We believe our facilities are in good condition and adequate for their current use. We may improve, replace or reduce facilities as considered appropriate to meet the needs of our operations.
As a U.S. 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. U.S. 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. 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.
Not applicable.
Brian P. Colan (age 57)61), Vice President, Controller, and Chief Accounting Officer
Mr. Colan has served as Vice President, Controller, and Chief Accounting Officer since August 2014.
Ms. HewsonHill has served as Chairman,Executive Vice President of Rotary and Chief Executive Officer of Lockheed MartinMission Systems (RMS) since January 2014 andJune 2020. She previously served as Chief Executive Officer andSenior Vice President, Enterprise Business Transformation from January 2013June 2019 to December 2013.June 2020. Prior to that, she has served over 30 years at Lockheed Martin in roleswas Deputy Executive Vice President of increasing responsibility.RMS from October 2018 to June 2019; Senior Vice President for Corporate Strategy and Business Development from September 2017 to October 2018; and Vice President and General Manager of the former Cyber, Ships and Advanced Technologies line of business for RMS from June 2015 to September 2017.
Maryanne R. Lavan (age 58)62), Senior Vice President, General Counsel and Corporate Secretary
John W. Mollard (age 60)64), Acting Chief Financial Officer, Vice President and Treasurer
Mr. TannerUlmer has served as Executive Vice President, Aeronautics since February 2021. He served as Vice President and Chief Financial Officer since September 2007.General Manager, F-35 Lightning II Program from March 2018 to January 2021. Prior to that he served as Vice President, F-35 Aircraft Production business unit from March 2016 to March 2018.
This graph is not deemed to be “filed” with the U.S. Securities and Exchange Commission or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 (the Exchange Act), and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933 or the Exchange Act.
There were no sales of unregistered equity securities during the quarter ended December 31, 2017.2021.
We are a global security and aerospace company 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. 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. In 2017, 69%2021, 71% of our $51.0$67.0 billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 58%62% from the Department of Defense (DoD)), 30%28% 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. Our main areas of focus are in defense, space, intelligence, homeland security and information technology, including cybersecurity.
We continuously strive to strengthen our portfolio of products and services to meet the current and future needs of our customers. We accomplish this in part by our independent research and development activities and through acquisition, divestiture and internal realignment activities.
We selectively pursue the acquisition of businesses and investments at attractive valuations that will expand or complement our current portfolio and allow access to new customers or technologies. We also may explore the divestiture of businesses that
no longer meet our needs or strategy or that could perform better outside of our organization. In pursuing our business strategy, we routinely conduct discussions, evaluate targets and enter into agreements regarding possible acquisitions, divestitures, joint ventures and equity investments.
U.S. Government Funding
A key component of our strategic plan is to grow our international sales. To accomplish this growth, we continue to focus on strengthening our relationships internationally through partnerships and joint technology efforts. We conductOur international business withis conducted either by foreign military sales (FMS) contracted through the U.S. Government or by direct commercial sales (DCS) to international customers through eachcustomers. In 2021, approximately 69% of our business segments through either FMS or direct sales to international customers.customers were FMS and about 31% were DCS. See Item 1A - Risk Factors for a discussion of risks related to international sales.
on a “per diluted share” basis, unless otherwise noted. Our consolidated results of operations were as follows (in millions, except per share data):
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.
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):
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. WeExcept for potential impacts to our programs resulting from COVID-19, 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.
Net Earnings
We reported net earnings of $2.0 billion ($6.89 per share) in 2017, $5.3 billion ($17.49 per share) in 2016 and $3.6 billion ($11.46 per share) in 2015.
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 the products and services offered. The financial information in the following tables includes the results of businesses we have acquired from their respective dates of acquisition
Net sales and excludes businesses included in discontinued operations (see “Note 3 – Acquisitions and Divestitures” included in our Notes to Consolidated Financial Statements) for all years presented. Net salesoperating profit of our business segments exclude intersegment sales, cost of sales, and profit as these activities are eliminated in consolidation.
Operating Business segment operating profit of our business segments includes our share of earnings or losses from equity method investees becauseas the operating activities of the equity method investees are closely aligned with the operations of our business segments. United Launch Alliance (ULA), results of which are included in our Space business segment, is one of our largest equity method investees. Operatinginvestee.
Business segment operating profit of our business segmentsalso excludes the FAS/CAS pension operating adjustment, described below; expense for stock-based compensation;a portion of corporate costs not considered allowable or allocable to contracts with the effects ofU.S. Government under the applicable U.S. Government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance such as charges related to goodwill impairments (see “Note 1 – Significant Accounting Policies” included in our Notes to Consolidated Financial Statements)a portion of management and administration costs, legal fees and settlements, environmental costs, stock-based compensation expense, retiree benefits, significant severance actions, (see “Note 15 – Restructuring Charges” included in our Notes to Consolidated Financial Statements);significant asset impairments, gains or losses from significant divestitures, (see “Note 3 – Acquisitions and Divestitures” included in our Notes to Consolidated Financial Statements); the effects of certain legal settlements; corporate costs not allocated to our business segments; and other miscellaneous corporate activities. These
Excluded items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See “Note 1 – Organization and Significant Accounting Policies” for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.
Summary operating results for each of our business segments were as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
Net sales | | | | | | |
Aeronautics | | $ | 26,748 | | | $ | 26,266 | | | $ | 23,693 | |
Missiles and Fire Control | | 11,693 | | | 11,257 | | | 10,131 | |
Rotary and Mission Systems | | 16,789 | | | 15,995 | | | 15,128 | |
Space | | 11,814 | | | 11,880 | | | 10,860 | |
Total net sales | | $ | 67,044 | | | $ | 65,398 | | | $ | 59,812 | |
Operating profit | | | | | | |
Aeronautics | | $ | 2,799 | | | $ | 2,843 | | | $ | 2,521 | |
Missiles and Fire Control | | 1,648 | | | 1,545 | | | 1,441 | |
Rotary and Mission Systems | | 1,798 | | | 1,615 | | | 1,421 | |
Space | | 1,134 | | | 1,149 | | | 1,191 | |
Total business segment operating profit | | 7,379 | | | 7,152 | | | 6,574 | |
Unallocated items | | | | | | |
FAS/CAS operating adjustment | | 1,960 | | | 1,876 | | | 2,049 | |
Stock-based compensation | | (227) | | | (221) | | | (189) | |
Severance and restructuring charges (a) | | (36) | | | (27) | | | — | |
Other, net (b) | | 47 | | | (136) | | | 111 | |
Total unallocated, net | | 1,744 | | | 1,492 | | | 1,971 | |
Total consolidated operating profit | | $ | 9,123 | | | $ | 8,644 | | | $ | 8,545 | |
(a)See “Consolidated Results of Operations – Severance and Restructuring Charges” discussion above for information on charges related to certain severance and restructuring actions across our organization.
(b)Other, net in 2020 includes a noncash impairment charge of $128 million recognized on our investment in the international equity method investee, AMMROC. Other, net in 2019 includes a previously deferred noncash gain of $51 million related to properties sold in 2015 as a result of completing our remaining obligations and a gain of $34 million for the sale of our Distributed Energy Solutions business. (See “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for more information).
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, therecognize CAS pension cost is recognized in each of our business segments’segment’s net sales and cost of sales. Since ourOur consolidated financial statements must present FAS pension expenseand other postretirement benefit plan income calculated in accordance with FAS requirements under U.S. GAAP, which we refer to as FAS pension expense,GAAP. The operating portion of the net FAS/CAS pension adjustment increases or decreasesrepresents the difference between the service cost component of FAS pension (expense) income and total CAS pension cost recordedcost. The non-service FAS pension (expense) income components are included in non-service FAS pension (expense) income in our business segments’ resultsconsolidated statements of operations to equal the FAS pension expense.earnings. As a result, to the extent that CAS pension cost exceeds the service cost component of FAS pension expense, which occurred for 2017, 2016 and 2015,(expense) income, we have a favorable FAS/CAS pensionoperating adjustment.
Summary operating results
Our total net FAS/CAS pension adjustments, including the service and non-service cost components of FAS pension (expense) income for each of our business segmentsqualified defined benefit pension plans, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
Total FAS (expense) income and CAS costs | | | | | | |
FAS pension (expense) income | | $ | (1,398) | | | $ | 118 | | | $ | (1,093) | |
Less: CAS pension cost | | 2,066 | | | 1,977 | | | 2,565 | |
Net FAS/CAS pension adjustment | | $ | 668 | | | $ | 2,095 | | | $ | 1,472 | |
| | | | | | |
Service and non-service cost reconciliation | | | | | | |
FAS pension service cost | | (106) | | | (101) | | | (516) | |
Less: CAS pension cost | | 2,066 | | | 1,977 | | | 2,565 | |
FAS/CAS operating adjustment | | 1,960 | | | 1,876 | | | 2,049 | |
Non-service FAS pension (expense) income | | (1,292) | | | 219 | | | (577) | |
Net FAS/CAS pension adjustment | | $ | 668 | | | $ | 2,095 | | | $ | 1,472 | |
|
| | | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
Net sales | | | | | | |
Aeronautics | | $ | 20,148 |
| | $ | 17,769 |
| | $ | 15,570 |
|
Missiles and Fire Control | | 7,212 |
| | 6,608 |
| �� | 6,770 |
|
Rotary and Mission Systems | | 14,215 |
| | 13,462 |
| | 9,091 |
|
Space | | 9,473 |
| | 9,409 |
| | 9,105 |
|
Total net sales | | $ | 51,048 |
| | $ | 47,248 |
| | $ | 40,536 |
|
Operating profit | | | | | | |
Aeronautics | | $ | 2,164 |
| | $ | 1,887 |
| | $ | 1,681 |
|
Missiles and Fire Control | | 1,053 |
| | 1,018 |
| | 1,282 |
|
Rotary and Mission Systems | | 905 |
| | 906 |
| | 844 |
|
Space (a) | | 993 |
| | 1,289 |
| | 1,171 |
|
Total business segment operating profit | | 5,115 |
| | 5,100 |
| | 4,978 |
|
Unallocated items | | | | | | |
FAS/CAS pension adjustment | | | | | | |
FAS pension expense (b)(c) | | (1,372 | ) | | (1,019 | ) | | (1,127 | ) |
Less: CAS pension cost (b)(c) | | 2,248 |
| | 1,921 |
| | 1,527 |
|
FAS/CAS pension adjustment (d) | | 876 |
| | 902 |
| | 400 |
|
Severance charges (b)(e) | | — |
| | (80 | ) | | (82 | ) |
Stock-based compensation | | (158 | ) | | (149 | ) | | (133 | ) |
Other, net (f)(g) | | 88 |
| | (224 | ) | | (451 | ) |
Total unallocated, net | | 806 |
| | 449 |
| | (266 | ) |
Total consolidated operating profit | | $ | 5,921 |
| | $ | 5,549 |
| | $ | 4,712 |
|
The decrease in the net FAS/CAS pension adjustment in 2021 was principally driven by 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 on August 3, 2021. See “Note 12 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements. | |
(a)
| On August 24, 2016, our ownership interest in the AWE joint venture increased from 33% to 51% and we were required to change our accounting for this investment from the equity method to consolidation. As a result of the increased ownership interest, we recognized a non-cash gain of $127 million at our Space business segment, which increased net earnings from continuing operations by $104 million ($0.34 per share) in 2016. See “Note 3 – Acquisitions and Divestitures” included in our Notes to Consolidated Financial Statements for more information).
|
| |
(b)
| FAS pension expense, CAS pension costs and severance charges reflect the reclassification for discontinued operations presentation of benefits related to former IS&GS salaried employees (see “Note 11 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements).
|
| |
(c)
| The higher FAS expense in 2017 is primarily due to a lower discount rate and lower expected long-term rate of return on plan assets in 2017 versus 2016. The higher CAS pension cost primarily reflects the impact of phasing in CAS Harmonization (see “Note 11 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements).
|
| |
(d)
| We expect a FAS/CAS pension adjustment in 2018 of about $1.0 billion (see “Critical Accounting Policies – Postretirement Benefit Plans” discussion below). |
| |
(e)
| See “Consolidated Results of Operations – Restructuring Charges” discussion above for information on charges related to certain severance actions at our business segments. Severance charges for initiatives that are not significant are included in business segment operating profit.
|
| |
(f)
| Other, net in 2017 includes a previously deferred non-cash gain of $198 million related to properties sold in 2015 as a result of completing our remaining obligations (see “Note 8 – Property, Plant and Equipment, net” included in our Notes to Consolidated Financial Statements for more information) and a $64 million charge, which represents our portion of a non-cash asset impairment charge recorded by our equity method investee, AMMROC (see “Note 1 – Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for more information).
|
| |
(g)
| Other, net in 2015 includes a non-cash asset impairment charge of approximately $90 million related to our decision in 2015 to divest our LMCFT business (see “Note 3 – Acquisitions and Divestitures” included in our Notes to Consolidated Financial Statements). This charge was partially offset by a net deferred tax benefit of about $80 million, which is recorded in income tax expense. The net impact reduced net earnings by about $10 million. Additionally other, net in 2015 includes approximately $38 million of non-recoverable transaction costs associated with the acquisition of Sikorsky.
|
The following segment discussions also include information relating to backlog for each segment. Backlog was approximately $99.9 billion, $96.2$135.4 billion and $94.8$147.1 billion at December 31, 2017, 20162021 and 2015.2020. These amounts included both funded backlog (firm orders for which funding has been both authorized and appropriated by the customer) and unfunded backlog (firm orders for which funding has not yet been appropriated). Backlog does not include unexercised options or task orders to be issued under indefinite-delivery, indefinite-quantity contracts. Funded backlog was approximately $73.6$88.5 billion at December 31, 2017.
2021, as compared to $102.3 billion at December 31, 2020. If any of our contracts with firm orders were to be terminated, our backlog would be reduced by the expected value of the unfilled orders of such contracts.
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 the recovery of our costs.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.
Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract, 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 total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead and the estimated costs to fulfill our industrial cooperation agreements required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract which decreases the estimated total costs to complete the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate.
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 account for these contracts, as well as product contracts with non-U.S. Government customers, using the percentage-of-completion method of accounting, which represent substantially all of our net sales. We derive our remaining net sales from contracts to provide services to non-U.S. Government customers, which we account for under the services method of accounting.
Under the percentage-of-completion method of accounting, we record sales on contracts based upon our progress towards completion on a particular contract as well as our estimate of the profit to be earned at completion. Cost-reimbursable contracts provide for the payment of allowable costs plus a fee. For fixed-priced contracts, net sales and cost of sales are recognized as products are delivered or as costs are incurred. Due to the nature of the percentage-of-completion method of accounting, changes in our cost of sales are typically accompanied by a related change in our net sales.
Changes in net sales and operating profit generally are expressed in terms of volume. 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.
In addition, comparability of our segment sales, operating profit and operating margins may be impacted favorably or unfavorably by changes in profit booking rates on our contracts accounted for using the percentage-of-completion method of accounting. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs 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 complete and a reduction in the profit booking rate. Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of such changes. Segment operating profit and margins may also be impacted favorably or unfavorably by other items. Favorable items may include the positive resolution of contractual matters, cost recoveries on restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring charges, except for significant severance actions, which are excluded from segment operating results; reserves for disputes; asset impairments; and losses on sales of certain assets. Segment operating profit and items such as risk retirements, reductions of profit booking rates or other matters are presented net of state income taxes.
As previously disclosed, we have a program to design, integrate, and install an air missile defense C4I systems for an international customer that has experienced performance issues and for which we have periodically accrued reserves. In 2017, we revised our estimated costs to complete the program, EADGE-T, as a consequence of ongoing performance matters and recorded an additional charge of $120 million ($74 million or $0.25 per share, after tax) at our RMS business segment. As of December 31, 2017, cumulative losses, including reserves, remained at approximately $260 million on this program. We are continuing to monitor the viability of the program and the available options and could record additional charges in future periods. However, based on the reserves already accrued and our current estimate of the costs to complete the program, at this time we do not anticipate that additional charges, if any, would be material.
We have two commercial satellite programs at our Space business segment, for which we have experienced performance issues related to the development and integration of a modernized LM 2100 satellite platform. These commercial programs require the development of new satellite technology to enhance the LM 2100’s power, propulsion and electronics, among other items. The enhanced satellite is expected to benefit other commercial and government satellite programs. We have periodically revised our estimated costs to complete these developmental commercial programs. We have recorded cumulative losses of approximately $305 million as of December 31, 2017, including approximately $135 million ($83 million or $0.29 per share, after tax) recorded during the year ended December 31, 2017. While these losses reflect our estimated total losses on the programs, we will continue to incur unrecovered costs each period until we complete these programs and may have to record additional loss reserves in future periods, which could be material to our operating results. While we do not currently anticipate recording additional loss reserves, the programs remain developmental and further challenges in the delivery and integration of new satellite technology, anomalies discovered during system testing requiring repair or rework, further schedule delays and potential penalties could require that we record additional reserves. We do not currently expect to be able to meet the delivery schedule under the contracts and have informed the customers. The customers could seek to exercise a termination right under the contracts, in which case we would have to refund the payments we have received and pay certain penalties. However, we think the probability that the customers will seek to exercise any termination right is remote as the delay beyond the termination date is modest and the customers have an immediate need for the satellites.
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, net of state income taxes, increased segment operating profit by approximately $1.5 billion in both 2017 and 2016 and $1.7 billion in 2015. The consolidated net adjustments in 2017 were comparable to 2016, with increases in profit booking rate adjustments at our Aeronautics and Space business segments, offset by decreases at our MFC and RMS business segments. The decrease in our consolidated net adjustments in 2016 compared to 2015 was primarily due to a decrease in profit booking rate adjustments at our MFC and Space business segments, partially offset by an increase at our RMS business segment. The consolidated net adjustments for 2017 are inclusive of approximately $790 million in unfavorable items, which include reserves for performance matters on the EADGE-T contract, Vertical Launching System (VLS) program and other programs at RMS and on commercial satellite programs at Space. The consolidated net adjustments for 2016 are inclusive of approximately $530 million in unfavorable items, which include reserves for performance matters on an international program at RMS and on commercial satellite programs at Space. The consolidated net adjustments for 2015 are inclusive of approximately $550 million in unfavorable items, which include reserves for performance matters on the EADGE-T contract at RMS and on commercial satellite programs at Space.
Aeronautics
Our Aeronautics business segment is engaged in the research, design, development, manufacture, integration, sustainment, support and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies. Aeronautics’ major programs include the F-35 Lightning II Joint Strike Fighter, C‑130 Hercules, F-16 Fighting Falcon, F-22 Raptor and C-5M Super Galaxy. Aeronautics’ operating results included the following (in millions):
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | | 2016 |
| | | 2015 |
| |
Net sales | | $ | 20,148 |
| | | $ | 17,769 |
| | | $ | 15,570 |
| |
Operating profit | | 2,164 |
| | | 1,887 |
| | | 1,681 |
| |
Operating margin | | 10.7 |
| % | | 10.6 |
| % | | 10.8 |
| % |
Backlog at year-end | | $ | 35,832 |
| | | $ | 34,182 |
| | | $ | 31,842 |
| |
2017 compared to 2016
Aeronautics’ net sales in 2017 increased $2.4 billion, or 13%, compared to 2016. The increase was primarily attributable to higher net sales of approximately $2.0 billion for the F-35 program due to increased volume on production and sustainment; about $260 million for the C-130 program due to increased deliveries (26 aircraft delivered in 2017 compared to 24 in 2016) and due to aircraft configuration mix, partially offset by lower volume for sustainment programs; and about $55 million for the F-16 program due to higher volume on aircraft modernization programs, partially offset by lower deliveries (eight aircraft delivered in 2017
compared to 12 in 2016). These increases were partially offset by a decrease of approximately $155 million for the C-5 program due to lower deliveries (seven aircraft delivered in 2017 compared to nine in 2016).
Aeronautics’ operating profit in 2017 increased $277 million, or 15%, compared to 2016. Operating profit increased approximately $290 million for the F-35 program due to increased volume on aircraft production and sustainment activities and higher risk retirements and about $85 million for the F-16 program due to higher risk retirements and higher volume on aircraft modernization programs, partially offset by lower deliveries. These increases were partially offset by a decrease of about $30 million due to lower equity earnings from an investee; about $25 million for the C-130 program primarily due to lower volume and the timing of expenses for sustainment programs; and approximately $45 million for other aeronautics programs primarily due to lower risk retirements and the establishment of a reserve recorded in the first quarter of 2017. Adjustments not related to volume, including net profit booking rate adjustments, were about $175 million higher in 2017 compared to 2016.
2016 compared to 2015
Aeronautics’ net sales in 2016 increased $2.2 billion, or 14%, compared to 2015. The increase was attributable to higher net sales of approximately $1.7 billion for the F-35 program due to increased volume on aircraft production and sustainment activities, partially offset by lower volume on development activities; and approximately $290 million for the C-130 program due to increased deliveries (24 aircraft delivered in 2016 compared to 21 in 2015) and increased sustainment activities; and approximately $250 million for the F-16 program primarily due to higher volume on aircraft modernization programs. The increases were partially offset by lower net sales of approximately $55 million for the C-5 program due to decreased sustainment activities.
Aeronautics’ operating profit in 2016 increased $206 million, or 12%, compared to 2015. Operating profit increased approximately $195 million for the F-35 program due to increased volume on aircraft production and sustainment activities and higher risk retirements; and by approximately $60 million for aircraft support and maintenance programs due to higher risk retirements and increased volume. These increases were partially offset by lower operating profit of approximately $65 million for the C-130 program due to contract mix and lower risk retirements. Adjustments not related to volume, including net profit booking rate adjustments, were approximately $20 million higher in 2016 compared to 2015.
Backlog
Backlog increased in 2017 compared to 2016 primarily due to higher orders on F-35 production and sustainment programs. Backlog increased in 2016 compared to 2015 primarily due to higher orders on F-35 production and sustainment programs.
Missiles and Fire Control
Our MFC business segment provides air and missile defense systems; tactical missiles and air-to-ground precision strike weapon systems; logistics; fire control systems; mission operations support, readiness, engineering support and integration services; manned and unmanned ground vehicles; and energy management solutions. MFC’s major programs include PAC‑3, THAAD, MLRS, Hellfire, JASSM, Javelin, Apache, SNIPER®, LANTIRN® and Special Operations Forces Contractor Logistics Support Services (SOF CLSS). In August 2017, we were awarded a contract for the Special Operations Forces Global Logistics Support Services (SOF GLSS) program, which is a competitive follow-on contract to SOF CLSS. MFC’s operating results included the following (in millions):
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | | 2016 |
| | | 2015 |
| |
Net sales | | $ | 7,212 |
| | | $ | 6,608 |
| | | $ | 6,770 |
| |
Operating profit | | 1,053 |
| | | 1,018 |
| | | 1,282 |
| |
Operating margin | | 14.6 |
| % | | 15.4 |
| % | | 18.9 |
| % |
Backlog at year-end | | $ | 17,863 |
| | | $ | 14,704 |
| | | $ | 15,463 |
| |
2017 compared to 2016
MFC’s net sales in 2017 increased $604 million, or 9%, compared to the same period in 2016. The increase was attributable to higher net sales of approximately $250 million for tactical missile programs due to product configuration mix and increased deliveries (JASSM) and due to increased deliveries for various other programs; about $210 million for air and missile defense programs due to contract mix on certain programs (primarily PAC-3) and increased volume on certain programs (primarily THAAD); and about $110 million for fire control programs due to increased deliveries (primarily LANTIRN® and SNIPER®).
MFC’s operating profit in 2017 increased $35 million, or 3%, compared to 2016. Operating profit increased about $70 million for air and missile defense programs due to increased volume (primarily THAAD), contract mix (primarily PAC-3), a reserve recorded in fiscal year 2016 for a contractual matter that did not recur in 2017, partially offset by lower risk retirements; and about
$30 million for fire control programs due to increased deliveries (primarily LANTIRN® and SNIPER®). These increases were partially offset by a decrease of approximately $65 million for tactical missile programs due to lower risk retirements (primarily JASSM and Hellfire) and the establishment of a reserve on a program. Adjustments not related to volume, including net profit booking rate adjustments, were about $80 million lower in 2017 compared to 2016.
2016 compared to 2015
MFC’s net sales in 2016 decreased $162 million, or 2%, compared to 2015. The decrease was attributable to lower net sales of approximately $205 million for air and missile defense programs due to decreased volume (primarily THAAD); and lower net sales of approximately $95 million due to lower volume on various programs. These decreases were partially offset by a $75 million increase for tactical missiles programs due to increased deliveries (primarily Hellfire); and approximately $70 million for fire control programs due to increased volume (SOF CLSS).
MFC’s operating profit in 2016 decreased $264 million, or 21%, compared to 2015. Operating profit decreased approximately $145 million for air and missile defense programs due to lower risk retirements (PAC-3 and THAAD) and a reserve for a contractual matter; approximately $45 million for tactical missiles programs due to lower risk retirements (Javelin); and approximately $45 million for fire control programs due to lower risk retirements (Apache) and program mix. Adjustments not related to volume, including net profit booking rate adjustments and reserves, were about $225 million lower in 2016 compared to 2015.
Backlog
Backlog increased in 2017 compared to 2016 primarily due to higher orders on Hellfire, Precision Fires and PAC-3. Backlog decreased in 2016 compared to 2015 primarily due to lower orders on PAC-3, Hellfire, and JASSM.
Rotary and Mission Systems
As previously described, on November 6, 2015, we acquired Sikorsky and aligned the Sikorsky business under our RMS business segment. The 2015 results of the acquired Sikorsky business have been included in our financial results from the November 6, 2015 acquisition date through December 31, 2015. As a result, our consolidated operating results and RMS business segment operating results for the year ended December 31, 2015 do not reflect a full year of Sikorsky operations.
Our RMS business segment provides design, manufacture, service and support for a variety of military and commercial helicopters, ship and submarine mission and combat systems; mission systems and sensors for rotary and fixed-wing aircraft; sea and land-based missile defense systems; radar systems; the Littoral Combat Ship (LCS); simulation and training services; and unmanned systems and technologies. In addition, RMS supports the needs of government customers in cybersecurity and delivers communication and command and control capabilities through complex mission solutions for defense applications. RMS’ major programs include Black Hawk and Seahawk helicopters, Aegis Combat System (Aegis), LCS, CH-53K development helicopter, VH-92A helicopter program, Advanced Hawkeye Radar System, and The Command, Control, Battle Management and Communications (C2BMC) contract. During the fourth quarter of 2017, we realigned certain programs within the RMS business segment to align with changes in management structure. RMS’ operating results included the following (in millions):
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | | 2016 |
| | | 2015 |
| |
Net sales | | $ | 14,215 |
| | | $ | 13,462 |
| | | $ | 9,091 |
| |
Operating profit | | 905 |
| | | 906 |
| | | 844 |
| |
Operating margin | | 6.4 |
| % | | 6.7 |
| % | | 9.3 |
| % |
Backlog at year-end | | $ | 28,974 |
| | | $ | 28,430 |
| | | $ | 30,076 |
| |
2017 compared to 2016
RMS’ net sales in 2017 increased $753 million, or 6%, compared to 2016. The increase was primarily attributable to approximately $680 million for Sikorsky helicopter programs due to certain adjustments recorded in 2016 required to account for the acquisition and higher volume on certain helicopter programs; and about $160 million for training and logistics services programs due to higher volume. These increases were partially offset by a decrease of about $50 million for IWSS programs due to lower volume.
RMS’ operating profit in 2017 was comparable with 2016. Operating profit increased about $105 million for Sikorsky helicopter programs due to certain adjustments recorded in 2016 required to account for the acquisition. This increase was offset by a decrease of $100 million for C4USS programs due to a net $95 million increase for charges for performance matters on the EADGE-T contract and $20 million for IWSS programs primarily due to a performance matter on the VLS program, partially offset by higher
risk retirements (primarily LCS). Adjustments not related to volume, including net profit booking rate adjustments, were about $55 million lower in 2017 compared to 2016.
2016 compared to 2015
RMS’ net sales in 2016 increased $4.4 billion, or 48%, compared to 2015. The increase was primarily attributable to higher net sales of approximately $4.6 billion from Sikorsky helicopter programs, which was acquired on November 6, 2015. Net sales for 2015 include Sikorsky’s results subsequent to the acquisition date, net of certain revenue adjustments required to account for the acquisition of this business. This increase was partially offset by lower net sales of approximately $115 million for IWSS programs due to decreased volume on various programs; and approximately $70 million for training and logistics programs due to the divestiture of our LMCFT business, which reported sales through the May 2, 2016 divestiture date.
RMS’ operating profit in 2016 increased $62 million, or 7%, compared to 2015. Operating profit increased approximately $85 million for training and logistics programs due primarily to the divestiture of our LMCFT business which generated operating losses through its May 2, 2016 divestiture date; about $30 million for our IWSS programs due to investments made in connection with a next generation radar technology program awarded during 2015; and approximately $55 million for C4USS programs due primarily to higher reserves for performance matters on an international program in 2015. These increases were partially offset by a decrease of $70 million as a result of a higher operating loss from Sikorsky, inclusive of the unfavorable impacts of intangible asset amortization and other adjustments required to account for the acquisition of this business; and about $25 million for other matters. Adjustments not related to volume, including net profit booking rate adjustments and reserves, were about $155 million higher in 2016 compared to 2015.
Backlog
Backlog increased in 2017 compared to 2016 primarily due to a new multi-year award at Sikorsky. Backlog decreased in 2016 compared to 2015 primarily due to sales being recognized on several multi-year programs (primarily in Sikorsky) related to prior year awards.
Space
Our Space business segment, previously known as Space Systems, is engaged in the research and development, design, engineering and production of satellites, strategic and defensive missile systems and space transportation systems. Space provides network-enabled situational awareness and integrates complex space and ground-based global systems to help our customers gather, analyze, and securely distribute critical intelligence data. Space is also responsible for various classified systems and services in support of vital national security systems. Space’s major programs include the Trident II D5 Fleet Ballistic Missile (FBM), AWE, Orion Multi-Purpose Crew Vehicle (Orion), Space Based Infrared System (SBIRS), Global Positioning System (GPS) III, Advanced Extremely High Frequency (AEHF), and The Mobile User Objective System (MUOS). Operating profit for our Space business segment includes our share of earnings for our investment in ULA, which provides expendable launch services to the U.S. Government. Space’s operating results included the following (in millions):
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | | 2016 |
| | | 2015 |
| |
Net sales | | $ | 9,473 |
| | | $ | 9,409 |
| | | $ | 9,105 |
| |
Operating profit | | 993 |
| | | 1,289 |
| | | 1,171 |
| |
Operating margin | | 10.5 |
| % | | 13.7 |
| % | | 12.9 |
| % |
Backlog at year-end | | $ | 17,267 |
| | | $ | 18,842 |
| | | $ | 17,375 |
| |
2017 compared to 2016
Space’s net sales in 2017 increased $64 million, or 1%, compared to 2016. The increase was attributable to approximately $810 million due to a full year of net sales from AWE in 2017 compared to four months of sales in 2016, which we began consolidating during the third quarter of 2016. This increase was partially offset by a decrease of approximately $300 million for space transportation programs due to a reduction in launch-related events; about $255 million for government satellite programs (primarily AEHF and SBIRS) due to lower volume; and approximately $190 million across other programs (including the Orion program) due to lower volume.
Space’s operating profit in 2017 decreased $296 million, or 23%, compared to 2016. Operating profit decreased about $127 million due to the pre-tax gain recorded in 2016 related to the consolidation of AWE; about $95 million for lower equity earnings from ULA; about $30 million for space transportation programs due to a reduction in launch-related events; a net decrease of about $25 million related to charges recorded in 2017 for performance matters on certain commercial satellite programs; and about $25 million for government satellite programs (primarily SBIRS and AEHF) due to a charge for performance matters and
lower volume. Adjustments not related to volume, including net profit booking rate adjustments and changes in reserves, were about $20 million higher in 2017 compared to 2016.
2016 compared to 2015
Space’s net sales in 2016 increased $304 million, or 3%, compared to 2015. The increase was attributable to net sales of approximately $410 million from AWE following the consolidation of this business in the third quarter of 2016; and approximately $150 million for commercial space transportation programs due to increased launch-related activities; and approximately $70 million of higher net sales for various programs (primarily FBM) due to increased volume. These increases were partially offset by a decrease in net sales of approximately $340 million for government satellite programs due to decreased volume (primarily SBIRS and MUOS) and the wind-down or completion of mission solutions programs.
Space’s operating profit in 2016 increased $118 million, or 10%, compared to 2015. The increase was primarily attributable to a non-cash, pre-tax gain of approximately $127 million related to the consolidation of AWE; and approximately $80 million of increased equity earnings from joint ventures (primarily ULA). These increases were partially offset by a decrease of approximately $105 million for government satellite programs due to lower risk retirements (primarily SBIRS, MUOS and mission solutions programs) and decreased volume. Adjustments not related to volume, including net profit booking rate adjustments, were approximately $185 million lower in 2016 compared to 2015.
Equity earnings
Total equity earnings recognized by Space (primarily ULA) represented approximately $205 million, $325 million and $245 million, or 21%, 25% and 21% of this business segment’s operating profit during 2017, 2016 and 2015.
Backlog
Backlog decreased in 2017 compared to 2016 primarily due to lower orders for government satellite programs, partially offset by higher orders on the Orion program. Backlog increased in 2016 compared to 2015 primarily due to the addition of AWE’s backlog.
Liquidity and Cash Flows
We have a balanced cash deployment strategy to 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, including capital expenditures, independent research and development and made selective business acquisitions, while returning cash to stockholders through dividends and share repurchases, and managing our debt levels, maturities and interest rates.
We have generated strong operating cash flows, which have been the primary source of funding for our operations, capital expenditures, debt service and repayments, dividends, share repurchases and postretirement benefit plan contributions. Our strong operating cash flows enabled our Board of Directors to approve two key cash deployment initiatives in September 2017. First, we increased our fourth quarter dividend rate by 10% to $2.00 per share. Second, the Board of Directors approved a $2.0 billion increase to our share repurchase program. Inclusive of this increase, the total remaining authorization for future common share repurchases under our program was $3.5 billion as of December 31, 2017.
