Item 2. Management’s Discussion and Analysis
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and notes to consolidated financial statements and with our Annual Report on Form 10-K for the year ended December 31, 2023 (2023 Form 10-K).
BUSINESS OVERVIEW
We are a global defense technology company driving innovation and advancing scientific discovery. Our all-domain mission solutions and 21st Century Security vision accelerate the delivery of transformative technologies to our customers. We are principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We also provide a broad range of management, engineering, technical, scientific, logistics, system integration and cybersecurity services. Our main areas of focus are in defense, space, intelligence, homeland security and information technology, including cybersecurity. We serve both U.S. and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S. Government. During the quarter ended March 31, 2024, 75% of our $17.2 billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 66% from the Department of Defense (DoD)), 24% were from international customers (including foreign military sales (FMS) contracted through the U.S. Government) and 1% were from U.S. commercial and other customers.
U.S. Budget Environment
With three quarters of our sales from the U.S. Government, U.S. Government spending levels, particularly defense spending, and timely funding thereof can affect our financial performance over the short and long term.
On March 22, 2024, the President signed the second Fiscal Year (FY) 2024 Consolidated Appropriations package into law, which includes the DoD. This legislation reflects the Fiscal Responsibility Act (FRA) spending limit of $886 billion for National Defense, of which $842 billion was for the DoD base budget.
The President’s FY 2025 budget request was submitted to Congress on March 11, 2024, initiating the FY 2025 defense authorization and appropriations legislative process. The request included $895 billion for National Defense, of which $850 billion is for the DoD base budget, in keeping with the limit established by the FRA. While compression on overall requirements driven by the FRA limit is evident, the Office of the Secretary of Defense has stated the FY 2025 budget proposal meets their objectives of keeping National Defense Strategy priorities on track.
On April 20, 2024, the House of Representatives passed three bills providing a total of $95 billion in additional supplemental funding for Ukraine, Israel and Taiwan, to include funding for the restock of U.S. munitions capacity, and a fourth bill to impose sanctions and allow the use of seized Russian assets to assist Ukraine. The four bills were combined into to one and sent to the Senate, where it is expected to be passed and subsequently signed into law in the near-term.
We anticipate the federal budget will continue to be subject to debate and compromise shaped by, among other things, heightened political tensions and the 2024 elections, the global security environment, inflationary pressures, and macroeconomic conditions. The result may be shifting funding priorities, which could have material impacts on defense spending broadly and our programs.
See also the discussion of U.S. Government funding risks within “Item 1A, Risk Factors” included in our 2023 Form 10-K.
Geopolitical and Economic Environment
We operate in a complex and evolving global security environment and our business is affected by geopolitical and security issues. Russia’s invasion of Ukraine, conflicts in the Middle East and heightened tension in the Pacific region have elevated global security concerns resulting in increased interest for our products and services as countries seek to improve their security posture. In this context, the U.S. Government, our largest customer, continues to align its budget with the defense priorities set forth in the 2022 National Defense Strategy. In addition, security assistance provided by the U.S. Government and its allies to Ukraine has increased U.S. Government and allied demand to replenish U.S. stockpiles, resulting in additional and potential future orders, including for the ramp-up in production capacity for certain products. We continue to expect additional orders over the next several years attributable to the global threat environment. We operate
25
Table of Contents
in a long-cycle business and the U.S. government has been focused on increasing industry capacity to meet demand. For example, in 2024, our Missiles and Fire Control business segment expects to begin realizing higher year over year sales from the production ramp up associated with munitions replenishment. We continue to work with the U.S. Government and our supply chain to evaluate increases in capacity at our operations to anticipate potential demand and enable us to deliver critical capabilities.
Our business and financial performance is also affected by general economic conditions. We continue to experience supply chain challenges, including supplier shortages and performance issues. These issues have delayed certain customer deliveries, have been a limiting factor on our ability to ramp up production in response to customer demand for certain products and have caused out-of-sequence manufacturing, which increases costs and decreases operational efficiency. In addition, elevated levels of inflation and macro-economic conditions present risks for Lockheed Martin, our suppliers and the stability of the broader defense industrial base. Certain costs, including rising labor rates and supplier costs, have increased as a result of inflation, and have adversely affected our margins on certain programs. In addition, some suppliers are reducing the typical duration of pricing validity in their proposals to us, which is operationally challenging and increases the risk of cost volatility. We continue to work to mitigate challenges caused by the supply chain or current macroeconomic environment on our business, including by supporting small business and at-risk suppliers, deploying resources to work with our supply chain, securing materials and support by executing long-term contracts, identifying alternative sources, and optimizing our supply chain organization through digital transformation and workforce development. If we experience significant supply chain issues or high rates of inflation, and are unable to successfully mitigate the impact, our future profits, margins and cash flows, particularly for existing fixed-price contracts, may be adversely affected. Inflation and higher interest rates can also constrain the overall purchasing power of our customers for our products and services potentially impacting future orders, especially in a budget constrained environment. We remain committed to our ongoing efforts to increase the efficiency of our operations and improve the cost competitiveness and affordability of our products and services, which may, in part, offset cost increases from inflation.
