated balance sheets.

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Our share of net earnings related to our equity method investees was $ 40 million in 2023, $ 114 million in 2022 and $ 97 million in 2021, of which approximately $ 20 million, $ 100 million and $ 65 million was included in our Space business segment operating profit.

In July 2020, we entered into an agreement to sell our ownership interest in Advanced Military Maintenance, Repair and Overhaul Center (AMMROC) to our joint venture partner for $ 307 million.

As a result, we adjusted the carrying value of our investment to the selling price of $ 307 million, which resulted in the recognition of a noncash impairment charge of $ 128 million ($ 96 million, or $ 0.34 per share, after-tax) in our results of operations disclosed in 2020.

Goodwill and Intangible Assets – The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition.

Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses.

Intangible assets from acquired businesses are recognized at fair value on the acquisition date and consist of customer programs, trademarks, customer relationships, technology and other intangible assets.

Customer programs include values assigned to major programs of acquired businesses and represent the aggregate value associated with the customer relationships, contracts, technology and trademarks underlying the associated program.

Intangible assets are amortized over a period of expected cash flows used to measure fair value, which typically ranges from five to 20 years.

We perform an impairment test of our goodwill at least annually in the fourth quarter or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may be impaired.

Such events or changes in circumstances may include a significant deterioration in overall economic conditions, changes in the business climate of our industry, a decline in our market capitalization, operating performance indicators, competition, reorganizations of our business, U.S.

Government budget restrictions or the disposal of all or a portion of a reporting unit.

Our goodwill has been allocated to and is tested for impairment at a level referred to as the reporting unit, which is typically a level below our business segments.

The level at which we test goodwill for impairment requires us to determine whether the operations below the business segment constitute a self-sustaining business for which discrete financial information is available and segment management regularly reviews the operating results.

We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment.

Goodwill and Intangible Assets – We perform an impairment test of our goodwill at least annually in the fourth quarter or more frequently whenever events or changes in circumstances indicate the carrying value of goodwill may be impaired.

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

For selected reporting units where we use the qualitative approach, we perform a qualitative evaluation of events and circumstances impacting the reporting unit to determine the likelihood of goodwill impairment.

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However, for certain reporting units we may perform a quantitative impairment test every year.

For the quantitative impairment test we compare the fair value of a reporting unit to its carrying value, including goodwill.

To perform the quantitative impairment test we compare the fair value of a reporting unit to its carrying value, including goodwill.

If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired.

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We generally estimate the fair value of each reporting unit using a combination of a discounted cash flow (DCF) analysis and market-based valuation methodologies such as comparable public company trading values and values observed in recent business acquisitions.

Determining fair value requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates, discount rates and relevant comparable public company earnings multiples and relevant transaction multiples.

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.

The discount rates utilized in the DCF analysis are

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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.

The carrying value of each reporting unit includes the assets and liabilities employed in its operations, goodwill and allocations of certain assets and liabilities held at the business segment and corporate levels.

During the fourth quarters of 2022, 2021 and 2020, we performed our annual goodwill impairment test for each of our reporting units.

The results of our annual impairment tests of goodwill indicated that no impairment existed.

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

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.

Finite-lived intangibles are amortized to expense over the 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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The funded status under the Employee Retirement Income Security Act of 1974 (ERISA), as amended, is calculated on a different basis than under GAAP.

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Postemployment plans – We record a liability for postemployment benefits, such as severance or job training, typically when payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated.

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Changes in the fair value of the derivatives that are not highly effective, if any, are immediately recognized in earnings.

Recent Accounting Pronouncements

Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No.

2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which requires a public entity to disclose significant segment expenses and other segment items on an annual and interim basis and provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually.

Additionally, it requires a public entity to disclose the title and position of the Chief Operating Decision Maker (CODM).

The ASU does not change how a public entity identifies its operating segments, aggregates them, or applies the quantitative thresholds to determine its reportable segments.

The new standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

A public entity should apply the amendments in this ASU retrospectively to all prior periods presented in the financial statements.

We expect this ASU to only impact our disclosures with no impacts to our results of operations, cash flows and financial condition.

Income Taxes (Topic 740):

Improvements to Income Tax Disclosures

In December 2023, the FASB issued ASU No.

2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures, which focuses on the rate reconciliation and income taxes paid.

2023-09 requires a public business entity (PBE) to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold.

In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received.

For PBEs, the new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted.

An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all period presented.

We expect this ASU to only impact our disclosures with no impacts to our results of operations, cash flows, and financial condition.

Note 2 – Earnings Per Share

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and energy management solutions.

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• Rotary and Mission Systems – 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.

• Rotary and Mission Systems – 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.

• Space – Engaged in the research and design, development, engineering and production of satellites, space transportation systems, and strategic, advanced strike, and defensive systems.

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Selected Financial Data by Business Segment

Net sales of our business segments in the following tables exclude intersegment sales as these activities are eliminated in consolidation and thus are 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.

Summary Operating Results

As discussed in “Note 1 – Organization and Significant Accounting Policies”, effective January 1, 2023, we no longer consider amortization expense related to purchased intangible assets when evaluating the operating performance of our business segments.

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

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

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

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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

Total consolidated operating profit $ 8,507 $ 8,348 $ 9,123

(a) Severance and other charges in 2022 include $ 100 million ($ 79 million, or $ 0.31 per share, after-tax) charge related to actions at our RMS business segment, which include severance costs for reduction of positions and asset impairment charges;

$ 36 million ($ 28 million, or $ 0.10 per share, after-tax) charge during 2021 associated with plans to close and consolidate certain facilities and reduce total workforce within our RMS business segment;

and $ 27 million ($ 21 million, or $ 0.08 per share, after-tax) charge during 2020 related to the planned elimination of certain positions primarily at our corporate functions.

(b) Other, net in 2020 includes a noncash impairment charge of $ 128 million ($ 96 million, or $ 0.34 per share, after-tax) for our investment in the international equity method investee, AMMROC.

(See “Note 1 – Organization and Significant Accounting Policies”).

(a) Severance and other charges include severance and other charges totaling $ 92 million ($ 73 million, or $ 0.30 per share, after-tax) associated with severance costs for the planned reduction of certain positions across the corporation and asset impairment charges in 2023;

$ 100 million ($ 79 million, or $ 0.31 per share, after-tax) charge related to actions at our RMS business segment, which include severance costs for reduction of positions and asset impairment charges in 2022;

and $ 36 million ($ 28 million, or $ 0.10 per share, after-tax) charge associated with plans to close and consolidate certain facilities and reduce total workforce within our RMS business segment in 2021.

Unallocated Items

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.

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

Government under the applicable U.S.