During 2016, we received a one-time, tax-free special cash payment of approximately $1.8 billion as a result of the divestiture of the IS&GS business in the third quarter of 2016. We used the proceeds to repay $500 million of long-term notes at their scheduled maturity and paid $484 million in dividends with a portion of this cash. The remainder was used for share repurchases.
We have accessed the capital markets opportunistically as we did in February 2015 when we issued $2.25 billion of long-term debt and as needed as we did in November 2015 when we issued $7.0 billion of long-term debt in connection with our acquisition of Sikorsky. We also used a combination of short-term debt financing, commercial paper and available cash to fund the Sikorsky acquisition, as discussed below in “Capital Structure, Resources and Other” and “Note 10 – Debt” included in our Notes to Consolidated Financial Statements. We expect our cash from operations will continue to be sufficient to support our operations and anticipated capital expenditures for the foreseeable future. We also have access to credit markets, if needed, for liquidity or general corporate purposes, including, but not limited to, our 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. See our “Capital Structure, Resources and Other” section below for a discussion on financial resources available to us.
We will make contributions of $5.0 billion to our qualified defined benefit pension plans in 2018, including required and discretionary contributions. As a result of these contributions, we do not expect any material qualified defined benefit cash funding
will be required until 2021. We plan to fund these contributions and manage the timing of cash flows in 2018 using a mix of cash on hand and commercial paper. While we do not anticipate a need to do so, our capital structure and resources would allow us to issue new debt if circumstances change.
Cash received from customers, either from the payment of invoices for work performed or for advances in excess of costs incurred, is our primary source of cash. We generally do not begin work on contracts until funding is appropriated by the customer. However, we may determine to fund customer programs ourselves pending government appropriations and are doing so with increased frequency. If we incur costs in excess of funds obligated on the contract, 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 and time-and-materials contracts, which together represents approximately 37% of the sales we recorded in 2017, as we are authorized to bill as the costs are incurred or work is performed. 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 encompassed in the negotiation of each contract. The timing of such payments may differ from our incurrence of costs 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. While the total amount of cash collected on a contract is the same, performance-based payments have had a more favorable impact on the timing of our cash flows. In addition, our cash flows may be affected if the U.S. Government decides to withhold payments on our billings. While the impact of withholding payments delays the receipt of cash, the cumulative amount of cash collected during the life of the contract will not vary.
The majority of our capital expenditures for 2017 and those planned for 2018 are for equipment, facilities infrastructure and information technology. Expenditures for equipment and facilities infrastructure are generally incurred to support new and existing programs across all of our business segments. For example, we have projects underway in our Aeronautics business segment for facilities and equipment to support higher production of the F-35 combat aircraft, and we have projects underway to modernize certain of our facilities. 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.
The following table provides a summary of our cash flow information followed by a discussion of the key elements (in millions):
|
| | | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
Cash and cash equivalents at beginning of year | | $ | 1,837 |
| | $ | 1,090 |
| | $ | 1,446 |
|
Operating activities | | | | | | |
Net earnings | | 2,002 |
| | 5,302 |
| | 3,605 |
|
Non-cash adjustments | | 4,514 |
| | (35 | ) | | 821 |
|
Changes in working capital | | (431 | ) | | (1,042 | ) | | (846 | ) |
Other, net | | 391 |
| | 964 |
| | 1,521 |
|
Net cash provided by operating activities | | 6,476 |
| | 5,189 |
| | 5,101 |
|
Net cash used for investing activities | | (1,147 | ) | | (985 | ) | | (9,734 | ) |
Net cash (used for) provided by financing activities | | (4,305 | ) | | (3,457 | ) | | 4,277 |
|
Net change in cash and cash equivalents | | 1,024 |
| | 747 |
| | (356 | ) |
Cash and cash equivalents at end of year | | $ | 2,861 |
| | $ | 1,837 |
| | $ | 1,090 |
|
Operating Activities
2017 compared to 2016
Net cash provided by operating activities increased $1.3 billion in 2017 compared to 2016 primarily due to a decrease in cash used for working capital, a reduction in cash paid for income taxes and a reduction in cash paid for severance. The change in working capital is defined as receivables and inventories less accounts payable and customer advances and amounts in excess of costs incurred. The change in working capital was largely driven by timing of cash receipts for accounts receivable (primarily PAC-3, THAAD, LANTIRN® and SNIPER®, and Sikorsky helicopter programs) and lower inventory. We made net income tax
payments of $1.1 billion and $1.3 billion during the years ended December 31, 2017 and 2016. Our effective income tax rate and cash tax payments in years after 2017 are expected to benefit materially from the enactment of the Tax Act. We made interest payments of approximately $610 million and approximately $600 million during the years ended December 31, 2017 and 2016. In addition, cash provided by operating activities during the year ended December 31, 2016 included cash generated by IS&GS of approximately $310 million as we retained this cash as part of the divestiture. We will make contributions of $5.0 billion to our qualified defined benefit pension plans in 2018. For discussion of future postretirement benefit plan funding, see “Critical Accounting Policies - Postretirement Benefit Plans” (under the caption “Funding Considerations”).
2016 compared to 2015
Net cash provided by operating activities increased $88 million in 2016 compared to 2015 primarily due to a reduction in cash paid for income taxes, partially offset by an increase in cash paid for interest expense and an increase in cash used for working capital. The $196 million increase in cash flows used for working capital (defined as receivables and inventories less accounts payable and customer advances and amounts in excess of costs incurred) was attributable to timing of cash receipts for receivables (primarily F-35 program), partially offset by timing of production and billing cycles affecting customer advances and progress payments applied to inventories (primarily C-130 program). We made net income tax payments of $1.3 billion and $1.8 billion during the years ended December 31, 2016 and 2015, respectively. We made interest payments of approximately $600 million and $375 million during the years ended December 31, 2016 and 2015, respectively. In addition, cash provided by operating activities during the year ended December 31, 2016 and 2015 included cash generated by IS&GS of approximately $310 million and approximately $500 million as we retained this cash as part of the divestiture.
Investing Activities
Net cash used for investing activities increased $162 million in 2017 compared to 2016, primarily due to higher capital expenditures and cash proceeds received in the prior year related to properties sold. Net cash used for investing activities decreased $8.7 billion in 2016 compared to 2015, primarily due to $9.0 billion of cash used for acquisition activities in 2015 that did not recur in 2016. Acquisition activities include both the acquisition of businesses and investments in affiliates. We had no significant cash acquisitions in 2017 and 2016. In 2015, we paid $9.0 billion for the Sikorsky acquisition, net of cash acquired (see “Note 3 – Acquisitions and Divestitures” included in our Notes to Consolidated Financial Statements).
Capital expenditures amounted to $1.2 billion in 2017, $1.1 billion in 2016 and $939 million in 2015. The majority of our capital expenditures were 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.
Additionally, in 2015, we received cash proceeds of approximately $165 million related to three properties sold in California.
Financing Activities
Net cash used for financing activities increased $848 million in 2017 compared to 2016 primarily due to the receipt of a one-time special cash payment in 2016 from the divestiture of the IS&GS business and higher dividend payments in 2017, partially offset by the repayment of long-term debt in 2016 and a reduction in cash used for repurchases of common stock.
Net cash used for financing activities increased $7.7 billion in 2016 compared to 2015 primarily due to proceeds from the issuance of long-term debt in 2015 which did not recur in 2016, the repayments of long-term debt in 2016, and higher dividend payments, partially offset by the proceeds from the one-time special cash payment of $1.8 billion from the divestiture of the IS&GS business and a reduction in cash used for repurchases of common stock.
In May 2016, we repaid $452 million of long-term notes with a fixed interest rate of 7.65% according to their scheduled maturities. In September 2016, we repaid $500 million of long-term notes with a fixed interest rate of 2.13% according to their scheduled maturities.
In February 2015, we received net proceeds of $2.21 billion for the issuance of $2.25 billion of fixed interest-rate long-term notes. In November 2015, we borrowed $7.0 billion of fixed interest-rate long-term notes and received net proceeds of $6.9 billion (the November 2015 Notes). These proceeds were used to repay $6.0 billion of outstanding borrowings under a 364-day revolving credit facility that was used to finance a portion of the purchase price for the Sikorsky acquisition. Additionally, in the fourth quarter of 2015, to partially finance the Sikorsky acquisition we borrowed and repaid approximately $1.0 billion under our commercial paper program.
For additional information about our debt financing activities see the “Capital Structure, Resources and Other” discussion below and “Note 10 – Debt” included in our Notes to Consolidated Financial Statements.
We paid dividends totaling $2.2 billion ($7.46 per share) in 2017, $2.0 billion ($6.77 per share) in 2016 and $1.9 billion ($6.15 per share) in 2015. We paid quarterly dividends of $1.82 per share during each of the first three quarters of 2017 and $2.00 per share during the fourth quarter of 2017; $1.65 per share during each of the first three quarters of 2016 and $1.82 per share during the fourth quarter of 2016; and $1.50 per share during each of the first three quarters of 2015 and $1.65 per share during the fourth quarter of 2015.
We paid $2.0 billion, $2.1 billion and $3.1 billion to repurchase 7.1 million, 8.9 million and 15.2 million shares of our common stock during 2017, 2016 and 2015.
Cash received from the issuance of our common stock in connection with employee stock option exercises during 2017, 2016 and 2015 totaled $71 million, $106 million and $174 million. The exercises resulted in the issuance of 0.8 million, 1.2 million and 2.2 million shares of our common stock.
Capital Structure, Resources and Other
At December 31, 2017, we held cash and cash equivalents of $2.9 billion. As of December 31, 2017, approximately $580 million of our cash and cash equivalents was held outside of the U.S. by foreign subsidiaries. Those balances are generally available to fund ordinary business operations without legal or other restrictions and a significant portion could be immediately available to fund U.S. operations upon repatriation. While our investment in our foreign subsidiaries continues to be permanent in duration, in light of our decision to accelerate contributions to our defined benefit pension plans, earnings from certain foreign subsidiaries may be repatriated.
Our outstanding debt, net of unamortized discounts and issuance costs, amounted to $14.3 billion at December 31, 2017 and mainly is in the form of publicly-issued notes that bear interest at fixed rates. As of December 31, 2017, we were in compliance with all covenants contained in our debt and credit agreements.
We actively seek to finance our business in a manner that preserves financial flexibility while minimizing borrowing costs to the extent practicable. 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.
On occasion, our customers may seek deferred payment terms to purchase our products. In connection with these transactions, we may, at our customer’s request, enter into arrangements for the non-recourse sale of customer receivables to unrelated third–party financial institutions. For accounting purposes, these transactions are not discounted and are treated as a sale of receivables as we have no continuing involvement. The sale proceeds from the financial institutions are reflected in our operating cash flows on the statement of cash flows. During 2017, we sold approximately $698 million of customer receivables. There were no gains or losses related to sales of these receivables.
Revolving Credit Facilities
On October 9, 2015, we entered into a $2.5 billion revolving credit facility (the 5-year Facility) with various banks. The 5‑year Facility was amended in October 2017 to extend its expiration date by one year from October 9, 2021 to October 9, 2022. The 5‑year Facility is available for general corporate purposes. The undrawn portion of the 5-year Facility is also available to serve as a backup facility for the issuance of commercial paper. We may request and the banks may grant, at their discretion, an increase in the borrowing capacity under the 5-year Facility of up to an additional $500 million. There were no borrowings outstanding under the 5-year Facility as of December 31, 2017 and 2016.
Borrowings under the 5-year Facility are unsecured and bear interest at rates based, at our option, on a Eurodollar Rate or a Base Rate, as defined in the 5-year Facility’s agreement. Each bank’s obligation to make loans under the 5-year Facility is subject to, among other things, our compliance with various representations, warranties, and covenants, including covenants limiting our ability and certain of our subsidiaries’ ability to encumber assets and a covenant not to exceed a maximum leverage ratio, as defined in the 5‑year Facility agreement.
Long-Term Debt
In September 2017, we issued notes totaling approximately $1.6 billion with a fixed interest rate of 4.09% maturing in September 2052 (the New Notes) in exchange for outstanding notes totaling approximately $1.4 billion with fixed interest rates ranging from 4.70% to 8.50% maturing 2029 to 2046 (the Old Notes). In connection with the exchange of principal, we paid a premium of $237 million, substantially all of which was in the form of New Notes. This premium will be amortized as additional interest expense over the term of the New Notes using the effective interest method. We may, at our option, redeem some or all of the New Notes at any time by paying the principal amount of notes being redeemed plus a make-whole premium and accrued
and unpaid interest. Interest on the New Notes is payable on March 15 and September 15 of each year, beginning on March 15, 2018. The New Notes are unsecured senior obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness.
In September 2016, we repaid $500 million of long-term notes with a fixed interest rate of 2.13% according to their scheduled maturities. In May 2016, we repaid $452 million of long-term notes with a fixed interest rate of 7.65% according to their scheduled maturities. We also had related variable interest rate swaps with a notional amount of $450 million mature, which did not have a significant impact on net earnings or comprehensive income.
In November 2015, we issued $7.0 billion of notes (the November 2015 Notes) in a registered public offering with fixed rates ranging from 1.85% to 4.70% and maturing 2018 to 2046. We received net proceeds of $6.9 billion from the offering, after deducting discounts and debt issuance costs, which are being amortized as interest expense over the life of the debt. The proceeds of the November 2015 Notes were used to repay $6.0 billion of borrowings under our 364-day Facility and for general corporate purposes.
In February 2015, we issued $2.25 billion of notes (the February 2015 Notes) in a registered public offering with fixed rates ranging from 2.90% to 3.80% and maturing 2025 to 2045. We received net proceeds of $2.21 billion from the offering, after deducting discounts and debt issuance costs, which are being amortized as interest expense over the life of the debt. The proceeds of the February 2015 Notes were used for general corporate purposes.
We have an effective shelf registration statement on Form S-3 on file with the U.S. Securities and Exchange Commission to provide for the issuance of an indeterminate amount of debt securities.
Commercial Paper
We have agreements in place with financial institutions to provide for the issuance of commercial paper backed by our $2.5 billion 5-year Facility. During 2017, we borrowed and fully repaid amounts under our commercial paper programs. There were no commercial paper borrowings outstanding as of December 31, 2017. However, we may as conditions warrant issue commercial paper backed by our credit facility to manage the timing of cash flows and to fund a portion of our defined benefit pension contributions of approximately $5.0 billion in 2018.
Total Equity
Our total deficit was $609 million at December 31, 2017 compared to equity of $1.6 billion at December 31, 2016. The decrease in equity was primarily due to the estimated impact of the Tax Act, which resulted in a net one-time tax charge of $1.9 billion, the annual December 31 re-measurement adjustment related to our postretirement benefit plans of $1.4 billion, the repurchase of 7.1 million common shares for $2.0 billion; and dividends declared of $2.2 billion during the year. These decreases were partially offset by net earnings of $2.0 billion, which includes the $1.9 billion net tax charge, recognition of previously deferred postretirement benefit plan amounts of $802 million, and employee stock activity of $400 million (including the impacts of stock option exercises, ESOP activity and stock-based compensation).
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. If additional paid-in capital is reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings. Due to the volume of repurchases made under our share repurchase program, additional paid-in capital was reduced to zero, with the remainder of the excess purchase price over par value of $1.6 billion recorded as a reduction of retained earnings in 2017.
Contractual Commitments and Off-Balance Sheet Arrangements
At December 31, 2017, we had contractual commitments to repay debt, make payments under operating leases, settle obligations related to agreements to purchase goods and services and settle tax and other liabilities. Capital lease obligations were not material. Payments due under these obligations and commitments are as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due By Period |
| | Total | | Less Than 1 Year | | Years 2 and 3 | | Years 4 and 5 | | After 5 Years |
Long-term debt (a) | | $ | 15,488 |
| | $ | 750 |
| | $ | 2,150 |
| | $ | 906 |
| | $ | 11,682 |
|
Interest payments | | 10,510 |
| | 624 |
| | 1,180 |
| | 1,048 |
| | 7,658 |
|
Other liabilities | | 2,883 |
| | 256 |
| | 561 |
| | 412 |
| | 1,654 |
|
Operating lease obligations | | 623 |
| | 162 |
| | 270 |
| | 136 |
| | 55 |
|
Purchase obligations: | |
| | | | | | | | |
Operating activities | | 42,542 |
| | 23,751 |
| | 15,011 |
| | 2,477 |
| | 1,303 |
|
Capital expenditures | | 522 |
| | 398 |
| | 105 |
| | 19 |
| | — |
|
Total contractual cash obligations | | $ | 72,568 |
| | $ | 25,941 |
|
| $ | 19,277 |
|
| $ | 4,998 |
|
| $ | 22,352 |
|
| |
(a)
| Long-term debt includes scheduled principal payments only and excludes approximately $10 million of debt issued by a consolidated joint venture, for which the debt is not guaranteed by us. |
The table above excludes estimated minimum funding requirements for our qualified defined benefit pension plans. For additional information about our future minimum contributions for these plans, see “Note 11 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements. Amounts related to other liabilities represent the contractual obligations for certain long-term liabilities recorded as of December 31, 2017. Such amounts mainly include expected payments under non-qualified pension plans, environmental liabilities and deferred compensation plans.
Purchase obligations related to operating activities include agreements and contracts that give the supplier recourse to us for cancellation or nonperformance under the contract or contain terms that would subject us to liquidated damages. Such agreements and contracts may, for example, be related to direct materials, obligations to subcontractors and outsourcing arrangements. Total purchase obligations for operating activities in the preceding table include approximately $37.3 billion related to contractual commitments entered into as a result of contracts we have with our U.S. Government customers. The U.S. Government generally would be required to pay us for any costs we incur relative to these commitments if they were to terminate the related contracts “for convenience” under the Federal Acquisition Regulation (FAR), subject to available funding. This also would be true in cases where we perform subcontract work for a prime contractor under a U.S. Government contract. The termination for convenience language also may be included in contracts with foreign, state and local governments. We also have contracts with customers that do not include termination for convenience provisions, including contracts with commercial customers.
Purchase obligations in the preceding table for capital expenditures generally include facilities infrastructure, equipment and information technology.
We also may enter into industrial cooperation agreements, sometimes referred to as offset agreements, as a condition to obtaining orders for our products and services from certain customers in foreign countries. These agreements are designed to enhance the social and economic environment of the foreign country by requiring the contractor to promote investment in the country. Offset agreements may be satisfied through activities that do not require us to use cash, including transferring technology, providing manufacturing and other consulting support to in-country projects and the purchase by third parties (e.g., our vendors) of supplies from in-country vendors. These agreements also may be satisfied through our use of cash for such activities as purchasing supplies from in-country vendors, providing financial support for in-country projects, establishment of ventures with local companies and building or leasing facilities for in-country operations. We typically do not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied against our offset agreements are based on negotiations with the customer and typically require cash outlays that represent only a fraction of the original amount in the offset agreement. Satisfaction of our offset obligations are included in the estimates of our total costs to complete the contract and may impact our sales, profitability and cash flows. Our ability to recover investments on our consolidated balance sheet that we make to satisfy offset obligations is generally dependent upon the successful operation of ventures that we do not control and may involve products and services that are dissimilar to our business activities. At December 31, 2017, the notional value of remaining obligations under our outstanding offset agreements totaled approximately $13.4 billion, which primarily relate to our Aeronautics, MFC and RMS business segments, most of which extend through 2044. To the extent we have entered into purchase or other obligations at December 31, 2017 that also satisfy offset agreements, those amounts are included in the preceding table. Offset programs usually extend over several years and may provide for penalties, estimated at approximately $1.6 billion at December 31, 2017, in the
event we fail to perform in accordance with offset requirements. While historically we have not been required to pay material penalties, resolution of offset requirements are often the result of negotiations and subjective judgments.
In connection with our 50% ownership interest of ULA, we and The Boeing Company (Boeing) are required to provide ULA an additional capital contribution if ULA is unable to make required payments under its inventory supply agreement with Boeing. As of December 31, 2017, ULA’s total remaining obligation to Boeing under the inventory supply agreement was $120 million. The parties have agreed to defer the remaining payment obligation, as it is more than offset by other commitments to ULA. Accordingly, we do not expect to be required to make a capital contribution to ULA under this agreement.
In addition, both we and Boeing have cross-indemnified each other for guarantees by us and Boeing of the performance and financial obligations of ULA under certain launch service contracts. We believe ULA will be able to fully perform its obligations, as it has done through December 31, 2017, and that it will not be necessary to make payments under the cross-indemnities or guarantees.
We have entered into standby letters of credit and surety bonds issued on our behalf by financial institutions and other directly issued guarantees to third parties primarily relating to advances received from customers and the guarantee of future performance on certain contracts. 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 venture partners. At December 31, 2017, we had the following outstanding letters of credit, surety bonds and third-party guarantees (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | Commitment Expiration By Period |
| | Total Commitment | | Less Than 1 Year | | Years 2 and 3 | | Years 4 and 5 | | After 5 Years |
Standby letters of credit (a) | | $ | 2,187 |
| | $ | 959 |
| | $ | 733 |
| | $ | 454 |
| | $ | 41 |
|
Surety bonds | | 368 |
| | 357 |
| | 2 |
| | 9 |
| | — |
|
Third-party Guarantees | | 750 |
| | 17 |
| | 338 |
| | — |
| | 395 |
|
Total commitments | | $ | 3,305 |
| | $ | 1,333 |
| | $ | 1,073 |
| | $ | 463 |
| | $ | 436 |
|
| |
(a)
| Approximately $640 million of standby letters of credit in the “Less Than 1 Year” category, $473 million in the “Years 2 and 3” category and $277 million in the “Years 4 and 5” category are expected to renew for additional periods until completion of the contractual obligation. |
At December 31, 2017, third-party guarantees totaled $750 million, of which approximately 62% related to guarantees of contractual performance of ventures to which we currently are or previously were a party. This amount represents our estimate of the maximum amount we would expect to incur upon the contractual non-performance of the venture, 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 venture partner.
In determining our exposures, we evaluate the reputation, performance on contractual obligations, technical capabilities and credit quality of our current and former venture partners and the transferee under novation agreements all of which include a guarantee as required by the FAR. There were no material amounts recorded in our financial statements related to third-party guarantees or novation agreements.
Critical Accounting Policies
Contract Accounting / Sales Recognition
Substantially all of our net sales are accounted for using the percentage-of-completion method, which requires that significant estimates and assumptions be made in accounting for the contracts. Our remaining net sales are derived from contracts to provide services to non-U.S. Government customers, which we account for under a services accounting model.
We evaluate new or significantly modified contracts with customers other than the U.S. Government, to the extent the contracts include multiple elements, to determine if the individual deliverables should be accounted for as separate units of accounting. When we determine that accounting for the deliverables as separate units is appropriate, we allocate the contract value to the deliverables based on their relative estimated selling prices. The contracts or contract modifications we evaluate for multiple elements typically are long-term in nature and include the provision of both products and services. Based on the nature of our business, we generally account for components of such contracts using the percentage-of-completion accounting model or the services accounting model, as appropriate.
We classify net sales as products or services on our consolidated statements of earnings based on the predominant attributes of the underlying contract. Most of our long-term contracts are denominated in U.S. dollars, including contracts for sales of military products and services to international governments contracted through the U.S. Government.
Contract Types
Our contracts generally record sales for both products and services under fixed-price, cost-reimbursable and time-and-materials contracts.
Fixed-price contracts
Under fixed-price contracts, which accounted for about 63%, 61%, and 57% of our total net sales in 2017, 2016, and 2015, we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Some fixed-price contracts have a performance-based component under which we may earn incentive payments or incur financial penalties based on our performance.
Cost-reimbursable contracts
Cost-reimbursable contracts, which accounted for about 37%, 38%, and 42% of our total net sales in 2017, 2016, and 2015, provide for the payment of allowable costs incurred during performance of the contract plus a fee, up to a ceiling based on the amount that has been funded. We generate revenue under two general types of cost-reimbursable contracts: cost-plus-award-fee/incentive-fee contracts, which represent a substantial majority of our cost-reimbursable contracts; and cost-plus-fixed-fee contracts.
Cost-plus-award-fee contracts provide for an award fee that varies within specified limits based on the customer’s assessment of our performance against a predetermined set of criteria, such as targets based on cost, quality, technical and schedule criteria. Cost-plus-incentive-fee contracts provide for reimbursement of costs plus a fee which is adjusted by a formula based on the relationship of total allowable costs to total target costs (incentive based on cost) or reimbursement of costs plus an incentive to exceed stated performance targets (incentive based on performance). The fixed fee in a cost-plus-fixed-fee contract is negotiated at the inception of the contract and that fixed fee does not vary with actual costs.
Percentage-of-Completion Method
We record net sales and estimated profits for substantially all of our contracts using the percentage-of-completion method for fixed-price and cost-reimbursable contracts for products and services with the U.S. Government.
The percentage-of-completion method for product contracts depends on the nature of the products provided under the contract. For example, for contracts that require us to perform a significant level of development effort in comparison to the total value of the contract and/or to deliver minimal quantities, sales are recorded using the cost-to-cost method to measure progress toward completion. Under the cost-to-cost method of accounting, we recognize sales and an estimated profit as costs are incurred based on the proportion that the incurred costs bear to total estimated costs. For contracts that require us to provide a substantial number of similar items without a significant level of development, we record sales and an estimated profit on a percentage-of-completion basis using units-of-delivery as the basis to measure progress toward completing the contract. For contracts to provide services to the U.S. Government, sales are generally recorded using the cost-to-cost method.
Award and incentive fees, as well as penalties related to contract performance, are considered in estimating sales and profit rates on contracts accounted for under the percentage-of-completion method. Estimates of award fees are based on past experience and anticipated performance. We record incentives or penalties when there is sufficient information to assess anticipated contract performance. Incentive provisions that increase or decrease earnings based solely on a single significant event are not recognized until the event occurs.
Accounting for contracts using the percentage-of-completion method requires judgment relative to assessing risks, estimating contract sales and costs (including estimating award and incentive fees and penalties related to performance) and making assumptions for schedule and technical issues. Due to the number of years it may take to complete many of our contracts and the scope and nature of the work required to be performed on those contracts, the estimation of total sales and costs at completion is complicated and subject to many variables and, accordingly, is subject to change. When adjustments in estimated total contract sales or estimated total costs are required, any changes from prior estimates are recognized in the current period for the inception-to-date effect of such changes.
Our estimates of costs at completion of the contract are based on assumptions we make for variables such as labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the contract (to estimate increases in wages and prices for materials), performance by our subcontractors and the availability and
timing of funding from our customer, among other variables. When estimates of total costs to be incurred on a contract exceed estimates of total sales to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.
Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract, 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 total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surroundingrelated to the technical, schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate.
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. Lower than expected supply chain activity negatively affected our net sales during 2021.
Changes in net sales and operating profit generally are expressed in terms of volume. 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.
In addition, comparability of our business segment sales, operating profit and operating marginsmargin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts accounted for which we recognize revenue over time using the percentage-of-completion cost-to-cost method of accounting.to measure progress towards completion. Increases in the profit booking rates, typically referred to as risk retirements, 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 completefulfill the performance obligations and a reduction in the profit booking rate. 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 marginsmargin may also be impacted favorably or unfavorably by other items.items, which may or may not impact sales. Favorable items may include the positive resolution of contractual matters, cost recoveries on severance and restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring charges, except for significant severance actions, (such as those mentioned in “Note 15 – Restructuring Charges” included in our Notes to Consolidated Financial Statements), which are excluded from segment operatingoperating results; reserves for disputes; certain asset impairments; and losses on sales of certain assets.
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, increased segment operating profit by approximately $2.0 billion in 2021 and $1.8 billion in 2020. The consolidated net adjustments in 2021 compared to 2020 increased primarily due to increases in profit booking rate adjustments at Space, MFC and RMS offset by a decrease in Aeronautics. The consolidated net adjustments for 2021 are inclusive of approximately $900 million in unfavorable items, which include reserves for a classified program at Aeronautics, various programs at RMS and a commercial ground solutions program at Space. The consolidated net adjustments for 2020 are inclusive of approximately $745 million in unfavorable items, which include reserves for various programs at RMS, government satellite programs at Space and performance matters on a sensors and global sustainment international military program at MFC.
We periodically experience performance issues and record losses for certain programs. For further discussion on certain programs at Aeronautics and RMS, see “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for more information.
Aeronautics
Our Aeronautics business segment is engaged in the research, design, development, manufacture, integration, sustainment, support and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies. Aeronautics’ major programs include the F-35 Lightning II Joint Strike Fighter, C‑130 Hercules, F-16 Fighting Falcon and F-22 Raptor. Aeronautics’ operating results included the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | | 2020 | | | 2019 | |
Net sales | | $ | 26,748 | | | | $ | 26,266 | | | | $ | 23,693 | | |
Operating profit | | 2,799 | | | | 2,843 | | | | 2,521 | | |
Operating margin | | 10.5 | | % | | 10.8 | | % | | 10.6 | | % |
Backlog at year-end | | $ | 49,118 | | | | $ | 56,551 | | | | $ | 55,636 | | |
Aeronautics’ net sales in 2021 increased $482 million, or 2%, compared to 2020. The increase was primarily attributable to higher net sales of approximately $290 million on classified contracts due to higher volume; about $180 million for the F-16 program due to higher volume on production contracts that was partially offset by lower sustainment volume; approximately $75 million for the F-35 program primarily due to higher volume on production and sustainment contracts that was partially offset by lower volume on development contracts; and about $30 million for the C-130 program primarily due to higher volume on production contracts and higher risk retirements on sustainment activities. These increases were partially offset by a decrease of approximately $170 million for lower sustainment volume for the F-22 program.
Aeronautics’ operating profit in 2021 decreased $44 million, or 2%, compared to 2020. The decrease was primarily attributable to lower operating profit of approximately $120 million for classified contracts primarily due to a $225 million loss recognized in the second quarter of 2021 for performance issues experienced on a classified program that was partially offset by higher risk retirements on other classified programs recognized in the second half of 2021; and about $70 million for the F-35 program due to lower risk retirements and volume on development contracts and lower risk retirements on production contracts that were partially offset by higher risk retirements and volume on sustainment contracts. These decreases were partially offset by an increase of approximately $90 million for the C-130 program due to higher risk retirements on sustainment contracts; and about $50 million for the F-16 program due to higher risk retirements on sustainment contracts and higher production volume. Adjustments not related to volume, including net profit booking rate adjustments, were $60 million lower in 2021 compared to 2020.
Backlog
Backlog decreased in 2021 compared to 2020 primarily due to prolonged negotiations for F-35 production contracts resulting in lower orders in 2021.
Trends
We expect Aeronautics’ 2022 net sales to increase in the low-single digit range from 2021 driven by growth in F-16, F-22 and classified volume. Operating profit is expected to increase in the low-single digit range above 2021 levels. Operating profit margin for 2022 is expected to be in line with 2021 levels.
Missiles and Fire Control
Our MFC business segment provides air and missile defense systems; tactical missiles and air-to-ground precision strike weapon systems; logistics; fire control systems; mission operations support, readiness, engineering support and integration services; manned and unmanned ground vehicles; and energy management solutions. MFC’s major programs include PAC‑3, THAAD, Multiple Launch Rocket System (MLRS), Hellfire, Joint Air-to-Surface Standoff Missile (JASSM), Apache fire control system, Sniper Advanced Targeting Pod (SNIPER®), Infrared Search and Track (IRST21®) and Special Operations Forces Global Logistics Support Services (SOF GLSS). MFC’s operating results included the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | | 2020 | | | 2019 | |
Net sales | | $ | 11,693 | | | | $ | 11,257 | | | | $ | 10,131 | | |
Operating profit | | 1,648 | | | | 1,545 | | | | 1,441 | | |
Operating margin | | 14.1 | | % | | 13.7 | | % | | 14.2 | | % |
Backlog at year-end | | $ | 27,021 | | | | $ | 29,183 | | | | $ | 25,796 | | |
MFC’s net sales in 2021 increased $436 million, or 4%, compared to 2020. The increase was primarily attributable to higher net sales of approximately $340 million for integrated air and missile defense programs due to higher volume and risk retirements (primarily PAC-3); and about $215 million for tactical and strike missile programs due to higher volume (primarily LRASM and JASSM). These increases were partially offset by a decrease of approximately $90 million for sensors and global sustainment programs due to lower volume (primarily SNIPER® and Apache) that was partially offset by close out activities related to the Warrior Capability Sustainment Program (Warrior) that was terminated by the customer in March 2021.
MFC’s operating profit in 2021 increased $103 million, or 7%, compared to 2020. The increase was primarily attributable to higher operating profit of approximately $65 million for integrated air and missile defense programs due to higher risk retirements and volume (primarily PAC-3); about $45 million for tactical and strike missile programs due to higher volume (primarily LRASM and JASSM) and higher risk retirements (primarily GMLRS); and approximately $20 million for sensors and global sustainment programs due to the reversal of a portion of previously recorded losses on the Warrior program in the second and third quarters of 2021 that will not recur as a result of the program being terminated, which was partially offset by lower volume (primarily SNIPER and Apache). These increases were partially offset by charges of approximately $25 million due to performance issues on an energy program during the third quarter of 2021. Adjustments not related to volume, including net profit booking rate adjustments, were $85 million higher in 2021 compared to 2020.
Backlog
Backlog decreased in 2021 compared to 2020 primarily due to lower orders on PAC-3 and air dominance programs.
Trends
We expect MFC’s 2022 net sales to decrease in the low-single digit range from 2021 driven by volume on SOF GLSS and funding on a classified program. Operating profit is expected to decrease in the low-single digit range below 2021 levels. Operating profit margin for 2022 is expected to increase slightly from 2021 levels.