For additional risks to the company related to the geopolitical and economic environment, see “Item 1A, Risk Factors” of our 2023 Form 10-K.
26
Table of Contents
CONSOLIDATED RESULTS OF OPERATIONS
Our operating cycle is primarily long-term and involves many types of contracts for the design, development and manufacture of products and related activities with varying delivery schedules. Additionally, we close our books and records on the last Sunday of each month, except for the month of December, as our fiscal year ends on December 31, to align our financial closing with our business processes. Because of this, the number of weeks in a reporting quarter may vary slightly during the year and for comparable prior year periods. Consequently, the results of operations of a particular year, or year-to-year comparisons of sales and profits, may not be indicative of future operating results. The following discussions of comparative results should be reviewed in this context. All per share amounts cited in these discussions are presented on a “per diluted share” basis, unless otherwise noted. Our consolidated results of operations were as follows (in millions, except per share data):
Quarters Ended
March 31,
2024 March 26,
2023
Net sales $ 17,195 $ 15,126
Cost of sales (15,202) (13,080)
Gross profit 1,993 2,046
Other income (expense), net 36 (9)
Operating profit 2,029 2,037
Interest expense (255) (202)
Non-service FAS pension income 16 110
Other non-operating income, net 45 49
Earnings before income taxes 1,835 1,994
Income tax expense (290) (305)
Net earnings $ 1,545 $ 1,689
Diluted earnings per common share $ 6.39 $ 6.61
Certain amounts reported in other income (expense), net, including our share of earnings or losses from equity method investees, are included in the operating profit of our business segments. Accordingly, such amounts are included in the discussion of our business segment results of operations.
Net Sales
We generate sales from the delivery of products and services to our customers. Our consolidated net sales were as follows (in millions):
Quarters Ended
March 31,
2024 March 26,
2023
Products $ 14,196 $ 12,526
% of total net sales 82.6 % 82.8 %
Services 2,999 2,600
% of total net sales 17.4 % 17.2 %
Total net sales $ 17,195 $ 15,126
Substantially all of our contracts are accounted for using the percentage-of-completion cost-to-cost method. Under the percentage-of-completion cost-to-cost method, we record net sales on contracts over time based upon our progress towards completion on a particular contract, as well as our estimate of the profit to be earned at completion. The following discussion of material changes in our consolidated net sales should be read in tandem with the subsequent discussion of changes in our consolidated cost of sales and our business segment results of operations because changes in our sales are typically accompanied by a corresponding change in our cost of sales due to the nature of the percentage-of-completion cost-to-cost method.
27
Table of Contents
Product Sales
Product sales increased $1.7 billion, or 13%, during the quarter ended March 31, 2024, compared to the same period in 2023. The increase was primarily attributable to higher product sales of $575 million at MFC, $450 million at RMS, $435 million at Aeronautics and $210 million at Space. Higher product sales at MFC were due to production ramp up on Guided Multiple Launch Rocket Systems (GMLRS), High Mobility Artillery Rocket System (HIMARS), Joint Air-to-Surface Standoff Missile (JASSM) and Long Range Anti-Ship Missile (LRASM) programs. Higher product sales at RMS were due to new program ramp up within the laser systems portfolio and higher volume on various C6ISR (command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance) and radar programs. Higher product sales at Aeronautics were due to higher volume on classified and F-35 production contracts. Higher product sales at Space were due to higher volume on Fleet Ballistic Missile (FBM) and transport layer programs and ramp up in the hypersonic development programs.
Service Sales
Service sales increased $399 million, or 15%, during the quarter ended March 31, 2024, compared to the same period in 2023. The increase was primarily attributable to higher service sales of approximately $140 million at Aeronautics, $130 million at RMS and $100 million at Space. Higher service sales at Aeronautics were due to higher volume on C-130 and F-35 sustainment contracts. Higher service sales at RMS were due to higher volume on various Training and Logistics Services and C6ISR programs. Higher service sales at Space were due to higher volume on national security space services.