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trust for deferred compensation plans, retiree benefits, significant severance actions, significant asset impairments, gains or losses from divestitures, and other miscellaneous corporate activities.

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, stock-based compensation expense, changes in the fair value of assets and liabilities for deferred compensation plans, retiree benefits, significant severance charges, significant asset impairments, gains or losses from divestitures, intangible asset amortization expense, and other miscellaneous corporate activities.

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

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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.

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):

2022 2021 2020

Total FAS (expense) income and CAS cost

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

CAS pension cost 1,796 2,066 1,977

Total FAS/CAS pension adjustment $ 738 $ 668 $ 2,095

Service and non-service cost reconciliation

FAS pension service cost $ ( 87 ) $ ( 106 ) $ ( 101 )

CAS pension cost 1,796 2,066 1,977

Total FAS/CAS pension operating adjustment 1,709 1,960 1,876

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

Total FAS/CAS pension adjustment $ 738 $ 668 $ 2,095

The total FAS/CAS pension adjustment in 2022 reflects a noncash, non-operating pension settlement charge of $ 1.5 billion ($ 1.2 billion, or $ 4.33 per share, after-tax) recognized in connection with 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.

The total FAS/CAS pension adjustment in 2021 reflects a noncash, non-operating pension settlement charge of $ 1.7 billion ($ 1.3 billion, or $ 4.72 per share, after-tax) in connection with the transfer of $ 4.9 billion of our 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.

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.

Intersegment Sales

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Total intersegment sales $ 3,474 $ 3,187 $ 3,092

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Disaggregation of Net Sales

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Total net sales $ 26,987 $ 11,317 $ 16,148 $ 11,532 $ 65,984

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Aeronautics MFC RMS Space Total

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Our Aeronautics business segment includes our largest program, the F-35 Lightning II Joint Strike Fighter, an international multi-role, multi-variant, stealth fighter aircraft.

Net sales for the F-35 program represented approximately 27 % of our consolidated net sales during both 2022 and 2021 and 28 % during 2020.

Capital Expenditures, PP&E Depreciation and Software Amortization, and Amortization of Purchased Intangibles

Net sales for the F-35 program represented approximately 26 % of our consolidated net sales during 2023 and 27 % during both 2022 and 2021.

Capital Expenditures and PP&E Depreciation and Software Amortization

2023 2022 2021

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Total capital expenditures $ 1,691 $ 1,670 $ 1,522

PP&E depreciation and software amortization (a)

PP&E depreciation and software amortization

Aeronautics $ 416 $ 383 $ 348

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Total business segment depreciation and amortization 1,032 989 956

Corporate activities 167 123 109

Corporate activities (a)

Total depreciation and amortization $ 1,430 $ 1,404 $ 1,364

Amortization of purchased intangibles

Aeronautics $ 1 $ 1 $ —

Missiles and Fire Control 2 2 2

Rotary and Mission Systems 233 232 232

Space 12 50 37

Total amortization of purchased intangibles $ 248 $ 285 $ 271

(a) Excludes amortization of purchased intangibles.

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(a) Includes amortization of purchased intangibles.

Total assets for each of our business segments were as follows (in millions):

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Corporate assets (a)

10,698 11,011

Total assets $ 52,456 $ 52,880

(a) Corporate assets primarily include cash and cash equivalents, deferred income taxes, assets for the portion of environmental costs that are probable of future recovery, property, plant and equipment, investments held in a separate trust for deferred compensation plans and other marketable investments.

(a) Corporate assets primarily include cash and cash equivalents, deferred income taxes, assets for the portion of environmental costs that are probable of future recovery, property, plant and equipment used in our corporate operations, assets held in a trust for deferred compensation plans, and other marketable investments.

Note 4 – Receivables, net, Contract Assets and Contract Liabilities

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government customers totaling approximately $ 50.5 billion and $ 47.0 billion as of December 31, 2023 and 2022.

Contract assets increased $ 1.7 billion during 2022, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during 2022 for which we have not yet billed our customers (primarily on the F-35 program at Aeronautics).

Contract assets increased $ 865 million during 2023, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during 2023 for which we have not yet billed our customers (primarily on the F-35 program at Aeronautics).

There were no significant credit or impairment losses related to our contract assets during 2023 and 2022.

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Costs incurred to fulfill a contract in advance of the contract being awarded are included in inventories as work-in-process if we determine that those costs relate directly to a contract or to an anticipated contract that we can specifically identify and determine that contract award is probable, the costs generate or enhance resources that will be used in satisfying performance obligations, and the costs are recoverable (referred to as pre-contract costs).

Pre-contract costs that are initially capitalized in inventory are generally recognized as cost of sales consistent with the transfer of products and services to the customer upon the

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receipt of the anticipated contract.

These advanced procurement costs are generally incurred in order to enhance our ability to achieve schedule and certain customer milestones.

Pre-contract costs that are initially

capitalized in inventory are generally recognized as cost of sales consistent with the transfer of products and services to the customer upon the receipt of the anticipated contract.

All other pre-contract costs, including start-up costs, are expensed as incurred.

As of December 31, 2023 and 2022, $ 989 million and $ 791 million of pre-contract costs were included in inventories.

The increase in pre-contract costs as of December 31, 2023 is primarily driven by our Aeronautics business segment (primarily classified contracts).

Note 6 – Property, Plant and Equipment, net

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Balance at December 31, 2022 196 2,083 6,726 1,775 10,780

Acquisitions — — 3 — 3

Other — 3 15 1 19

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and $ 148 million in 2028.

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Note 8 – Leases

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The weighted average remaining lease term and discount rate for our operating leases were approximately 7 years and 2.9 % at December 31, 2023.

We recognized operating lease expense of $ 275 million in both 2022 and 2021 and $ 223 million in 2020.

We recognized operating lease expense of $ 273 million in 2023 and $ 275 million in both 2022 and 2021.

In addition, we made cash payments of $ 267 million for operating leases during 2023, which are included in cash flows from operating activities in our consolidated statement of cash flows.

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As a result, the impact of certain transactions on our operating profit and of other matters presented in these consolidated financial statements is disclosed net of state income taxes.

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A reconciliation of the U.S.

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Income tax expense $ 1,178 14.5 % $ 948 14.2 % $ 1,235 16.4 %

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

The rate for all years benefited from tax deductions for foreign derived intangible income, dividends paid to our defined contribution plans with an employee stock ownership plan feature, and employee equity awards.

The 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.

Uncertain Tax Positions

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Balance at December 31 $ 146 $ 1,622 $ 69

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

For the year ended 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 resulting from the Tax Cuts and Jobs Act of 2017’s elimination of the option for taxpayers to deduct research and development expenditures immediately in the year incurred and instead requiring taxpayers to amortize such expenditures over five years.