Rotary and Mission Systems
RMS designs, manufactures, services and supports various military and commercial helicopters, surface ships, sea and land-based missile defense systems, radar systems, sea and air-based mission and combat systems, command and control mission solutions, cyber solutions, and simulation and training solutions. RMS’ major programs include Aegis Combat System, Littoral Combat Ship (LCS), Multi-Mission Surface Combatant (MMSC), Black Hawk® and Seahawk® helicopters, CH-53K King Stallion heavy lift helicopter, Combat Rescue Helicopter (CRH), VH-92A helicopter, and the C2BMC program. RMS’ operating results included the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | | 2020 | | | 2019 | |
Net sales | | $ | 16,789 | | | | $ | 15,995 | | | | $ | 15,128 | | |
Operating profit | | 1,798 | | | | 1,615 | | | | 1,421 | | |
Operating margin | | 10.7 | | % | | 10.1 | | % | | 9.4 | | % |
Backlog at year-end | | $ | 33,700 | | | | $ | 36,249 | | | | $ | 34,296 | | |
RMS’ net sales in 2021 increased $794 million, or 5%, compared to 2020. The increase was primarily attributable to higher net sales of $540 million for Sikorsky helicopter programs due to higher production volume (Black Hawk, CH-53K and CRH); and about $340 million for TLS programs primarily due to the delivery of an international pilot training system in the first quarter of 2021. These increases were partially offset by lower net sales of about $65 million for integrated warfare systems and sensors (IWSS) programs due to lower volume on the LCS and TPQ-53 programs that were partially offset by higher volume on the Canadian Surface Combatant (CSC) and Aegis programs.
RMS’ operating profit in 2021 increased $183 million, or 11%, compared to 2020. The increase was primarily attributable to higher operating profit of approximately $140 million for Sikorsky helicopter programs due to higher risk retirements (Black Hawk and CH-53K), higher production volume (Black Hawk and CRH), and lower charges on the CRH program in the first half of 2021; and about $10 million for TLS programs due to the delivery of an international pilot training system in the first quarter of 2021. Operating profit for IWSS programs was comparable as lower risk retirements on the LCS program and lower volume on the TPQ-53 program were offset by higher volume on the CSC program and lower charges on a ground-based radar program. Adjustments not related to volume, including net profit booking rate adjustments, were $80 million higher in 2021 compared 2020.
Backlog
Backlog decreased in 2021 compared to 2020 primarily due to lower orders on Sikorsky programs.
Trends
We expect RMS’ 2022 net sales to decrease in the low-single digit range from 2021 driven by the delivery of a training system on an international pilot training program at RMS in 2021, as well as from lower volume on Black Hawk. Operating profit is expected to decline in the high-single digit range below 2021. Operating profit margin for 2022 is expected to be lower than 2021 levels.
Space
Our Space business segment is engaged in the research and development, design, engineering and production of satellites, space transportation systems, and strategic, advanced strike and defensive systems. Space provides network-enabled situational awareness and integrates complex space and ground global systems to help our customers gather, analyze, and securely distribute critical intelligence data. Space is also responsible for various classified systems and services in support of vital national security systems. Space’s major programs include the Trident II D5 Fleet Ballistic Missile (FBM), Orion Multi-Purpose Crew Vehicle (Orion), Space Based Infrared System (SBIRS) and Next Generation Overhead Persistent Infrared (Next Gen OPIR) system, Global Positioning System (GPS) III, hypersonics programs and Next Generation Interceptor (NGI). Operating profit for our Space business segment includes our share of earnings for our investment in ULA, which provides expendable launch services to the U.S. Government and commercial customers. Space’s operating results included the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | | 2020 | | | 2019 | |
Net sales | | $ | 11,814 | | | | $ | 11,880 | | | | $ | 10,860 | | |
Operating profit | | 1,134 | | | | 1,149 | | | | 1,191 | | |
Operating margin | | 9.6 | | % | | 9.7 | | % | | 11.0 | | % |
Backlog at year-end | | $ | 25,516 | | | | $ | 25,148 | | | | $ | 28,253 | | |
Space’s net sales in 2021 decreased $66 million, or 1%, compared to 2020. The decrease was primarily attributable to lower net sales of approximately $535 million due to the renationalization of the AWE program; and about $105 million for commercial civil space programs due to lower volume (primarily Orion). These decreases were partially offset by higher net sales of approximately $405 million for strategic and missile defense programs due to higher volume (primarily hypersonic development and NGI programs); and about $140 million for national security space programs due to higher volume and risk retirements (primarily Next Gen OPIR and SBIRS).
Space’s operating profit in 2021 decreased $15 million, or 1%, compared to 2020. The decrease was primarily attributable to approximately $70 million of lower equity earnings from the company's investment in ULA due to lower launch volume and launch vehicle mix; and about $20 million due to the renationalization of the AWE program. These decreases were partially offset by an increase of about $35 million for strategic and missile defense programs due to higher volume (primarily hypersonic development programs); and approximately $25 million for national security space programs due to higher risk retirements (primarily SBIRS and classified programs) and higher volume (primarily Next Gen OPIR) that was partially offset by charges of about $80 million on a commercial ground solutions program. Operating profit was comparable for commercial civil space programs as higher risk retirements (primarily space transportation programs) were offset by lower volume (primarily Orion). Adjustments not related to volume, including net profit booking rate adjustments, were $100 million higher in 2021 compared to 2020.
Equity earnings
Total equity earnings recognized by Space (primarily ULA) represented approximately $65 million and $135 million, or 6% and 12%, of this business segment’s operating profit during 2021 and 2020.
Backlog
Backlog increased in 2021 compared to 2020 primarily due to multi-year contract awards in national security space (Next Gen OPIR) and strategic missile defense (Next Generation Interceptor). These backlog increases were partially offset by higher sales on hypersonic development programs and the renationalization of the Atomic Weapons Establishment.
Trends
We expect Space’s 2022 net sales to decrease in the mid-single digit levels from 2021 primarily driven by the renationalization of the AWE and lower volume on OPIR/SBIRS due to program lifecycles, partially offset by growth on the NGI program. Operating profit is expected to decrease in the high single-digit level from 2021. Operating profit margin for 2022 is expected to be lower than 2021 levels.
Liquidity and Cash Flows
As of December 31, 2021, we had cash and cash equivalents of $3.6 billion. 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 our 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. 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, either from the payment of invoices for work performed or for advances from non-U.S. Government customers in excess of costs incurred, is our primary source of cash. We generally do not begin work on contracts until funding is appropriated by the customer. However, we may determine to fund customer programs ourselves pending government appropriations. If we incur costs in excess of funds obligated on the contract, 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 38% of the sales we recorded in 2021, 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 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. In March 2020, the DoD increased the percentage rate for certain progress payments from 80% to 90%. Our cash flows may be affected if the U.S. Government changes its payment policies or decides to withhold payments on our billings. While the impact of policy changes or withholding payments may delay the receipt of cash, the cumulative amount of cash collected during the life of the contract should not vary.
We have a balanced cash deployment strategy to invest in our business and key technologies to provide our customers with enhanced capabilities, enhance stockholder value, and position ourselves to take advantage of new business opportunities when they arise. Consistent with that strategy, we have continued to invest in our business and technologies through capital expenditures, independent research and development, and selective business acquisitions and investments. We have returned cash to stockholders through dividends and share repurchases. We also continue to actively manage our debt levels, including maturities and interest rates, and our pension obligations. We expect to continue to opportunistically manage our pension liabilities through the purchase of group annuity contracts for portions of our outstanding defined benefit pension obligations using assets from the pension trust.
In September 2021, our Board of Directors increased our dividend rate in the fourth quarter by $0.20 to $2.80 per share and approved a $5.0 billion increase to our share repurchase program. Inclusive of this increase, the total remaining authorization for future common share repurchases under our program was $3.9 billion as of December 31, 2021.
As disclosed in the “Business Overview” section above, on December 20, 2020, we entered into an agreement to acquire Aerojet Rocketdyne for approximately $4.4 billion after the assumption of Aerojet Rocketdyne’s then-projected net cash and are awaiting a final FTC decision. If the transaction is completed, we expect to finance the acquisition primarily through new debt issuances. Please see the “Business Overview” above for the status of the transaction.
On August 3, 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. The group annuity contracts were purchased using assets from Lockheed Martin’s master retirement trust and no additional funding
contribution was required by us. See “Note 12 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements for additional information. We expect to continue to opportunistically manage our pension liabilities through the purchase of group annuity contracts for portions of our outstanding defined benefit pension obligations using assets from the pension trust. Future pension risk transfer transactions could also be significant and result in us making additional contributions to the pension trust and/or require us to recognize noncash pension settlement charges in earnings in the applicable reporting period.
To date, the effects of COVID-19 have resulted in some negative impacts on our cash flows, partially due to supplier delays. The U.S. Government has taken certain actions and enacted legislation to mitigate the impacts of COVID-19 on public health, the economy, state and local governments, individuals, and businesses. Since the pandemic began, Lockheed Martin has remained committed to flowing down the benefits received from the DoD’s modification of the progress payment rate to our supply chain partners. As of December 31, 2021, we have received approximately $1.5 billion of net accelerated progress payments, the majority of which were in 2020. We continue to use accelerated progress payments and cash on hand to accelerate payments to our suppliers. As of December 31, 2021, we have accelerated $2.2 billion of payments to our suppliers that are due by their terms in future periods. We will continue to monitor risk driven by the pandemic and, based on our current assessment, we will continue to accelerate payments to our suppliers based on risk assessed need through the end of 2022. Consistent with our current acceleration approach, we will prioritize small and COVID-19 impacted businesses.
On March 11, 2021, the President signed the American Rescue Plan Act of 2021 (ARPA) into law. ARPA eased funding rules for single-employer defined benefit pension plans by extending the amortization of funding shortfalls and enhancing interest rate stabilization, which has the effect of reducing the funding requirements for our single-employer defined benefit pension plans beginning in 2021 and reducing the amount of CAS pension costs allocated to our U.S. Government contracts beginning in 2022. The lower pension contributions will be partially offset by lower tax deductions.
The following table provides a summary of our cash flow information followed by a discussion of the key elements (in millions): | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
Cash and cash equivalents at beginning of year | | $ | 3,160 | | | $ | 1,514 | | | $ | 772 | |
Operating activities | | | | | | |
Net earnings | | 6,315 | | | 6,833 | | | 6,230 | |
Noncash adjustments | | 3,109 | | | 1,726 | | | 1,549 | |
Changes in working capital | | 9 | | | 101 | | | (672) | |
Other, net | | (212) | | | (477) | | | 204 | |
Net cash provided by operating activities | | 9,221 | | | 8,183 | | | 7,311 | |
Net cash used for investing activities | | (1,161) | | | (2,010) | | | (1,241) | |
Net cash used for financing activities | | (7,616) | | | (4,527) | | | (5,328) | |
Net change in cash and cash equivalents | | 444 | | | 1,646 | | | 742 | |
Cash and cash equivalents at end of year | | $ | 3,604 | | | $ | 3,160 | | | $ | 1,514 | |
Operating Activities
Net cash provided by operating activities increased $1.0 billion in 2021 compared to 2020. The increase in cash from operating activities was primarily attributable to lower pension contributions, as we made no contributions in 2021 compared to a pension contribution of $1.0 billion in 2020, and an increase of approximately $865 million in cash from our net earnings adjusted for noncash items. These increases in cash from operations were partially offset by an increase of approximately $720 million in payroll taxes and an increase of about $100 million in accelerated payments to our supply chain. During 2021, we paid employer payroll taxes of $942 million, compared to $222 million during 2020. The increase in employer payroll taxes was due to the deferral of $460 million of payments in 2020, half of which were paid in the fourth quarter of 2021 and half of which will be paid in the fourth quarter of 2022, pursuant to the CARES Act. As of December 31, 2021, we accelerated $2.2 billion of payments to suppliers that were due in the first quarter of 2022, compared to $2.1 billion of payments to suppliers as of December 31, 2020 that were due in the first quarter of 2021. Our federal and foreign income tax payments, net of refunds, were $1.4 billion in both 2021 and 2020.
Investing Activities
Cash flows related to investing activities primarily include capital expenditures and payments for acquisitions and divestitures of businesses and investments. The majority of our capital expenditures are for equipment and facilities
infrastructure that generally are incurred to support new and existing programs across all of our business segments. We also incur capital expenditures for information technology to support programs and general enterprise information technology infrastructure, inclusive of costs for the development or purchase of internal-use software.
Net cash used for investing activities decreased $849 million in 2021 compared to 2020. The decrease in net cash used for investing activities is primarily attributable to proceeds of $307 million received in 2021 from the sale of our ownership interest in the AMMROC joint venture, cash payments of $282 million for various business acquisitions in 2020, and a decrease of $244 million in capital expenditures. Capital expenditures totaled $1.5 billion in 2021, compared to $1.8 billion in 2020.
Financing Activities
Net cash used for financing activities increased $3.1 billion in 2021 compared to 2020, primarily due to increased repurchases of common stock and higher dividend payments.
During 2021, we paid $4.1 billion to repurchase 11.7 million shares of our common stock, of which 2.2 million shares were received upon settlement in January 2022. During 2020, we paid $1.1 billion to repurchase 3.0 million shares of our common stock.
We paid dividends totaling $2.9 billion ($10.60 per share) in 2021 and $2.8 billion ($9.80 per share) in 2020. We paid quarterly dividends of $2.60 per share during each of the first three quarters of 2021 and $2.80 per share during the fourth quarter of 2021. We paid quarterly dividends of $2.40 per share during each of the first three quarters of 2020 and $2.60 per share during the fourth quarter of 2020.
In September 2021, we repaid $500 million of long-term notes with a fixed interest rate of 3.35% according to their scheduled maturities.
In May 2020, we received net cash proceeds of $1.1 billion from the issuance of senior unsecured notes. In June 2020, we used the net proceeds from the offering plus cash on hand to redeem $750 million of notes due in 2020 and $400 million of notes due in 2021, each at their redemption price.
In October 2020, we repaid $500 million of long-term notes with a fixed interest rate of 2.50% due in November 2020.
Capital Structure, Resources and Other
At December 31, 2021, we held cash and cash equivalents of $3.6 billion that was generally available to fund ordinary business operations without significant legal, regulatory, or other restrictions.
Our outstanding debt, net of unamortized discounts and issuance costs was $11.7 billion as of December 31, 2021 and is in the form of publicly-issued notes that bear interest at fixed rates. As of December 31, 2021, we had $6 million of short-term borrowings due within one year, which are scheduled to mature in the first quarter of 2022. As of December 31, 2021, we were in compliance with all covenants contained in our debt and credit agreements. See “Note 11 – Debt”included in our Notes to Consolidated Financial Statements for more information on our long-term debt and revolving credit facilities.
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.
Contractual Commitments
At December 31, 2021, we had contractual commitments to repay debt, make payments under operating leases, settle obligations related to agreements to purchase goods and services and settle tax and other liabilities. Financing lease obligations were not material. Payments due under these obligations and commitments are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Total | | Due Within 1 Year | | | | | | |
Total debt | | $ | 12,799 | | | $ | 6 | | | | | | | |
Interest payments | | 8,827 | | | 537 | | | | | | | |
Other liabilities | | 2,503 | | | 242 | | | | | | | |
Operating lease obligations | | 1,566 | | | 325 | | | | | | | |
Purchase obligations: | | | | | | | | | | |
Operating activities | | 56,923 | | | 25,139 | | | | | | | |
Capital expenditures | | 737 | | | 582 | | | | | | | |
Total contractual cash obligations | | $ | 83,355 | | | $ | 26,831 | | | | | | | |
The table above includes debt presented gross of any unamortized discounts and issuance costs, but excludes the net unfunded obligation and estimated minimum funding requirements related to our qualified defined benefit pension plans. For additional information about obligations and our future minimum contribution requirements for these plans, see “Note 12 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements. Amounts related to other liabilities represent the contractual obligations for certain long-term liabilities recorded as of December 31, 2021. Such amounts mainly include expected payments under non-qualified pension plans, environmental liabilities and deferred compensation plans.
Purchase obligations related to operating activities include agreements and contracts that give the supplier recourse to us for cancellation or nonperformance under the contract or contain terms that would subject us to liquidated damages. Such agreements and contracts may, for example, be related to direct materials, obligations to subcontractors and outsourcing arrangements. Total purchase obligations for operating activities in the preceding table include approximately $52.8 billion related to contractual commitments entered into as a result of contracts we have with our U.S. Government customers. The U.S. Government generally would be required to pay us for any costs we incur relative to these commitments if they were to terminate the related contracts “for convenience” under the FAR, subject to available funding. This also would be true in cases where we perform subcontract work for a prime contractor under a U.S. Government contract. The termination for convenience language also may be included in contracts with foreign, state and local governments. We also have contracts with customers that do not include termination for convenience provisions, including contracts with commercial customers.
The majority of our capital expenditures for 2021 and those planned for 2022 are for equipment, facilities infrastructure and information technology. The amounts above in the table represent the portion of expected capital expenditures to be incurred in 2022 and beyond that have been obligated under contracts as of December 31, 2021 and not necessarily total capital expenditures for future periods. Expenditures for equipment and facilities infrastructure are generally incurred to support new and existing programs across all of our business segments. For example, we have projects underway at Aeronautics to support classified development programs and at RMS to support our Sikorsky helicopter programs; and we have projects underway to modernize certain of our facilities. 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.
We also may enter into industrial cooperation agreements, sometimes referred to as offset agreements, as a condition to obtaining orders for our products and services from certain customers in foreign countries. These agreements are designed to enhance the social and economic environment of the foreign country by requiring the contractor to promote investment in the country. Offset agreements may be satisfied through activities that do not require us to use cash, including transferring technology, providing manufacturing and other consulting support to in-country projects and the purchase by third parties (e.g., our vendors) of supplies from in-country vendors. These agreements also may be satisfied through our use of cash for such activities as purchasing supplies from in-country vendors, providing financial support for in-country projects, establishment of joint ventures with local companies and building or leasing facilities for in-country operations. We typically do not commit to offset agreements until orders for our products or services are definitive. The amounts ultimately applied against our offset agreements are based on negotiations with the customer and typically require cash outlays that represent only a fraction of the original amount in the offset agreement. Satisfaction of our offset obligations are included in the estimates of our total costs to complete the contract and may impact our sales, profitability and cash flows. Our ability to recover investments on our consolidated balance sheet that we make to satisfy offset obligations is generally dependent upon the successful operation of
ventures that we do not control and may involve products and services that are dissimilar to our business activities. At December 31, 2021, the notional value of remaining obligations under our outstanding offset agreements totaled approximately $17.0 billion, which primarily relate to our Aeronautics, MFC and RMS business segments, most of which extend through 2044. To the extent we have entered into purchase or other obligations at December 31, 2021 that also satisfy offset agreements, those amounts are included in the contractual commitments table above. Offset programs usually extend over several years and may provide for penalties, estimated at approximately $1.7 billion at December 31, 2021, in the event we fail to perform in accordance with offset requirements. While historically we have not been required to pay material penalties, resolution of offset requirements are often the result of negotiations and subjective judgments.
We have entered into standby letters of credit and surety bonds issued on our behalf by financial institutions, and we have directly issued guarantees to third parties primarily relating to advances received from customers and the guarantee of future performance on certain contracts. 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. At December 31, 2021, we had the following outstanding letters of credit, surety bonds and third-party guarantees (in millions):
| | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Total Commitment | | Less Than 1 Year | | | | | | |
Standby letters of credit (a) | | $ | 2,439 | | | $ | 1,035 | | | | | | | |
Surety bonds | | 342 | | | 319 | | | | | | | |
Third-party Guarantees | | 838 | | | 428 | | | | | | | |
Total commitments | | $ | 3,619 | | | $ | 1,782 | | | | | | | |
(a)Approximately $781 million of standby letters of credit in the “Less Than 1 Year” category are expected to renew for additional periods until completion of the contractual obligation.
At December 31, 2021, third-party guarantees totaled $838 million, of which approximately 69% 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.
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, 2021 and 2020, there were no material amounts recorded in our financial statements related to third-party guarantees or novation agreements.
Critical Accounting Policies
Contract Accounting / Sales Recognition
The majority of our net sales are generated from long-term contracts with the U.S. Government and international customers (including FMS contracted through the U.S. Government) for the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For certain contracts that meet the foregoing requirements, primarily international direct commercial sale contracts, we are required to obtain certain regulatory approvals. In these cases, we recognize revenue when it is probable that we will receive regulatory approvals based upon all known facts and circumstances. We provide our products and services under fixed-price and cost-reimbursable contracts.
Under fixed-price contracts, we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Some fixed-price contracts have a performance-based component under which we may earn incentive payments or incur financial penalties based on our performance.
Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract plus a fee up to a ceiling based on the amount that has been funded. Typically, we enter into three types of cost-reimbursable contracts: cost-plus-award-fee, cost-plus-incentive-fee, and cost-plus-fixed-fee. Cost-plus-award-fee contracts provide for an award fee that varies within specified limits based on the customer’s assessment of our performance against a predetermined set of criteria, such as targets based on cost, quality, technical and schedule criteria. Cost-plus-incentive-fee contracts provide for reimbursement of costs plus a fee, which is adjusted by a formula based on the relationship of total allowable costs to total target costs (i.e., incentive based on cost) or reimbursement of costs plus an incentive to exceed stated performance targets (i.e.,
incentive based on performance). Cost-plus-fixed-fee contracts provide a fixed fee that is negotiated at the inception of the contract and does not vary with actual costs.
We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.
We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The products and services in our contracts are typically not distinct from one another due to their complex relationships and the significant contract management functions required to perform under the contract. Accordingly, our contracts are typically accounted for as one performance obligation. In limited cases, our contracts have more than one distinct performance obligation, which occurs when we perform activities that are not highly complex or interrelated or involve different product lifecycles. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded in a given period. We classify net sales as products or services on our consolidated statements of earnings based on the predominant attributes of the performance obligations.
We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. For contracts where a portion of the price may vary, we estimate variable consideration at the most likely amount, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. We analyze the risk of a significant revenue reversal and if necessary constrain the amount of variable consideration recognized in order to mitigate this risk.
At the inception of a contract we estimate the transaction price based on our current rights and do not contemplate future modifications (including unexercised options) or follow-on contracts until they become legally enforceable. Contracts are often subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the context of the contract. Therefore, such modifications are accounted for as if they were part of the existing contract and recognized as a cumulative adjustment to revenue.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis (i.e., not bundled with any other products or services). Our contracts with the U.S. Government, including FMS contracts, are subject to FAR and the price is typically based on estimated or actual costs plus a reasonable profit margin. As a result of these regulations, the standalone selling price of products or services in our contracts with the U.S. Government and FMS contracts are typically equal to the selling price stated in the contract.
For non-U.S. Government contracts with multiple performance obligations, we evaluate whether the stated selling prices for the products or services represent their standalone selling prices. We primarily sell customized solutions unique to a customer’s specifications. When it is necessary to allocate the transaction price to multiple performance obligations, we typically use the expected cost plus a reasonable profit margin to estimate the standalone selling price of each product or service. We occasionally sell standard products or services with observable standalone sales transactions. In these situations, the observable standalone sales transactions are used to determine the standalone selling price.
We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of our revenue is recognized over time as we perform under the contract because control of the work in process transfers continuously to the customer. For most contracts with the U.S. Government and FMS contracts, this continuous transfer of control of the work in process to the customer is supported by clauses in the contract that give the customer ownership of work in process and allow the customer to unilaterally terminate the contract for convenience and pay us for costs incurred plus a reasonable profit. For most non-U.S. Government contracts, primarily international direct commercial contracts, continuous transfer of control to our customer is supported because we deliver products that do not have an alternative use to us and if our customer were to terminate the contract for reasons other than our non-performance we would have the right to recover damages which would include, among other potential damages, the right to payment for our work performed to date plus a reasonable profit.
For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the percentage-of-completion cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation(s). For performance obligations to provide services to the customer, revenue is recognized over time based on costs incurred or the right to invoice method (in situations where the value transferred matches our billing rights) as our customer receives and consumes the benefits.
For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point.
Significant estimates and assumptions are made in estimating contract sales and costs, including the profit booking rate. At the outset of a long-term contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract, as well as variable consideration, and assess the effects of those risks on our estimates of sales and total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead, general and administrative and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset or localization agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding 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. 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 determined.
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. Increases in the profit booking rates, typically referred to as risk retirements, 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. Increases or decreases in profit booking rates are recognized in the period they are determined and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other items, such as risk retirements, reductionswhich may or may not impact sales. Favorable items may include the positive resolution of profit booking rates or othercontractual matters, are presented netcost recoveries on severance and restructuring charges, insurance recoveries and gains on sales of state income taxes.
Services Method
Under fixed-price service contracts, we are paid a predetermined fixed amount for a specified scopeassets. Unfavorable items may include the adverse resolution of work and generally have full responsibility for the costs associated with the contract and the resulting profit or loss. We record net sales under fixed-price service contracts with non-U.S. Government customers on a straight-line basis over the period of contract performance, unless evidence suggests that net sales are earned or the obligations are fulfilled in a different pattern. For cost-reimbursable contracts for services to non-U.S. Government customers, we record net sales as services are performed,contractual matters; restructuring charges, except for awardsignificant severance actions, which are excluded from segment operating results; reserves for disputes; certain asset impairments; and incentive fees. Award and incentive fees are recorded when they are fixed or determinable, generally at the date the amount is communicated to us by the customer. This approach results in the recognitionlosses on sales of such fees at contractual intervals (typically every six months) throughout the contract and is dependent on the customer’s processes for notification of awards and issuance of formal notifications. Costs for all service contracts are expensed as incurred.certain assets.
Other Contract Accounting Considerations
The majority of our sales are driven by pricing based on costs incurred to produce products or perform services under contracts with the U.S. Government. Cost-based pricing is determined under the FAR. The FAR provides guidance on the types of costs that are allowable in establishing prices for goods and services under U.S. Government contracts. For example, costs such as those related to charitable contributions, interest expense and certain advertising and public relations activities are unallowable and, therefore, not recoverable through sales. In addition, we may enter into advance agreements with the U.S. Government that address the subjects of allowability and allocability of costs to contracts for specific matters. For example, most of the environmental costs we incur for environmental remediation related to sites operated in prior years are allocated to our current operations as general and administrative costs under FAR provisions and supporting advance agreements reached with the U.S. Government.
We closely monitor compliance with and the consistent application of our critical accounting policies related to contract accounting. Costs incurred and allocated to contracts are reviewed for compliance with U.S. Government regulations by our personnel and are subject to audit by the Defense Contract Audit Agency.
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New Accounting Pronouncement
On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers, as amended (Topic 606) (commonly referred to as ASC 606), which will change the way we recognize revenue and significantly expand the disclosure requirements for revenue arrangements. We adopted the requirementsPostretirement Benefit Plans
Overview
Many of our employees and retirees participate in qualified and nonqualified defined benefit pension plans, retiree medical and life insurance plans and other postemployment plans (collectively, postretirement benefit plans - see “Note 1112 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements). The majority of our accrued benefit obligations relate to our qualified defined benefit pension plans and retiree medical and life insurance plans. We recognize on a plan-by-plan basis the net funded status of these postretirement benefit plans under GAAP as either an asset or a liability on our consolidated balance sheets. The GAAP funded status represents the difference between the fair value of each plan’s assets and the benefit obligation of the plan. The GAAP benefit obligation represents the present value of the estimated future benefits we currently expect to pay to plan participants based on past service.
In June 2014, we amended certain of our The qualified and nonqualified defined benefit pension plans for non-union employees; comprising the majority of our benefit obligations; to freeze future retirement benefits. The calculation of retirement benefits under the affected defined benefit pension plans is determined by a formula that takes into account the participants’ years of credited service and average compensation. The freeze will take effect in two stages. On January 1, 2016, the pay-based component of the formula used to determine retirement benefits wassalaried employees are fully frozen so that future pay increases, annual incentive bonuses or other amounts earned for or related to periods after December 31, 2015 are not used to calculate retirement benefits. Oneffective January 1, 2020 the service-based component of the formula used to determine retirement benefits will also be frozen so that participants will no longer earn further credited service for any period after December 31, 2019. When the freeze is complete, the majority ofand our salaried employees will have transitioned toparticipate in an enhanced defined contribution retirement savings plan.
Similar to recent years, we continue to take actions to mitigate the effect of our defined benefit pension plans on our financial results by reducing the volatility of our pension obligations, including entering into pension risk transfer transactions involving the purchase of group annuity contracts (GACs) for portions of our outstanding defined benefit pension obligations using assets from the pension trust. On August 3, 2021, we purchased GACs to transfer $4.9 billion of gross defined benefit pension obligations and related plan assets to an insurance company for approximately 18,000 U.S. retirees and beneficiaries. The GACs were purchased using assets from Lockheed Martin’s master retirement trust and no additional funding contribution was required by us. This transaction had no impact on the amount, timing, or form of the monthly retirement benefit payments to the affected retirees and beneficiaries. In connection with this transaction, we recognized a noncash pension settlement charge of $1.7 billion ($1.3 billion, or $4.72 per share, after tax) for the affected defined benefit pension plans during the third quarter of 2021, which represents the accelerated recognition of actuarial losses that were included in the accumulated other comprehensive loss account within stockholders’ equity. As a result of this transaction, we were required to remeasure the benefit obligations and plan assets for the affected defined benefit pension plans as of the August 3, 2021 close date. The purchase of the GACs and the pension remeasurement did not have an impact on our CAS pension cost and did not significantly impact our total FAS pension expense or net FAS/CAS pension adjustment in 2021, except for the noncash pension settlement charge.
Inclusive of the transaction described above, since December 2018, Lockheed Martin, through its master retirement trust, has purchased total contracts for approximately $11.6 billion related to our outstanding defined benefit pension obligations eliminating pension plan volatility for approximately 95,000 retirees and beneficiaries and annually required Pension Benefit Guarantee Corporation (PBGC) premiums of approximately $69 million per year.
We expect to continue to look for opportunities to manage our pension liabilities through additional pension risk transfer transactions in future years. Future transactions could result in a noncash settlement charge to earnings, which could be material to a reporting period.
Notwithstanding these actions, the impact of theseour postretirement benefit plans and benefits on our earnings may be volatile in that the amount of expense we record and the funded status for our postretirement benefit plans may materially change from year to year because thosethe calculations are sensitive to funding levels as well as changes in several key economic assumptions, including interest rates, actual rates of return on plan assets and other actuarial assumptions including participant longevity and employee turnover, as well as the timing of cash funding.
Actuarial Assumptions
The planbenefit obligations and assets andof our postretirement benefit obligationsplans are measured at the end of each year, or more frequently, upon the occurrence of certain events such as a significant plan amendment (including in connection with a pension risk transfer transaction), settlement or curtailment. The amounts we record are measured using actuarial valuations, which are dependent upon key assumptions such as discount rates, the expected long-term rate of return on plan assets, participant longevity, and employee turnover and the health care cost trend rates for our retiree medical plans.turnover. The assumptions we make affect both the calculation of the benefit obligations as of the measurement date and the calculation of net periodic benefit costFAS expense in subsequent periods. When reassessing these assumptions, we consider past and current market conditions and make judgments about future market trends. We also consider factors such as the timing and amounts of expected contributions to the plans and benefit payments to plan participants.
We continue to use a single weighted average discount rate approach when calculating our consolidated benefit obligations related to our defined benefit pension plans resulting in 3.625%2.875% at December 31, 2017,2021, compared to 4.125%2.50% at December 31, 2016 and 4.375% at December 31, 2015.2020. We utilized a single weighted average discount rate of 3.625%2.75% when calculating our benefit obligations related to our
retiree medical and life insurance plans at December 31, 2017,2021, compared to 4.00%2.375% at December 31, 2016 and 4.25% at December 31, 2015.2020. We evaluate several data points in order to arrive at an appropriate single weighted average discount rate, including results from cash flow models, quoted rates from long-term bond indices and changes in long-term bond rates over the past year. As part of our evaluation, we calculate the approximate average yields on corporate bonds rated AA or better selected to match our projected postretirement benefit plan cash flows.
The increase in the discount rate from December 31, 2020 to December 31, 2021 resulted in a decrease in the projected benefit obligations of our qualified defined benefit pension plans of approximately $2.3 billion at December 31, 2021.
We utilized an expected long-term rate of return on plan assets of 7.50% at both December 31, 2017 and December 31, 2016 as compared to 8.00%6.50% at December 31, 2015.2021 compared to 7.00% at December 31, 2020. We reducedlowered our expected long-term rate of return assumption in 2016on plan assets due to downward pressure on the equity and fixed income asset classeschanges in our trust. An increasingly aging population and debt burden place downward pressure on already low interest rates and economic growth; suggesting the future return for our fixed-income may be lower than historical norms. Surges in equities since 2009 have led to a high valuation of the equity markets, suggesting the forward return may also be lower than historical norms.asset allocation targets. The long-term rate of return assumption represents the expected long-term rate of return on the funds invested or to be invested, to provide for the benefits included in the benefit obligations. This assumption is based on several factors including historical market index returns, the anticipated long-term allocation of plan assets, the historical return data for the trust funds, plan expenses and the potential to outperform market index returns. The difference between the long-term rate of return on plan assets assumption we select and the actual return on plan assets in any given year affects both the funded status of our benefit plans and the calculation of FAS pension expense in subsequent periods. Although the actual return in any specific year likely will differ from the assumption, the average expected return over a long-term future horizon should be approximately equal to the assumption. Any variance in a giveneach year should not, by itself, suggest that the assumption should be changed. Patterns of variances are reviewed over time, and then combined with expectations for the future. As a result, changes in this assumption are less frequent than changes in the discount rate. The actual investment return for our qualified defined benefit plans during 2021 of $3.9 billion, based on an actual rate of approximately 10.5%, improved plan assets more than the $2.1 billion expected return based on our long-term rate of return assumption.
In both October 2017 and 2016,2021, the Society of Actuaries published revised longevity assumptions that refined its prior studies. We used the revised assumptions indicating a shortened longevity in our December 31, 2017 and December 31, 2016 re-measurements2021 re-measurement of benefit obligation. The publications were a refinement to assumptionsobligation resulting in an approximate $109 million increase in the Societyprojected benefit obligations of Actuaries published in previous years, beginning in 2014.our qualified defined benefit pension plans.
Our stockholders’ equity has been reduced cumulatively by $12.6$11.0 billion from the annual year-end measurements of the funded status of postretirement benefit plans. The cumulative non-cash,noncash, after-tax reduction primarily represents net actuarial losses resulting from declines in discount rates, investment losses and updated longevity. A market-related value of our plan assets, determined using actual asset gains or losses over the prior three yearthree-year period, is used to calculate the amount of deferred asset gains or losses to be amortized. These cumulative actuarial losses will be amortized to expense using the corridor method, where gains and losses are recognized to the extent they exceed 10% of the greater of plan assets or benefit obligations, over thean average future service period of employees expected to receive benefits under the plans of approximately ninetwenty years as of December 31, 2017. This amortization period is expected to extend (approximately double) in 2020 when our non-union pension plans are completely frozen to use the average remaining life expectancy of the participants instead of average future service.2021. During 2017, $802 million2021, $1.8 billion of these amounts waswere recognized as a component of postretirement benefit plans expense and about $1.2 billion is expected to be recognized as expense in 2018.inclusive of the noncash pension settlement charge of $1.3 billion.