Cost of Sales
Cost of sales, for both products and services, consist of materials, labor, subcontracting costs and an allocation of indirect costs (overhead and general and administrative), as well as the costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers. For each of our contracts, we monitor the nature and amount of costs at the contract level, which form the basis for estimating our total costs to complete the contract. Our consolidated cost of sales were as follows (in millions):
Quarters Ended
March 31,
2024 March 26,
2023
Cost of sales – products $ (12,884) $ (11,151)
% of product sales 90.8 % 89.0 %
Cost of sales – services (2,603) (2,284)
% of service sales 86.8 % 87.8 %
Other unallocated, net 285 355
Total cost of sales $ (15,202) $ (13,080)
The following discussion of material changes in our consolidated cost of sales for products and services should be read in tandem with the preceding discussion of changes in our consolidated net sales and our business segment results of operations. Except for potential impacts to our programs resulting from supply chain disruptions and inflation, we have not identified any additional developing trends in cost of sales for products and services that would have a material impact on our future operations.
Product Costs
Product costs increased $1.7 billion, or 16%, during the quarter ended March 31, 2024, compared to the same period in 2023. The increase was primarily attributable to higher product costs of approximately $650 million at MFC, $460 million at Aeronautics, $400 million at RMS and $220 million at Space due to higher volume and production ramp up as described above in “Product Sales”.
28
Table of Contents
Service Costs
Service costs increased $319 million, or 14%, during the quarter ended March 31, 2024, compared to the same period in 2023. The increase was primarily attributable to higher service costs of $115 million at Aeronautics, $95 million at RMS and $80 million at Space due to higher volume as described above in “Service Sales”.
Other Unallocated, Net
Other unallocated, net primarily includes the FAS/CAS pension operating adjustment (which represents the difference between total CAS pension cost recorded in our business segments’ results of operations and the service cost component of Financial Accounting Standards (FAS) pension income (expense)), stock-based compensation expense, changes in the fair value of assets and liabilities for deferred compensation plans, intangible asset amortization expense and other corporate costs. These items are not allocated to the business segments and, therefore, are not allocated to cost of sales for products or services. Other unallocated, net reduced cost of sales by $285 million during the quarter ended March 31, 2024, compared to $355 million during the quarter ended March 26, 2023. The decrease in other unallocated, net was primarily due to lower gains from the changes in the fair value of assets and liabilities related to deferred compensation plans during the quarter ended March 31, 2024 compared to the same periods in 2023 and fluctuations in costs associated with various corporate items, none of which were individually significant.
Other Income (Expense), Net
Other income (expense), net, primarily includes earnings generated by equity method investees. Other income, net was $36 million during the quarter ended March 31, 2024, compared to other expense, net of $9 million during the quarter ended March 26, 2023. Other income (expense), net during the quarter ended March 31, 2024 includes higher earnings generated by our equity method investment in ULA due to higher launch volume.
Interest Expense
Interest expense was $255 million and $202 million during the quarters ended March 31, 2024 and March 26, 2023. The increase in interest expense in 2024 resulted primarily from the issuance of senior unsecured notes in January 2024 and May 2023.
Non-Service FAS Pension Income
Non-service FAS pension income was $16 million and $110 million during the quarters ended March 31, 2024 and March 26, 2023. The decrease was primarily due to a lower prior service credit amortization and a reduced asset base as detailed in “Note 6 - Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements.
Other Non-operating Income, Net
Other non-operating income, net primarily includes gains or losses related to changes in the fair value of early-stage company investments or gains or losses upon sale of these investments. Other non-operating income, net was $45 million and $49 million during the quarters ended March 31, 2024 and March 26, 2023. See “Note 10 - Other” included in our Notes to Consolidated Financial Statements for additional information.
Income Tax Expense
Our effective income tax rates were 15.8% and 15.3% for the quarters ended March 31, 2024 and March 26, 2023. 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.
29
Table of Contents
Changes in U.S. (federal or state) or foreign tax laws and regulations, or their interpretation and application (including those with retroactive effect), such as the amortization for research or experimental expenditures, could significantly impact our provision for income taxes, the amount of taxes payable, our deferred tax asset and liability balances, and stockholders’ equity. In addition to future changes in tax laws, the amount of net deferred tax assets will change periodically based on several factors, including the measurement of our postretirement benefit plan obligations, actual cash contributions to our postretirement benefit plans and the change in the amount or reevaluation of uncertain tax positions.
Beginning in 2022, The Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for tax purposes. This provision is expected to increase our 2024 cash tax liability by approximately $350 million and our net deferred tax assets will increase by a similar amount. The actual impact on 2024 cash tax liability will depend on the amount of research and development expenses paid or incurred in 2024 among other factors. The cash tax impact will continue over the five-year amortization period but will decrease over the period and be immaterial by 2027.