It is reasonably possible that within the next twelve months, our liabilities associated with uncertain tax positions may increase by approximately $ 1.3 billion related to this provision.

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

For the year ended December 31, 2023, our liabilities associated with uncertain tax positions decreased to $ 146 million with a corresponding decrease to net deferred tax assets primarily resulting from our analysis of IRS Notice 2023-63 released on September 8, 2023 confirming that certain expenditures incurred in the performance of cost-type contracts are not subject to capitalization.

The reduction in uncertain tax positions had an immaterial impact to our effective tax rate.

It is reasonably possible that within the next twelve months, our liabilities associated with uncertain tax positions may increase by an immaterial amount.

This uncertain tax position will have an immaterial impact to our effective tax rate if recognized.

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As of December 31, 2023 and 2022, our accrued interest and penalties related to unrecognized tax benefits were not material.

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Deferred Income Taxes

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Property, plant and equipment 415 503

Exchanged debt securities and other (a)

Deferred tax liabilities 1,506 1,557

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We withdrew from the IRS Compliance Assurance Process (CAP) program in 2022 starting with our 2021 tax return.

Examinations of the years 2018 to 2020 remain under IRS review under the CAP program.

Examinations of the years 2018 to 2020 remain under IRS review.

We are also subject to taxation in various states and foreign jurisdictions including Australia, Canada, India, Italy, Japan, Poland, and the United Kingdom.

We are under, or may be subject to, audit or examination and additional assessments by the relevant authorities.

Our federal and foreign income tax payments, net of refunds, were $ 1.6 billion in 2022 and $ 1.4 billion in 2021 and 2020.

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Our federal and foreign income tax payments, net of refunds, were $ 1.8 billion in 2023, $ 1.6 billion in 2022 and $ 1.4 billion in 2021.

Note 10 – Debt

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4.30 % due 2062

5.90 % due 2063

Other notes with rates from 4.85 % to 8.50 %, due 2024 to 2041

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The Revolving Credit Agreement consists of a $ 3.0 billion five-year unsecured revolving credit facility, with the option to increase the commitments under the credit facility by an additional amount of up to $ 500 million (for an aggregate amount of up to $ 3.5 billion), subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions.

The Revolving Credit Agreement matures on August 24, 2027.

However, we may request that commitments be renewed for additional one-year periods under certain circumstances as set forth in the Revolving Credit Agreement.

Effectiv e August 24, 2023, we extended the expiration date of the Revolving Credit Agreement from August 24, 2027 to August 24, 2028.

The Revolving Credit Agreement is available for any of our lawful corporate purposes, including supporting commercial paper borrowings.

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

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amount reported at the end of the period.

There were no commercial paper borrowings outstanding as of December 31, 2022 and we did not issue or repay any during 2022.

There were no commercial paper borrowings outstanding as of December 31, 2023.

We may, as conditions warrant, issue commercial paper backed by our revolving credit agreement to manage the timing of cash flows.

Long Term Debt

On May 25, 2023, we issued a total of $ 2.0 billion of senior unsecured notes, consisting of $ 500 million aggregate principal amount of 4.45 % Notes due May 15, 2028 (the “2028 Notes”), $ 850 million aggregate principal amount of 4.75 % Notes due February 15, 2034 (the “2034 Notes”) and $ 650 million aggregate principal amount of 5.20 % Notes due February 15, 2055 (the “2055 Notes” and, together with the 2028 Notes and 2034 Notes, the “Notes”) in a registered public offering.

Net proceeds of $ 1,975 million were received from the offering after deducting pricing discounts and debt issuance costs, which are being amortized and recorded as interest expense over the term of the Notes.

We will pay interest on the 2028 Notes semi-annually in arrears on May 15 and November 15 with the first payment to be made on November 15, 2023.

Additionally, we will pay interest on the 2034 Notes and 2055 Notes on February 15 and August 15 of each year with the first payment made on August 15, 2023.

We may, at our option, redeem the 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 Notes to be redeemed or an applicable make-whole amount, plus accrued and unpaid interest to the date of redemption.

The Notes rank equally in right of payment with all of our existing unsecured and unsubordinated indebtedness.

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”) in a registered public offering.

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 will pay interest on the 2025 Notes semi-annually in arrears on April 15 and October 15 of each year with the first payment made 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 with the first payment made 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 with the first payment made 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 October 2022 Notes to be redeemed or an applicable “make-whole” amount, plus accrued and unpaid interest to the date of redemption.

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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.

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

We made interest payments of approximately $ 832 million, $ 573 million and $ 543 million during the years ended December 31, 2023, 2022 and 2021.

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defined benefit pension plans provide for benefits in excess of qualified plan limits imposed by federal tax law (referred to as nonqualified plans).

Salaried employees hired after December 31, 2005 are not eligible to participate in our qualified defined benefit pension plans, but are eligible to participate in a qualified defined contribution plan in addition to our other retirement savings plans.

They also have the ability to participate in our retiree medical plans, but we do not subsidize the cost of their participation in those plans as we do with employees hired before January 1, 2006.

Over the last few years, we have negotiated similar changes with various labor organizations such that new union represented employees do not participate in our defined benefit pension

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Our defined benefit pension plans for salaried employees were fully frozen effective January 1, 2020, at which time such employees no longer earn additional benefits under the defined benefit pension plans and were transitioned to an enhanced defined contribution retirement savings plan.

Over the last few years, we have negotiated similar changes with various labor organizations such that new union represented employees do not participate in our defined benefit pension plans.

We continue to take actions to mitigate the effect of our defined benefit pension plans on our financial results by reducing the volatility and size of our net pension obligations.

During the fourth quarter of 2023, a voluntary offering was made to certain former employees who had not yet commenced receiving their vested benefit payments.

Total settlement payments of $ 414 million for approximately 6,500 participants were made from the defined benefit pension trust with a similar corresponding reduction in benefit obligation.

During the second quarter of 2022, we purchased group annuity contracts 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.

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 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 (AOCL) account within stockholders’ equity.

During the third quarter of 2021, we purchased group annuity contracts 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, and in connection recognized a noncash pension settlement charge of $ 1.7 billion ($ 1.3 billion, or $ 4.72 per share, after tax) in 2021.

These group annuity contracts were purchased using assets from Lockheed Martin’s master retirement trust and no additional funding contributions were required.

These transactions had no impact on the amount, timing, or form of the monthly retirement benefit payments to the affected retirees and beneficiaries;

and as a result of these transactions, we were relieved of all responsibility for the pension obligations and the insurance company is now required to pay and administer the retirement benefits.

In connection with this transaction, we recognized a noncash, non-operating pension settlement charge of $ 1.5 billion for the affected 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 (AOCL) account within stockholders’ equity.