The discount rate and long-term rate of return on plan assets assumptions we select at the end of each year are based on our best estimates and judgment. A change of plus or minus 25 basis points in the 3.625%2.875% discount rate assumption at December 31, 2017,2021, with all other assumptions held constant, would have decreased or increased the amount of the qualified pension benefit obligation we recorded at the end of 20172021 by approximately $1.5 billion, which would result in an after-tax increase or decrease in stockholders’ equity at the end of the year of approximately $1.2 billion. If the 3.625%2.875% discount rate at December 31, 20172021 that was used to compute the expected 20182022 FAS pension expense for our qualified defined benefit pension plans had been 25 basis points higher or lower, with all other assumptions held constant, the amount of FAS pension expense projected for 20182022 would be lower or higher by approximately $115$10 million. If the 7.50%6.50% expected long-term rate of return on plan assets assumption at December 31, 20172021 that was used to compute the expected 20182022 FAS pension expense for our qualified defined benefit pension plans had been 25 basis points higher or lower, with all other assumptions held constant, the amount of FAS pension expense projected for 20182022 would be lower or higher by approximately $85$75 million. Each year, differences between the actual plan asset return and the expected long-term rate of return on plan assets impacts the measurement of the following year’s FAS expense. Every 100 basis points differenceincrease (decrease) in return during 20172021 between our actual rate of return of approximately 13.00%10.5% and our expected long-term rate of return of 7.50% impacted 2018decreased (increased) 2022 expected FAS pension expense by approximately $20$15 million.
Funding Considerations
There wereWe made no material contributions in 2021, compared to $1.0 billion in 2020, to our qualified defined benefit pension plans in 2017, 2016 and 2015.plans. Funding of our qualified defined benefit pension plans is determined in a manner consistent with CAS and in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), as amended, by the Pension Protection Actalong with consideration of 2006 (PPA).CAS and Internal Revenue Code rules. Our goal has been to fund the pension plans to a level of at least 80%, as determined under the PPA. The ERISA funded status is calculated on a different basis than under GAAP. As a result of the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21), which included a provision that changed the methodology for calculating the interest rate assumption used in determining the minimum funding requirements under the PPA, there was an increase in the interest rate assumption, which in turn lowered the minimum funding requirements. On August 8, 2014, the Highway and Transportation Funding Act of 2014 (HATFA) was enacted; and on November 2, 2015, the Bipartisan Budget Act of 2015; which extend the methodology put in place by MAP-21 to calculate the
interest rate assumption so that the impact will begin to decrease in 2021 and phase out by 2024. This has the effect of lowering our minimum funding requirements during the affected periods from what they otherwise would have been.accordance with ERISA. The ERISA funded status of our qualified defined benefit pension plans was about 83%approximately 92% and 86%82% as of
December 31, 20172021 and 2016. The2020; which is calculated on a different basis than under GAAP funded statusand reflects the impact of our qualified defined benefit pension plans was about 68% and 70% at December 31, 2017 and 2016.the American Rescue Plan Act of 2021 discussed below.
Contributions to our defined benefit pension plans are recovered over time through the pricing of our products and services on U.S. Government contracts, including FMS, and are recognized in our cost of sales and net sales. CAS govern the extent to which our pension costs are allocable to and recoverable under contracts with the U.S. Government, including FMS. We recovered $2.2 billion in 2017, $2.0 billion in 2016, and $1.6 billion in 2015 as CAS pension costs. Effective February 27, 2012, CAS rules were revised to better align the recovery of pension costs, including prepayment credits, on U.S. Government contracts with the minimum funding requirements of the PPA (referred to as CAS Harmonization). Specifically, CAS Harmonization shortened the amortization period for allocating gains and losses to U.S. Government contracts from 15 to 10 years and requires the use of an interest rate to determine CAS pension cost consistent with the interest rate used to determine minimum pension funding requirements under the PPA. While the change in the amortization period was applicable beginning in 2013, there was a transition period for the impact of the change in the CAS liability measurement due to the revised interest rate that was phased in with the full impact occurring in 2017. The incremental impact of CAS Harmonization increased successively through 2017, primarily due to the liability measurement transition period included in the amended rule. The enactment of the HATFA and Bipartisan Budget Act of 2015 also increased the interest rate assumption used to determine our CAS pension costs, which has the effect of lowering the recovery of pension contributions during the affected periods as it decreases our CAS pension costs.
Pension cost recoveries under CAS occur in different periods from when pension contributions are made under the PPA.in accordance with ERISA.
We recovered $2.1 billion in 2021 and $2.0 billion in 2020 as CAS pension costs. Amounts contributed in excess of the CAS pension costs recovered under U.S. Government contracts are considered to be prepayment credits under the CAS rules. As of December 31, 2017, ourOur prepayment credits were approximately $6.3$7.0 billion as compared to $7.7and $8.3 billion at December 31, 2016. The recovery of CAS pension costs under U.S. Government contracts in excess of our contributions reduces the prepayment credit balance.2021 and 2020, respectively. The prepayment credit balance will also increase or decrease based on our actual investment return on plan assets.
On March 11, 2021, the President signed the American Rescue Plan Act of 2021 into law, which eased funding requirements for single-employer defined benefit pension plans under ERISA, as amended, by restarting and extending the amortization of funding shortfalls and extending and enhancing interest rate stabilization percentages, among many other stimulus measures. These changes have the effect of lowering our minimum funding requirements and CAS pension costs from what they otherwise would have been had the measures not been enacted.
Trends
We willdo not plan to make contributions of $5.0 billion to our qualified defined benefit pension plans in 2018, including required and discretionary contributions. As a result of these contributions, we do not expect any material qualified defined benefit cash funding will be required until 2021. We plan to fund these contributions using a mix of cash on hand and commercial paper. While we do not anticipate a need to do so, our capital structure and resources would allow us to issue new debt if circumstances change (see our “Capital Structure, Resources and Other” discussion above).2022. We anticipate recovering approximately $2.4$1.8 billion of CAS pension cost in 2018.2022 allowing us to recoup a portion of our CAS prepayment credits.
We expect our 2018project FAS pension expenseincome of $460 million in 2022 compared to be $1.4 billion; comparable to our 2017 FAS pension expenseincome of $1.4 billion. The impact of the lower FAS discount rate of 3.625% for 2018 versus 4.125% for 2017 was mostly offset by our actual rate of investment return$265 million in 2017 of approximately 13.00% versus our expected long-term rate of return of 7.50%, shortened longevity assumptions,2021 and 2018 cash contributions of $5.0 billion versus immaterial cash contributions in 2017. We expect a net 2022 FAS/CAS pension adjustmentbenefit of $2.3 billion, which is comparable to the $2.3 billion in 20182021. This excludes the noncash pension settlement charge of about $1.0$1.7 billion as compared to $876 million(pretax) recognized in 2017, due to higher 2018 CAS pension costs as compared to 2017.the third quarter of 2021 described above for comparison year over year.
Environmental Matters
We are a party to various agreements, proceedings and potential proceedings for environmental cleanupremediation issues, including matters at various sites where we have been designated a potentially responsible party (PRP). At December 31, 20172021 and 2016,2020, the total amount of liabilities recorded on our consolidated balance sheet for environmental matters was $920$742 million and $1.0 billion.$789 million. We have recorded receivablesassets totaling $799$645 million and $870$685 million at December 31, 20172021 and 20162020 for the portion of environmental costs that are probable of future recovery in pricing of our products and services for agencies of the U.S. Government, as discussed below. The amount that is expected to be allocated to our non-U.S. Government contracts or that is determined to not be recoverable under U.S. Government contracts has beenis expensed through cost of sales. We project costs and recovery of costs over approximately 20 years.
We enter into agreements (e.g., administrative consent orders, consent decrees) that document the extent and timing of some of our environmental remediation obligations. We also are involved in environmental remediation activities at sites where formal agreements either do not exist or do not quantify the extent and timing of our obligations. Environmental cleanupremediation activities usually span many years, which makes estimating the costs more judgmental due to, for example, changing remediation technologies. To determine the costs related to clean up sites, we have to assess the extent of contamination, effects on natural resources, the appropriate technology to be used to accomplish the remediation, and evolving environmental standards.
We perform quarterly reviews of environmental remediation sites and record liabilities and receivables in the period it becomes probable that a liability hasthe liabilities have been incurred and the amounts can be reasonably estimated (see the discussion under “Environmental Matters” in “Note 1 – Organization and Significant Accounting Policies” and “Note 1415 – Legal Proceedings, Commitments and Contingencies” included in our Notes to Consolidated Financial Statements). We consider the above factors in our quarterly estimates of the timing and amount of any future costs that may be required for environmental remediation activities, which resultsresult in the calculation of a range of estimates for aeach particular environmental remediation site. We do not discount the recorded liabilities, as the amount and timing of future cash payments are not fixed or cannot be reliably determined. Given the required level of judgment and estimation, it is likely that materially different amounts could be recorded if different assumptions were used or if circumstances were to change (e.g., a change in environmental standards or a change in our estimate of the extent of contamination).
Under agreements reached with the U.S. Government, most of the amounts we spend for environmental remediation are allocated to our operations as general and administrative costs. Under existing U.S. Government regulations, these and other environmental expenditures relating to our U.S. Government business, after deducting any recoveries received from insurance or other PRPs, are allowable in establishing prices of our products and services. As a result, most of the expenditures we incur are included in our net sales and cost of sales according to U.S. Government agreement or regulation, regardless of the contract form (e.g. cost-reimbursable, fixed-price). We continually evaluate the recoverability of our assets for the portion of environmental receivablescosts that are probable of future recovery by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and contract mix, our history of receiving reimbursement of such costs, and recent efforts by some U.S. Government representatives to limit such reimbursement.
In addition to the proceedings and potential proceedings discussed above, the California previously establishedState Water Resources Control Board, a branch of the California Environmental Protection Agency, has indicated it will work to re-establish a maximum level of the contaminant hexavalent chromium in drinking water after a prior standard of 10 parts per billion (ppb). Recently, this standard was successfully challenged by the California Manufacturers and Technology Association (CMTA) for failure to conduct the required economic feasibility analysis. In response to the court’s ruling, the State Water Resources Control Board (State Board), a branch of the California Environmental Protection Agency, withdrew the hexavalent chromium standard from the published regulations, leaving only the 50 ppb standard for total chromium. The State Board has indicated it will work to re-establish a hexavalent chromium standard. If the standard for hexavalent chromium is re-established at 10 ppb or above, it will not have a material impact on our existing remediation costs in California. Further, the U.S. Environmental Protection Agency (U.S. EPA) is considering whether to regulate hexavalent chromium.
Californiawithdrawn, and is also reevaluating its existing drinking water standard of 6 ppb for perchlorate, and theperchlorate. The U.S. EPA is taking stepsEnvironmental Protection Agency decided in June 2020 not to regulate perchlorate in drinking water. water at the federal level, although this decision has been challenged, and is considering whether to regulate hexavalent chromium.
If substantially lower standards are adopted in eitherfor perchlorate (in California) or for hexavalent chromium (in California or at the federal level for perchlorate or for hexavalent chromium,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. Government. The amount that would be allocable to our non-U.S. Government contracts or that is determined not to be recoverable under U.S. Government contracts would be expensed, which may have a material effect on our earnings in any particular interim reporting period.
We also are evaluating the potential impact of existing and contemplated legal requirements addressing a class of chemicals known generally as per- and polyfluoroalkyl substances (PFAS). PFAS have been used ubiquitously, such as in fire-fighting foams, manufacturing processes, and stain- and stick-resistant products (e.g., Teflon, stain-resistant fabrics). Because we have used products and processes over the years containing some of those compounds, they likely exist as contaminants at many of our environmental remediation sites. Governmental authorities have announced plans, and in some instances have begun, to regulate certain of these compounds at extremely low concentrations in drinking water, which could lead to increased cleanup costs at many of our environmental remediation sites.
As disclosed above, we may record changes in the amount of environmental remediation liabilities as a result of our quarterly reviews of the status of our environmental remediation sites, which would result in a change to the corresponding environmental receivableamount that is probable of future recovery and a charge to earnings. For example, if we were to determine that the liabilities should be increased by $100 million, the corresponding receivablesamount that is probable of future recovery would be increased by approximately $87 million, with the remainder recorded as a charge to earnings. This allocation is determined annually, based upon our existing and projected business activities with the U.S. Government.
We cannot reasonably determine the extent of our financial exposure at all environmental remediation sites with which we are involved. There are a number of former operating facilities we are monitoring or investigating for potential future environmental remediation. In some cases, although a loss may be probable, it is not possible at this time to reasonably estimate the amount of any obligation for remediation activities because of uncertainties (e.g., assessing the extent of the contamination). During any particular quarter, such uncertainties may be resolved, allowing us to estimate and recognize the initial liability to remediate a particular former operating site. The amount of the liability could be material. Upon recognition of the liability, a portion will be recognized as a receivable with the remainder charged to earnings, which may have a material effect in any particular interim reporting period.
If we are ultimately found to have liability at those sites where we have been designated a PRP, we expect that the actual costs of environmental remediation will be shared with other liable PRPs. Generally, PRPs that are ultimately determined to be responsible parties are strictly liable for site cleanupremediation and usually agree among themselves to share, on an allocated basis, the costs and expenses for environmental investigation and remediation. Under existing environmental laws, responsible parties are jointly and severally liable and, therefore, we are potentially liable for the full cost of funding such remediation. In the unlikely event that we were required to fund the entire cost of such remediation, the statutory framework provides that we may pursue rights of cost recovery or contribution from the other PRPs. The amounts we record do not reflect the fact that we may recover some of the environmental costs we have incurred through insurance or from other PRPs, which we are required to pursue by agreement and U.S. Government regulation.
Goodwill
As disclosed in “Note 1 – Significant Accounting Policies” in our Notes to Consolidated Financial Statements (under the caption “Recent Accounting Pronouncements”), at the beginning of the quarter ended September 24, 2017, we adopted the amendments in ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to compare the implied fair value of reporting unit goodwill with the carrying amount of that goodwill (commonly referred to as Step 2) from the goodwill impairment test and requires entities to only compare the fair value of the reporting unit to the reporting units’ carrying amount to determine goodwill impairment. We elected to adopt the new standard at the beginning of the third quarter of 2017 because it significantly simplifies the evaluation of goodwill for impairment and we have updated our critical accounting policy for goodwill to reflect the adoption of the new standard.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 ranges from five to 20 years.
Our goodwill balance was $10.8 billion at both December 31, 20172021 and 2016.2020. 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 our business segment level or a level below the business segment. 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 both 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. Based on that qualitative evaluation, if we determine it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary. Otherwise, we perform a quantitative impairment test. We perform quantitative tests for most reporting units at least once every three years. However, for certain reporting units we may perform a quantitative impairment test every year.
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. If the carrying value of the reporting unit, including goodwill, exceeds its fair value, a goodwill impairment loss is recognized in an amount equal to that excess. 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 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 amounts held at the business segment and corporate levels.
In the fourth quarter of 2017,2021, we performed our annual goodwill impairment test for each of our reporting units utilizing the statutory tax rate in effect at the time of the test.units. The results of that test indicated that for each of our reporting units including Sikorsky, no impairment existed. As of December 31, 2017, the carrying valuedate of our Sikorsky reporting unit includes goodwill of $2.7 billion and exceeds its fair value by a margin of approximately 25%, after adjusting forannual impairment test, the positive impact of lower statutory tax rates due to the passage of the Tax Act on December 22, 2017. We acquired Sikorsky in November 2015 and recorded the assets acquired and liabilities assumed at fair value. As a result, the carrying value and fair value of our Sikorsky reporting unit continue to be closely aligned. Therefore, any business deterioration, changes in timingexceeded its carrying value, which included goodwill of orders, contract cancellations or terminations, or negative changes in market factors could cause our sales, earnings and cash flows to decline below current projections. Similarly, market factors utilized in the impairment analysis, including long-term growth rates, discount rates and relevant comparable public company earnings multiples and transaction multiples, could negatively impact the$2.7 billion, by a margin of approximately 30%. The fair value of our Sikorsky reporting units.unit can be significantly impacted by its performance, the amount and timing of expected future cash flows, contract terminations, changes in expected future orders, general market pressures, including U.S. Government budgetary constraints, discount rates, long term growth rates, and changes in U.S. (federal or state) or foreign tax laws and regulations, or their interpretation and application, including those with retroactive effect, along with other significant judgments. Based on our assessment of these circumstances, we have determined that goodwill at our Sikorsky reporting unit
is remains at risk for impairment should there be a deterioration of projected cash flows negative changes in market factors or a significant increase in the carrying value of the reporting unit.
During the fourth quarter of 2017, we realigned certain programs within the RMS business segment to align with changes in management structure. We performed goodwill impairment tests prior and subsequent to the realignment, and there was no indication of goodwill impairment.
Impairment assessments inherently involve management judgments regarding a number of assumptions such as those described above. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of our recorded goodwill, differences in assumptions could have a material effect on the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.
Intangible Assets
Acquired intangible assets from acquired businesses are recognized at their estimated fair values at the date of acquisition 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 and are amortized on a straight-line basis over a period of expected cash flows used to measure the fair value, which ranges from nine to 20 years. Acquired intangibles deemed to have indefinite lives are not amortized, but are subject to annual impairment testing. This testing compares carrying value to fair value and, when appropriate, the carrying value of these assets is reduced to fair value. Finite-lived intangiblesIn the fourth quarter of 2021, we performed our annual impairment test, and the results of that test indicated no impairment existed. Intangibles are amortized to expense over thetheir applicable useful lives, ranging from threefive 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. ShouldIf events or changes in circumstances indicate the carrying value of a finite-lived intangible may be impaired, the sum of the undiscounted future cash flows expected to result from the use of the asset group would be compared to the asset group’s carrying value. ShouldIf the asset group’s carrying amount exceed the sum of the undiscounted future cash flows, we would determine the fair value of the asset group and record an impairment loss in net earnings.
The carrying value of our Sikorsky business includes an indefinite-lived trademark intangible asset of $887 million as of December 31, 2017. In the fourth quarter of 2017, we performed the annual impairment test for the Sikorsky indefinite-lived trademark intangible asset utilizing the statutory tax rate in effect at the time of the test and the results indicated that no impairment existed. At December 31, 2017, the Sikorsky trademark exceeded its carrying value by a margin of approximately 20%, after adjusting for the positive impact of lower statutory tax rates due to the passage of the Tax Act on December 22, 2017. Additionally, our Sikorsky business has finite-lived customer program intangible assets with carrying values of $2.7 billion as of December 31, 2017. As discussed above in the Goodwill section, the carrying value and fair value of Sikorsky’s intangible assets continue to be closely aligned due to the November 2015 acquisition of Sikorsky. Therefore, any business deterioration, contract cancellations or terminations, or negative changes in market factors could cause our sales to decline below current projections. Based on our assessment of these circumstances, we have determined that our Sikorsky intangible assets are at risk for impairment should there be any business deterioration, contract cancellations or terminations, or negative changes in market factors.
Recent Accounting Pronouncements
See “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements (under the caption “Recent Accounting Pronouncements”).
ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk
We maintain active relationships with a broad and diverse group of U.S. and international financial institutions. We believe that they provide us with sufficient access to the general and trade credit we require to conduct our business. We continue to closely monitor the financial market environment and actively manage counterparty exposure to minimize the potential impact from adverse developments with any single credit provider while ensuring availability of, and access to, sufficient credit resources.
Our main exposure to market risk relates to interest rates, foreign currency exchange rates and market prices on certain equity securities. Our financial instruments that are subject to interest rate risk principally include fixed-rate long-term debt.debt and commercial paper, if issued. The estimated fair value of our outstanding debt was $16.8$15.4 billion at December 31, 20172021 and the outstanding principal amount was $15.5$12.8 billion, excluding unamortized discounts and issuance costs of $1.2$1.1 billion. A 10% change in the level of interest rates would not have a material impact on the fair value of our outstanding debt at December 31, 2017.
2021.
We use derivative instruments principally to reduce our exposure to market risks from changes in foreign currency exchange rates and interest rates. We do not enter into or hold derivative instruments for speculative trading purposes. We transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into foreign currency hedges such as forward and option contracts that change in value as foreign currency exchange rates change. Our most significant foreign currency exposures relate to the British Pound Sterling,pound sterling, the Euro,euro, the Canadian dollar, the Australian dollar, the Norwegian Kroner and the Australian dollar.Polish Zloty. These contracts hedge forecasted foreign currency transactions in order to mitigate fluctuations in our earnings and cash flows associated with changes in foreign currency exchange rates. We designate foreign currency hedges as cash flow hedges. We also are exposed to the impact of interest rate changes primarily through our borrowing activities. For fixed rate borrowings, we may use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings indexed to LIBOR in order to reducehedge changes in the amountfair value of interest paid.the debt. These swaps are designated as fair value hedges. For variable rate borrowings, we may use fixed interest rate swaps, effectively converting variable rate borrowings to fixed rate borrowings in order to mitigate the impact of interest rate changes on earnings. These swaps are designated as cash flow hedges. We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are intended to mitigate certain economic exposures.
The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on our intended use of the derivative and its resulting designation. Adjustments to reflect changes in fair values of derivatives attributable to thehighly effective portion of hedges are either reflected in earnings and largely offset by corresponding adjustments to the hedged items or reflected net of income taxes in accumulated other comprehensive loss until the hedged transaction is recognized in earnings. Changes in the fair value of the derivatives that are attributable to the ineffective portion of the hedges, or of derivatives that are not considered to be highly effective, hedges, if any, are immediately recognized in earnings. The aggregate notional amount of our outstanding interest rate swaps at both December 31, 20172021 and 20162020 was $1.2 billion.$500 million and $572 million. The aggregate notional amount of our outstanding foreign currency hedges at December 31, 20172021 and 20162020 was $4.1$4.0 billion and $4.0$3.4 billion. At December 31, 20172021 and 2016,2020, the net fair value of our derivative instruments was not material (see “Note 16 – Fair Value Measurements” included in our Notes to Consolidated Financial Statements). A 10% unfavorable exchange rate movement of our foreign currency contracts would not have a material impact on the aggregate net fair value of such contracts or our consolidated financial statements. Additionally, as we enter into foreign currency contractcontracts to hedge foreign currency exposure on underlying transactions we believe that any movement on our foreign currency contracts would be offset by movement on the underlying transactions and, therefore, when taken together do not create material risk.
We evaluate the credit quality of potential counterparties to derivative transactions and only enter into agreements with those deemed to have acceptable credit risk at the time the agreements are executed. Our foreign currency exchange hedge portfolio is diversified across several banks. We periodically monitor changes to counterparty credit quality as well as our concentration of credit exposure to individual counterparties. We do not hold or issue derivative financial instruments for trading or speculative purposes.
We maintain a separate trust that includes investments to fund certain of our non-qualified deferred compensation plans. As of December 31, 2017,2021, investments in the trust totaled $1.4$2.1 billion and are reflected at fair value on our consolidated balance sheet in other noncurrent assets. The trust holds investments in marketable equity securities and fixed-income securities that are exposed to price changes and changes in interest rates. A portion of the liabilities associated with the deferred compensation plans supported by the trust is also impacted by changes in the market price of our common stock and certain market indices. Changes in the value of the liabilities have the effect of partially offsetting the impact of changes in the value of the trust. Both the change in the fair value of the trust and the change in the value of the liabilities are recognized on our consolidated statements of earnings in other unallocated, net and were not material for the year ended December 31, 2017.2021.
We are exposed to equity market risk through certain marketable securities held by our Lockheed Martin Ventures fund. The fair value of our marketable securities held by the fund was $132 million as of December 31, 2021. A 10% decrease in the market price of our marketable equity securities as of December 31, 2021 would not have a material impact on the carrying amounts of these securities or our consolidated financial statements. Many of the same factors that could result in an adverse movement of equity market prices affect our non-marketable equity investments, although we cannot always quantify the impacts directly. Financial markets are volatile, which could negatively affect the valuations and prospects of the companies we invest in, their ability to raise additional capital, and the likelihood of our ability to realize value in our investments through liquidity events such as initial public offerings, mergers, and private sales.
ITEM 8. Financial Statements and Supplementary Data
Report of Ernst & Young LLP,
Independent Registered Public Accounting Firm
on the Audited Consolidated Financial Statements
Board of Directors and Stockholders
Lockheed Martin Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lockheed Martin Corporation (the “Corporation”)Corporation) as of December 31, 20172021 and 2016, and2020, the related consolidated statements of earnings, comprehensive income, equity,cash flows and cash flows,equity for each of the three years in the period ended December 31, 2017.2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Corporation as ofat December 31, 20172021 and 2016,2020, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Corporation’s internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control - IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 6, 2018January 25, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includeincluded examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. 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.
| | | | | | | | |
| | Revenue recognition based on the percentage of completion method |
| | |
Description of the Matter | | For the year ended December 31, 2021, the Corporation recorded net sales of $67.0 billion. As more fully described in Note 1 to the consolidated financial statements, the Corporation generates the majority of its net sales from long-term contracts with its customers whereby substantially all of the Corporation’s revenue is recognized over time using the percentage-of-completion cost-to-cost measure of progress. Under the percentage-of-completion cost-to-cost measure of progress, the Corporation measures progress towards completion based on the ratio of costs incurred to date to the estimated total costs to complete the performance obligation(s) (referred to as the estimate-at-completion analysis). The Corporation estimates profit on these contracts as the difference between total estimated revenues and total estimated cost at completion.
The percentage-of-completion cost-to-cost method requires management to make significant estimates and assumptions to estimate contract sales and costs associated with its contracts with customers. At the outset of a long-term contract, the Corporation identifies risks to the achievement of the technical, schedule and cost aspects of the contract. Throughout the contract life cycle, the Corporation monitors and assesses the effects of those risks on its estimates of sales and total costs to complete the contract. Profit booking rates may increase during the performance of the contract if the Corporation successfully retires risks surrounding the technical, schedule and cost aspects of the contract, which would decrease the estimated total costs to complete the contract. Conversely, the profit booking rates may decrease if the estimated total costs to complete the contract increase. 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. 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. |
| | |
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 the Corporation’s revenue recognition process. For example, we tested internal controls over management’s review of the estimate-at-completion analyses and the significant assumptions underlying the estimated contract value and estimated total costs to complete. We also tested internal controls that management executes to validate the data used in the estimate-at-completion analyses was complete and accurate.
To test the accuracy of the Corporation’s estimate-at-completion analyses, our audit procedures included, among others, comparing estimates of labor costs, subcontractor costs, and materials to historical results of similar contracts, and agreeing the key terms to contract documentation and management’s estimates. We also performed sensitivity analyses over the significant assumptions to evaluate the change in the profit booking rates resulting from changes in the assumptions. |
| | |
| | Defined Benefit Pension Plan Obligation |
| | |
Description of the Matter | | At December 31, 2021, the Corporation’s aggregate obligation for its qualified defined benefit pension plans was $43.5 billion and exceeded the gross fair value of the related plan assets of $35.2 billion, resulting in a net unfunded qualified defined benefit pension obligation of $8.3 billion. As explained in Note 12 of the consolidated financial statements, the Corporation remeasures the qualified defined benefit pension assets and obligations at the end of each year or more frequently upon the occurrence of certain events. The amounts are measured using actuarial valuations, which depend on key assumptions such as the discount rate and participant longevity.
Auditing the defined benefit pension obligation was complex and required the involvement of specialists as a result of the judgmental nature of the actuarial assumptions such as discount rate and participant longevity, used in the measurement process. These assumptions have a significant effect on the projected benefit obligation, with the discount rate being the most sensitive of those assumptions. |
| | |
| | | | | | | | |
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. For example, we tested the internal controls over management’s review of the defined benefit pension obligation calculations, the significant actuarial assumptions and the data inputs provided to the actuaries.
To test the defined benefit pension obligation, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions described above and the underlying data used by the Corporation. We compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension obligation from prior year due to the change in service cost, interest cost, benefit payments, settlements, actuarial gains and losses, new longevity assumptions and plan amendments. In addition, we involved our actuarial specialists to assist in evaluating management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and is used to measure the defined benefit pension obligation. As part of this assessment, we compared the projected cash flows to the prior year and compared the current year benefits paid to the prior year projected cash flows. To evaluate longevity, we evaluated management’s selection of mortality base tables and improvement scales, adjusted for entity-specific factors. Lastly, we also tested the completeness and accuracy of the underlying data, including the participant data provided to the Corporation’s actuarial specialists. |
| | |
/s/ Ernst & Young LLP
We have served as the Corporation’s auditor since 1994.
Tysons, Virginia
February 6, 2018January 25, 2022
Lockheed Martin Corporation
Consolidated Statements of Earnings
(in millions, except per share data)
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 |
| | 2016 |
| | 2015 |
|
Net sales | | | | | | |
Products | | $ | 43,875 |
| | $ | 40,365 |
| | $ | 34,868 |
|
Services | | 7,173 |
| | 6,883 |
| | 5,668 |
|
Total net sales | | 51,048 |
| | 47,248 |
| | 40,536 |
|
Cost of sales | | | | | | |
Products | | (39,750 | ) | | (36,616 | ) | | (31,091 | ) |
Services | | (6,405 | ) | | (6,040 | ) | | (4,824 | ) |
Severance charges | | — |
| | (80 | ) | | (82 | ) |
Other unallocated, net | | 655 |
| | 550 |
| | (47 | ) |
Total cost of sales | | (45,500 | ) | | (42,186 | ) | | (36,044 | ) |
Gross profit | | 5,548 |
| | 5,062 |
| | 4,492 |
|
Other income, net | | 373 |
| | 487 |
| | 220 |
|
Operating profit | | 5,921 |
| | 5,549 |
| | 4,712 |
|
Interest expense | | (651 | ) | | (663 | ) | | (443 | ) |
Other non-operating (expense) income, net | | (1 | ) | | — |
| | 30 |
|
Earnings from continuing operations before income taxes | | 5,269 |
| | 4,886 |
| | 4,299 |
|
Income tax expense | | (3,340 | ) | | (1,133 | ) | | (1,173 | ) |
Net earnings from continuing operations | | 1,929 |
| | 3,753 |
| | 3,126 |
|
Net earnings from discontinued operations | | 73 |
| | 1,549 |
| | 479 |
|
Net earnings | | $ | 2,002 |
| | $ | 5,302 |
| | $ | 3,605 |
|
Earnings per common share | | | | | | |
Basic | | | | | | |
Continuing operations | | $ | 6.70 |
| | $ | 12.54 |
| | $ | 10.07 |
|
Discontinued operations | | 0.26 |
| | 5.17 |
| | 1.55 |
|
Basic earnings per common share | | $ | 6.96 |
| | $ | 17.71 |
| | $ | 11.62 |
|
Diluted | | | | | | |
Continuing operations | | $ | 6.64 |
| | $ | 12.38 |
| | $ | 9.93 |
|
Discontinued operations | | 0.25 |
| | 5.11 |
| | 1.53 |
|
Diluted earnings per common share | | $ | 6.89 |
| | $ | 17.49 |
| | $ | 11.46 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | | | |
| | 2021 | | 2020 | | 2019 | | | | | |
Net sales | | | | | | | | | | | |
Products | | $ | 56,435 | | | $ | 54,928 | | | $ | 50,053 | | | | | | |
Services | | 10,609 | | | 10,470 | | | 9,759 | | | | | | |
Total net sales | | 67,044 | | | 65,398 | | | 59,812 | | | | | | |
Cost of sales | | | | | | | | | | | |
Products | | (50,273) | | | (48,996) | | | (44,589) | | | | | | |
Services | | (9,463) | | | (9,371) | | | (8,731) | | | | | | |
Severance and restructuring charges | | (36) | | | (27) | | | — | | | | | | |
Other unallocated, net | | 1,789 | | | 1,650 | | | 1,875 | | | | | | |
Total cost of sales | | (57,983) | | | (56,744) | | | (51,445) | | | | | | |
Gross profit | | 9,061 | | | 8,654 | | | 8,367 | | | | | | |
Other income (expense), net | | 62 | | | (10) | | | 178 | | | | | | |
Operating profit | | 9,123 | | | 8,644 | | | 8,545 | | | | | | |
Interest expense | | (569) | | | (591) | | | (653) | | | | | | |
Non-service FAS pension (expense) income | | (1,292) | | | 219 | | | (577) | | | | | | |
Other non-operating income (expense), net | | 288 | | | (37) | | | (74) | | | | | | |
Earnings from continuing operations before income taxes | | 7,550 | | | 8,235 | | | 7,241 | | | | | | |
Income tax expense | | (1,235) | | | (1,347) | | | (1,011) | | | | | | |
Net earnings from continuing operations | | 6,315 | | | 6,888 | | | 6,230 | | | | | | |
Net loss from discontinued operations | | — | | | (55) | | | — | | | | | | |
Net earnings | | $ | 6,315 | | | $ | 6,833 | | | $ | 6,230 | | | | | | |
| | | | | | | | | | | |
Earnings (loss) per common share | | | | | | | | | | | |
Basic | | | | | | | | | | | |
Continuing operations | | $ | 22.85 | | | $ | 24.60 | | | $ | 22.09 | | | | | | |
Discontinued operations | | — | | | (0.20) | | | — | | | | | | |
Basic earnings per common share | | $ | 22.85 | | | $ | 24.40 | | | $ | 22.09 | | | | | | |
Diluted | | | | | | | | | | | |
Continuing operations | | $ | 22.76 | | | $ | 24.50 | | | $ | 21.95 | | | | | | |
Discontinued operations | | — | | | (0.20) | | | — | | | | | | |
Diluted earnings per common share | | $ | 22.76 | | | $ | 24.30 | | | $ | 21.95 | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Lockheed Martin Corporation
Consolidated Statements of Comprehensive Income
(in millions)
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 |
| | 2016 |
| | 2015 |
|
Net earnings | | $ | 2,002 |
| | $ | 5,302 |
| | $ | 3,605 |
|
Other comprehensive (loss) income, net of tax | | | | | | |
Postretirement benefit plans | | | | | | |
Net other comprehensive loss recognized during the period, net of tax benefit of $375 million in 2017, $668 million in 2016 and $192 million in 2015 | | (1,380 | ) | | (1,232 | ) | | (351 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of tax expense of $437 million in 2017, $382 million in 2016 and $464 million in 2015 | | 802 |
| | 699 |
| | 850 |
|
Reclassifications from divestiture of IS&GS business | | — |
| | (134 | ) | | — |
|
Other, net | | 140 |
| | 9 |
| | (73 | ) |
Other comprehensive (loss) income, net of tax | | (438 | ) | | (658 | ) | | 426 |
|
Comprehensive income | | $ | 1,564 |
| | $ | 4,644 |
| | $ | 4,031 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Net earnings | | $ | 6,315 | | | $ | 6,833 | | | $ | 6,230 | |
Other comprehensive income (loss), net of tax | | | | | | |
Postretirement benefit plans | | | | | | |
Net other comprehensive income (loss) recognized during the period, net of tax of $925 million in 2021, $292 million in 2020 and $586 million in 2019 | | 3,404 | | | (1,067) | | | (2,182) | |
Amounts reclassified from accumulated other comprehensive loss, net of tax of $130 million in 2021, $119 million in 2020 and $247 million in 2019 | | 477 | | | 440 | | | 908 | |
Pension settlement charge, net of tax of $355 million in 2021 | | 1,310 | | | — | | | — | |
Other, net | | (76) | | | 60 | | | 41 | |
Other comprehensive income (loss), net of tax | | 5,115 | | | (567) | | | (1,233) | |
Comprehensive income | | $ | 11,430 | | | $ | 6,266 | | | $ | 4,997 | |
The accompanying notes are an integral part of these consolidated financial statements.