We are regularly under audit or examination by tax authorities, including foreign tax authorities (including in, amongst others, Australia, Canada, India, Italy, Japan, Poland, and the United Kingdom). The final determination of tax audits and any related litigation could similarly result in unanticipated increases in our tax expense and affect profitability and cash flows.
The Organisation for Economic Co-operation and Development (OECD) has a framework to implement a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds (referred to as Pillar 2), with certain aspects of Pillar 2 effective January 1, 2024 and other aspects effective January 1, 2025. While it is uncertain whether the U.S. will enact legislation to adopt Pillar 2, certain countries in which we operate have adopted legislation, and other countries are in the process of introducing legislation to implement Pillar 2. We do not expect Pillar 2 to have a material impact on our effective tax rate or our consolidated results of operation, financial position, and cash flows.
Net Earnings
We reported net earnings of $1.5 billion ($6.39 per share) during the quarter ended March 31, 2024, compared to $1.7 billion ($6.61 per share) during the quarter ended March 26, 2023. Net earnings and earnings per share for the quarter ended March 31, 2024 were affected by the factors mentioned above. Earnings per share also benefited from a net decrease of approximately 14.1 million weighted average common shares outstanding during the quarter ended March 31, 2024, compared to the same period in 2023. The reduction in weighted average common shares was a result of share repurchases, partially offset by share issuance under our stock-based awards and certain defined contribution plans.
BUSINESS SEGMENT RESULTS OF OPERATIONS
We operate in four business segments: Aeronautics, MFC, RMS and Space. We organize our business segments based on the nature of products and services offered.
Net sales and operating profit of our business segments exclude intersegment sales, cost of sales and profit as these activities are eliminated in consolidation and 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.
Business segment operating profit excludes the FAS/CAS pension operating adjustment described below, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. Government under the applicable U.S. Government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance. See “Note 3 - Information on Business Segments – unallocated items”.
30
Table of Contents
Sales and operating profit for each of our business segments were as follows (in millions):
Quarters Ended
March 31,
2024 March 26,
2023
Net sales
Aeronautics $ 6,845 $ 6,269
Missiles and Fire Control 2,993 2,388
Rotary and Mission Systems 4,088 3,510
Space 3,269 2,959
Total net sales $ 17,195 $ 15,126
Operating profit
Aeronautics $ 679 $ 675
Missiles and Fire Control 311 377
Rotary and Mission Systems 430 350
Space 325 280
Total business segment operating profit 1,745 1,682
Unallocated items
FAS/CAS pension operating adjustment 406 415
Intangible asset amortization expense (61) (62)
Other, net (61) 2
Total unallocated items 284 355
Total consolidated operating profit $ 2,029 $ 2,037
Our business segments’ results of operations include pension expense only as calculated under U.S. Government Cost Accounting Standards (CAS), which we refer to as CAS pension cost. We recover CAS pension and other postretirement benefit plan cost through the pricing of our products and services on U.S. 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 income calculated in accordance with Financial Accounting Standards (FAS) requirements under U.S. GAAP. 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.
31
Table of Contents
The total FAS/CAS pension adjustments, including the service and non-service cost components of FAS pension income for our qualified defined benefit pension plans, were as follows (in millions):
Quarters Ended
March 31,
2024 March 26,
2023
Total FAS income and CAS cost
FAS pension income $ 1 $ 94
Less: CAS pension cost 421 431
Total FAS/CAS pension adjustment $ 422 $ 525
Service and non-service cost reconciliation
FAS pension service cost $ (15) $ (16)
Less: CAS pension cost 421 431
Total FAS/CAS pension operating adjustment 406 415
Non-service FAS pension income 16 110
Total FAS/CAS pension adjustment $ 422 $ 525
Management evaluates performance on our contracts by focusing on net sales and operating profit and not by type or amount of operating expense. Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing the business. This approach is consistent throughout the life cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance on our contracts in a similar manner through their completion.
We regularly provide customers with reports of our costs as the contract progresses. The cost information in the reports is accumulated in a manner specified by the requirements of each contract. For example, cost data provided to a customer for a product would typically align to the subcomponents of that product (such as a wing-box on an aircraft) and for services would align to the type of work being performed (such as aircraft sustainment). Our contracts generally allow for the recovery of costs in the pricing of our products and services. Most of our contracts are bid and negotiated with our customers under circumstances in which we are required to disclose our estimated total costs to provide the product or service. This approach for negotiating contracts with our U.S. Government customers generally allows for recovery of our actual costs plus a reasonable profit margin. We also may enter into long-term supply contracts for certain materials or components to coincide with the production schedule of certain products and to ensure their availability at known unit prices.