Similarly, during the third quarter of 2021, we purchased group annuity contracts 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, and in connection recognized a noncash pension settlement charge of $ 1.7 billion.

Qualified Defined Benefit Pension Plans and Retiree Medical and Life Insurance Plans

FAS (Expense) Income

The pretax FAS (expense) income related to our qualified defined benefit pension plans and retiree medical and life insurance plans included the following (in millions):

FAS Income (Expense)

The pretax FAS income (expense) related to our qualified defined benefit pension plans and retiree medical and life insurance plans included the following (in millions):

Qualified Defined

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Settlement charge — ( 1,470 ) ( 1,665 ) — — —

Non-service FAS (expense) income ( 971 ) ( 1,292 ) 219 106 51 22

Total FAS (expense) income $ ( 1,058 ) $ ( 1,398 ) $ 118 $ 97 $ 38 $ 9

We record the service cost component of FAS (expense) income for our qualified defined benefit plans and retiree medical and life insurance plans in the cost of sales accounts;

the non-service components of our FAS (expense) income for our qualified defined benefit pension plans in the non-service FAS pension (expense) income account;

and the non-service components of our FAS income for our retiree medical and life insurance plans as part of the other non-operating (expense) income, net account on our consolidated statements of earnings.

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Non-service FAS income (expense) 443 ( 971 ) ( 1,292 ) 56 106 51

Total FAS income (expense) $ 378 $ ( 1,058 ) $ ( 1,398 ) $ 51 $ 97 $ 38

We record the service cost component of FAS income (expense) for our qualified defined benefit pension plans and retiree medical and life insurance plans in the cost of sales accounts;

the non-service components of our FAS income (expense) for our qualified defined benefit pension plans in the non-service FAS pension income (expense) account;

and the non-service components of our FAS income (expense) for our retiree medical and life insurance plans as part of the other non-operating income (expense), net account on our consolidated statements of earnings.

Funded Status

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Interest cost 1,459 1,289 68 49

Actuarial (gains) losses (b)

Actuarial losses (gains) (b)

731 ( 10,270 ) 27 ( 396 )

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Benefits paid

( 1,586 ) ( 1,732 ) ( 192 ) ( 207 )

Medicare Part D subsidy — — 1 3

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Benefits paid

( 1,586 ) ( 1,732 ) ( 192 ) ( 207 )

Company contributions — — 1 11

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(Unfunded) funded status of the plans $ ( 6,159 ) $ ( 5,470 ) $ 387 $ 297

(a) Benefit obligation balances represent the projected benefit obligation for our qualified defined benefit pension plans and the accumulated benefit obligation for our retiree medical and life insurance plans.

(b) Actuarial gains for our qualified defined benefit pension plans in 2022 primarily reflect an increase in the discount rate from 2.875 % at December 31, 2021 to 5.25 % at December 31, 2022, which decreased benefit obligations by $ 10.2 billion.

(a) Benefit obligation balances represent the projected benefit obligation for our qualified defined benefit pension plans, which is approximately equal to accumulated benefit obligation, and accumulated benefit obligation for our retiree medical and life insurance plans.

(b) Actuarial losses for our qualified defined benefit pension plans in 2023 primarily reflect a decrease in the discount rate from 5.25 % at December 31, 2022 to 5.00 % at December 31, 2023, which increased benefit obligations by approximately $ 765 million.

Actuarial losses for our retiree medical and life insurance plans in 2023 reflect a decrease in the discount rate from 5.25 % at December 31, 2022 to 5.00 % at December 31, 2023.

Actuarial gains for our qualified defined benefit pension plans in 2022 primarily reflect an increase in the discount rate from 2.875 % at December 31, 2021 to 5.25 % at December 31, 2022, which decreased benefit obligations by $ 10.2 billion.

Actuarial gains for our retiree medical and life insurance plans in 2022 reflect an increase in the discount rate from 2.750 % at December 31, 2021 to 5.25 % at December 31, 2022, which decreased benefit obligations by $ 335 million.

Actuarial gains for our qualified defined benefit pension plans in 2021 primarily reflect an increase in the discount rate from 2.50 % at December 31, 2020 to 2.875 % at December 31, 2021, which decreased benefit obligations by $ 2.3 billion, partially offset by an increase of approximately $ 250 million due to changes in longevity assumptions and participant data.

Actuarial gains for our retiree medical and life insurance plans in 2021 reflect an increase in the discount rate from 2.375 % at December 31, 2020 to 2.75 % at December 31, 2021, which decreased benefit obligations by $ 70 million, and $ 282 million due to changes in plan participation assumptions and claims data.

(c) Qualified defined benefit pension plan settlements in 2022 and 2021 represent the transfer of gross defined benefit pension obligations and related plan assets to insurance companies pursuant to group annuity contracts purchased in the second quarter of 2022 and third quarter of 2021 as described above.

(d) Actual return on plan assets for our qualified defined benefit pension plans and retiree medical and life insurance plans was approximately ( 18 )% in 2022 and 10.5 % in 2021.

(c) Qualified defined benefit pension plans settlements in 2023 include $ 414 million in the form of lump-sum settlement payments to former employees who had not commenced receiving their vested benefit payments.

The settlement payments had no impact on year 2023 FAS pension income.

Qualified defined benefit pension plan settlements in 2022 represent the transfer of gross defined benefit pension obligations and related plan assets to insurance companies pursuant to group annuity contracts purchased in the second quarter of 2022 as described above.

(d) Actual return on plan assets for our qualified defined benefit pension plans was approximately 7 % in 2023 and ( 18 )% in 2022.

We are required to recognize the net funded status of each postretirement benefit plan on a standalone basis as either an asset or a liability on our consolidated balance sheet.

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Each year we measure the fair value of each plan’s assets and benefit obligation on December 31, consistent with our fiscal year end.

The fair value of each plan’s benefit obligation reflects assumptions in effect as of the measurement date as described below.

The fair value of each plan’s benefit obligation reflects assumptions in effect

as of the measurement date as described below.

For certain of our qualified defined benefit pension plans and retiree medical and life insurance plans the plan assets may exceed the benefit obligation, for which we recognize the net amount as an asset on our consolidated balance sheet.

Conversely, for most of our qualified defined benefit pension plans the benefit obligation exceeds plan assets, for which we recognize the net amount as a liability on our consolidated balance sheet.

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The following table provides amounts recognized on our consolidated balance sheets related to our qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):

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Net (unfunded) funded status of the plans $ ( 6,159 ) $ ( 5,470 ) $ 387 $ 297

The accumulated benefit obligation (ABO) for all qualified defined benefit pension plans was $ 28.6 billion and $ 43.4 billion at December 31, 2022 and 2021.

The ABO represents benefits accrued without assuming future compensation increases to plan participants and is approximately equal to our projected benefit obligation.