Lockheed Martin Corporation
Consolidated Balance Sheets
(in millions, except par value)
|
| | | | | | | | |
| | December 31, |
| | 2017 |
| | 2016 |
|
Assets | | | | |
Current assets | | | | |
Cash and cash equivalents | | $ | 2,861 |
| | $ | 1,837 |
|
Receivables, net | | 8,603 |
| | 8,202 |
|
Inventories, net | | 4,487 |
| | 4,670 |
|
Other current assets | | 1,510 |
| | 399 |
|
Total current assets | | 17,461 |
| | 15,108 |
|
Property, plant and equipment, net | | 5,775 |
| | 5,549 |
|
Goodwill | | 10,807 |
| | 10,764 |
|
Intangible assets, net | | 3,797 |
| | 4,093 |
|
Deferred income taxes | | 3,111 |
| | 6,625 |
|
Other noncurrent assets | | 5,570 |
| | 5,667 |
|
Total assets | | $ | 46,521 |
| | $ | 47,806 |
|
Liabilities and equity | | | | |
Current liabilities | | | | |
Accounts payable | | $ | 1,467 |
| | $ | 1,653 |
|
Customer advances and amounts in excess of costs incurred | | 6,752 |
| | 6,776 |
|
Salaries, benefits and payroll taxes | | 1,785 |
| | 1,764 |
|
Current maturities of long-term debt | | 750 |
| | — |
|
Other current liabilities | | 1,883 |
| | 2,349 |
|
Total current liabilities | | 12,637 |
| | 12,542 |
|
Long-term debt, net | | 13,513 |
| | 14,282 |
|
Accrued pension liabilities | | 15,703 |
| | 13,855 |
|
Other postretirement benefit liabilities | | 719 |
| | 862 |
|
Other noncurrent liabilities | | 4,558 |
| | 4,659 |
|
Total liabilities | | 47,130 |
| | 46,200 |
|
Stockholders’ equity | | | | |
Common stock, $1 par value per share | | 284 |
| | 289 |
|
Additional paid-in capital | | — |
| | — |
|
Retained earnings | | 11,573 |
| | 13,324 |
|
Accumulated other comprehensive loss | | (12,540 | ) | | (12,102 | ) |
Total stockholders’ (deficit) equity | | (683 | ) | | 1,511 |
|
Noncontrolling interests in subsidiary | | 74 |
| | 95 |
|
Total (deficit) equity | | (609 | ) | | 1,606 |
|
Total liabilities and equity | | $ | 46,521 |
| | $ | 47,806 |
|
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Assets | | | | |
Current assets | | | | |
Cash and cash equivalents | | $ | 3,604 | | | $ | 3,160 | |
Receivables, net | | 1,963 | | | 1,978 | |
Contract assets | | 10,579 | | | 9,545 | |
Inventories | | 2,981 | | | 3,545 | |
Other current assets | | 688 | | | 1,150 | |
Total current assets | | 19,815 | | | 19,378 | |
Property, plant and equipment, net | | 7,597 | | | 7,213 | |
Goodwill | | 10,813 | | | 10,806 | |
Intangible assets, net | | 2,706 | | | 3,012 | |
Deferred income taxes | | 2,290 | | | 3,475 | |
Other noncurrent assets | | 7,652 | | | 6,826 | |
Total assets | | $ | 50,873 | | | $ | 50,710 | |
Liabilities and equity | | | | |
Current liabilities | | | | |
Accounts payable | | $ | 780 | | | $ | 880 | |
Salaries, benefits and payroll taxes | | 3,108 | | | 3,163 | |
Contract liabilities | | 8,107 | | | 7,545 | |
Current maturities of long-term debt | | 6 | | | 500 | |
Other current liabilities | | 1,996 | | | 1,845 | |
Total current liabilities | | 13,997 | | | 13,933 | |
Long-term debt, net | | 11,670 | | | 11,669 | |
Accrued pension liabilities | | 8,319 | | | 12,874 | |
Other noncurrent liabilities | | 5,928 | | | 6,196 | |
Total liabilities | | 39,914 | | | 44,672 | |
Stockholders’ equity | | | | |
Common stock, $1 par value per share | | 271 | | | 279 | |
Additional paid-in capital | | 94 | | | 221 | |
Retained earnings | | 21,600 | | | 21,636 | |
Accumulated other comprehensive loss | | (11,006) | | | (16,121) | |
Total stockholders’ equity | | 10,959 | | | 6,015 | |
Noncontrolling interests in subsidiary | | — | | | 23 | |
Total equity | | 10,959 | | | 6,038 | |
Total liabilities and equity | | $ | 50,873 | | | $ | 50,710 | |
The accompanying notes are an integral part of these consolidated financial statements.
Lockheed Martin Corporation
Consolidated Statements of Cash Flows
(in millions)
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 |
| | 2016 |
| | 2015 |
|
Operating activities | | | | | | |
Net earnings | | $ | 2,002 |
| | $ | 5,302 |
| | $ | 3,605 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities | | | | | | |
Depreciation and amortization | | 1,195 |
| | 1,215 |
| | 1,026 |
|
Stock-based compensation | | 158 |
| | 149 |
| | 138 |
|
Deferred income taxes | | 3,432 |
| | (152 | ) | | (445 | ) |
Severance charges | | — |
| | 99 |
| | 102 |
|
Gain on property sale | | (198 | ) | | — |
| | — |
|
Gain on divestiture of IS&GS business | | (73 | ) | | (1,242 | ) | | — |
|
Gain on step acquisition of AWE | | — |
| | (104 | ) | | — |
|
Changes in assets and liabilities | | | | | | |
Receivables, net | | (401 | ) | | (811 | ) | | (256 | ) |
Inventories, net | | 183 |
| | (46 | ) | | (398 | ) |
Accounts payable | | (189 | ) | | (188 | ) | | (160 | ) |
Customer advances and amounts in excess of costs incurred | | (24 | ) | | 3 |
| | (32 | ) |
Postretirement benefit plans | | 1,316 |
| | 1,028 |
| | 1,068 |
|
Income taxes | | (1,210 | ) | | 146 |
| | (48 | ) |
Other, net | | 285 |
| | (210 | ) | | 501 |
|
Net cash provided by operating activities | | 6,476 |
| | 5,189 |
| | 5,101 |
|
Investing activities | | | | | | |
Capital expenditures | | (1,177 | ) | | (1,063 | ) | | (939 | ) |
Acquisitions of businesses and investments in affiliates | | — |
| | — |
| | (9,003 | ) |
Other, net | | 30 |
| | 78 |
| | 208 |
|
Net cash used for investing activities | | (1,147 | ) | | (985 | ) | | (9,734 | ) |
Financing activities | | | | | | |
Repurchases of common stock | | (2,001 | ) | | (2,096 | ) | | (3,071 | ) |
Dividends paid | | (2,163 | ) | | (2,048 | ) | | (1,932 | ) |
Special cash payment from divestiture of IS&GS business | | — |
| | 1,800 |
| | — |
|
Proceeds from stock option exercises | | 71 |
| | 106 |
| | 174 |
|
Repayments of long-term debt | | — |
| | (952 | ) | | — |
|
Proceeds from the issuance of long-term debt | | — |
| | — |
| | 9,101 |
|
Proceeds from borrowings under revolving credit facilities | | — |
| | — |
| | 6,000 |
|
Repayments of borrowings under revolving credit facilities | | — |
| | — |
| | (6,000 | ) |
Other, net | | (212 | ) | | (267 | ) | | 5 |
|
Net cash (used for) provided by financing activities | | (4,305 | ) | | (3,457 | ) | | 4,277 |
|
Net change in cash and cash equivalents | | 1,024 |
| | 747 |
| | (356 | ) |
Cash and cash equivalents at beginning of year | | 1,837 |
| | 1,090 |
| | 1,446 |
|
Cash and cash equivalents at end of year | | $ | 2,861 |
| | $ | 1,837 |
| | $ | 1,090 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Operating activities | | | | | | |
Net earnings | | $ | 6,315 | | | $ | 6,833 | | | $ | 6,230 | |
Adjustments to reconcile net earnings to net cash provided by operating activities | | | | | | |
Depreciation and amortization | | 1,364 | | | 1,290 | | | 1,189 | |
Stock-based compensation | | 227 | | | 221 | | | 189 | |
Equity method investment impairment | | — | | | 128 | | | — | |
Tax resolution related to former IS&GS business | | — | | | 55 | | | — | |
Deferred income taxes | | (183) | | | 5 | | | 222 | |
Pension settlement charge | | 1,665 | | | — | | | — | |
Severance and restructuring charges | | 36 | | | 27 | | | — | |
Gain on property sale | | — | | | — | | | (51) | |
| | | | | | |
Changes in assets and liabilities | | | | | | |
Receivables, net | | 15 | | | 359 | | | 107 | |
Contract assets | | (1,034) | | | (451) | | | 378 | |
Inventories | | 564 | | | 74 | | | (622) | |
Accounts payable | | (98) | | | (372) | | | (1,098) | |
Contract liabilities | | 562 | | | 491 | | | 563 | |
Income taxes | | 45 | | | (19) | | | (151) | |
Postretirement benefit plans | | (267) | | | (1,197) | | | 81 | |
Other, net | | 10 | | | 739 | | | 274 | |
Net cash provided by operating activities | | 9,221 | | | 8,183 | | | 7,311 | |
Investing activities | | | | | | |
Capital expenditures | | (1,522) | | | (1,766) | | | (1,484) | |
Acquisitions of businesses | | — | | | (282) | | | — | |
Other, net | | 361 | | | 38 | | | 243 | |
Net cash used for investing activities | | (1,161) | | | (2,010) | | | (1,241) | |
Financing activities | | | | | | |
Repayment of commercial paper, net | | — | | | — | | | (600) | |
Issuance of long-term debt, net of related costs | | — | | | 1,131 | | | — | |
Repayments of long-term debt | | (500) | | | (1,650) | | | (900) | |
Repurchases of common stock | | (4,087) | | | (1,100) | | | (1,200) | |
Dividends paid | | (2,940) | | | (2,764) | | | (2,556) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Other, net | | (89) | | | (144) | | | (72) | |
Net cash used for financing activities | | (7,616) | | | (4,527) | | | (5,328) | |
Net change in cash and cash equivalents | | 444 | | | 1,646 | | | 742 | |
Cash and cash equivalents at beginning of year | | 3,160 | | | 1,514 | | | 772 | |
Cash and cash equivalents at end of year | | $ | 3,604 | | | $ | 3,160 | | | $ | 1,514 | |
The accompanying notes are an integral part of these consolidated financial statements.
Lockheed Martin Corporation
Consolidated Statements of Equity
(in millions, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ (Deficit) Equity | Noncontrolling Interests in Subsidiary | Total (Deficit) Equity |
Balance at December 31, 2014 | $ | 314 |
| $ | — |
| | $ | 14,956 |
| $ | (11,870 | ) | | $ | 3,400 |
| | $ | — |
| | $ | 3,400 |
|
Net earnings | — |
| — |
| | 3,605 |
| — |
| | 3,605 |
| | — |
| | 3,605 |
|
Other comprehensive income, net of tax | — |
| — |
| | — |
| 426 |
| | 426 |
| | — |
| | 426 |
|
Repurchases of common stock | (15 | ) | (656 | ) | | (2,400 | ) | — |
| | (3,071 | ) | | — |
| | (3,071 | ) |
Dividends declared ($6.15 per share) | — |
| — |
| | (1,923 | ) | — |
| | (1,923 | ) | | — |
| | (1,923 | ) |
Stock-based awards, ESOP activity and other | 4 |
| 656 |
| | — |
| — |
| | 660 |
| | — |
| | 660 |
|
Balance at December 31, 2015 | 303 |
| — |
| | 14,238 |
| (11,444 | ) | | 3,097 |
| | — |
| | 3,097 |
|
Net earnings | — |
| — |
| | 5,302 |
| — |
| | 5,302 |
| | — |
| | 5,302 |
|
Other comprehensive loss, net of tax | — |
| — |
| | — |
| (658 | ) | | (658 | ) | | — |
| | (658 | ) |
Shares exchanged and retired in connection with divestiture of IS&GS business | (9 | ) | — |
| | (2,488 | ) | — |
| | (2,497 | ) | | — |
| | (2,497 | ) |
Repurchases of common stock | (9 | ) | (395 | ) | | (1,692 | ) | — |
| | (2,096 | ) | | — |
| | (2,096 | ) |
Dividends declared ($6.77 per share) | — |
| — |
| | (2,036 | ) | — |
| | (2,036 | ) | | — |
| | (2,036 | ) |
Stock-based awards, ESOP activity and other | 4 |
| 395 |
| | — |
| — |
| | 399 |
| | — |
| | 399 |
|
Net increase in noncontrolling interests in subsidiary | — |
| — |
| | — |
| — |
| | — |
| | 95 |
| | 95 |
|
Balance at December 31, 2016 | 289 |
| — |
| | 13,324 |
| (12,102 | ) | | 1,511 |
| | 95 |
| | 1,606 |
|
Net earnings | — |
| — |
| | 2,002 |
| — |
| | 2,002 |
| | — |
| | 2,002 |
|
Other comprehensive loss, net of tax | — |
| — |
| | — |
| (438 | ) | | (438 | ) | | — |
| | (438 | ) |
Repurchases of common stock | (7 | ) | (398 | ) | | (1,596 | ) | — |
| | (2,001 | ) | | — |
| | (2,001 | ) |
Dividends declared ($7.46 per share) | — |
| — |
| | (2,157 | ) | — |
| | (2,157 | ) | | — |
| | (2,157 | ) |
Stock-based awards, ESOP activity and other | 2 |
| 398 |
| | — |
| — |
| | 400 |
| | — |
| | 400 |
|
Net decrease in noncontrolling interests in subsidiary | — |
| — |
| | — |
| — |
| | — |
| | (21 | ) | | (21 | ) |
Balance at December 31, 2017 | $ | 284 |
| $ | — |
| | $ | 11,573 |
| $ | (12,540 | ) | | $ | (683 | ) | | $ | 74 |
| | $ | (609 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | Noncontrolling Interests in Subsidiary | Total Equity | | |
Balance at December 31, 2018 | $ | 281 | | $ | — | | | $ | 15,434 | | $ | (14,321) | | | $ | 1,394 | | | $ | 55 | | | $ | 1,449 | | | |
Net earnings | — | | — | | | 6,230 | | — | | | 6,230 | | | — | | | 6,230 | | | |
Other comprehensive loss, net of tax | — | | — | | | — | | (1,233) | | | (1,233) | | | — | | | (1,233) | | | |
Repurchases of common stock | (4) | | (483) | | | (713) | | — | | | (1,200) | | | — | | | (1,200) | | | |
Dividends declared ($9.00 per share) | — | | — | | | (2,550) | | — | | | (2,550) | | | — | | | (2,550) | | | |
Stock-based awards, ESOP activity and other | 3 | | 483 | | | — | | — | | | 486 | | | — | | | 486 | | | |
| | | | | | | | | | | | | |
Net decrease in noncontrolling interests in subsidiary | — | | — | | | — | | — | | | — | | | (11) | | | (11) | | | |
Balance at December 31, 2019 | $ | 280 | | $ | — | | | $ | 18,401 | | $ | (15,554) | | | $ | 3,127 | | | $ | 44 | | | $ | 3,171 | | | |
Net earnings | — | | — | | | 6,833 | | — | | | 6,833 | | | — | | | 6,833 | | | |
Other comprehensive loss, net of tax | — | | — | | | — | | (567) | | | (567) | | | — | | | (567) | | | |
Repurchases of common stock | (3) | | (256) | | | (841) | | — | | | (1,100) | | | — | | | (1,100) | | | |
Dividends declared ($9.80 per share) | — | | — | | | (2,757) | | — | | | (2,757) | | | — | | | (2,757) | | | |
Stock-based awards, ESOP activity and other | 2 | | 477 | | | — | | — | | | 479 | | | — | | | 479 | | | |
| | | | | | | | | | | | | |
Net decrease in noncontrolling interests in subsidiary | — | | — | | | — | | — | | | — | | | (21) | | | (21) | | | |
Balance at December 31, 2020 | $ | 279 | | $ | 221 | | | $ | 21,636 | | $ | (16,121) | | | $ | 6,015 | | | $ | 23 | | | $ | 6,038 | | | |
Net earnings | — | | — | | | 6,315 | | — | | | 6,315 | | | — | | | 6,315 | | | |
Other comprehensive loss, net of tax | — | | — | | | — | | 5,115 | | | 5,115 | | | — | | | 5,115 | | | |
Repurchases of common stock | (9) | | (671) | | | (3,407) | | — | | | (4,087) | | | — | | | (4,087) | | | |
Dividends declared ($10.60 per share) | — | | — | | | (2,944) | | — | | | (2,944) | | | — | | | (2,944) | | | |
Stock-based awards, ESOP activity and other | 1 | | 544 | | | — | | — | | | 545 | | | — | | | 545 | | | |
Net decrease in noncontrolling interests in subsidiary | — | | — | | | — | | — | | | — | | | (23) | | | (23) | | | |
Balance at December 31, 2021 | $ | 271 | | $ | 94 | | | $ | 21,600 | | $ | (11,006) | | | $ | 10,959 | | | $ | — | | | $ | 10,959 | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Lockheed Martin Corporation
Notes to Consolidated Financial Statements
Note 1 – Organization and Significant Accounting Policies
Organization – We are a global security and aerospace company 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. 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. As described in “Note 4 – Information on Business Segments”, we operate in 4 business segments: 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, however, during 2021, AWE 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 – OurThese consolidated financial statements include the accounts of subsidiaries we control and variable interest entities if we are the primary beneficiary. We eliminate intercompany balances and transactions in consolidation. Our receivables, inventories, customer advancesWe classify certain assets and amounts in excessliabilities as current utilizing the duration of costs incurred and certain amounts in other current liabilities primarily are attributable to long-term contracts or programs in progress for which the related contract or program as our operating cycles arecycle, which is generally longer than one year. In accordance with industry practice, we include these items in currentThis primarily impacts receivables, contract assets, inventories, and currentcontract liabilities. Unless otherwise noted, we presentWe classify all per share amounts cited in these consolidated financial statements on a “per diluted share” basis. Certain prior period amounts have been reclassified to conform with current year presentation.
The discussion and presentation of the operating results of our business segments have been impacted by the following recent events.
During the fourth quarter of 2017, the business segment formally known as Space Systems was renamed Space. There was no change to the composition of the portfolio in connection with the name change. The information for this segment for all periods included in these consolidated financial statements has been labeled using the new name.
On August 16, 2016, we completed the divestiture of the Information Systems & Global Solutions (IS&GS) business, which merged with a subsidiary of Leidos Holdings, Inc. (Leidos) in a Reverse Morris Trust transaction. Accordingly, the operating results of the IS&GS business have been classified as discontinued operations on our consolidated statements of earnings for all prior periods presented. However, the cash flows of the IS&GS business have not been reclassified in our consolidated statements of cash flows as we retained the cash as part of the Transaction. See “Note 3 – Acquisitions and Divestitures” for additional information about the divestiture of the IS&GS business.
On August 24, 2016, we increased our ownership interest in the AWE Management Limited (AWE) joint venture, which operates the United Kingdom’s nuclear deterrent program, from 33% to 51%. At which time, we began consolidating AWE. Consequently, our operating results include 100% of AWE’s sales and 51% of its operating profit. Prior to increasing our ownership interest, we accounted for our investment in AWE using the equity method of accounting. Under the equity method, we recognized only 33% of AWE’s earnings or losses and no sales. Accordingly, prior to August 24, 2016, the date we obtained control, we recorded 33% of AWE’s net earnings in our operating results and subsequent to August 24, 2016, we recognized 100% of AWE’s sales and 51% of its operating profit. See “Note 3 – Acquisitions and Divestitures” for additional information about the change in ownership of AWE.
On November 6, 2015, we completed the acquisition of Sikorsky Aircraft Corporation and certain affiliated companies (collectively “Sikorsky”) for $9.0 billion, net of cash acquired, and aligned Sikorsky under our Rotary and Mission Systems (RMS) business segment. The operating results and cash flows of Sikorsky have been included on our consolidated statements of earnings and consolidated statements of cash flows since the November 6, 2015 acquisition date. Additionally, theother assets and liabilities of Sikorsky are included in our consolidated balance sheets as of December 31, 2017 and December 31, 2016. See “Note 3 – Acquisitions and Divestitures” for additional information aboutbased on whether the acquisition of Sikorsky and related final purchase accounting.asset will be realized or the liability will be paid within one year.
During the fourth quarter of 2015, we realigned certain programs among our business segments. The amounts, discussion and presentation of our business segments for all periods presented in these consolidated financial statements reflect the program realignment.
Use of estimates – We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP). In doing so, we are required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates. Significant estimates inherent in the preparation of our consolidated financial statements include, but are not limited to, accounting for sales and cost recognition,recognition; postretirement benefit plans,plans; environmental receivablesliabilities and
liabilities, assets for the portion of environmental costs that are probable of future recovery; evaluation of goodwill, intangible assets, investments and other assets for impairment,impairment; income taxes including deferred tax assets,income taxes; fair value measurementsmeasurements; and contingencies.
Sales and earnings
Revenue Recognition – We recordThe majority of our net sales are generated from long-term contracts with the U.S. Government and estimated profitsinternational customers (including foreign military sales (FMS) contracted through the U.S. Government) for substantiallythe research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For certain contracts that meet the foregoing requirements, primarily international direct commercial sale contracts, we are required to obtain certain regulatory approvals. In these cases, we recognize revenue when it is probable that we will receive regulatory approvals based upon all ofknown facts and circumstances. We provide our contracts using the percentage-of-completion method forproducts and services under fixed-price and cost-reimbursable contracts.
Under fixed-price contracts, we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Some fixed-price contracts have a performance-based component under which we may earn incentive payments or incur financial penalties based on our performance.
Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract plus a fee up to a ceiling based on the amount that has been funded. Typically, we enter into 3 types of cost-reimbursable contracts: cost-plus-award-fee, cost-plus-incentive-fee, and cost-plus-fixed-fee. Cost-plus-award-fee contracts provide for an award fee that varies within specified limits based on the customer’s assessment of our performance against a predetermined set of criteria, such as targets based on cost, quality, technical and schedule criteria. Cost-plus-incentive-fee contracts provide for reimbursement of costs plus a fee, which is adjusted by a formula based on the relationship of total allowable costs to total target costs (i.e., incentive based on cost) or reimbursement of costs plus an incentive to exceed stated performance targets (i.e.,
incentive based on performance). Cost-plus-fixed-fee contracts provide a fixed fee that is negotiated at the inception of the contract and does not vary with actual costs.
We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.
We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The products and services within our contracts are typically not distinct from one another due to their complex relationships and the U.S. Government. Salessignificant contract management functions required to perform under the contract. Accordingly, our contracts are typically accounted for as one performance obligation. In limited cases, our contracts have more than one distinct performance obligation, which occurs when we perform activities that are not highly complex or interrelated or involve different product lifecycles. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded on all time-and-materials contracts as the work is performed based on agreed-upon hourly rates and allowable costs. We account for our services contracts with non-U.S. Government customers using the services method of accounting.in a given period. We classify net sales as products or services on our consolidated statements of earnings based on the predominant attributes of the underlying contracts.performance obligations.
Percentage-of-Completion Method – The percentage-of-completion methodWe determine the transaction price for producteach contract based on the consideration we expect to receive for the products or services being provided under the contract. For contracts dependswhere a portion of the price may vary, we estimate variable consideration at the most likely amount, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. We analyze the risk of a significant revenue reversal and if necessary constrain the amount of variable consideration recognized in order to mitigate this risk.
At the inception of a contract we estimate the transaction price based on our current rights and do not contemplate future modifications (including unexercised options) or follow-on contracts until they become legally enforceable. Contracts are often subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the context of the contract. Therefore, such modifications are accounted for as if they were part of the existing contract and recognized as a cumulative adjustment to revenue.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis (i.e., not bundled with any other products providedor services). Our contracts with the U.S. Government, including FMS contracts, are subject to the Federal Acquisition Regulations (FAR) and the price is typically based on estimated or actual costs plus a reasonable profit margin. As a result of these regulations, the standalone selling price of products or services in our contracts with the U.S. Government and FMS contracts are typically equal to the selling price stated in the contract.
For non-U.S. Government contracts with multiple performance obligations, we evaluate whether the stated selling prices for the products or services represent their standalone selling prices. We primarily sell customized solutions unique to a customer’s specifications. When it is necessary to allocate the transaction price to multiple performance obligations, we typically use the expected cost plus a reasonable profit margin to estimate the standalone selling price of each product or service. We occasionally sell standard products or services with observable standalone sales transactions. In these situations, the observable standalone sales transactions are used to determine the standalone selling price.
We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of our revenue is recognized over time as we perform under the contract.contract because control of the work in process transfers continuously to the customer. For example,most contracts with the U.S. Government and FMS contracts, this continuous transfer of control of the work in process to the customer is supported by clauses in the contract that give the customer ownership of work in process and allow the customer to unilaterally terminate the contract for convenience and pay us for costs incurred plus a reasonable profit. For most non-U.S. Government contracts, primarily international direct commercial contracts, continuous transfer of control to our customer is supported because we deliver products that requiredo not have an alternative use to us and if our customer were to performterminate 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 significant levelreasonable 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. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total value ofestimated costs to complete the contract and/or to deliver minimal quantities, sales are recorded using the cost-to-cost method to measure progress toward completion. Under the cost-to-cost method of accounting, we recognize sales and an estimated profit as costs are incurred based on the proportion that the incurred costs bear to total estimated costs.performance obligation(s). For contracts that require us to provide a substantial number of similar items without a significant level of development, we record sales and an estimated profit on a percentage-of-completion basis using units-of-delivery as the basis to measure progress toward completing the contract. For contractsperformance obligations to provide services to the customer, revenue is recognized over time based on costs incurred or the right to invoice method (in situations where the value transferred matches our billing rights) as our customer receives and consumes the benefits.
For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point.
Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. It is converted into sales in future periods as work is performed or deliveries are made. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and is continuously reviewed throughout the contract period. In determining the estimated consideration, we consider the risks related to the technical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers may be reduced, resulting in a reduction of backlog without a corresponding recognition of sales. As of December 31, 2021, our ending backlog was $135.4 billion. We expect to recognize approximately 38% of our backlog over the next 12 months and approximately 60% over the next 24 months as revenue, with the remainder recognized thereafter.
For arrangements with the U.S. Government sales areand FMS contracts, we generally recorded usingdo not begin work on contracts until funding is appropriated by the cost-to-cost method.
Awardcustomer. Billing timetables and incentive fees,payment terms on our contracts vary based on a number of factors, including the contract type. Typical payment terms under fixed-price contracts with the U.S. Government provide that the customer pays either performance-based payments (PBPs) based on the achievement of contract milestones or progress payments based on a percentage of costs we incur. For the majority of our international direct commercial contracts to deliver complex systems, we typically receive advance payments prior to commencement of work, as well as penalties relatedmilestone payments that are paid in accordance with the terms of our contract as we perform. We recognize a liability for payments in excess of revenue recognized, which is presented as a contract liability on the balance sheet. The portion of payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to contract performance, are considered in estimating sales and profit rates on contracts accounted forprotect the customer from our failure to adequately complete some or all of the obligations under the percentage-of-completion method. Estimatescontract. Payments received from customers in advance of award fees are based on past experience and anticipated performance. We record incentives or penalties when there is sufficient information to assess anticipated contract performance. Incentive provisions that increase or decrease earnings based solely on a single significant eventrevenue recognition are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract.
For fixed-price and cost-reimbursable contracts, we present revenues recognized untilin excess of billings as contract assets on the event occurs.balance sheet. Amounts billed and due from our customers under both contract types are classified as receivables on the balance sheet.
Accounting for contracts using the percentage-of-completion method requires judgment relative to assessing risks,Significant estimates and assumptions are made in estimating contract sales and costs, (including estimating award and incentive fees and penalties related to performance) and making assumptions for schedule and technical issues. Due toincluding the number of years it may take to complete many of our contracts and the scope and nature of the work required to be performed on those contracts, the estimation of total sales and costs at completion is complicated and subject to many variables and, accordingly, is subject to change. When adjustments in estimated total contract sales or estimated total costs are required, any changes from prior estimates are recognized in the current period for the inception-to-date effect of such changes. When estimates of total costs to be incurred on a contract exceed estimates of total sales to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.
Many of our contracts span several years and include highly complex technical requirements.profit booking rate. At the outset of a long-term contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract, as well as variable consideration, and assess the effects of those risks on our estimates of sales and total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead, general and administrative and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset or localization agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding 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.increase or our estimates of variable consideration we expect to receive decrease. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate. 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 determined.
In addition, comparability
Comparability of our business segment sales, operating profit and operating marginsmargin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts accounted for which we recognize revenue over time using the percentage-of-completion cost-to-cost method of accounting.to measure progress towards completion. Increases in the profit booking rates, typically referred to as risk retirements, 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 completefulfill the performance obligations and a reduction in the profit booking rate. 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 marginsmargin may also be impacted favorably or unfavorably by other items.items, which may or may not impact sales. Favorable items may include the positive resolution of contractual matters, cost recoveries on severance and restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring charges, except for significant severance actions, (such as those mentioned below in “Note 15 – Restructuring Charges”), which are excluded from segment operatingoperating results; reserves for disputes; certain asset impairments; and losses on sales of certain assets. Segment operating profit and items such as risk retirements, reductions of profit booking rates or other matters are presented net of state income taxes.
Changes in Estimates –As previously disclosed, we have a program to design, integrate, and install an air missile defense C4I systems for an international customer that has experienced performance issues and for which we have periodically accrued reserves. In 2017, we revised our estimated costs to complete the program, EADGE-T, as a consequence of ongoing performance matters and recorded an additional charge of $120 million ($74 million or $0.25 per share, after tax) at our RMS business segment. As of December 31, 2017, cumulative losses, including reserves, remained at approximately $260 million on this program. We are continuing to monitor the viability of the program and the available options and could record additional charges in future periods. However, based on the reserves already accrued and our current estimate of the costs to complete the program, at this time we do not anticipate that additional charges, if any, would be material.
We have two commercial satellite programs at our Space business segment, for which we have experienced performance issues related to the development and integration of a modernized LM 2100 satellite platform. These commercial programs require the development of new satellite technology to enhance the LM 2100’s power, propulsion and electronics, among other items. The enhanced satellite is expected to benefit other commercial and government satellite programs. We have periodically revised our estimated costs to complete these developmental commercial programs. We have recorded cumulative losses of approximately $305 million as of December 31, 2017, including approximately $135 million ($83 million or $0.29 per share, after tax) recorded during the year ended December 31, 2017. While these losses reflect our estimated total losses on the programs, we will continue to incur unrecovered costs each period until we complete these programs and may have to record additional loss reserves in future periods, which could be material to our operating results. While we do not currently anticipate recording additional loss reserves, the programs remain developmental and further challenges in the delivery and integration of new satellite technology, anomalies discovered during system testing requiring repair or rework, further schedule delays and potential penalties could require that we record additional reserves. We do not currently expect to be able to meet the delivery schedule under the contracts and have informed the customers. The customers could seek to exercise a termination right under the contracts, in which case we would have to refund the payments we have received and pay certain penalties. However, we think the probability that the customers will seek to exercise any termination right is remote as the delay beyond the termination date is modest and the customers have an immediate need for the satellites.
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, net of state income taxes,items, increased segment operating profit by approximately $1.5$2.0 billion in both 2017 and 2016 and $1.72021, $1.8 billion in 2015.2020 and $1.9 billion in 2019. These adjustments increased net earnings by approximately $980 million$1.6 billion ($3.375.81 per share) in 2017, $950 million2021 and $1.5 billion ($3.135.33 and $5.29 per share) in 20162020 and $1.12019. We recognized net sales from performance obligations satisfied in prior periods of approximately $2.2 billion, $2.0 billion and $2.2 billion in 2021, 2020 and 2019, which primarily relate to changes in profit booking rates that impacted revenue.