We have a number of programs that are designated as classified by the U.S. Government which cannot be specifically described. The operating results of these classified programs are included in our consolidated and business segment results and are subjected to the same oversight and internal controls as our other programs.
Our net sales are primarily derived from long-term contracts for products and services provided to the U.S. Government as well as FMS contracted through the U.S. Government. We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. 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. For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied.
Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract accounted for under the percentage-of-completion cost-to-cost method, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract and assess the effects of those risks on our estimates of sales and total costs to complete the contract, as well as our ability to earn variable consideration. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset or localization agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract and variable considerations. Profit booking rates may increase during
32
Table of Contents
the performance of the contract if we successfully retire risks related to the technical, schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract or may increase the variable consideration we expect to receive on the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase or our estimates of variable consideration we expect to receive decrease. The profit booking rate may also be adjusted if the total estimated value of the contract changes or there is a contract modification. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate. For further discussion on fixed-price contracts, see “Note 10 - Other” included in our Notes to Consolidated Financial Statements.
Changes in net sales and operating profit generally are expressed in terms of volume, contract mix, and/or performance (referred to as profit booking rate adjustments). Changes in volume refer to increases or decreases in sales or operating profit resulting from varying production activity levels, deliveries or service levels on individual contracts. Volume changes in segment operating profit are typically based on the current profit booking rate for a particular contract. Contract mix refers to changes in the ratio of contract type or life cycle (e.g., cost-type, fixed-price, development, production and/or sustainment).
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 booking rate adjustments, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate, resulting in an increase in the estimated total costs to fulfill the performance obligations and a reduction in the profit booking rate and are typically referred to as unfavorable profit booking rate adjustments. Increases or decreases in profit booking rates are recognized in the current period they are determined and reflect the inception-to-date effect of such changes. Segment operating profit and margin can be impacted favorably or unfavorably by, for example, certain items listed below, which may or may not impact sales. Favorable items include the positive resolution of contractual matters, cost recoveries on severance and restructuring, insurance recoveries and gains on sales of assets. Unfavorable items include the adverse resolution of contractual matters; supply chain disruptions; restructuring charges (except for significant severance actions, which are excluded from segment operating results); reserves for disputes; certain asset impairments; and losses on sales of certain assets. Our consolidated net profit booking rate adjustments increased segment operating profit by approximately $195 million during the quarter ended March 31, 2024 and $415 million during the quarter ended March 26, 2023. The impact to 2024 segment operating profit includes a reach-forward loss of $100 million recognized on a classified program at our MFC business segment (as further described on page 22, see the discussion under “Contract Estimates” in Note 10 - Other included in our Notes to Consolidated Financial Statements).
We periodically experience performance issues and record losses for certain programs. For further discussion on programs, see “Note 10 - Other” included in our Notes to Consolidated Financial Statements.
Aeronautics
Summary operating results for our Aeronautics business segment were as follows (in millions):
Quarters Ended
March 31,
2024 March 26,
2023
Net sales $ 6,845 $ 6,269
Operating profit 679 675
Operating margin 9.9 % 10.8 %
Aeronautics’ net sales during the quarter ended March 31, 2024 increased $576 million, or 9%, compared to the same period in 2023. The increase was primarily attributable to higher net sales of $305 million on the F-35 program due to higher volume on production, development and sustainment contracts; $155 million on classified programs driven by higher volume; and $60 million on the F-16 program due to the ramp up on production.
33
Table of Contents
Aeronautics’ operating profit during the quarter ended March 31, 2024 was comparable to the same period in 2023. Operating profit increased $50 million on the F-16 program as operating profit for the first quarter of 2023 reflects the impact of unfavorable profit adjustments on a production contract and sustainment contracts as a result of schedule delays related to software and technical specification risks that did not recur in the first quarter of 2024. This increase was partially offset by lower operating profit of $30 million on the F-35 program primarily due to lower net profit adjustments on production contracts as a result of higher than anticipated material costs, partially offset by higher volume described above. Total net profit booking rate adjustments were $40 million lower in the first quarter of 2024 compared to the same period in 2023.
Missiles and Fire Control
Summary operating results for our MFC business segment were as follows (in millions):
Quarters Ended
March 31,
2024 March 26,
2023
Net sales $ 2,993 $ 2,388
Operating profit 311 377
Operating margin 10.4 % 15.8 %
MFC’s net sales during the quarter ended March 31, 2024 increased $605 million, or 25%, compared to the same period in 2023 . The increase was primarily attributable to higher net sales of $460 million for tactical and strike missile programs due to production ramp up on GMLRS, HIMARS , JASSM and LRASM programs; and $100 million for integrated air and missile defense programs primarily due to higher volume on PAC-3 and Terminal High Altitude Area Defense (THAAD).