Plans where the benefit obligation was less than plan assets represent prepaid pension assets, which are included on our consolidated balance sheets in other noncurrent assets.

Plans where the obligation was in excess of plan assets represent accrued pension liabilities, which are included on our consolidated balance sheets.

Differences between the actual return and expected return on plan assets during the year, and changes in the benefit obligation for our qualified defined benefit pension plans and retiree medical and life insurance plans due to changes in the annual valuation assumptions, generate actuarial gains or losses.

Additionally, the benefit obligation for our qualified defined benefit pension plans and retiree medical and life insurance plans may increase or decrease as a result of plan amendments that affect the benefits to plan participants related to service for periods prior to the effective date of the amendment, which generates prior service costs or credits.

Actuarial gains or losses, and prior service costs or credits, are initially deferred in accumulated other comprehensive loss and subsequently amortized for each plan into (expense) or income on a straight-line basis either over the average remaining life expectancy of plan participants or over the average remaining service period of plan participants, subject to certain thresholds.

Actuarial gains or losses, and prior service costs or credits, are initially deferred in accumulated other comprehensive loss and subsequently amortized for each plan into income or (expense) on a straight-line basis either over the average remaining life expectancy of plan participants or over the average remaining service period of plan participants, subject to certain thresholds.

The following table provides the amount of actuarial gains or losses, and prior service costs or credits, recognized in accumulated other comprehensive loss related to qualified defined benefit pension plans and retiree medical and life insurance plans at December 31 (in millions):

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Accumulated other comprehensive (loss) pre-tax related to:

Net actuarial (losses) $ ( 10,287 ) $ ( 14,675 ) $ 387 $ 554

Prior service credit (cost) 339 884 ( 10 ) ( 36 )

Net actuarial (losses) gains $ ( 10,999 ) $ ( 10,287 ) $ 416 $ 387

Prior service (costs) credits ( 15 ) 339 ( 2 ) ( 10 )

$ ( 11,014 ) $ ( 9,948 ) $ 414 $ 377

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Net amount recognized in accumulated other comprehensive (loss) $ ( 8,675 ) $ ( 7,831 ) $ 327 $ 298

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The following table provides the changes recognized in accumulated other comprehensive loss, net of tax, for actuarial gains or losses and prior service costs or credits due to differences between the actual return and expected return on plan assets and changes in the fair value of the benefit obligation recognized in connection with our annual remeasurement and the amortization during the year for our qualified defined benefit pension plans, retiree medical and life insurance plans, and certain other plans (in millions):

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Year ultimate health care trend rate is reached 2038 2034 2034

(a) A pension discount rate of 4.75 %, and 2.75 %, was used for the applicable plans following the transaction and remeasurement recognized in the second quarter of 2022, and third quarter of 2021, respectively.

We lowered our expected long-term rate of return on plan assets from 7.00 % to 6.50 % in connection with the third quarter of 2021 remeasurement, applicable to all qualified defined benefit pension and retiree medical and life insurance plans as of the December 31, 2021 remeasurement.

(a) A pension discount rate of 4.75 % was used for the applicable plans following the transaction and remeasurement recognized in the second quarter of 2022.

The long-term rate of return assumption represents the expected long-term rate of earnings on the funds invested, or to be invested, to provide for the benefits included in the benefit obligations.

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

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

Our wholly-owned subsidiary, Lockheed Martin Investment Management Company (LMIMCo), has the fiduciary responsibility for making investment decisions related to the assets of our postretirement benefit plans.

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Commodities 0 - 10 %

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The following table presents the fair value of the assets of our qualified defined benefit pension plans and retiree medical and life insurance plans by asset category and their level within the fair value hierarchy (see “Note 1 – Organization and Significant Accounting Policies - Investments” for definition of these levels), which we are required to disclose even though these assets are not separately recorded on our consolidated balance sheet.

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Loan, net (c)

( 497 ) ( 497 )

(Payables) Receivables, net ( 439 ) ( 92 )

Total $ 24,515 $ 24,884

(a) Cash and cash equivalents, equity securities and fixed income securities included derivative assets and liabilities with fair values that were not material as of December 31, 2022 and 2021.

(a) Cash and cash equivalents, equity securities and fixed income securities include derivative assets and liabilities with fair values that were not material as of December 31, 2023 and 2022.

LMIMCo’s investment policies restrict the use of derivatives to either establish long or short exposures for purposes consistent with applicable investment mandate guidelines or to hedge risks to the extent of a plan’s current exposure to such risks.

Most derivative transactions are settled on a daily basis.

(b) Level 3 investments include $ 1.1 billion at December 31, 2022 and $ 1.5 billion at December 31, 2021 related to buy-in contracts.

(b) Level 3 investments include $ 1.1 billion at both December 31, 2023 and at December 31, 2022 related to buy-in contracts.

(c) The Lockheed Martin Corporation Master Retirement Trust (MRT) obtained a loan from a third-party financial institution, collateralized by private equity investments, to invest in fixed income securities.

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These securities are categorized as Level 2 if the custodian obtains corroborated quotes from a pricing vendor or categorized as Level 3 if the custodian obtains uncorroborated quotes from a broker or investment manager.

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Commingled equity funds categorized as Level 1 are traded on active national and international exchanges and are valued at their closing prices on the last trading day of the year.

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Real estate funds consist of partnerships and similar vehicles, for which the NAV is based on valuation models and periodic appraisals.

These funds typically have redemption periods between eight and 10 years.

Hedge funds consist of separate accounts and commingled funds, for which the NAV is generally based on the valuation of the underlying investments.

These funds typically have terms between eight and 10 years.

Hedge funds generally consist of separate accounts and commingled funds, for which the NAV is generally based on the valuation of the underlying investments.

Redemptions in hedge funds generally range from a minimum of one month to several months.

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We sponsor nonqualified defined benefit pension plans to provide benefits in excess of qualified plan limits imposed by federal tax law.

The gross benefit obligation for these plans was $ 1.0 billion and $ 1.3 billion as of December 31, 2022 and 2021, most of which was recorded in the other noncurrent liabilities account on our consolidated balance sheet.

The gross benefit obligation for these plans was $ 1.0 billion as of both December 31, 2023 and 2022, most of which was recorded in the other noncurrent liabilities account on our consolidated balance sheet.

We have set aside certain assets totaling $ 615 million and $ 595 million as of December 31, 2023 and 2022 in a separate trust that we expect to use to pay the benefit obligations under our nonqualified defined benefit pension plans, most of which were recorded in the other noncurrent assets account on our consolidated balance sheet.

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We recognized pretax pension expense of $ 64 million in 2023, $ 81 million in 2022 and $ 56 million in 2021 related to our nonqualified defined benefit pension plans.