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. During the second quarter of 2021, we completed a comprehensive review and negotiation of scope of the program with our customer, including the technical requirements, performance to date, remaining work, schedule, and estimated costs to complete the program. At the conclusion of the review, we determined that the total costs to complete the current phase of the program would exceed the contract price. Accordingly, during the second quarter of 2021, we recognized a loss of $225 million ($3.50169 million, or $0.61 per share)share, after tax) on the program at our Aeronautics business segment, which represented our estimated total losses on the current phase of the program. During the fourth quarter of 2021, we amended the contract with our customer to modify the contract scope and price. The terms of the amendment are consistent with the assumptions used to estimate the loss recognized in 2015.the second quarter of 2021. Therefore, our current estimated loss remains at $225 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 periods if we experience further performance issues, increases in scope, or cost growth, which could be material to our operating results. In addition, we and our industry team will incur advanced procurement costs (also referred to as precontract costs) in order to enhance our ability to achieve the revised schedule and certain milestones. We will monitor the recoverability of precontract costs, which could be impacted by the customer’s decision regarding future phases of the program.
Services Method – Under fixed-price service contracts, weWe are paid a predetermined fixed amountresponsible for a specifiedprogram to design, develop and construct a ground-based radar at our RMS business segment. The program has experienced performance issues for which we have periodically accrued reserves. Cumulative losses on this program were approximately $280 million as of December 31, 2021. We will continue to monitor our performance, any future changes in scope, of work and generallyestimated costs to complete the program and may have full responsibility for the costs associated with the contract and the resulting profitto record additional losses in future periods if we experience further performance issues, increases in scope, or loss. We record net sales under fixed-price service contracts with non-U.S. Government customers on a straight-line basis over the period of contract performance, unless evidence suggests that net sales are earned or the obligations are fulfilled in a different pattern. For cost-reimbursable contracts for services to non-U.S. Government customers, we record net sales as services are performed, except for award and incentive fees. Award and incentive fees are recorded when they are fixed or determinable, generally at the date the amount is communicated to us by the customer. This approach results in the recognition of such fees at contractual intervals (typically every six months) throughout the contract and is dependentcost growth. However, based on the customer’s processeslosses 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 operating results or financial condition.
We have a program, EADGE-T, to design, integrate and install an air missile defense command, control, communications, computers - intelligence (C4I) system for notificationan international customer that has experienced performance issues and for which we have periodically accrued reserves at our RMS business segment. We last recorded a charge and accrued reserves for this program in 2017. As of awardsDecember 31, 2021, cumulative losses remained at approximately $260 million. We continue to monitor program requirements and issuanceour performance. At this time, we do not anticipate additional charges that would be material to our operating results or financial condition.
Research and development and similar costs – Except for certain arrangements described below, we account forWe 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. R&D costs include basic research, applied research, concept formulation studies, design, development, and related test activities. Company-funded R&D costs are allocated to customer contracts as part of the general and administrative overhead costs thatand generally recoverable on our customer contracts with the U.S. Government. Customer-funded R&D costs are allocated amongcharged directly to the related customer contract. Substantially all of our contracts and programs in progress under U.S. Government contractual arrangements andR&D costs are charged to cost of sales. Under certain arrangements in which a customer shares in product development costs, our portion of unreimbursed costs is expensedsales as incurred in cost of sales. Independent research and developmentincurred. Company-funded R&D costs charged to cost of sales totaled $1.2$1.5 billion in 2017, $988 million2021, and $1.3 billion in 2016both 2020 and $817 million2019.
Stock-based compensation – We issue stock-based compensation awards in 2015. Costs we incur under customer-sponsored researchthe form of restricted stock units (RSUs) and development programs pursuant to contractsperformance stock units (PSUs) that generally vest three years from the grant date and are includedsettled in net sales and cost of sales.
Stock-based compensation –shares. Compensation cost related to all share-based paymentsstock-based awards is measured at the grant date based on the estimated fair value of the award. We generallyThe grant date fair value of RSUs is equal to the closing market price of our common stock on the grant date less a discount to reflect the delay in payment of dividend-equivalent cash payments that are made only upon vesting. The grant date fair value of PSUs is measured in a manner similar to RSUs or using a Monte Carlo model, depending on the vesting conditions.
For all RSUs, we recognize the grant date fair value, less estimated forfeitures, as compensation costexpense ratably over a three-yearthe requisite service period, which is shorter than the vesting period netif the employee is retirement eligible on the date of grant or will become retirement eligible before the end of the vesting period. For PSUs that vest based on service and performance conditions, we recognize the grant date fair value, less estimated forfeitures.forfeitures, as compensation expense ratably over the vesting period based on the number of awards expected to ultimately vest. For PSUs that vest based on service and market conditions, we recognize the grant date fair value, less estimated forfeitures, as compensation expense ratably over the vesting period. At each reporting date, estimated forfeitures for all stock-based compensation awards and the number of shares is adjusted to the number ultimatelyPSUs expected to vest.vest based on service and performance conditions is adjusted.
Income taxes – We calculate our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying amount of assets and liabilities and their respective tax bases, as well as from operating loss and tax credit carry-forwards. The provision for income taxes differs from the amounts currently receivable or payable because certain items of income and expense are recognized in different periods for financial reporting purposes than for income tax purposes. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.
We periodically assess our tax exposures related to periods that are open to examination. Based on the latest available information, we evaluate our tax positions to determine whether the position will more likely than not be sustained upon examination by the Internal Revenue Service (IRS) or other taxing authorities. If we cannot reach a more-likely-than-not determination, no benefit is recorded. If we determine that the tax position is more likely than not to be sustained, we record the largest amount of benefit that is more likely than not to be realized when the tax position is settled. 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.
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. We generally recognize changes in deferred state taxes and unrecognized state tax benefits in unallocated corporate expenses.
Cash and cash equivalents – Cash equivalents include highly liquid instruments with original maturities of 90 days or less.
Receivables – Receivables, net represent our unconditional right to consideration under the contract and include amounts billed and currently due from customers and unbilled costs and accrued profits primarily relatedcustomers. Receivables, net are recorded at the net amount expected to sales on long-term contracts that have been recognized but not yet billed to customers. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers have title to, or a security interest in, assets related to such contracts as a result of advances, performance-based payments and progress payments. We reflect those advances and payments as an offset to the related receivables balance for contracts that we account for on a percentage-of-completion basis using the cost-to-cost method to measure progress towards completion.
On occasion, our customers may seek deferred payment terms to purchase our products. In connection with these transactions, we may, at our customer’s request, enter into arrangements for the non-recourse sale of customer receivables to unrelated third–party financial institutions. For accounting purposes, these transactions are not discounted and are treated as a sale of receivables as we have no continuing involvement. The sale proceeds from the financial institutions are reflected in our operating cash flows on the statement of cash flows. During 2017, we sold approximately $698 million of customer receivables.be collected. There were no gains orsignificant impairment losses related to our receivables in 2021, 2020 or 2019.
Contract assets – Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of these receivables.revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract assets are recorded at the net amount expected to be billed and collected. 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.
Inventories – We record inventories at the lower of cost or estimated net realizable value. Costs on long-termThe majority of our inventory represents work-in-process for contracts where control has not yet passed to the customer. Work-in-process primarily consists of labor, material, subcontractor, and programs in progress represent recoverableoverhead costs. In addition, costs incurred for productionto fulfill a contract in advance of the contract being awarded are recorded in inventories as work-in-process if we determine that those costs relate directly to a contract or contract-specific facilitiesto an anticipated contract that we can specifically identify and equipment, allocable operating overhead, advancescontract award is probable, the costs generate or enhance resources that will be used in satisfying performance obligations, and the costs are recoverable (referred to suppliers and,as pre-contract costs). Pre-contract costs that are initially capitalized in the caseinventory are generally recognized as cost of contractssales consistent with the U.S. Governmenttransfer of products and substantially all other governments, research and development and general and administrative expenses. Pursuantservices to contract provisions, agenciesthe customer upon the receipt of the U.S. Government and certainanticipated contract. All other customers have title to, or a security interest in, inventories related to such contractspre-contract costs, including start-up costs, are expensed as a result of advances, performance-based payments and progress payments. We reflect those advances and payments as an offset against the related inventory balances for contracts that we account for on a percentage-of-completion basis using units-of-delivery as the basis to measure progress toward completing the contract.incurred. We determine the costs of other productinventories such as materials, spares and supply inventoriessupplies by using the first-in first-out or average cost methods. If events or changes in circumstances indicate that precontract 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 – We record property,Property, plant and equipment are initially recorded at cost. We provide for depreciation and amortization onThe 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. No depreciation expense is recorded on construction in progress until such assets are placed into operation. Depreciation expense related to plant and equipment was $760$904 million in 2017, $7472021, $853 million in 2016,2020 and $716$794 million in 2015.2019.
We review the carrying amounts of long-lived assets for impairment if events or changes in the facts and circumstances indicate that their carrying amounts may not be recoverable. We assess impairment by comparing the estimated undiscounted future cash flows of the related asset grouping to its carrying amount. If an asset is determined to be impaired, we recognize an impairment charge in the current period for the difference between the fair value of the asset and its carrying amount.
Capitalized software – We capitalize certain costs associated with the development or purchase of internal-use software. 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 six years. As of December 31, 20172021 and 2016,2020, capitalized software totaled $424$777 million and $427$686 million, net of accumulated amortization of $2.0$2.3 billion and $1.9$2.2 billion. No amortization expense is recorded until the software is ready for its intended use. Amortization expense related to capitalized software was $123$175 million in 2017, $1362021, $166 million in 20162020 and $161$111 million in 2015.2019.
Fair value of financial instruments – We measure the fair value of our financial instruments using observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. The following hierarchy classifies the inputs used to determine fair value into three levels:
Level 1 – quoted prices in active markets for identical assets or liabilities.
Level 2 – inputs, other than quoted prices, observable by a marketplace participant either directly or indirectly.
Level 3 – unobservable inputs significant to the fair value measurement.
Investments – Substantially all assets measured at fair value represent investments held in a separate trust to fund certain of our non-qualified deferred compensation plan liabilities. As of December 31, 2021 and 2020, the fair value of our investments held in trust totaled $2.1 billion and $2.0 billion and was included in other noncurrent assets on our consolidated balance sheets.
Net gains on these securities were $205 million, $231 million and $233 million in 2021, 2020 and 2019. 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.
Additionally, through our Lockheed Martin Ventures Fund, we make strategic investments in certain early stage 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 end of each reporting period. The carrying amounts of investments
held in our Lockheed Martin Ventures Fund were $465 million and $173 million at December 31, 2021 and December 31, 2020 and are included on our consolidated balance sheets within other assets, both current and noncurrent. During 2021, we recorded $265 million ($199 million, or $0.72 per share, after-tax) of net gains, compared to recording no net gains during 2020, 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.
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. Significant influence typically exists if we have a 20% to 50% ownership interest in the investee. Under this method of accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on our consolidated statements of earnings since the activities of the investee are closely aligned with the operations of the business segment holding the investment. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. As of December 31, 2021 and December 31, 2020, our equity method investments totaled $689 million and $784 million, which was primarily composed of our investment in the United Launch Alliance (ULA) joint venture. Our share of net earnings related to our equity method investees was $97 million in 2021, $163 million in 2020 and $154 million in 2019, of which approximately $67 million, $135 million and $145 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. The sale was completed on November 25, 2020 and all the proceeds have been received in cash.
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 ranges from five to 20 years.
Our goodwill balance was $10.8 billion at both December 31, 20172021 and 2016.2020. 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 our business segment level or a level below the business segment. 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. 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. Based on that qualitative evaluation, if we determine it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary. Otherwise we perform a quantitative impairment test. We perform quantitative tests for most reporting units at least once every three years. 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. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the carrying value of the reporting unit, including goodwill, exceeds its fair value, a goodwill impairment loss is recognized in an amount equal to that excess. 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 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 amountscertain assets and liabilities held at the business segment and corporate levels.
During the fourth quarters of 20172021, 2020 and 2016,2019, 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.
During the fourth quarter of 2017, we realigned certain programs within the RMS business segment to align with changes in management structure. We performed goodwill impairment tests prior and subsequent to the realignment, and there was no indication of goodwill impairment.
During the fourth quarter of 2015, we performed our annual goodwill impairment test for each of our reporting units. During the fourth quarter of 2015, we realigned certain programs between our business segments in connection with our strategic review of our government IT and technical services businesses. As part of the realignment, goodwill was reallocated between affected reporting units on a relative fair value basis. We performed goodwill impairment tests prior and subsequent to the realignment. The results of our 2015 annual impairment tests of goodwill indicated that no impairment existed.
IntangibleAcquired intangible assets – Intangible assets from acquired businesses are recognized at their estimated fair values at the date of acquisition 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 and are amortized on a straight-line basis over a period of expected cash flows used to measure the fair value, which ranges from nine to 20 years. Acquired intangibles deemed to have indefinite lives are not amortized, but are subject to annual impairment testing. 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 threefive 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.
Customer advances and amounts in excess of cost incurredLeases – We receive advances, performance-based paymentsevaluate whether our contractual arrangements contain leases at the inception of such arrangements. Specifically, we consider whether we can control the underlying asset and progress payments from customers that may exceed costs incurred on certain contracts, including contracts with agencieshave the right to obtain substantially all of the U.S. Government.economic benefits or outputs from the asset. Substantially all of our leases are long-term operating leases with fixed payment terms. We classify such advances, do not have significant financing leases. Our right-of-use (ROU) operating lease assets represent our right to use an underlying asset for the lease term, and our operating lease liabilities represent our obligation to make lease payments. ROU operating lease assets are recorded in other than those reflectednoncurrent assets in our consolidated balance sheet. Operating lease liabilities are recorded in other current liabilities or other noncurrent liabilities in our consolidated balance sheet based on their contractual due dates.
Both the ROU operating lease asset and liability are recognized as of the lease commencement date at the present value of the lease payments over the lease term. Most of our leases do not provide an implicit rate that can readily be determined. Therefore, we use a discount rate based on our incremental borrowing rate, which is determined using our credit rating and information available as of the commencement date. ROU operating lease assets include lease payments made at or before the lease commencement date, net of any lease incentives.
Our operating lease agreements may include options to extend the lease term or terminate it early. We include options to extend or terminate leases in the ROU operating lease asset and liability when it is reasonably certain we will exercise these options. Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales on our consolidated statement of earnings.
We have operating lease arrangements with lease and non-lease components. The non-lease components in our arrangements are not significant when compared to the lease components. For all operating leases, we account for the lease and non-lease components as a reduction of receivables or inventories as discussed above, as currentsingle component. Additionally, for certain equipment leases, we apply a portfolio approach to recognize operating lease ROU assets and liabilities. We evaluate ROU assets for impairment consistent with our property, plant and equipment policy.
Postretirement benefit plans – Many of our employees are covered byand retirees participate in defined benefit pension plans, and we provide certain health careretiree medical and life insurance benefits to eligible retireesplans, and other postemployment plans (collectively, postretirement benefit plans). GAAP requires that the
amounts we record related to our postretirement benefit plans be computed, based on service to date, using actuarial valuations that are based in part on certain key economic assumptions we make, including the discount rate, the expected long-term rate of return on plan assets and other actuarial assumptions including participant longevity (also known as mortality), health care cost trend rates and employee turnover, each as appropriate based on the nature of the plans.
A market-related value of our plan assets, determined using actual asset gains or losses over the prior three year period, is used to calculate the amount of deferred asset gains or losses to be amortized. These asset gains or losses, along with those resulting from adjustments to our benefit obligation, will be amortized to expense using the corridor method, where gains and losses are recognized over a period of years to the extent they exceed 10% of the greater of plan assets or benefit obligations, over the average future service period of employees expected to receive benefits under the plans of approximately nine years as of December 31, 2017. This amortization period is expected to extend (approximately double) in 2020 when our non-union pension plan is frozen to use the average remaining life expectancy of the participants instead of average future service.obligations.
We recognize on a plan-by-plan basis the funded status of our postretirement benefit plans under GAAP as either an asset recorded within other noncurrent assets or a liability recorded within noncurrent liabilities on our consolidated balance sheets. The GAAP funded status is measured as the difference between the fair value of the plan’s assets and the benefit obligation of the plan. The funded status under the Employee Retirement Income Security Act of 1974 (ERISA), as amended, by the Pension Protection Act of 2006 (PPA), is calculated on a different basis than under GAAP.
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.
During 2021, we recognized severance and restructuring 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. These actions were taken to consolidate certain operations in order to improve the efficiency of RMS’ manufacturing operations and the affordability of its products and services. 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.
Environmental matters – We record a liability for environmental matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. The amount of liability recorded is based on our estimate of the costs to be incurred for remediation at a particular site. We do not discount the recorded liabilities, as the amount and timing of future cash payments are not fixed or cannot be reliably determined. Our environmental liabilities are recorded on our consolidated balance sheets within other liabilities, both current and noncurrent. We expect to include a substantial portion of environmental costs in our net sales and cost of sales in future periods pursuant to U.S. Government agreement or regulation. At the time a liability is recorded for future environmental costs, we record a receivable 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 continuously evaluate the recoverability of our assets for the portion of environmental receivablescosts that are probable of future recovery by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and contract mix, our history of receiving reimbursement of such costs, and recent efforts by some U.S. Government representatives to limit such reimbursement. We include the portion of those environmental costs expected to be allocated to our non-U.S. Government contracts, or that is determined not to not be recoverable under U.S. Government contracts, in our cost of sales at the time the liability is established.established or adjusted. Our assets for the portion of environmental receivablescosts that are probable of future recovery are recorded on our consolidated balance sheets within other assets, both current and noncurrent. We project costs and recovery of costs over approximately 20 years.
Investments in marketable securities – Investments in marketable securities consist of debt and equity securities and are classified as trading securities. As of December 31, 2017 and 2016, the fair value of our trading securities totaled $1.4 billion and $1.2 billion and was included in other noncurrent assets on our consolidated balance sheets. Our trading securities are held in a separate trust, which includes investments to fund our deferred compensation plan liabilities. Net gains on trading securities in 2017 and 2016 were $150 million and $66 million. Net losses on trading securities in 2015 were $11 million. 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.
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. Significant influence typically exists if we have a 20% to 50% ownership interest in the investee. Under this method of accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on our consolidated statements of earnings since the activities of the investee are closely aligned with the operations of the business segment holding the investment. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. As of both December 31, 2017 and 2016, our equity method investments totaled $1.4 billion, which primarily are composed of our Space business segment’s investment in United Launch Alliance (ULA), see “Note 14 – Legal Proceedings, Commitments and Contingencies”, and our Aeronautics and RMS business segments’ investments in the Advanced Military Maintenance, Repair and Overhaul Center (AMMROC) venture. Our share of net earnings related to our equity method investees was $207 million in 2017, $443 million in 2016 and $320 million in 2015, of which approximately $205 million, $325 million and $245 million related to our Space business segment.
During the year ended December 31, 2017, equity earnings included a charge recorded in the first quarter of approximately $64 million ($40 million or $0.14 per share, after tax), which represented our portion of a non-cash asset impairment related to certain long-lived assets held by our equity method investee, AMMROC. We are continuing to monitor this investment. It is possible that we may have to record our portion of additional charges should their business continue to experience performance issues, which could adversely affect our business, financial condition and results of operations.
Derivative financial instruments – We use derivative instruments principally to reduce our exposure to market risks from changes in foreign currency exchange rates and interest rates. We do not enter into or hold derivative instruments for speculative trading purposes. We transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into foreign currency hedges such as forward and option contracts that change in value as foreign currency exchange rates change. These contracts hedge forecasted foreign currency transactions in order to mitigate fluctuations in our earnings and cash flows associated with changes in foreign currency exchange rates. We designate foreign currency hedges as cash flow hedges. We also are exposed to the impact of interest rate changes primarily through our borrowing activities. For fixed rate borrowings, we may use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings in order to reduce the amount of interest paid. These swaps are designated as fair value hedges. For variable rate borrowings, we may use fixed interest rate swaps, effectively converting variable rate borrowings to fixed rate borrowings in order to mitigate the impact of interest rate changes on earnings. These swaps are designated as cash flow hedges. We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are intended to mitigate certain economic exposures.
We record derivatives at their fair value. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on our intended use of the derivative and its resulting designation. Adjustments to reflect changes in fair values of derivatives attributable to thehighly effective portion of hedges are either reflected in earnings and largely offset by corresponding adjustments to the hedged items or reflected net of income taxes in accumulated other comprehensive loss until the hedged transaction is recognized in earnings. Changes in the fair value of the derivatives that are attributable to the ineffective portion of the hedges or of derivatives that are not considered to be highly effective, hedges, if any, are immediately recognized in earnings. The aggregate notional amount
Recent Accounting Pronouncements
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In 2017, the United Kingdom’s Financial Conduct Authority (FCA) announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (LIBOR), which have been widely used as reference rates for various securities and 2016 was $1.2 billionfinancial contracts, including loans, debt and derivatives. This announcement indicates that the fair value was not significant. The aggregate notional amountcontinuation of our outstanding foreign currency hedges at December 31, 2017 and 2016 was $4.1 billion and $4.0 billion and the fair value was not significant. Derivative instruments did not have a material impact on net earnings and comprehensive income during the years ended December 31, 2017, 2016 and 2015. Substantially all of our derivatives are designated for hedge accounting. See “Note 16 – Fair Value Measurements” for more informationLIBOR on the fair value measurements related to our derivative instruments.
Recent Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014,current basis is not guaranteed after 2021. Subsequently in March 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, as amended (Topic 606) (commonly referred to as ASC 606), which will change the way we recognize revenueFCA announced some USD LIBOR tenors (overnight, 1 month, 3 month, 6 month and significantly expand the disclosure requirements for revenue arrangements. The new standard is effective for annual reporting periods beginning after December 15, 2017.
We adopted the requirements of the new standard on January 1, 2018 using the full retrospective transition method, whereby ASC 606 will be applied to each prior year presented and the cumulative effect of applying ASC 606 will be recognized at January 1, 2016, the beginning of the earliest year presented. As ASC 606 supersedes substantially all existing revenue guidance affecting us under current GAAP, it will impact revenue and cost recognition across all of our business segments, as well as our business processes and our information technology systems.
We commenced our evaluation of the impact of ASC 606 in late 2014, by evaluating its impact on selected contracts at each of our business segments. With this baseline understanding, we developed a project plan to evaluate thousands of contracts across our business segments, develop processes and tools to dual report financial results under both current GAAP and ASC 606 and assess the internal control structure in order to adopt ASC 606 on January 1, 2018. We have periodically briefed our Audit Committee on our progress made towards adoption.
We currently recognize the majority of our revenue using the percentage-of-completion method of accounting, whereby revenue is recognized as we progress on the contract. For contracts with a significant amount of development and/or requiring the delivery of a minimal number of units, revenue and profit are recognized using the percentage-of-completion cost-to-cost method to measure progress. For example, we use this method at our Aeronautics business segment for the F-35 program; at our Missiles and Fire Control (MFC) business segment for the THAAD program; at our RMS business segment for the Littoral Combat Ship and Aegis Combat System programs; and at our Space business segment for government satellite programs. For contracts that
require us to produce a substantial number of similar items without a significant level of development, we currently record revenue and profit using the percentage-of-completion units-of-delivery method as the basis for measuring progress on the contract. For example, we use this method in Aeronautics for the C-130J and C-5 programs; in MFC for tactical missile programs (e.g., Hellfire, JASSM), PAC-3 programs and fire control programs (e.g., LANTIRN® and SNIPER®); in RMS for Black Hawk and Seahawk helicopter programs; and in Space for commercial satellite programs. For contracts to provide services to the U.S. Government, revenue is generally recorded using the percentage-of-completion cost-to-cost method.
Under ASC 606, revenue will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). Given the nature of our products and terms and conditions in our contracts, in particular those with the U.S. Government (including foreign military sales (FMS) contracts), the customer obtains control as we perform work under the contract. Therefore, we expect to recognize revenue over time for substantially all of our contracts using a method similar to our current percentage-of-completion cost-to-cost method. Accordingly, adoption of ASC 606 will primarily impact our contracts where revenue is currently recognized using the percentage-of-completion units-of-delivery method. As a result, we anticipate recognizing revenue for these contracts earlier in the performance period as we incur costs, as opposed to when units are delivered. We may also have more performance obligations in our contracts under ASC 606, which may impact the timing of recording sales and operating profit, including those where sales recognition is deferred pending the incurrence of costs.
During the third quarter of 2017, we completed our preliminary assessment of the cumulative effect of adopting ASC 606 on our December 31, 2015 balance sheet using the full retrospective transition method. The adoption resulted in a decrease in inventories, an increase in billed receivables, contract assets (i.e., unbilled receivables) and contract liabilities (i.e., customer advances and amounts in excess of costs incurred) to primarily reflect the impact of converting contracts currently applying the units-of-delivery method to the cost-to-cost method for recognizing revenue and profits. We expect the net impact of these reclassifications to increase both our current assets and current liabilities by approximately 2%.
In addition, we have completed our preliminary assessment of adopting ASC 606 on our 2017 and 2016 operating results, and have presented selected recast, unaudited financial data in the following table (in millions, except per share data). The impact of adopting ASC 606 on our 2017 and 2016 operating results may not be indicative of the adoption impacts in future periods or of our operating performance.
|
| | | | | | | | |
| | Years Ended December 31, |
| | 2017 |
| | 2016 |
|
| | (unaudited) |
Net sales | | $ | 49,976 |
| | $ | 47,320 |
|
Operating profit (a) | | $ | 6,759 |
| | $ | 5,910 |
|
| | | | |
Earnings per common share | | | | |
Basic | | | | |
Continuing operations | | $ | 6.63 |
| | $ | 12.28 |
|
Discontinued operations | | 0.26 |
| | 5.05 |
|
Basic earnings per common share | | $ | 6.89 |
| | $ | 17.33 |
|
Diluted | | | | |
Continuing operations | | $ | 6.57 |
| | $ | 12.13 |
|
Discontinued operations | | 0.25 |
| | 4.99 |
|
Diluted earnings per common share | | $ | 6.82 |
| | $ | 17.12 |
|
| |
(a)
| Operating profit includes an increase of $846 million in 2017 and $471 million in 2016 for the expected impact of adopting ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715) on January 1, 2018 as discussed below.
|
Total net cash provided by operating activities and net cash used by investing and financing activities on our consolidated statements of cash flows were not impacted by the adoption of ASC 606.
Compensation-Retirement Benefits
In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715), which changes the income statement presentation of certain components of net periodic benefit cost related to defined benefit pension and other postretirement benefit plans. Currently, we record all components of net periodic benefit costs in operating profit as part of cost of sales. Under ASU No. 2017-07, we will be required to record only the service cost component of net periodic benefit cost in operating profit and the non-service cost components of net periodic benefit cost (i.e., interest cost, expected return on plan assets, amortization
of prior service cost or credits, and net actuarial gains or losses) as part of non-operating income. We adopted the requirements of ASU No. 2017-07 on January 1, 2018 using the retrospective transition method. We expect the adoption of ASU No. 2017-07 to result in an increase to consolidated operating profit of $471 million and $846 million for 2016 and 2017, respectively, and a corresponding decrease in non-operating income for each year. We do not expect any impact to our business segment operating profit, our consolidated net earnings, or cash flows as a result of adopting ASU No. 2017-07.
Intangibles-Goodwill and Other
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350), which eliminates the requirement to compare the implied fair value of reporting unit goodwill with the carrying amount of that goodwill (commonly referred to as Step 2) from the goodwill impairment test. The new standard does not change how a goodwill impairment is identified. We12 month) will continue to performbe published until June 30, 2023. Regulators in the U.S. and other jurisdictions have been working to replace these rates with alternative reference interest rates that are supported by transactions in liquid and observable markets, such as the Secured Overnight Financing Rate (SOFR) for USD LIBOR. Currently, our quantitativecredit facility and qualitative goodwill impairment test by comparingcertain of our derivative instruments reference LIBOR-based rates. Our credit facility contains provisions specifying alternative interest rate calculations to be employed when LIBOR ceases to be available as a benchmark and we have adhered to the fair valueISDA 2020 IBOR Fallbacks Protocol, which will govern our derivatives upon the final cessation of each reporting unit to its carrying amount, but if we are required to recognize a goodwill impairment charge, under the new standard the amountUSD LIBOR. ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the charge will be calculatedEffects of Reference Rate Reform on Financial Reporting, as amended, helps limit the accounting impact from contract modifications, including hedging relationships, due to the transition from LIBOR to alternative reference rates that are completed by subtracting the reporting unit’s fair value from its carrying amount. Under the prior standard, if we were required to recognize a goodwill impairment charge, Step 2 required us to calculate the implied value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination and the amount of the charge was calculated by subtracting the reporting unit’s implied fair value of goodwill from its actual goodwill balance. The new standard is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted, and should be applied prospectively from the date of adoption. We elected to adopt the new standard for future goodwill impairment tests at the beginning of the third quarter of 2017, because it significantly simplifies the evaluation of goodwill for impairment. The impact of the new standard will depend on the outcomes of future goodwill impairment tests.
Derivatives and Hedging
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), which eliminates the requirement to separately measure and report hedge ineffectiveness. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted.31, 2022. We do not expect a significant impact to our consolidated assets and liabilities, net earnings,operating results, financial position or cash flows as a resultfrom the transition from LIBOR to alternative reference interest rates, but we will continue to monitor the impact of adopting this new standard. We plan to adopt the new standard January 1, 2019.transition until it is completed.
LeasesBusiness Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
In February 2016,October 2021, the FASB issued ASU No. 2016-02, Leases2021-08, Business Combinations (Topic 842)805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires the recognition of leaseentities to recognize and measure contract assets and leasecontract liabilities onacquired in a business combination in accordance with ASC 2014-09, Revenue from Contracts with Customers (Topic 606). The update will generally result in an entity recognizing contract assets and contract liabilities at amounts consistent with those recorded by the balance sheet and disclosure of key information about leasing arrangements for both lessees and lessors.acquiree immediately before the acquisition date rather than at fair value. The new standard is effective January 1, 2019on a prospective basis for public companies,fiscal years beginning after December 15, 2022, with early adoption permitted. The new standard currently requires the application of a modified retrospective approach to the beginning of the earliest period presented in the financial statements. We are continuing to evaluate the expected impact to our consolidated financial statements and related disclosures. We plan to adoptadopted the new standard effective January 1, 2019.2022. The adoption of the new standard did not have an impact to our operating results, financial position, or cash flows.
Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The new standard is effective for the Corporation on January 1, 2022 and only impacts annual financial statement footnote disclosures. Therefore, the adoption will not have a material effect on our consolidated financial statements.
Note 2 – Pending Acquisition of Aerojet Rocketdyne Holdings, Inc.
On December 20, 2020, we entered into an agreement to acquire Aerojet Rocketdyne Holdings, Inc. (Aerojet Rocketdyne) for $51.00 per share, which is net of a $5.00 per share special cash dividend Aerojet Rocketdyne paid to its stockholders on March 24, 2021. At the time of announcement, this represented a post-dividend equity value of approximately $4.6 billion, on a fully diluted as-converted basis, and a transaction value of approximately $4.4 billion after the assumption of Aerojet Rocketdyne’s then-projected net cash. If the transaction is completed, we expect to finance the acquisition primarily through new debt issuances. The transaction was approved by Aerojet Rocketdyne’s stockholders on March 9, 2021. As part of the regulatory review process of the transaction, on September 24, 2021, we and Aerojet Rocketdyne each certified substantial compliance with the Federal Trade Commission’s (FTC) requests for additional information, known as a “second request.” On January 11, 2022, the parties provided an updated notice of their intended closing date under their timing agreement with the FTC, whereby the parties agreed that they would not close the transaction before January 27, 2022, to enable the parties to discuss the scope and nature of the merchant supply and firewall commitments previously offered to the FTC by Lockheed Martin. We have been advised by the FTC that its concerns regarding the transaction cannot be addressed adequately by the terms of a consent order. We believe it is highly likely that the FTC will vote to sue to block the transaction and expect they will make a decision before January 27, 2022. If the FTC sues to block the transaction, we could elect to defend the lawsuit within 30 days or terminate the merger agreement. If the FTC does not file a lawsuit to block the transaction before January 27, 2022, the parties could proceed to close the transaction, but there is no assurance that the FTC would not file a lawsuit
challenging the transaction after the closing since the parties have not reached agreement on the terms of a consent order. Under the terms of the merger agreement, either party may terminate the transaction if it has not closed on or before March 21, 2022.
Note 23 – Earnings Per Share
The weighted average number of shares outstanding used to compute earnings per common share were as follows (in millions): |
| | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
Weighted average common shares outstanding for basic computations | | 287.8 |
| | 299.3 |
| | 310.3 |
|
Weighted average dilutive effect of equity awards | | 2.8 |
| | 3.8 |
| | 4.4 |
|
Weighted average common shares outstanding for diluted computations | | 290.6 |
| | 303.1 |
| | 314.7 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
Weighted average common shares outstanding for basic computations | | 276.4 | | | 280.0 | | | 282.0 | |
Weighted average dilutive effect of equity awards | | 1.0 | | | 1.2 | | | 1.8 | |
Weighted average common shares outstanding for diluted computations | | 277.4 | | | 281.2 | | | 283.8 | |
We compute basic and diluted earnings per common share by dividing net earnings by the respective weighted average number of common shares outstanding for the periods presented. Our calculation of diluted earnings per common share also includes the dilutive effects for the assumed vesting of outstanding restricted stock units (RSUs), and performance stock units (PSUs) and exercise of outstanding stock options based on the treasury stock method. Basic and diluted earnings per common share for 2021 reflects share repurchases. There were no significant anti-dilutive equity awards for the years ended December 31, 2017, 20162021, 2020 and 2015.2019.
Note 34 – AcquisitionsInformation on Business Segments
Overview
We operate in 4 business segments: Aeronautics, MFC, RMS and Divestitures
AcquisitionSpace. We organize our business segments based on the nature of Sikorsky Aircraft Corporation
On November 6, 2015, we completed the acquisition of Sikorsky from United Technologies Corporation (UTC)products and certain of UTC’s subsidiaries. The purchase priceservices offered. Following is a brief description of the acquisition was $9.0 billion, netactivities of cash acquired. As a result of the acquisition,our business segments:
Sikorsky became a wholly-owned subsidiary of ours. Sikorsky is a global company primarily engaged•Aeronautics – Engaged in the research, design, development, manufacture, integration, sustainment, support and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies.