MFC’s operating profit during the quarter ended March 31, 2024 decreased $66 million , or 18%, compared to the same period in 2023. The decrease was primarily attributable to lower operating profit for tactical and strike missile programs due to a $100 million reach-forward loss recognized for an option on a classified program and an unfavorable profit adjustment on HELLFIRE as a result of additional costs expected to be incurred associated with a contract claim, partially offset by the production ramp up described above. Total net profit booking rate adjustments, inclusive of the $100 million loss described above, were $120 million lower in the first quarter of 2024 compared to the same period in 2023.
Rotary and Mission Systems
In February 2024, the U.S. Army announced it is cancelling the Future Attack Reconnaissance Aircraft (FARA) program at the conclusion of fiscal year 2024, for which our Sikorsky business was competing. We are currently evaluating the potential effect of this decision on our Sikorsky business operations including assessing the recoverability of certain assets.
Summary operating results for our RMS business segment were as follows (in millions):
Quarters Ended
March 31,
2024 March 26,
2023
Net sales $ 4,088 $ 3,510
Operating profit 430 350
Operating margin 10.5 % 10.0 %
RMS’ net sales during the quarter ended March 31, 2024 increased $578 million , or 16%, compared to the same period in 2023. The increase was primarily attributable to higher net sales of $295 million on integrated warfare systems and sensors (IWSS) programs due to new program ramp up within the laser systems portfolio and higher volume on the Aegis and radar programs; $150 million for various C6ISR programs due to higher volume; and $100 million for Sikorsky helicopter programs due to higher volume on Seahawk and CH-53K programs.
RMS’ operating profit during the quarter ended March 31, 2024 increased $80 million , or 23%, compared to the same period in 2023. The increase was primarily attributable to higher operating profit of $40 million on IWSS programs due to higher volume described above and a favorable profit rate adjustment as a result of the delivery of a ground-based radar which retired the technical risk; and $25 million on Sikorsky helicopter programs due to higher volume described above and higher margins due to contract mix, partially offset by unfavorable profit adjustments on Seahawk programs. Total net
34
Table of Contents
profit booking rate adjustments were $30 million lower in the first quarter of 2024 compared to the same period in 2023.
Space
Summary operating results for our Space business segment were as follows (in millions):
Quarters Ended
March 31,
2024 March 26,
2023
Net sales $ 3,269 $ 2,959
Operating profit 325 280
Operating margin 9.9 % 9.5 %
Space’s net sales during the quarter ended March 31, 2024 increased $310 million , or 10%, compared to the same period in 2023. The increase was primarily attributable to higher net sales of $140 million for strategic and missile defense programs due to higher volume on FBM and ramp up in the hypersonic and Next Generation Interceptor (NGI) development programs; and higher net sales of $115 million for national security space programs due to higher volume on Transport Layer and GPS III programs and ramp up on the Tracking Layer program.
Space’s operating profit during the quarter ended March 31, 2024 increased $45 million , or 16%, compared to the same period in 2023. The increase was primarily attributable to $30 million of higher equity earnings from our investment in United Launch Alliance (ULA) due to higher launch volume, and higher operating profit of $20 million on strategic and missile defense programs due to the higher volume described above. These increases were partially offset by lower operating profit of $25 million for national security space programs due to the impact of lower net favorable profit adjustments on Next Gen OPIR as a result of the timing of the award and incentive fee assessments. Total net profit booking rate adjustments were $30 million lower in the first quarter of 2024 compared to the same period in 2023.
Total equity earnings/(losses) (primarily ULA) represented approximately $15 million or 5% in the first quarter of 2024, compared to approximately $(15) million, or (5)% for the same period in 2023.
FINANCIAL CONDITION
Liquidity and Capital Resources
At March 31, 2024, we had cash and cash equivalents of $2.8 billion that was generally available to fund ordinary business operations without significant legal, regulatory or other restrictions. Our principal source of liquidity is our cash from operations. However, we also have access to credit markets, if needed, for liquidity or general corporate purposes, including share repurchases. This access includes our $3.0 billion revolving credit facility or the ability to issue commercial paper and letters of credit to support customer advance payments and for other trade finance purposes such as guaranteeing our performance on particular contracts. There were no borrowings outstanding under the revolving credit facility and commercial paper at both March 31, 2024 and December 31, 2023. As of March 31, 2024, we were in compliance with all covenants contained in our debt and credit agreements.