The assumptions used to determine the benefit obligations and FAS expense for

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our nonqualified defined benefit pension plans are similar to the assumptions for our qualified defined benefit pension plans described above.

We also sponsor other postemployment plans and foreign benefit plans, which are accounted for similar to defined benefit pension plans.

The benefit obligations, assets, expense, and amounts recorded in accumulated other comprehensive loss for other postemployment plans and foreign benefit plans were not material to our results of operations, financial position or cash flows.

The assumptions used to determine the benefit obligations and FAS expense for our

nonqualified defined benefit pension plans are similar to the assumptions for our qualified defined benefit pension plans described above.

We also sponsor other postemployment and foreign benefit plans, which are accounted for similar to defined benefit pension plans.

The benefit obligations, assets, expense, and amounts recorded in accumulated other comprehensive loss for other postemployment and foreign benefit plans were not material to our results of operations, financial position or cash flows.

Defined Contribution Retirement Savings Plans

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For most plans, we make employer contributions to the employee accounts that comprise of a company non-elective contribution and a matching contribution.

Company contributions are automatically invested in an Employee Stock Ownership Plan (ESOP) fund, which primarily invests in shares of our common stock.

Company matching contributions are automatically invested in an Employee Stock Ownership Plan (ESOP) fund, which primarily invests in shares of our common stock.

Plan participants can transfer from the ESOP fund into any investment option provided by the respective plan.

Our contributions to defined contribution retirement savings plans were $ 1.1 billion in 2022 and 2021 and $ 984 million in 2020.

Our contributions to defined contribution retirement savings plans were $ 1.2 billion in 2023 and $ 1.1 billion in both 2022 and 2021.

Our defined contribution retirement savings plans held 26.6 million and 27.4 million shares of our common stock at December 31, 2023 and 2022.

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Repurchases of Common Stock

During 2023, we repurchased 13.4 million shares of our common stock for $ 6.0 billion pursuant to accelerated share repurchase (ASR) agreements and open market purchases.

We also retired an additional 1.5 million shares received for no additional consideration in the first quarter of 2023 upon final settlement of an ASR agreement executed in the fourth quarter of 2022.

During 2022, we repurchased 18.3 million shares of our common stock for $ 7.9 billion, including 13.9 million shares of our common stock repurchased pursuant to ASR agreements and the remainder in open market purchases.

During the fourth quarter of 2022, under the terms of an ASR agreement, we paid $ 4.0 billion and received an initial delivery of 7.0 million shares of our common stock.

We expect to receive additional shares upon final settlement, which is expected in March or April 2023.

In addition, we repurchased 4.7 million shares for $ 2.0 billion under an ASR agreement that we entered into in the first quarter of 2022.

As previously disclosed, in January 2022, we received 2.2 million shares of our common stock for no additional consideration upon final settlement of the ASR we entered into in the fourth quarter of 2021.

During 2021, we paid $ 4.1 billion to repurchase 9.4 million shares of our common stock, including 9.2 million shares of our common stock repurchased for $ 4.0 billion under an ASR agreement.

The total remaining authorization for future common share repurchases under our share repurchase program was $ 10.0 billion as of December 31, 2022, including a $ 14 billion increase to the program authorized by our Board of Directors on October 17, 2022.

The total remaining authorization for future common share repurchases under our share repurchase program was $ 10.0 billion as of December 31, 2023, including a $ 6.0 billion increase to the program authorized by our Board of Directors in October 2023.

As we repurchase our common shares, we reduce common stock for the $ 1 of par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in capital.

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

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Accumulated Other Comprehensive Loss

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Balance at December 31, 2020 $ ( 16,155 ) $ 34 $ ( 16,121 )

Other comprehensive (loss) income before reclassifications ( 1,067 ) 56 ( 1,011 )

Other comprehensive income (loss) before reclassifications 3,404 ( 85 ) 3,319

Amounts reclassified from AOCL

Pension settlement charge (b)

1,310 — 1,310

Recognition of net actuarial losses 733 — 733

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Total reclassified from AOCL 1,787 9 1,796

Total other comprehensive (loss) income ( 627 ) 60 ( 567 )

Total other comprehensive income (loss) 5,191 ( 76 ) 5,115

Balance at December 31, 2021 ( 10,964 ) ( 42 ) ( 11,006 )

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Pension settlement charge (b)

1,156 — 1,156

Recognition of net actuarial losses 337 — 337

Amortization of net prior service credits ( 268 ) — ( 268 )

Other — 44 44

Total reclassified from AOCL 1,225 44 1,269

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Balance at December 31, 2022 ( 7,866 ) ( 157 ) ( 8,023 )

Other comprehensive income (loss) before reclassifications

Other comprehensive (loss) income before reclassifications

( 689 ) 23 ( 666 )

Amounts reclassified from AOCL

Pension settlement charge (b)

1,156 — 1,156

Recognition of net actuarial losses

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Total reclassified from AOCL ( 149 ) 35 ( 114 )

Total other comprehensive income (loss) 3,098 ( 115 ) 2,983

Total other comprehensive (loss) income ( 838 ) 58 ( 780 )

Balance at December 31, 2023 $ ( 8,704 ) $ ( 99 ) $ ( 8,803 )

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(b) During 2022 and 2021, we recognized a noncash, non-operating pension settlement charge of $ 1.5 billion ($ 1.2 billion, or $ 4.33 per share, after-tax) and $ 1.7 billion ($ 1.3 billion, $ 4.72 per share, after-tax) related to the accelerated recognition of actuarial losses included in AOCL for certain defined benefit pension plans that purchased a group annuity contract from an insurance company (see “Note 11 – Postretirement Benefit Plans”).

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Note 13 – Stock-Based Compensation

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At December 31, 2023, inclusive of the shares reserved for outstanding RSUs and PSUs, we had approximately 8.4 million shares reserved for issuance under the plans.

At December 31, 2023, we had no outstanding options to purchase common stock and have not issued stock options to employees since 2012.

At December 31, 2023, approximately 6.1 million of the shares reserved for issuance remained available for grant under our stock-based compensation plans.

We issue new shares upon the exercise of stock options or when restrictions on RSUs and PSUs have been satisfied.

The exercise price of options to purchase common stock may not be less than the fair market value of our stock on the date of grant.

The minimum vesting period for restricted stock or stock units payable in stock is generally three years .

Award agreements may provide for shorter or pro-rated vesting periods or vesting following termination of employment in the case of death, disability, divestiture, retirement, change of control or layoff.

The maximum term of a stock option or any other award is 10 years.

We issue new shares when restrictions on RSUs and PSUs have been satisfied.

The minimum vesting period under our equity compensation plan for employees generally is one year , although most RSUs granted annually to executives and other key employees vest over three years .