•Missiles and Fire Control – Provides air and missile defense systems; tactical missiles and air-to-ground precision strike weapon systems; logistics; fire control systems; mission operations support, ofreadiness, engineering support and integration services; manned and unmanned ground vehicles; and energy management solutions.
•Rotary and Mission Systems – Designs, manufactures, services and supports various military and commercial helicopters. Sikorsky’s products include military helicopters, such as the Black Hawk, Seahawk, CH-53K, H-92;surface ships, sea and commercial helicopters such as the S-76land-based missile defense systems, radar systems, sea and S-92. The acquisition enables us to extend our core business into the militaryair-based mission and commercial rotary wing markets, allowing us to strengthen our positioncombat systems, command and control mission solutions, cyber solutions, and simulation and training solutions.
•Space – Engaged in the aerospaceresearch and defense industry. Further, this acquisition will expanddevelopment, design, engineering and production of satellites, space transportation systems, and strategic, advanced strike, and defensive systems. Space provides network-enabled situational awareness and integrates complex space and ground global systems to help our presencecustomers gather, analyze and securely distribute critical intelligence data. Space is also responsible for various classified systems and services in commercial and international markets. Sikorsky has been aligned under our RMS business segment.
To fund the $9.0 billion acquisition price, we utilized $6.0 billionsupport of proceeds borrowed under a temporary 364-day revolving credit facility (the 364-day Facility), $2.0 billion of cash on hand and $1.0 billion from the issuance of commercial paper. In the fourth quarter of 2015, we repaid all outstanding borrowings under the 364-day Facility with the proceeds from the issuance of $7.0 billion of fixed interest-rate long-term notes in a public offering (the November 2015 Notes). In the fourth quarter of 2015, we also repaid the $1.0 billion in commercial paper borrowings.
Allocation of Purchase Price to Assets Acquired and Liabilities Assumed
We accountedvital national security systems. Operating profit for the acquisition of Sikorsky as a business combination, which requires us to record the assets acquired and liabilities assumed at fair value. The amount by which the purchase price exceeds the fair value of the net assets acquired is recorded as goodwill.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date, including the refinements described in the previous paragraph (in millions):
|
| | | |
Cash and cash equivalents | $ | 75 |
|
Receivables, net | 1,924 |
|
Inventories, net | 1,632 |
|
Other current assets | 46 |
|
Property, plant and equipment | 649 |
|
Goodwill | 2,842 |
|
Intangible assets: | |
Customer programs | 3,184 |
|
Trademarks | 887 |
|
Other noncurrent assets | 572 |
|
Deferred income taxes, noncurrent | 256 |
|
Total identifiable assets and goodwill | 12,067 |
|
Accounts payable | (565 | ) |
Customer advances and amounts in excess of costs incurred | (1,197 | ) |
Salaries, benefits, and payroll taxes | (105 | ) |
Other current liabilities | (430 | ) |
Customer contractual obligations (a) | (507 | ) |
Other noncurrent liabilities | (185 | ) |
Total liabilities assumed | (2,989 | ) |
Total consideration | $ | 9,078 |
|
| |
(a)
| Recorded in other noncurrent liabilities on our consolidated balance sheets. |
Intangible assets related to customer programs were recognized for each major helicopter and aftermarket program and represent the aggregate value associated with the customer relationships, contracts, technology and tradenames underlying the associated program. These intangible assets will be amortized on a straight-line basis over a weighted-average useful life of approximately 15 years. The useful life is based on a period of expected cash flows used to measure the fair value of each of the intangible assets.
Customer contractual obligations represent liabilities on certain development programs where the expected costs exceed the expected sales under contract. We measured these liabilities based on the price to transfer the obligation to a market participant at the measurement date, assuming that the liability will remain outstanding in the marketplace. Based on the estimated net cash outflows of the developmental programs plus a reasonable contracting profit margin required to transfer the contracts to market participants, we recorded assumed liabilities of $507 million. These liabilities will be liquidated in accordance with the underlying
economic pattern of the contractual obligations, as reflected by the estimated future net cash outflows incurred on the associated contracts. As of December 31, 2017, we recognized approximately $225 million in sales related to customer contractual obligations. As of December 31, 2017, the estimated liquidation of the customer contractual obligation is approximated as follows: $100 million in 2018, $55 million in 2019, $55 million in 2020, $55 million in 2021, $5 million in 2022 and $12 million thereafter.
The fair values of the assets acquired and liabilities assumed were determined using income, market and cost valuation methodologies. The fair value measurements were estimated using significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in Accounting Standards Codification (ASC) 820, Fair Value Measurement. The income approach was primarily used to value the customer programs and trademarks intangible assets. The income approach indicates value for an asset or liability based on the present value of cash flow projected to be generated over the remaining economic life of the asset or liability being measured. Both the amount and the duration of the cash flows are considered from a market participant perspective. Our estimates of market participant net cash flows considered historical and projected pricing, remaining developmental effort, operational performance including company-specific synergies, aftermarket retention, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. Where appropriate, the net cash flows are adjusted to reflect the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The adjusted future cash flows are then discounted to present value using an appropriate discount rate. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The market approach is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities. Valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for property, plant and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost, less an allowance for loss in value due to depreciation.
The purchase price allocation resulted in the recognition of $2.8 billion of goodwill, all of which is expected to be amortizable for tax purposes. Substantially all of the goodwill was assigned to our RMS business. The goodwill recognized is attributable to expected revenue synergies generated by the integration of our products and technologies with those of Sikorsky, costs synergies resulting from the consolidation or elimination of certain functions, and intangible assets that do not qualify for separate recognition, such as the assembled workforce of Sikorsky.
Determining the fair value of assets acquired and liabilities assumed requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The cash flows employed in the DCF analyses are based on our best estimate of future sales, earnings and cash flows after considering factors such as general market conditions, customer budgets, existing firm orders, expected future orders, contracts with suppliers, labor agreements, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield different results.
Impact to 2015 Financial Results
Sikorsky’s 2015 financial results have been included in our consolidated financial results only for the period from the November 6, 2015 acquisition date through December 31, 2015. As a result, our consolidated financial results for the year ended December 31, 2015 do not reflect a full year of Sikorsky’s results. From the November 6, 2015 acquisition date through December 31, 2015, Sikorsky generated net sales of approximately $400 million and operating loss of approximately $45 million, inclusive of intangible amortization and adjustments required to account for the acquisition.
We incurred approximately $38 million of non-recoverable transaction costs associated with the Sikorsky acquisition in 2015 that were expensed as incurred. These costs are included in other income, net on our consolidated statements of earnings. We also incurred approximately $48 million in costs associated with issuing the $7.0 billion November 2015 Notes used to repay all outstanding borrowings under the 364-day Facility used to finance the acquisition. The financing costs were recorded as a reduction of debt and will be amortized to interest expense over the term of the related debt.
Supplemental Pro Forma Financial Information (unaudited)
The following table presents summarized unaudited pro forma financial information as if Sikorsky had been included in our financial results for the entire year in 2015 (in millions):
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| | | | | | |
Net sales | | | | $ | 45,366 |
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Net earnings | | | | 3,534 |
|
Basic earnings per common share | | | | 11.39 |
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Diluted earnings per common share | | | | 11.23 |
|
The unaudited supplemental pro forma financial data above has been calculated after applying our accounting policies and adjusting the historical results of Sikorsky with pro forma adjustments, net of tax, that assume the acquisition occurred on January 1, 2015. Significant pro forma adjustments include the recognition of additional amortization expense related to acquired intangible assets and additional interest expense related to the short-term debt used to finance the acquisition. These adjustments assume the application of fair value adjustments to intangibles and the debt issuance occurred on January 1, 2015 and are approximated as follows: amortization expense of $125 million and interest expense of $40 million. In addition, significant nonrecurring adjustments include the elimination of a $72 million pension curtailment loss, net of tax, recognized in 2015 and the elimination of a $58 million income tax charge related to historic earnings of foreign subsidiaries recognized by Sikorsky in 2015.
The unaudited supplemental pro forma financial information also reflects an increase in interest expense, net of tax, of approximately $110 million in 2015. The increase in interest expense is the result of assuming the November 2015 Notes were issued on January 1, 2015. Proceeds of the November 2015 Notes were used to repay all outstanding borrowings under the 364-day Facility used to finance a portion of the purchase price of Sikorsky, as contemplated at the date of acquisition.
The unaudited supplemental pro forma financial information does not reflect the realization of any expected ongoing cost or revenue synergies relating to the integration of the two companies. Further, the pro forma data should not be considered indicative of the results that would have occurred if the acquisition, related financing and associated notes issuance and repayment of the 364-day Facility had been consummated on January 1, 2015, nor are they indicative of future results.
Consolidation of AWE Management Limited
On August 24, 2016, we increased our ownership interest in the AWE joint venture, which operates the United Kingdom’s nuclear deterrent program, from 33% to 51%. At which time, we began consolidating AWE. Consequently, our operating results include 100% of AWE’s sales and 51% of its operating profit. Prior to increasing our ownership interest, we accounted for our investment in AWE using the equity method of accounting. Under the equity method, we recognized only 33% of AWE’s earnings or losses and no sales. Accordingly, prior to August 24, 2016, the date we obtained control, we recorded 33% of AWE’s net earnings in our operating results and subsequent to August 24, 2016, we recognized 100% of AWE’s sales and 51% of its operating profit.
We accounted for this transaction as a “step acquisition” (as defined by U.S. GAAP), which requires us to consolidate and record the assets and liabilities of AWE at fair value. Accordingly, we recorded intangible assets of $243 million related to customer relationships, $32 million of net liabilities, and noncontrolling interests of $107 million. The intangible assets are being amortized over a period of eight years in accordance with the underlying pattern of economic benefit reflected by the future net cash flows. In 2016, we recognized a non-cash net gain of $104 million associated with obtaining a controlling interest in AWE, which consisted of a $127 million pretax gain recognized in the operating results of our Space business segment also includes our share of earnings for our 50% ownership interest in ULA, which provides expendable launch services to the U.S. Government. Our investment in ULA totaled $585 million and $23$691 million of tax-related items at our corporate office. The gain represents the fair valueDecember 31, 2021 and 2020.
Selected Financial Data by Business Segment
Net sales of our 51% interestbusiness segments in AWE, less the carrying valuefollowing 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.
Summary Operating Results
Sales and operating profit for each of our previously held investment in AWE and deferred taxes. The gain was recorded in other income, net on our consolidated statements of earnings. The fair value of AWE (including the intangible assets), our controlling interest, and the noncontrolling interests were determined using the income approach.
Divestiture of the Information Systems & Global Solutions Business
On August 16, 2016, we divested our former IS&GS business which merged with Leidos, in a Reverse Morris Trust transaction (the “Transaction”). The Transaction was completed in a multi-step process pursuant to which we initially contributed the IS&GS business to Abacus Innovations Corporation (Abacus), a wholly owned subsidiary of Lockheed Martin created to facilitate the Transaction, and the common stock of Abacus was distributed to participating Lockheed Martin stockholders through an exchange offer. Under the terms of the exchange offer, Lockheed Martin stockholders had the option to exchange shares of Lockheed Martin common stock for shares of Abacus common stock. At the conclusion of the exchange offer, all shares of Abacus common stock were exchanged for 9,369,694 shares of Lockheed Martin common stock held by Lockheed Martin stockholders that elected to participate in the exchange. The shares of Lockheed Martin common stock that were exchanged and accepted were retired, reducing the number of shares of our common stock outstanding by approximately 3%. Following the exchange offer, Abacus merged with
a subsidiary of Leidos, with Abacus continuing as the surviving corporation and a wholly-owned subsidiary of Leidos. As part of the merger, each share of Abacus common stock was automatically converted into one share of Leidos common stock. We did not receive any shares of Leidos common stock as part of the Transaction and do not hold any shares of Leidos or Abacus common stock following the Transaction. Based on an opinion of outside tax counsel, subject to customary qualifications and based on factual representations, the exchange offer and merger will qualify as tax-free transactions to Lockheed Martin and its stockholders, except to the extent that cash was paid to Lockheed Martin stockholders in lieu of fractional shares.
In connection with the Transaction, Abacus borrowed an aggregate principal amount of approximately $1.84 billion under term loan facilities with third party financial institutions, the proceeds of which were used to make a one-time special cash payment of $1.80 billion to Lockheed Martin and to pay associated borrowing fees and expenses. The entire special cash payment was used to repay debt, pay dividends and repurchase stock during the third and fourth quarters of 2016. The obligations under the Abacus term loan facilities were guaranteed by Leidos as part of the Transaction.
As a result of the Transaction, we recognized a net gain of approximately $1.3 billion, including $1.2 billion recognized in 2016. The net gain represents the $2.5 billion fair value of the shares of Lockheed Martin common stock exchanged and retired as part of the exchange offer, plus the $1.8 billion one-time special cash payment, less the net book value of the IS&GS business of about $3.0 billion at August 16, 2016 and other adjustments of about $100 million. During the fourth quarter of 2017, we recognized an additional gain of $73 million, which reflects certain post-closing adjustments, including certain tax adjustments and the final determination of net working capital.
We classified the operating results of our former IS&GS business as discontinued operations in our consolidated financial statements in accordance with U.S. GAAP, as the divestiture of this business represented a strategic shift that had a major effect on our operations and financial results. However, the cash flows generated by the IS&GS business have not been reclassified in our consolidated statements of cash flows as we retained this cash as part of the Transaction.
The operating results of the IS&GS business that have been reflected within net earnings from discontinued operations for the years ended December 31, 2016 and 2015 are as follows (in millions):
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| | 2016 |
| (a) | 2015 |
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Net sales | | $ | 3,410 |
| | $ | 5,596 |
|
Cost of sales | | (2,953 | ) | | (4,868 | ) |
Severance charges | | (19 | ) | | (20 | ) |
Gross profit | | 438 |
| | 708 |
|
Other income, net | | 16 |
| | 16 |
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Operating profit | | 454 |
| | 724 |
|
Earnings from discontinued operations before income taxes | | 454 |
| | 724 |
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Income tax expense | | (147 | ) | | (245 | ) |
Net gain on divestiture of discontinued operations | | 1,242 |
| | — |
|
Net earnings from discontinued operations | | $ | 1,549 |
| | $ | 479 |
|
| |
(a)
| Operating results for the year ended December 31, 2016 reflect operating results prior to the August 16, 2016 divestiture date. |
The operating results of the IS&GS business reported as discontinued operations are different than the results previously reported for the IS&GS business segment. Results reported within net earnings from discontinued operations only include costs that were directly attributable to the IS&GS business and exclude certain corporate overhead costs that were previously allocated to the IS&GS business. As a result, we reclassified $82 million in 2016 and $165 million in 2015 of corporate overhead costs from the IS&GS business to other unallocated, net on our consolidated statements of earnings.
Additionally, we retained all assets and obligations related to the pension benefits earned by former IS&GS business salaried employees through the date of divestiture. Therefore, the non-service portion of net pension costs (e.g., interest cost, actuarial gains and losses and expected return on plan assets) for these plans have been reclassified from the operating results of the IS&GS business segment and reported as a reduction to the FAS/CAS pension adjustment. These net pension costs were $54 million and $71 million for the years ended December 31, 2016 and 2015. The service portion of net pension costs related to IS&GS business’s salaried employees that transferred to Leidos were included in the operating results of the IS&GS business classified as discontinued operations because such costs are no longer incurred by us.
Significant severance charges related to the IS&GS business were historically recorded at the Lockheed Martin corporate office. These charges have been reclassified into the operating results of the IS&GS business, classified as discontinued operations,
and excluded from the operating results of our continuing operations. The amount of severance charges reclassified were $19 million in 2016 and $20 million in 2015.
In connection with the Transaction, Lockheed Martin retained certain liabilities, including liabilities associated with the New York Metropolitan Transportation Authority and its Capital Construction Company (collectively, the MTA) litigation discussed in “Note 14 - Legal Proceedings, Commitments and Contingencies,” and has indemnified Abacus and Leidos in connection with other liabilities associated with the IS&GS business, including certain liabilities associated with ongoing investigations by the Department of Energy and the Department of Justice (DOJ) relating to the IS&GS business’s involvement in the Mission Support Alliance, LLC (MSA) joint venture that manages and operates the Hanford Nuclear site for the Department of Energy. The DOJ has issued a number of Civil Investigative Demands to MSA, Lockheed Martin and the subsidiary of Lockheed Martin that performed information technology services for MSA, as well as current and former employees of each of these entities, and is continuing its False Claims Act investigation into matters involving MSA and the IS&GS business. The DOJ also is conducting a parallel criminal investigation. The investigations relate primarily to certain information technology services performed by a subsidiary of Lockheed Martin under a fixed price/fixed unit rate subcontract to MSA. In the event that the DOJ were to pursue a claim in connection with the ongoing MSA investigation, through the indemnification provisions agreed to as part of the Transaction, Lockheed Martin and Leidos have allocated liabilities between themselves.
Financial information related to cash flows generated by the IS&GS business, such as depreciation and amortization, capital expenditures, and other non-cash items, included in our consolidated statements of cash flows for the years ended December 31, 2016 and 2015 were not significant.
Other Divestitures
During 2016, we completed the sale of our Lockheed Martin Commercial Flight Training (LMCFT) business, which was classified as held for sale in the fourth quarter of 2015. Other, net in 2015 includes a non-cash asset impairment charge of approximately $90 million. This charge was partially offset by a net deferred tax benefit of about $80 million, which is recorded in income tax expense. The net impact reduced net earnings by about $10 million. LMCFT’s financial results are not material and there was no significant impact on our consolidated financial results as a result of completing the sale of our LMCFT business. Accordingly, LMCFT’s financial results are not classified in discontinued operations.
Note 4 – Goodwill and Acquired Intangibles
Changes in the carrying amount of goodwill by segmentsegments were as follows (in millions):
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| | 2021 | | 2020 | | 2019 |
Net sales | | | | | | |
Aeronautics | | $ | 26,748 | | | $ | 26,266 | | | $ | 23,693 | |
Missiles and Fire Control | | 11,693 | | | 11,257 | | | 10,131 | |
Rotary and Mission Systems | | 16,789 | | | 15,995 | | | 15,128 | |
Space | | 11,814 | | | 11,880 | | | 10,860 | |
Total net sales | | $ | 67,044 | | | $ | 65,398 | | | $ | 59,812 | |
Operating profit | | | | | | |
Aeronautics | | $ | 2,799 | | | $ | 2,843 | | | $ | 2,521 | |
Missiles and Fire Control | | 1,648 | | | 1,545 | | | 1,441 | |
Rotary and Mission Systems | | 1,798 | | | 1,615 | | | 1,421 | |
Space | | 1,134 | | | 1,149 | | | 1,191 | |
Total business segment operating profit | | 7,379 | | | 7,152 | | | 6,574 | |
Unallocated items | | | | | | |
FAS/CAS operating adjustment | | 1,960 | | | 1,876 | | | 2,049 | |
Stock-based compensation | | (227) | | | (221) | | | (189) | |
Severance and restructuring charges (a) | | (36) | | | (27) | | | — | |
Other, net (b) | | 47 | | | (136) | | | 111 | |
Total unallocated, net | | 1,744 | | | 1,492 | | | 1,971 | |
Total consolidated operating profit | | $ | 9,123 | | | $ | 8,644 | | | $ | 8,545 | |
(a)Severance and restructuring includes a $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 a $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 recognized in the second quarter of 2020 on our investment in the international equity method investee, AMMROC, which decreased net earnings from continuing operations by $96 million. Other, net in 2019 includes a previously deferred non-cash gain of $51 million related to properties sold in 2015 as a result of completing our remaining obligations and a gain of $34 million for the sale of our Distributed Energy Solutions business. (See “Note 1 – Organization and Significant Accounting Policies”).
Unallocated Items
Business segment operating profit also excludes the FAS/CAS operating adjustment, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. Government under the applicable U.S. Government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance such as a portion of management and administration costs, legal fees and settlements, environmental costs, stock-based compensation expense, retiree benefits, significant severance actions, significant asset impairments, gains or losses from divestitures, and other miscellaneous corporate activities. Excluded items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. However, 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. See “Note 1 – Organization and Significant Accounting Policies” (under the caption “Use of Estimates”) for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.
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| | Aeronautics |
| | MFC |
| | RMS |
| | Space |
| | Total |
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Balance at December 31, 2015 | | $ | 171 |
| | $ | 2,198 |
| | $ | 6,738 |
| | $ | 1,588 |
| | $ | 10,695 |
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Purchase accounting adjustments | | — |
| | — |
| | 78 |
| | — |
| | 78 |
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Other | | — |
| | 62 |
| | (68 | ) | | (3 | ) | | (9 | ) |
Balance at December 31, 2016 | | 171 |
| | 2,260 |
| | 6,748 |
| | 1,585 |
| | 10,764 |
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Other | | — |
| | 5 |
| | 36 |
| | 2 |
| | 43 |
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Balance at December 31, 2017 | | $ | 171 |
| | $ | 2,265 |
| | $ | 6,784 |
| | $ | 1,587 |
| | $ | 10,807 |
|
FAS/CAS Operating Adjustment
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 FAS pension and other postretirement benefit plan income calculated in accordance with FAS requirements under U.S. GAAP. The operating portion of the net 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 operating adjustment.
Our total net 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):
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| | 2021 | | 2020 | | 2019 |
Total FAS (expense) income and CAS costs | | | | | | |
FAS pension (expense) income | | $ | (1,398) | | | $ | 118 | | | $ | (1,093) | |
Less: CAS pension cost | | 2,066 | | | 1,977 | | | 2,565 | |
Net FAS/CAS pension adjustment | | $ | 668 | | | $ | 2,095 | | | $ | 1,472 | |
| | | | | | |
Service and non-service cost reconciliation | | | | | | |
FAS pension service cost | | $ | (106) | | | $ | (101) | | | $ | (516) | |
Less: CAS pension cost | | 2,066 | | | 1,977 | | | 2,565 | |
FAS/CAS operating adjustment | | 1,960 | | | 1,876 | | | 2,049 | |
Non-service FAS pension (expense) income | | (1,292) | | | 219 | | | (577) | |
Net FAS/CAS pension adjustment | | $ | 668 | | | $ | 2,095 | | | $ | 1,472 | |
The decrease in the net FAS/CAS pension adjustment in 2021 was principally driven by 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 carrying amountsdefined benefit pension obligations and accumulatedrelated plan assets to an insurance company on August 3, 2021. See “Note 12 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements.
Intersegment Sales
Sales between our business segments are excluded from our consolidated and segment operating results as these activities are eliminated in consolidation. Intersegment sales for each of our business segments were as follows (in millions):
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| | 2021 | | 2020 | | 2019 |
Intersegment sales | | | | | | |
Aeronautics | | $ | 219 | | | $ | 243 | | | $ | 217 | |
Missiles and Fire Control | | 618 | | | 562 | | | 515 | |
Rotary and Mission Systems | | 1,895 | | | 1,903 | | | 1,872 | |
Space | | 360 | | | 377 | | | 352 | |
Total intersegment sales | | $ | 3,092 | | | $ | 3,085 | | | $ | 2,956 | |
Dissaggregation of Net Sales
Net sales by total products and services, contract type, customer category and geographic region for each of our business segments were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| | Aeronautics | | MFC | | RMS | | Space | | Total |
Net sales | | | | | | | | | | |
Products | | $ | 22,631 | | | $ | 10,269 | | | $ | 13,483 | | | $ | 10,052 | | | $ | 56,435 | |
Services | | 4,117 | | | 1,424 | | | 3,306 | | | 1,762 | | | 10,609 | |
Total net sales | | $ | 26,748 | | | $ | 11,693 | | | $ | 16,789 | | | $ | 11,814 | | | $ | 67,044 | |
Net sales by contract type | | | | | | | | | | |
Fixed-price | | $ | 19,734 | | | $ | 8,079 | | | $ | 11,125 | | | $ | 2,671 | | | $ | 41,609 | |
Cost-reimbursable | | 7,014 | | | 3,614 | | | 5,664 | | | 9,143 | | | 25,435 | |
Total net sales | | $ | 26,748 | | | $ | 11,693 | | | $ | 16,789 | | | $ | 11,814 | | | $ | 67,044 | |
Net sales by customer | | | | | | | | | | |
U.S. Government | | $ | 17,262 | | | $ | 8,341 | | | $ | 11,736 | | | $ | 10,811 | | | $ | 48,150 | |
International (a) | | 9,403 | | | 3,346 | | | 4,719 | | | 971 | | | 18,439 | |
U.S. commercial and other | | 83 | | | 6 | | | 334 | | | 32 | | | 455 | |
Total net sales | | $ | 26,748 | | | $ | 11,693 | | | $ | 16,789 | | | $ | 11,814 | | | $ | 67,044 | |
Net sales by geographic region | | | | | | | | | | |
United States | | $ | 17,345 | | | $ | 8,347 | | | $ | 12,070 | | | $ | 10,843 | | | $ | 48,605 | |
Europe | | 3,973 | | | 910 | | | 909 | | | 968 | | | 6,760 | |
Asia Pacific | | 3,644 | | | 292 | | | 2,178 | | | (6) | | | 6,108 | |
Middle East | | 1,351 | | | 2,066 | | | 827 | | | 9 | | | 4,253 | |
Other | | 435 | | | 78 | | | 805 | | | — | | | 1,318 | |
Total net sales | | $ | 26,748 | | | $ | 11,693 | | | $ | 16,789 | | | $ | 11,814 | | | $ | 67,044 | |
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| | 2020 |
| | Aeronautics | | MFC | | RMS | | Space | | Total |
Net sales | | | | | | | | | | |
Products | | $ | 22,327 | | | $ | 9,804 | | | $ | 12,748 | | | $ | 10,049 | | | $ | 54,928 | |
Services | | 3,939 | | | 1,453 | | | 3,247 | | | 1,831 | | | 10,470 | |
Total net sales | | $ | 26,266 | | | $ | 11,257 | | | $ | 15,995 | | | $ | 11,880 | | | $ | 65,398 | |
Net sales by contract type | | | | | | | | | | |
Fixed-price | | $ | 18,477 | | | $ | 7,587 | | | $ | 10,795 | | | $ | 2,247 | | | $ | 39,106 | |
Cost-reimbursable | | 7,789 | | | 3,670 | | | 5,200 | | | 9,633 | | | 26,292 | |
Total net sales | | $ | 26,266 | | | $ | 11,257 | | | $ | 15,995 | | | $ | 11,880 | | | $ | 65,398 | |
Net sales by customer | | | | | | | | | | |
U.S. Government | | $ | 18,175 | | | $ | 8,404 | | | $ | 11,596 | | | $ | 10,293 | | | $ | 48,468 | |
International (a) | | 8,012 | | | 2,842 | | | 3,986 | | | 1,546 | | | 16,386 | |
U.S. commercial and other | | 79 | | | 11 | | | 413 | | | 41 | | | 544 | |
Total net sales | | $ | 26,266 | | | $ | 11,257 | | | $ | 15,995 | | | $ | 11,880 | | | $ | 65,398 | |
Net sales by geographic region | | | | | | | | | | |
United States | | $ | 18,254 | | | $ | 8,415 | | | $ | 12,009 | | | $ | 10,334 | | | $ | 49,012 | |
Europe | | 3,283 | | | 767 | | | 806 | | | 1,478 | | | 6,334 | |
Asia Pacific | | 3,162 | | | 280 | | | 1,666 | | | 68 | | | 5,176 | |
Middle East | | 1,344 | | | 1,749 | | | 847 | | | — | | | 3,940 | |
Other | | 223 | | | 46 | | | 667 | | | — | | | 936 | |
Total net sales | | $ | 26,266 | | | $ | 11,257 | | | $ | 15,995 | | | $ | 11,880 | | | $ | 65,398 | |
(a)International sales include FMS contracted through the U.S. Government, direct commercial sales with international governments and commercial and other sales to international customers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 |
| | Aeronautics | | MFC | | RMS | | Space | | Total |
Net sales | | | | | | | | | | |
Products | | $ | 20,319 | | | $ | 8,424 | | | $ | 12,206 | | | $ | 9,104 | | | $ | 50,053 | |
Services | | 3,374 | | | 1,707 | | | 2,922 | | | 1,756 | | | 9,759 | |
Total net sales | | $ | 23,693 | | | $ | 10,131 | | | $ | 15,128 | | | $ | 10,860 | | | $ | 59,812 | |
Net sales by contract type | | | | | | | | | | |
Fixed-price | | $ | 17,239 | | | $ | 6,449 | | | $ | 10,382 | | | $ | 2,135 | | | $ | 36,205 | |
Cost-reimbursable | | 6,454 | | | 3,682 | | | 4,746 | | | 8,725 | | | 23,607 | |
Total net sales | | $ | 23,693 | | | $ | 10,131 | | | $ | 15,128 | | | $ | 10,860 | | | $ | 59,812 | |
Net sales by customer | | | | | | | | | | |
U.S. Government | | $ | 14,776 | | | $ | 7,524 | | | $ | 10,803 | | | $ | 9,322 | | | $ | 42,425 | |
International (a) | | 8,733 | | | 2,465 | | | 3,822 | | | 1,511 | | | 16,531 | |
U.S. commercial and other | | 184 | | | 142 | | | 503 | | | 27 | | | 856 | |
Total net sales | | $ | 23,693 | | | $ | 10,131 | | | $ | 15,128 | | | $ | 10,860 | | | $ | 59,812 | |
Net sales by geographic region | | | | | | | | | | |
United States | | $ | 14,960 | | | $ | 7,666 | | | $ | 11,306 | | | $ | 9,349 | | | $ | 43,281 | |
Europe | | 3,224 | | | 516 | | | 769 | | | 1,419 | | | 5,928 | |
Asia Pacific | | 3,882 | | | 420 | | | 1,451 | | | 73 | | | 5,826 | |
Middle East | | 1,465 | | | 1,481 | | | 979 | | | 19 | | | 3,944 | |
Other | | 162 | | | 48 | | | 623 | | | — | | | 833 | |
Total net sales | | $ | 23,693 | | | $ | 10,131 | | | $ | 15,128 | | | $ | 10,860 | | | $ | 59,812 | |
(a)International sales include FMS contracted through the U.S. Government, direct commercial sales with international governments and commercial and other sales to international customers.
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 2021, 28% during 2020 and 27% during 2019.
Capital Expenditures, PP&E Depreciation and Software Amortization, and Amortization of Purchased Intangibles
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
Capital expenditures | | | | | | |
Aeronautics | | $ | 477 | | | $ | 534 | | | $ | 526 | |
Missiles and Fire Control | | 304 | | | 391 | | | 300 | |
Rotary and Mission Systems | | 279 | | | 311 | | | 272 | |
Space | | 305 | | | 403 | | | 258 | |
Total business segment capital expenditures | | 1,365 | | | 1,639 | | | 1,356 | |
Corporate activities | | 157 | | | 127 | | | 128 | |
Total capital expenditures | | $ | 1,522 | | | $ | 1,766 | | | $ | 1,484 | |
PP&E depreciation and software amortization (a) | | | | | | |
Aeronautics | | $ | 348 | | | $ | 348 | | | $ | 318 | |
Missiles and Fire Control | | 153 | | | 136 | | | 122 | |
Rotary and Mission Systems | | 250 | | | 244 | | | 232 | |
Space | | 205 | | | 182 | | | 164 | |
Total business segment depreciation and amortization | | 956 | | | 910 | | | 836 | |
Corporate activities | | 123 | | | 109 | | | 70 | |
Total depreciation and amortization | | $ | 1,079 | | | $ | 1,019 | | | $ | 906 | |
Amortization of purchased intangibles | | | | | | |
Aeronautics | | $ | 1 | | | $ | — | | | $ | — | |
Missiles and Fire Control | | 2 | | | 2 | | | 2 | |
Rotary and Mission Systems | | 232 | | | 232 | | | 232 | |
Space | | 50 | | | 37 | | | 50 | |
Total amortization of purchased intangibles | | $ | 285 | | | $ | 271 | | | $ | 284 | |
(a)Excludes amortization of purchased intangibles.
Assets
Total assets for each of our acquired intangiblebusiness segments were as follows (in millions): | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
Assets | | | | |
Aeronautics | | $ | 10,756 | | | $ | 9,903 | |
Missiles and Fire Control | | 5,243 | | | 4,966 | |
Rotary and Mission Systems | | 17,664 | | | 18,035 | |
Space | | 6,199 | | | 6,451 | |
Total business segment assets | | 39,862 | | | 39,355 | |
Corporate assets (a) | | 11,011 | | | 11,355 | |
Total assets | | $ | 50,873 | | | $ | 50,710 | |
(a)Corporate assets primarily include cash and cash equivalents, deferred income taxes, assets for the portion of certain environmental costs that are probable of future recovery, and investments. Substantially all of our operating assets are located in the U.S.
Note 5 – Receivables, net, Contract Assets and Contract Liabilities
Receivables, net, contract assets and contract liabilities were as follows (in millions): | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
Receivables, net | | $ | 1,963 | | | $ | 1,978 | |
Contract assets | | 10,579 | | | 9,545 | |
Contract liabilities | | 8,107 | | | 7,545 | |
Receivables, net consist of approximately $1.3 billion from the U.S. Government and $708 million from other governments and commercial customers as of December 31, 2021. Substantially all accounts receivable at December 31, 2021 are expected to be collected in 2022. We do not believe we have significant exposure to credit risk as the majority of our accounts receivable are due from the U.S. Government either as the ultimate customer or in connection with foreign military sales.
Contract assets are net of progress payments and performance based payments from our customers as well as advance payments from non-U.S. Government customers totaling approximately $43.9 billion and $39.7 billion as of December 31, 2021 and 2020. Contract assets increased $1.0 billion during 2021, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during 2021 for which we have not yet billed our customers. There were no significant impairment losses related to our contract assets during 2021 and 2020. We expect to bill our customers for the majority of the December 31, 2021 contract assets during 2022.
Contract liabilities increased $562 million during 2021, primarily due to payments received in excess of revenue recognized on these performance obligations. During 2021, we recognized $4.5 billion of our contract liabilities at December 31, 2020 as revenue. During 2020, we recognized $4.0 billion of our contract liabilities at December 31, 2019 as revenue. During 2019, we recognized $3.9 billion of our contract liabilities at December 31, 2018 as revenue.