We believe our cash and cash equivalents, our expected cash flow generated from operations and our access to credit markets will be sufficient to meet our cash requirements and cash deployment plans over the next twelve months and beyond based on our current business plans.
Cash received from customers is our primary source of cash from operations. We generally do not begin work on contracts until funding is appropriated by the customer. However, from time to time, we fund customer programs ourselves pending government appropriations. If we incur costs in excess of funds obligated on the contract or in advance of a contract award, this negatively affects our cash flows and we may be at risk for reimbursement of the excess costs.
Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type. We generally bill and collect cash more frequently under cost-reimbursable contracts, which represented approximately 42% of the sales we recorded during the quarter ended March 31, 2024, as we are authorized to bill as the costs are incurred. A number of our fixed-price contracts may provide for performance-based payments, which allow us to bill and collect cash as we perform on the contract. The amount of performance-based payments and the related milestones are
35
Table of Contents
encompassed in the negotiation of each contract. The timing of such payments may differ from the timing of the costs incurred related to our contract performance, thereby affecting our cash flows.
The U.S. Government has indicated that it would consider progress payments as the baseline for negotiating payment terms on fixed-price contracts, rather than performance-based payments. In contrast to negotiated performance-based payment terms, progress payment provisions correspond to a percentage of the amount of costs incurred during the performance of the contract and are invoiced regularly as costs are incurred. Our cash flows may be affected if the U.S. Government changes its payment policies. The U.S. Government from time to time withholds payments on certain of our billings based on contract terms or regulatory provisions. Ultimately, the impact of policy changes or withholding payments may delay the receipt of cash, but the cumulative amount of cash collected during the life of the contract should not vary.
We have a disciplined and dynamic cash deployment strategy to invest in our business and key technologies to provide our customers with enhanced capabilities, enhance stockholder value, and position ourselves to take advantage of new business opportunities when they arise. Consistent with that strategy, we have continued to invest in our business and technologies through capital expenditures, independent research and development, and selective business acquisitions and investments.
We continue to return cash to stockholders through dividends and share repurchases. As of March 31, 2024, the total remaining authorization for future common share repurchases under our program was $9.0 billion. The stock repurchase program does not have an expiration date and may be amended or terminated by the Board of Directors at any time. The amount of shares ultimately purchased and the timing of purchases are at the discretion of management and subject to compliance with applicable law and regulation.
We continue to actively manage our debt levels, including maturities and interest rates. We actively seek to finance our business in a manner that preserves financial flexibility while minimizing borrowing costs to the extent practicable. We review changes in financial market and economic conditions to manage the types, amounts and maturities of our indebtedness. We may at times refinance existing indebtedness, vary our mix of variable-rate and fixed-rate debt or seek alternative financing sources for our cash and operational needs.
We also actively manage our pension obligations and expect to continue to opportunistically manage our pension liabilities through the purchase of group annuity contracts or other actions for portions of our outstanding defined benefit pension obligations using assets from the pension trust. Future pension risk transfer transactions could be significant and result in us making additional contributions to the pension trust. The required funding of our qualified defined benefit pension plans is determined in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), as amended, and Cost Accounting Standards (CAS). We could be required to make pension contributions earlier and/or in excess than planned if our return on pension assets is less than our assumptions, which would reduce our free cash flow. We may also make additional contributions on an ad hoc basis at our discretion.
There were no material changes during the quarter ended March 31, 2024 to our contractual commitments as presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K that were outside the ordinary course of our business.
36
Table of Contents
The following table provides a summary of our cash flow information followed by a discussion of the key elements (in millions):
Quarters Ended
March 31,
2024 March 26,
2023
Cash and cash equivalents at beginning of year $ 1,442 $ 2,547
Operating activities
Net earnings 1,545 1,689
Noncash adjustments 335 265
Changes in working capital (282) (267)
Other, net 37 (123)
Net cash provided by operating activities 1,635 1,564
Net cash used for investing activities (372) (259)
Net cash provided by (used for) financing activities 85 (1,412)
Net change in cash and cash equivalents 1,348 (107)
Cash and cash equivalents at end of period $ 2,790 $ 2,440
Operating Activities
Net cash provided by operating activities during the quarter ended March 31, 2024 was comparable to the same period in 2023.