Award agreements may provide for vesting periods between one and three years and in certain circumstances less than one year , pro-rated vesting periods or vesting following termination of employment in the case of death, disability, divestiture, retirement, change of control or layoff.

The maximum term of any award is 10 years.

During 2023, 2022 and 2021, we recorded noncash stock-based compensation expense totaling $ 265 million, $ 238 million and $ 227 million, which is included as a component of other unallocated, net on our consolidated statements of earnings.

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As of December 31, 2023, we had $ 223 million of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 1.8 years.

We received cash from the exercise of stock options totaling $ 8 million, $ 28 million and $ 41 million during 2022, 2021 and 2020.

We received zero cash from the exercise of stock options during 2023, $ 8 million and $ 28 million during 2022 and 2021.

In addition, our income tax liabilities for 2023, 2022 and 2021 were reduced by $ 78 million, $ 124 million and $ 67 million due to recognized tax benefits on stock-based compensation arrangements.

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Note 14 – Legal Proceedings, Commitments and Contingencies

We are a party to litigation and other proceedings that arise in the ordinary course of our business, including matters arising under provisions relating to the protection of the environment, and are subject to contingencies related to certain businesses we

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previously owned.

Legal Proceedings

These types of matters could result in fines, penalties, cost reimbursements or contributions, compensatory or treble damages or non-monetary sanctions or relief.

We believe the probability is remote that the outcome of each of these matters, including the legal proceedings described below, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings and cash flows in any particular interim reporting period.

We believe the probability is remote that the outcome of each of these matters, including the legal proceedings described below, will have a material adverse effect on the company as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings and cash flows in any particular interim reporting period.

Among the factors that we consider in this assessment are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim.

Our assessment of these factors may change over time as individual proceedings or claims progress.

Government contractor, we are subject to various audits and investigations by the U.S.

Government to determine whether our operations are being conducted in accordance with applicable regulatory requirements.

Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil, or criminal liabilities, including repayments, fines or penalties being imposed upon us, suspension, proposed debarment, debarment from eligibility for future U.S.

Government contracting, or suspension of export privileges.

Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S.

Government investigations often take years to complete and many result in no adverse action against us.

We also provide products and services to customers outside of the U.S., which are subject to U.S.

and foreign laws and regulations and foreign procurement policies and practices.

Our compliance with local regulations or applicable U.S.

Government regulations also may be audited or investigated.

In the normal course of business, we provide warranties to our customers associated with certain product sales.

We record estimated warranty costs in the period in which the related products are delivered.

The warranty liability is generally based on the number of months of warranty coverage remaining for the products delivered and the average historical monthly warranty payments.

Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion.

Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may have been incurred, GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made.

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Accordingly, unless otherwise indicated below in our discussion of legal proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.

Legal Proceedings

United States of America, ex rel.

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Government’s motion for partial summary judgment, finding that the Derco-SSSI agreement was a CPPC contract.

On October 17, 2023, the District Court ruled on the parties’ cross motions for summary judgment, granting some motions and denying others.

Trial on the U.S.

Government’s remaining claims is scheduled for May 6, 2024.

We believe that we have legal and factual defenses to the U.S.

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Although we continue to evaluate our liability and exposure, we do not currently believe that it is probable that we will incur a material loss.

If, contrary to our

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expectations, the U.S.

If, contrary to our expectations, the U.S.

Government prevails on the remaining issues in this matter and proves damages at or near $ 52 million and is successful in having such damages trebled, the outcome could have an adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.

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The primary damages sought by the MTA are the costs to complete the contract and potential re-procurement costs.

While we are unable to estimate the cost of another contractor to complete the contract and the costs of re-procurement, we note that our contract with the MTA had a total value of $ 323 million, of which $ 241 million was paid to us, and that the MTA is seeking damages of approximately $ 190 million.

unable to estimate the cost of another contractor to complete the contract and the costs of re-procurement, we note that our contract with the MTA had a total value of $ 323 million, of which $ 241 million was paid to us, and that the MTA is seeking damages of approximately $ 190 million.

We dispute the MTA’s allegations and are defending against them.

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We are involved in proceedings and potential proceedings relating to soil, sediment, surface water, and groundwater contamination, disposal of hazardous substances, and other environmental matters at several of our current or former facilities, facilities for which we may have contractual responsibility, and at third-party sites where we have been designated as a potentially responsible party (PRP).

A substantial portion of environmental costs will be included in our net sales and cost of sales in future periods pursuant to U.S.

Government regulations.

At the time a liability is recorded for future environmental costs, we record assets for estimated future recovery considered probable through the pricing of products and services to agencies of the U.S.

Government, regardless of the contract form (e.g., cost-reimbursable, fixed-price).

We continually evaluate the recoverability of our assets for the portion of environmental costs that are probable of future recovery by assessing, among other factors, U.S.

Government regulations, our U.S.

Government business base and contract mix, and our history of receiving reimbursement of such costs.

We include the portions of those environmental costs expected to be allocated to our non-U.S.

government contracts, or determined not to be recoverable under U.S.

Government contracts, in our cost of sales at the time the liability is established or adjusted.

At December 31, 2023 and 2022, the aggregate amount of liabilities recorded relative to environmental matters was $ 680 million and $ 696 million, most of which are recorded in other noncurrent liabilities on our consolidated balance sheets.

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In particular, the U.S.

Environmental Protection

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Agency (EPA) is considering whether to regulate hexavalent chromium at the federal level and the California State Water Resources Control Board continues to reevaluate its existing drinking water standard of 6 ppb for perchlorate.

If substantially lower standards are adopted for perchlorate in California or for hexavalent chromium at the federal level, we expect a material increase in our estimates for environmental liabilities and the related assets for the portion of the increased costs that are probable of future recovery in the pricing of our products and services for the U.S.

Environmental Protection Agency (EPA) is considering whether to regulate hexavalent chromium at the federal level, and as a result of a court decision, must regulate perchlorate at the federal level.

The California State Water Resources Control Board (SWRCB) continues to reevaluate its existing drinking water standard of 6 parts per billion (ppb) for perchlorate.

The California SWRCB has also proposed to regulate hexavalent chromium at 10 ppb, which we currently do not expect would materially increase our cleanup costs in California.

If substantially lower standards are adopted for perchlorate or for hexavalent chromium, we expect a material increase in our estimates for environmental liabilities and the related assets for the portion of the increased costs that

are probable of future recovery in the pricing of our products and services for the U.S.

The amount that would be allocable to our non-U.S.

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Letters of credit and surety bonds generally are available for draw down in the event we do not perform.

In some cases, we may guarantee the contractual performance of third parties such as joint venture partners.

We had total outstanding letters of credit, surety bonds and third-party guarantees aggregating $ 3.8 billion and $ 3.6 billion at December 31, 2022 and December 31, 2021.