Non-GAAP Financial Measure - Free Cash Flow
Free cash flow is a non-GAAP financial measure that we define as cash from operations less capital expenditures. Our capital expenditures are comprised of equipment and facilities infrastructure and information technology (inclusive of costs for the development or purchase of internal-use software that are capitalized). We use free cash flow to evaluate our business performance and overall liquidity, as well as a performance goal in our annual and long-term incentive plans. We believe free cash flow is a useful measure for investors because it represents the amount of cash generated from operations after reinvesting in the business and that may be available to return to stockholders and creditors (through dividends, stock repurchases and debt repayments) or available to fund acquisitions and other investments. The entire amount of free cash flow is not necessarily available for discretionary expenditures, however, because it does not account for certain mandatory expenditures, such as the repayment of maturing debt and pension contributions. While management believes that free cash flow as a non-GAAP financial measure may be useful in evaluating our financial performance, it should be considered supplemental to, and not a substitute for, financial information prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies.
The following table reconciles net cash provided by operating activities to free cash flow (in millions):
Quarters Ended
March 31,
2024 March 26,
2023
Cash from operations $ 1,635 $ 1,564
Capital expenditures (378) (294)
Free cash flow $ 1,257 $ 1,270
Investing Activities
Net cash used for investing activities during the quarter ended March 31, 2024 increased $113 million compared to the same period in 2023 . Capital expenditures totaled $378 million and $294 million during the quarters ended March 31, 2024 and March 26, 2023. The majority of our capital expenditures are for equipment and facilities infrastructure that generally are incurred to support new and existing programs across all of our business segments. We also incur capital expenditures for information technology to support programs and general enterprise information technology infrastructure, inclusive of costs for the development or purchase of internal-use software.
37
Table of Contents
Financing Activities
Net cash provided by financing activities during the quarter ended March 31, 2024 increased $1.5 billion compared to the same period in 2023 .
During the quarter ended March 31, 2024 and March 26, 2023, we paid dividends totaling $780 million ($3.15 per share) and $784 million ($3.00 per share).
During the quarter ended March 31, 2024, we paid $1.0 billion to repurchase 2.3 million shares of our common stock. See “Note 9 - Stockholders’ Equity” included in our Notes to Consolidated Financial Statements for additional information. During the quarter ended March 26, 2023, we paid $500 million to repurchase 1.1 million shares of our common stock.
During the quarter ended March 31, 2024, we received net proceeds of $2.0 billion from issuance of senior unsecured notes. See “Note 10 - Other” included in our Notes to Consolidated Financial Statements for additional information.
OTHER MATTERS
Status of the F-35 Program
The F-35 program primarily consists of production contracts, sustainment activities, and new development efforts. Production of the aircraft is expected to continue for many years given the U.S. Government’s objective of 2,456 aircraft for the U.S. Air Force, U.S. Marine Corps, and U.S. Navy; commitments from our seven international partner countries and ten Foreign Military Sales (FMS) customers; as well as interest from other countries.
We continue to see strong international demand for the F-35. In December 2023, the Republic of Korea announced it signed a follow-on Letter of offer and acceptance (LOA) for 20 additional F-35s, increasing its program of record from 40 to 60. In January 2024, the Czech Republic signed a LOA to procure 24 F-35s and the U.S. Department of State approved a potential Foreign Military Sale to Greece for up to 40 F-35s. In February 2024, Singapore announced its intent to purchase eight F-35As to complement the 12 F-35Bs to which it has previously committed.
Since program inception through March 31, 2024, we have delivered 992 production F-35 aircraft, including 710 F-35A variants, 197 F-35B variants and 85 F-35C variants, demonstrating the F-35 program’s continued progress and longevity. Our backlog as of March 31, 2024 was 373 aircraft and our aircraft production rate remains at approximately 156 per year; however, we had no customer deliveries of aircraft in the first quarter of 2024. Deliveries of aircraft with Technology Refresh-3 (TR-3) capability remain on hold as the software is finalized. We continue to target a second quarter 2024 customer acceptance of a specific software configuration permitting deliveries of TR-3 aircraft and expect deliveries to begin in the third quarter 2024. Additionally, we remain focused on receiving the necessary hardware from our suppliers to deliver this critical combat capability for the F-35.
Given the size and complexity of the F-35 program, we anticipate continual reviews on aircraft performance, program and delivery schedule, cost and requirements as part of the DoD, Congressional and international countries’ oversight and budgeting processes. Areas of focus include Lockheed Martin’s and our suppliers’ performance, software development (including, in particular, software maturation related to TR-3 capability), and flight test execution and related findings. Additional areas of focus include the level of cost associated with life cycle operations, sustainment and potential contractual obligations, inflation-related cost pressures, and the ability to increase affordability.
Contingencies
See “Note 7 - Legal Proceedings and Contingencies” included in our Notes to Consolidated Financial Statements for information regarding our contingent obligations, including off-balance sheet arrangements.
Critical Accounting Policies
There have been no significant changes to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Form 10-K.
38
Table of Contents