We had total outstanding letters of credit and surety bonds aggregating $ 2.9 billion at both December 31, 2023 and December 31, 2022.

Third-party guarantees do not include guarantees issued on behalf of subsidiaries and other consolidated entities.

At December 31, 2022 and 2021, third-party guarantees totaled $ 904 million and $ 838 million, of which approximately 71 % and 69 % related to guarantees of contractual performance of joint ventures to which we currently are or previously were a party.

Additionally, we may guarantee the contractual performance of third parties such as joint venture partners.

At December 31, 2023 and 2022, third-party guarantees totaled $ 1.0 billion and $ 904 million, of which approximately 75 % and 71 % 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.

Generally, we also have cross-indemnities in place that may enable us to recover amounts that may be paid on behalf of a joint venture partner.

Third-party guarantees do not include guarantees issued on behalf of subsidiaries and other consolidated entities.

In determining our exposures, we evaluate the reputation, performance on contractual obligations, technical capabilities and credit quality of our current and former joint venture partners and the transferee under novation agreements all of which include a guarantee as required by the FAR.

At December 31, 2023 and 2022, there were no material amounts recorded in our financial statements related to third-party guarantees or novation agreements.

Other Contingencies

Government contractor, we are subject to various audits and investigations by the U.S.

Government to determine whether our operations are being conducted in accordance with applicable regulatory requirements.

Government contracting, or suspension of export privileges.

Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S.

Government investigations often take years to complete and many result in no adverse action against us.

We also provide products and services to customers outside of the U.S., which are subject to U.S.

and foreign laws and regulations and foreign procurement policies and practices.

Our compliance with local regulations or applicable U.S.

Government regulations also may be audited or investigated.

In the normal course of business, we provide warranties to our customers associated with certain product sales.

We record estimated warranty costs in the period in which the related products are delivered.

The warranty liability is generally based on the number of months of warranty coverage remaining for the products delivered and the average historical monthly warranty payments.

Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion.

Note 15 – Fair Value Measurements

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December 31, 2023 December 31, 2022

Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 2 Level 3

Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3

Mutual funds $ 1,025 $ 1,025 $ — $ — $ 897 $ 897 $ — $ —

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Derivatives 200 — 200 — 196 — 196 —

Assets measured at NAV

Other commingled funds — 20

Substantially all assets measured at fair value, other than derivatives, represent investments held in a separate trust to fund certain of our non-qualified deferred compensation plan liabilities.

As of December 31, 2022 and 2021, the fair value of our investments held in trust totaled $ 1.6 billion and $ 2.1 billion and was included in other noncurrent assets on our

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consolidated balance sheets.

Net losses on these securities were $ 323 million in 2022 and net gains of $ 205 million and $ 231 million in 2021 and 2020.

Substantially all assets measured at fair value, other than derivatives, represent assets held in a trust to fund certain of our non-qualified deferred compensation plan and are recorded in other noncurrent assets on our consolidated balance sheets.

As of December 31, 2023 and 2022, the fair value of our assets held in the trust totaled $ 1.8 billion and $ 1.6 billion.

Net gains on these securities were $ 240 million and $ 205 million in 2023 and 2021 and net losses of $ 323 million in 2022.

Gains and losses on these investments are included in other unallocated, net within cost of sales on our consolidated statements of earnings in order to align the classification of changes in the market value of investments held for the plan with changes in the value of the corresponding plan liabilities.

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We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are intended to minimize certain economic exposures.

The aggregate notional amount of our outstanding interest rate swaps at December 31, 2022 and 2021 was $ 1.3 billion and $ 500 million and the increase from 2021 was due to interest rate swaps being designated on the additional debt we issued during the fourth quarter.

The aggregate notional amount of our outstanding foreign currency hedges at December 31, 2022 and 2021 was $ 7.3 billion and $ 4.0 billion and the increase from 2021 is due to the timing of contract awards denominated in foreign currencies.

The aggregate notional amount of our outstanding interest rate swaps was $ 1.3 billion at both December 31, 2023 and 2022.

The aggregate notional amount of our outstanding foreign currency hedges at December 31, 2023 and 2022 was $ 6.5 billion and $ 7.3 billion.

The fair values of our outstanding interest rate swaps and foreign currency hedges at December 31, 2023 and 2022 were not significant.

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See “Note 1 – Organization and Significant Accounting Policies - Derivative financial instruments.”

We also make investments in early-stage companies that we believe are advancing or developing new technologies applicable to our business.

Investments that have quoted market prices in active markets (Level 1) are recorded at fair value and reflected in other securities while certain investments are categorized as Level 3 when valuations using observable inputs are unavailable.

See “Note 1 – Organization and Significant Accounting Policies - Investments.”

In addition to the financial instruments listed in the table above, we hold other financial instruments, including cash and cash equivalents, receivables, accounts payable and debt.

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The estimated fair value of our outstanding debt was $ 18.5 billion and $ 16.0 billion at December 31, 2023 and 2022.

The outstanding principal amount was $ 16.8 billion and $ 12.8 billion at December 31, 2022 and 2021, excluding $ 1.3 billion and $ 1.1 billion of unamortized discounts and issuance costs at December 31, 2022 and 2021.

The outstanding principal amount of debt, including short-term and long-term debt, was $ 18.7 billion and $ 16.8 billion at December 31, 2023 and 2022, excluding $ 1.3 billion of unamortized discounts and issuance costs at both December 31, 2023 and 2022.

The estimated fair values of our outstanding debt were determined based on the present value of future cash flows using model-derived valuations that use observable inputs such as interest rates and credit spreads (Level 2).

We also hold investments in early stage companies.

Most of these investments are in equity securities without readily determinable fair values.

Investments with quoted market prices in active markets (Level 1) are recorded at fair value at the end of each reporting period and reflected in other securities in the table above.

See “Note 1 – Organization and Significant Accounting Policies - Investments”.

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Note 16 – Severance and Other Charges

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 will improve the efficiency of our operations, better align the organization and cost structure with changing economic conditions, and changes in program lifecycles.

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.

During 2021, we recognized severance charges totaling $ 36 million ($ 28 million, or $ 0.10 per share, after-tax) related to workforce reductions and facility exit costs within our RMS business segment.

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Employees terminated as part of these actions will receive lump-sum severance payments upon separation primarily based on years of service.

During 2020, we recognized severance charges totaling $ 27 million ($ 21 million, or $ 0.08 per share, after-tax) related to workforce reductions primarily within our corporate functions.

These actions were taken to keep our cost structure aligned with our customers’ need to improve efficiency and deliver cost savings.

Employees terminated as part of these actions received lump-sum severance payments upon separation primarily based on years of service.

Table o f C ontents

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.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data