Note 6 – Inventories
Inventories consisted of the following (in millions): | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
Materials, spares and supplies | | $ | 624 | | | $ | 612 | |
Work-in-process | | 2,163 | | | 2,693 | |
Finished goods | | 194 | | | 240 | |
Total inventories | | $ | 2,981 | | | $ | 3,545 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | | 2016 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Finite-Lived: | | | | | | | | | | | | | |
Customer programs | | $ | 3,184 |
| | $ | (503 | ) | | $ | 2,681 |
| | | $ | 3,184 |
| | $ | (273 | ) | | $ | 2,911 |
|
Customer relationships | | 352 |
| | (140 | ) | | 212 |
| | | 359 |
| | (92 | ) | | 267 |
|
Other | | 71 |
| | (54 | ) | | 17 |
| | | 111 |
| | (83 | ) | | 28 |
|
Total finite-lived intangibles | | 3,607 |
| | (697 | ) | | 2,910 |
| | | 3,654 |
| | (448 | ) | | 3,206 |
|
Indefinite-Lived: | | | | | | | | | | | | | |
Trademarks | | 887 |
| | — |
| | 887 |
| | | 887 |
| | — |
| | 887 |
|
Total acquired intangibles | | $ | 4,494 |
| | $ | (697 | ) | | $ | 3,797 |
| | | $ | 4,541 |
| | $ | (448 | ) | | $ | 4,093 |
|
Acquired finite-lived intangible assetsCosts incurred to fulfill a contract in advance of the contract being awarded are amortizedincluded in inventories as work-in-process if we determine that those costs relate directly to expense primarily on a straight-line basis overcontract or to an anticipated contract that we can specifically identify and contract award is probable, the following estimated useful lives: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 programs, from nine to 20 years; customer relationships, from four to 10 years;upon the receipt of the anticipated contract. All other pre-contract costs, including start-up costs, are expensed as incurred. As of December 31, 2021 and other intangibles, from three to 10 years.
Amortization expense for acquired finite-lived intangible assets was $312 million, $2842020, $634 million and $68$583 million of pre-contract costs were included in 2017, 2016 and 2015. Estimated future amortization expense is as follows: $296 million in 2018; $285 million in 2019; $263 million in 2020; $256 million in 2021; $253 million in 2022 and $1.6 billion thereafter.inventories.
Note 5 – Information on Business Segments
We operate in four business segments: Aeronautics, MFC, RMS and Space. We organize our business segments based on the nature of the products and services offered. Following is a brief description of the activities of our business segments:
Aeronautics – Engaged in the research, design, development, manufacture, integration, sustainment, support and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies.
Missiles and Fire Control – Provides air and missile defense systems; tactical missiles and air-to-ground precision strike weapon systems; logistics; fire control systems; mission operations support, readiness, engineering support and integration services; manned and unmanned ground vehicles; and energy management solutions.
Rotary and Mission Systems – Provides design, manufacture, service and support for a variety of military and civil helicopters; ship and submarine mission and combat systems; mission systems and sensors for rotary and fixed-wing aircraft; sea and land-based missile defense systems; radar systems; the Littoral Combat Ship; simulation and training services; and unmanned systems and technologies. In addition, RMS supports the needs of customers in cybersecurity and delivers communications and command and control capability through complex mission solutions for defense applications. The 2015 results of the acquired Sikorsky business have been included in our consolidated results of operations from the November 6, 2015 acquisition date through December 31, 2015. Accordingly, the consolidated results of operations for the year ended December 31, 2015 do not reflect a full year of Sikorsky operations.
Space – Engaged in the research and development, design, engineering and production of satellites, strategic and defensive missile systems and space transportation systems. Space provides network-enabled situational awareness and integrates complex space and ground-based global systems to help our customers gather, analyze and securely distribute critical intelligence data. Space is also responsible for various classified systems and services in support of vital national security systems. Prior to August 24, 2016, the date we obtained control of AWE we accounted for the venture using the equity method of accounting with 33% of AWE’s earnings or losses recognized by Space. Subsequent to August 24, 2016, we obtained control of AWE and 100% of AWE’s sales and 51% of AWE’s earnings have been included in our consolidated results of operations. Accordingly, the consolidated results of operations for the year ended December 31, 2016 do not reflect a full year of AWE operations. Operating profit for our Space business segment also includes our share of earnings for our investment in ULA, which provides expendable launch services to the U.S. Government.
The financial information in the following tables includes the results of businesses we have acquired from their respective dates of acquisition and excludes businesses included in discontinued operations (see “Note 3 – Acquisitions and Divestitures”) for all years presented. Net sales of our business segments exclude intersegment sales as these activities are eliminated in consolidation.
Operating profit of our business segments 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. ULA, results of which are included in our Space business segment, is our primary equity method investee. Operating profit of our business segments excludes the FAS/CAS pension adjustment described below; expense for stock-based compensation; the effects of items not considered part of management’s evaluation of segment operating performance, such as charges related to significant severance actions (see “Note 15 – Restructuring Charges”) and goodwill impairments; gains or losses from significant divestitures; the effects of certain legal settlements; corporate costs not allocated to our business segments; and other miscellaneous corporate activities. These items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See “Note 1 – Significant Accounting Policies” (under the caption “Use of Estimates”) for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.
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 cost through the pricing of our products and services on U.S. Government contracts and, therefore, the CAS pension cost is recognized in each of our business segments’ net sales and cost of sales. Since our consolidated financial statements must present pension expense calculated in
accordance with the financial accounting standards (FAS) requirements under GAAP, which we refer to as FAS pension expense, the FAS/CAS pension adjustment increases or decreases the CAS pension cost recorded in our business segments’ results of operations to equal the FAS pension expense.
Selected Financial Data by Business Segment
Summary operating results for each of our business segments were as follows (in millions):
|
| | | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
Net sales | | | | | | |
Aeronautics | | $ | 20,148 |
| | $ | 17,769 |
| | $ | 15,570 |
|
Missiles and Fire Control | | 7,212 |
| | 6,608 |
| | 6,770 |
|
Rotary and Mission Systems | | 14,215 |
| | 13,462 |
| | 9,091 |
|
Space | | 9,473 |
| | 9,409 |
| | 9,105 |
|
Total net sales | | $ | 51,048 |
| | $ | 47,248 |
| | $ | 40,536 |
|
Operating profit | | | | | | |
Aeronautics | | $ | 2,164 |
| | $ | 1,887 |
| | $ | 1,681 |
|
Missiles and Fire Control | | 1,053 |
| | 1,018 |
| | 1,282 |
|
Rotary and Mission Systems | | 905 |
| | 906 |
| | 844 |
|
Space (a) | | 993 |
| | 1,289 |
| | 1,171 |
|
Total business segment operating profit | | 5,115 |
| | 5,100 |
| | 4,978 |
|
Unallocated items | | | | | | |
FAS/CAS pension adjustment | | | | | | |
FAS pension expense (b)(c) | | (1,372 | ) | | (1,019 | ) | | (1,127 | ) |
Less: CAS pension cost (b)(c) | | 2,248 |
| | 1,921 |
| | 1,527 |
|
FAS/CAS pension adjustment | | 876 |
| | 902 |
| | 400 |
|
Severance charges (b)(d) | | — |
| | (80 | ) | | (82 | ) |
Stock-based compensation | | (158 | ) | | (149 | ) | | (133 | ) |
Other, net (e)(f) | | 88 |
| | (224 | ) | | (451 | ) |
Total unallocated, net | | 806 |
| | 449 |
| | (266 | ) |
Total consolidated operating profit | | $ | 5,921 |
| | $ | 5,549 |
| | $ | 4,712 |
|
| |
(a)
| On August 24, 2016, our ownership interest in the AWE joint venture increased from 33% to 51% and we were required to change our accounting for this investment from the equity method to consolidation. As a result of the increased ownership interest, we recognized a non-cash gain of $127 million at our Space business segment, which increased net earnings from continuing operations by $104 million ($0.34 per share) in 2016. See “Note 3 – Acquisitions and Divestitures” for more information.
|
| |
(b)
| FAS pension expense, CAS pension costs and severance charges reflect the reclassification for discontinued operations presentation of benefits related to former IS&GS salaried employees (see “Note 11 – Postretirement Benefit Plans”).
|
| |
(c)
| The higher FAS expense in 2017 is primarily due to a lower discount rate and lower expected long-term rate of return on plan assets in 2017 versus 2016. The higher CAS pension cost primarily reflects the impact of phasing in CAS Harmonization (see “Note 11 – Postretirement Benefit Plans”).
|
| |
(d)
| See “Note 15 – Restructuring Charges” for information on charges related to certain severance actions at our business segments. Severance charges for initiatives that are not significant are included in business segment operating profit.
|
| |
(e)
| Other, net in 2017 includes a previously deferred non-cash gain of $198 million related to properties sold in 2015 as a result of completing our remaining obligations (see “Note 8 – Property, Plant and Equipment, net”) and a $64 million charge, which represents our portion of a non-cash asset impairment charge recorded by our equity method investee, AMMROC (see “Note 1 – Significant Accounting Policies”).
|
| |
(f)
| Other, net in 2015 includes a non-cash asset impairment charge of approximately $90 million related to our decision in 2015 to divest our LMCFT business (see “Note 3 – Acquisitions and Divestitures”). This charge was partially offset by a net deferred tax benefit of about $80 million, which is recorded in income tax expense. The net impact reduced net earnings by about $10 million. Additionally other, net in 2015 includes approximately $38 million of non-recoverable transaction costs associated with the acquisition of Sikorsky.
|
Selected Financial Data by Business Segment (continued)
|
| | | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
Intersegment sales | | | | | | |
Aeronautics | | $ | 122 |
| | $ | 137 |
| | $ | 102 |
|
Missiles and Fire Control | | 366 |
| | 305 |
| | 315 |
|
Rotary and Mission Systems | | 2,009 |
| | 1,816 |
| | 1,533 |
|
Space | | 111 |
| | 110 |
| | 146 |
|
Total intersegment sales | | $ | 2,608 |
| | $ | 2,368 |
| | $ | 2,096 |
|
Depreciation and amortization | | | | | | |
Aeronautics | | $ | 311 |
| | $ | 299 |
| | $ | 317 |
|
Missiles and Fire Control | | 99 |
| | 105 |
| | 99 |
|
Rotary and Mission Systems | | 468 |
| | 476 |
| | 211 |
|
Space | | 245 |
| | 212 |
| | 220 |
|
Total business segment depreciation and amortization | | 1,123 |
| | 1,092 |
| | 847 |
|
Corporate activities | | 72 |
| | 75 |
| | 98 |
|
Total depreciation and amortization (a) | | $ | 1,195 |
| | $ | 1,167 |
| | $ | 945 |
|
Capital expenditures | | | | | | |
Aeronautics | | $ | 371 |
| | $ | 358 |
| | $ | 387 |
|
Missiles and Fire Control | | 156 |
| | 167 |
| | 120 |
|
Rotary and Mission Systems | | 308 |
| | 271 |
| | 169 |
|
Space | | 179 |
| | 183 |
| | 172 |
|
Total business segment capital expenditures | | 1,014 |
| | 979 |
| | 848 |
|
Corporate activities | | 163 |
| | 75 |
| | 60 |
|
Total capital expenditures (b) | | $ | 1,177 |
| | $ | 1,054 |
| | $ | 908 |
|
| |
(a)
| Total depreciation and amortization in the table above excludes $48 million and $81 million for the years ended December 31, 2016 and 2015 related to the former IS&GS business segment. These amounts are included in depreciation and amortization in our consolidated statements of cash flows as we did not reclassify our cash flows to exclude the IS&GS business segment. See “Note 3 – Acquisitions and Divestitures” for more information. |
| |
(b)
| Total capital expenditures in the table above excludes $9 million and $31 million for the years ended December 31, 2016 and 2015 related to the former IS&GS business segment. These amounts are included in capital expenditures in our consolidated statements of cash flows as we did not reclassify our cash flows to exclude the IS&GS business segment. See “Note 3 – Acquisitions and Divestitures” for more information. |
Selected Financial Data by Business Segment (continued)
Net Sales by Customer Category
Net sales by customer category were as follows (in millions):
|
| | | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
U.S. Government | | | | | | |
Aeronautics | | $ | 12,753 |
| | $ | 11,714 |
| | $ | 11,195 |
|
Missiles and Fire Control | | 4,640 |
| | 4,026 |
| | 4,150 |
|
Rotary and Mission Systems | | 9,834 |
| | 9,187 |
| | 6,961 |
|
Space | | 8,097 |
| | 8,543 |
| | 8,845 |
|
Total U.S. Government net sales | | $ | 35,324 |
| | $ | 33,470 |
| | $ | 31,151 |
|
International (a) | | | | | | |
Aeronautics | | $ | 7,307 |
| | $ | 5,973 |
| | $ | 4,328 |
|
Missiles and Fire Control | | 2,423 |
| | 2,444 |
| | 2,449 |
|
Rotary and Mission Systems | | 4,006 |
| | 3,798 |
| | 2,016 |
|
Space | | 1,305 |
| | 488 |
| | 218 |
|
Total international net sales | | $ | 15,041 |
| | $ | 12,703 |
| | $ | 9,011 |
|
U.S. Commercial and Other | | | | | | |
Aeronautics | | $ | 88 |
| | $ | 82 |
| | $ | 47 |
|
Missiles and Fire Control | | 149 |
| | 138 |
| | 171 |
|
Rotary and Mission Systems | | 375 |
| | 477 |
| | 114 |
|
Space | | 71 |
| | 378 |
| | 42 |
|
Total U.S. commercial and other net sales | | $ | 683 |
| | $ | 1,075 |
| | $ | 374 |
|
Total net sales | | $ | 51,048 |
| | $ | 47,248 |
| | $ | 40,536 |
|
| |
(a)
| International sales include foreign military sales contracted through the U.S. Government, direct commercial sales with international governments and commercial and other sales to international customers. |
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 25% of our total consolidated net sales during 2017, and 23% during both 2016 and 2015.
Total assets and customer advances and amounts in excess of costs incurred for each of our business segments were as follows (in millions):
|
| | | | | | | | |
| | 2017 |
| | 2016 |
|
Assets (a) | | | | |
Aeronautics | | $ | 7,903 |
| | $ | 7,896 |
|
Missiles and Fire Control | | 4,395 |
| | 4,000 |
|
Rotary and Mission Systems | | 18,235 |
| | 18,367 |
|
Space | | 5,236 |
| | 5,250 |
|
Total business segment assets | | 35,769 |
| | 35,513 |
|
Corporate assets (b) | | 10,752 |
| | 12,293 |
|
Total assets | | $ | 46,521 |
| | $ | 47,806 |
|
Customer advances and amounts in excess of costs incurred | | | | |
Aeronautics | | $ | 2,752 |
| | $ | 2,133 |
|
Missiles and Fire Control | | 1,268 |
| | 1,517 |
|
Rotary and Mission Systems | | 2,288 |
| | 2,590 |
|
Space | | 444 |
| | 536 |
|
Total customer advances and amounts in excess of costs incurred | | $ | 6,752 |
| | $ | 6,776 |
|
| |
(a)
| We have no long-lived assets with material carrying values located in foreign countries. |
| |
(b)
| Corporate assets primarily include cash and cash equivalents, deferred income taxes, environmental receivables and investments held in a separate trust. |
Note 6 – Receivables, net
Receivables, net consisted of the following (in millions):
|
| | | | | | | | |
| | 2017 |
| | 2016 |
|
U.S. Government | | | | |
Amounts billed | | $ | 1,433 |
| | $ | 792 |
|
Unbilled costs and accrued profits | | 6,337 |
| | 6,877 |
|
Less: customer advances and progress payments | | (1,042 | ) | | (1,346 | ) |
Total U.S. Government receivables, net | | 6,728 |
| | 6,323 |
|
Other governments and commercial | | | | |
Amounts billed | | 687 |
| | 546 |
|
Unbilled costs and accrued profits | | 1,651 |
| | 1,847 |
|
Less: customer advances | | (463 | ) | | (514 | ) |
Total other governments and commercial receivables, net | | 1,875 |
| | 1,879 |
|
Total receivables, net | | $ | 8,603 |
| | $ | 8,202 |
|
We expect to bill our customers for the majority of the December 31, 2017 unbilled costs and accrued profits during 2018.
Note 7 – Inventories, net
Inventories, net consisted of the following (in millions):
|
| | | | | | | | |
| | 2017 |
| | 2016 |
|
Work-in-process, primarily related to long-term contracts and programs in progress | | $ | 6,510 |
| | $ | 7,864 |
|
Spare parts, used aircraft and general stock materials | | 811 |
| | 833 |
|
Other inventories | | 1,134 |
| | 719 |
|
Total inventories | | 8,455 |
| | 9,416 |
|
Less: customer advances and progress payments | | (3,968 | ) | | (4,746 | ) |
Total inventories, net | | $ | 4,487 |
| | $ | 4,670 |
|
Work-in-process inventories at December 31, 2017 and 2016 included general and administrative costs of $509 million and $529 million. General and administrative costs incurred and recorded in inventories totaled $3.5 billion in 2017, $3.3 billion in 2016 and $2.7 billion in 2015. General and administrative costs charged to cost of sales from inventories totaled $3.5 billion in 2017, $3.3 billion in 2016 and $2.8 billion in 2015.
Note 8 – Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following (in millions): | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
Land | | $ | 144 | | | $ | 142 | |
Buildings | | 8,003 | | | 7,425 | |
Machinery and equipment | | 9,053 | | | 8,661 | |
Construction in progress | | 1,900 | | | 1,921 | |
Total property, plant and equipment | | 19,100 | | | 18,149 | |
Less: accumulated depreciation | | (11,503) | | | (10,936) | |
Total property, plant and equipment, net | | $ | 7,597 | | | $ | 7,213 | |
Note 8 – Goodwill and Acquired Intangibles
Changes in the carrying amount of goodwill by business segment were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Aeronautics | | MFC | | RMS | | Space | | Total |
Balance at December 31, 2019 | | $ | 171 | | | $ | 2,089 | | | $ | 6,758 | | | $ | 1,586 | | | $ | 10,604 | |
| | | | | | | | | | |
Acquisitions | | 16 | | | — | | | — | | | 173 | | | 189 | |
Other | | — | | | 2 | | | 10 | | | 1 | | | 13 | |
Balance at December 31, 2020 | | 187 | | | 2,091 | | | 6,768 | | | 1,760 | | | 10,806 | |
Acquisitions | | — | | | — | | | — | | | 17 | | | 17 | |
Other | | — | | | (1) | | | (9) | | | — | | | (10) | |
Balance at December 31, 2021 | | $ | 187 | | | $ | 2,090 | | | $ | 6,759 | | | $ | 1,777 | | | $ | 10,813 | |
The gross carrying amounts and accumulated amortization of our acquired intangible assets consisted of the following (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | | 2020 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Finite-Lived: | | | | | | | | | | | | | | | |
Customer programs | | $ | 3,184 | | | $ | (1,431) | | | | $ | 1,753 | | | | $ | 3,184 | | | $ | (1,199) | | | | $ | 1,985 | |
Customer relationships | | 120 | | | (96) | | | | 24 | | | | 366 | | | (287) | | | | 79 | |
Other | | 76 | | | (34) | | | | 42 | | | | 85 | | | (24) | | | | 61 | |
Total finite-lived intangibles | | 3,380 | | | (1,561) | | | | 1,819 | | | | 3,635 | | | (1,510) | | | | 2,125 | |
Indefinite-Lived: | | | | | | | | | | | | | | | |
Trademark | | 887 | | | — | | | | 887 | | | | 887 | | | — | | | | 887 | |
Total acquired intangibles | | $ | 4,267 | | | $ | (1,561) | | | | $ | 2,706 | | | | $ | 4,522 | | | $ | (1,510) | | | | $ | 3,012 | |
Acquired finite-lived intangible assets are amortized to expense primarily on a straight-line basis over the following estimated useful lives: customer programs from nine to 20 years; customer relationships from four to 10 years; and other intangibles assets from three to 10 years.
Amortization expense for acquired finite-lived intangible assets was $285 million, $271 million and $284 million in 2021, 2020 and 2019. Estimated future amortization expense is as follows: $248 million in 2022; $246 million in 2023; $243 million in 2024; $221 million in 2025; and $154 million in 2026.
|
| | | | | | | | |
| | 2017 |
| | 2016 |
|
Land | | $ | 131 |
| | $ | 127 |
|
Buildings | | 6,401 |
| | 6,385 |
|
Machinery and equipment | | 7,624 |
| | 7,389 |
|
Construction in progress | | 1,205 |
| | 976 |
|
Total property, plant and equipment | | 15,361 |
| | 14,877 |
|
Less: accumulated depreciation and amortization | | (9,586 | ) | | (9,328 | ) |
Total property, plant and equipment, net | | $ | 5,775 |
| | $ | 5,549 |
|
Land SalesNote 9 – Leases
During the fourth quarterWe generally enter into operating lease agreements for facilities, land and equipment. Our ROU operating lease assets were $1.3 billion at December 31, 2021. Operating lease liabilities were $1.4 billion, of 2017,which $1.1 billion were classified as noncurrent, at December 31, 2021. New ROU operating lease assets and liabilities entered into during 2021 were $473 million. The weighted average remaining lease term and discount rate for our operating leases were approximately 8.9 years and 2% at December 31, 2021.
We recognized operating lease expense of $275 million, $223 million and $239 million in 2021, 2020 and 2019. In addition, we recognized a previously deferred non-cash gainmade cash payments of $299 million for operating leases during 2021, which are included in other income, netcash flows from operating activities in our consolidated statement of earnings of $198 million ($122 million or $0.42 per share, after tax) related to properties sold in 2015cash flows.
Future minimum lease commitments at December 31, 2021 were as a result of completing our remaining obligations.follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter |
Operating leases | $ | 1,566 | | | $ | 325 | | | $ | 225 | | | $ | 196 | | | $ | 151 | | | $ | 108 | | | $ | 561 | | |
Less: imputed interest | 140 | | | | | | | | | | | | | | |
Total | $ | 1,426 | | | | | | | | | | | | | | |
Note 910 – Income Taxes
On December 22, 2017, the President signed the
Income Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote down our net deferred tax assets as of December 31, 2017 by $1.9 billion to reflect the estimated impact of the Tax Act. We recorded a corresponding net one-time charge of $1.9 billion ($6.69 per share), substantially all of which was non-cash, primarily related to enactment of the Tax Act, the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate, a deemed repatriation tax, and a reduction in the U.S. manufacturing benefit as a result of our decision to accelerate contributions to our pension fund in 2018 in order to receive a tax deduction in 2017.Provisions
While we have substantially completed our provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate of such effects, the net one-time charge related to the Tax Act may differ, possibly materially, due to, among other things, further refinement of our calculations, changes in interpretations and assumptions that we have made, additional guidance that may be issued by the U.S. Government, and actions and related accounting policy decisions we may take as a result of the Tax Act. We will complete our analysis over a one-year measurement period ending December 22, 2018, and any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined.
Our provision for federal and foreign income tax expense for continuing operations consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
Federal income tax expense (benefit): | | | | | | |
Current | | $ | 1,325 | | | $ | 1,292 | | | $ | 698 | |
| | | | | | |
Deferred | | (194) | | | 21 | | | 235 | |
Total federal income tax expense | | 1,131 | | | 1,313 | | | 933 | |
Foreign income tax expense (benefit): | | | | | | |
Current | | 93 | | | 50 | | | 91 | |
Deferred | | 11 | | | (16) | | | (13) | |
Total foreign income tax expense | | 104 | | | 34 | | | 78 | |
Total federal and foreign income tax expense | | $ | 1,235 | | | $ | 1,347 | | | $ | 1,011 | |
|
| | | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
Federal income tax expense (benefit): | | | | | | |
Current | | | | | | |
Operations | | $ | (189 | ) | | $ | 1,327 |
| | $ | 1,573 |
|
One-time charge due to tax legislation (a) | | 43 |
| | — |
| | — |
|
Deferred | | | | | | |
Operations | | 1,613 |
| | (231 | ) | | (473 | ) |
One-time charge due to tax legislation (a) | | 1,819 |
| | — |
| | — |
|
Total federal income tax expense | | 3,286 |
| | 1,096 |
| | 1,100 |
|
Foreign income tax expense (benefit): | | | | | | |
Current | | 53 |
| | 56 |
| | 39 |
|
Deferred | | 1 |
| | (19 | ) | | 34 |
|
Total foreign income tax expense | | 54 |
| | 37 |
| | 73 |
|
Total income tax expense | | $ | 3,340 |
| | $ | 1,133 |
| | $ | 1,173 |
|
| |
(a)
| Represents one-time charge due primarily to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate and a deemed repatriation tax. |
State income taxes are included in our operations as general and administrative costs and, under U.S. Government regulations, are allowable costs in establishing prices for the products and services we sell to the U.S. Government. Therefore, a substantial portion of state income taxes is included in our net sales and cost of sales. 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. Our total net state income tax expense was $103$195 million for 2017, $1122021, $197 million for 2016,2020, and $106$96 million for 2015.2019.
A reconciliation of the 35% U.S. federal statutory income tax rateexpense to actual income tax expense for continuing operations is as follows (dollars in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
Income tax expense at the U.S. federal statutory tax rate | | $ | 1,585 | | | 21.0 | % | | $ | 1,729 | | | 21.0 | % | | $ | 1,521 | | | 21.0 | % |
Foreign derived intangible income deduction | | (170) | | | (2.3) | | | (170) | | | (2.1) | | | (122) | | | (1.7) | |
Research and development tax credit | | (118) | | | (1.6) | | | (97) | | | (1.2) | | | (148) | | | (2.0) | |
Tax deductible dividends | | (65) | | | (0.9) | | | (64) | | | (0.8) | | | (62) | | | (0.9) | |
Excess tax benefits for stock-based payment awards | | (28) | | | (0.4) | | | (52) | | | (0.6) | | | (63) | | | (0.9) | |
Other, net (a) | | 31 | | | 0.6 | | | 1 | | | 0.1 | | | (115) | | | (1.5) | |
Income tax expense | | $ | 1,235 | | | 16.4 | % | | $ | 1,347 | | | 16.4 | % | | $ | 1,011 | | | 14.0 | % |
(a)Includes additional $98 million deduction for foreign derived intangible income related to 2018 recognized in 2019 reflecting proposed tax regulations released on March 4, 2019. |
| | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
Income tax expense at the U.S. federal statutory tax rate | | $ | 1,844 |
| | 35.0 | % | | $ | 1,710 |
| | 35.0 | % | | $ | 1,505 |
| | 35.0 | % |
Deferred tax write down and transition tax (a) | | 1,862 |
| | 35.3 |
| | — |
| | — |
| | — |
| | — |
|
Excess tax benefits for share-based payment awards | | (106 | ) | | (2.0 | ) | | (152 | ) | | (3.1 | ) | | — |
| | — |
|
U.S. manufacturing deduction benefit (b) | | (7 | ) | | (0.1 | ) | | (117 | ) | | (2.4 | ) | | (123 | ) | | (2.9 | ) |
Research and development tax credit | | (115 | ) | | (2.2 | ) | | (107 | ) | | (2.2 | ) | | (70 | ) | | (1.6 | ) |
Tax deductible dividends | | (94 | ) | | (1.8 | ) | | (92 | ) | | (1.9 | ) | | (87 | ) | | (2.0 | ) |
Other, net | | (44 | ) | | (0.8 | ) | | (109 | ) | | (2.2 | ) | | (52 | ) | | (1.2 | ) |
Income tax expense | | $ | 3,340 |
| | 63.4 | % | | $ | 1,133 |
| | 23.2 | % | | $ | 1,173 |
| | 27.3 | % |
| |
(a)
| Includes one-time charge due primarily to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate and a deemed repatriation tax. |
| |
(b)
| Includes a reduction in our 2017 manufacturing benefit as a result of our decision to accelerate contributions to our pension fund in 2018. |
In 2016, we adopted the accounting standard update for employee share-based payment awards onWe recognized a prospective basis. Accordingly, we recognized additional income tax benefitsbenefit of $106$170 million in 2021 and $152$191 million during the years ended December 31, 2017 and 2016. The 2016 income tax rate also benefitedin 2020 from the nontaxable gain recorded in connection withdeduction for foreign derived intangible income enacted by the consolidationTax Cuts and Jobs Act of AWE.2017 (the “Tax Act”).
Tax benefits from the U.S. manufacturing deduction were insignificantin 2017, $117 million in 2016, and $123 million in 2015. We recognized tax benefits$118 million of $115 million in 2017, $107 million in 2016, and $70 million in 2015 from U.S. research and development (R&D) tax credits including benefits attributablein 2021 due to prior periods.increased qualifying activity.
We receive a tax deduction for dividends paid on shares of our common stock held by certain of our defined contribution plans with an employee stock ownership plan feature. The amount of the tax deduction has increased as we increased our dividend over the last three years, partially offset by a decline in the number of shares in these plans.
Uncertain Tax Positions
As a result of a decision in 2015 to divestDecember 31, 2021 and 2020, our LMCFT business (see “Note 3 – Acquisitions and Divestitures”), we recorded an asset impairment charge of approximately $90 million. This charge was partially offset by a net deferredliabilities associated with unrecognized tax benefit of about $80 million. The net impact of the resulting tax benefit reduced the effective income tax rate by 1.2 percentage points in 2015.benefits were not material.
We participate in the IRS Compliance Assurance Process program. Examinations of the years 2015, 2016, and 2017 remain under IRS review.Deferred Income Taxes
The primary components of our federal and foreign deferred income tax assets and liabilities at December 31 were as follows (in millions): | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
Deferred tax assets related to: | | | | |
Pensions | | $ | 1,985 | | | $ | 2,994 | |
Accrued compensation and benefits | | 957 | | | 926 | |
Contract accounting methods | | 470 | | | 392 | |
Foreign company operating losses and credits | | 40 | | | 51 | |
Other (a) | | 473 | | | 509 | |
Valuation allowance | | (15) | | | (13) | |
Deferred tax assets, net | | 3,910 | | | 4,859 | |
Deferred tax liabilities related to: | | | | |
Goodwill and intangible assets | | 401 | | | 363 | |
Property, plant and equipment | | 518 | | | 481 | |
Exchanged debt securities and other (a) | | 709 | | | 547 | |
Deferred tax liabilities | | 1,628 | | | 1,391 | |
Net deferred tax assets | | $ | 2,282 | | | $ | 3,468 | |
(a)Includes deferred tax assets and liabilities related to lease liability and ROU asset. |
| | | | | | | | |
| | 2017(a) |
| | 2016 |
|
Deferred tax assets related to: | | | | |
Accrued compensation and benefits | | $ | 595 |
| | $ | 1,012 |
|
Pensions (b) | | 2,495 |
| | 5,197 |
|
Other postretirement benefit obligations | | 153 |
| | 302 |
|
Contract accounting methods | | 487 |
| | 878 |
|
Foreign company operating losses and credits | | 27 |
| | 30 |
|
Other | | 154 |
| | 327 |
|
Valuation allowance (c) | | (20 | ) | | (15 | ) |
Deferred tax assets, net | | 3,891 |
| | 7,731 |
|
Deferred tax liabilities related to: | | | | |
Goodwill and purchased intangibles | | 266 |
| | 378 |
|
Property, plant and equipment | | 239 |
| | 346 |
|
Exchanged debt securities and other | | 303 |
| | 418 |
|
Deferred tax liabilities | | 808 |
| | 1,142 |
|
Net deferred tax assets | | $ | 3,083 |
| | $ | 6,589 |
|
| |
(a)
| Components of our federal and foreign deferred income tax assets and liabilities at December 31, 2017 after taking into account the estimated impacts of the Tax Act and related items. |
| |
(b)
| The decrease in 2017 was primarily due to the enactment of the Tax Act and our decision to accelerate contributions of cash to our defined benefit pension plans, partially offset by the reduction in the discount rate used to measure our postretirement benefit plans (see “Note 11 – Postretirement Benefit Plans”). |
| |
(c)
| A valuation allowance was provided against certain foreign company deferred tax assets arising from carryforwards of unused tax benefits. |
As of December 31, 2017 and 2016, our liabilities associated with unrecognized tax benefits are not material.
We and our subsidiaries file federal income tax returns in the U.S. federal jurisdiction and income tax returns in various foreign jurisdictions. With few exceptions, the statute of limitations for these jurisdictions is no longer open for U.S. federalaudit or non-U.S. income tax examinationsexamination for the years before 2014,2015, other than with respect to refunds.
U.S. income taxes have been provided on deemed repatriated earnings of $435 million related to our non-U.S. companies as of December 31, 2017, as a result
We participate in the IRS Compliance Assurance Process program. Examinations of the enactment of the Tax Act. The additional net transition tax of $43 million on the deemed repatriated earnings was recorded for 2017. Before the Tax Act, U.S. income taxesyears 2018 to 2021 remain under IRS review. We are also subject to taxation in various states and foreign withholding taxes have not been provided on earningsjurisdictions including Australia, Canada, India, Italy,
Japan, Poland, and $310 million that have not been distributed by our non-U.S. companies as of December 31, 2016 and 2015. Our intention before enactment of the Tax Act was to permanently reinvest these earnings, thereby indefinitely postponing their remittance to the U.S. If these earnings had been remitted, we estimate that the additional income taxes after foreign tax credits would have been approximately $64 million in 2016 and $49 million in 2015. In addition, we have reevaluated our intention concerning repatriation of foreign earnings. While our investment in foreign subsidiaries continues to be permanent in duration, in light of our decision to accelerate contributions to our defined benefit pension plans, earnings from certain foreign subsidiariesUnited Kingdom. We are under, or may be repatriated.subject to, audit or examination and additional assessments by the relevant authorities.
Our federal and foreign income tax payments, net of refunds, received, were $1.1$1.4 billion in 2017, $1.3 billionboth 2021 and 2020, and $940 million in 2016, and $1.8 billion in 2015.2019.
Note 1011 – Debt
Our long-termtotal debt consisted of the following (in millions):
|
| | | | | | | | |
| | December 31, |
| | 2017 |
| | 2016 |
|
Notes | | | | |
1.85% due 2018 | | $ | 750 |
| | $ | 750 |
|
4.25% due 2019 | | 900 |
| | 900 |
|
2.50% due 2020 | | 1,250 |
| | 1,250 |
|
3.35% due 2021 | | 900 |
| | 900 |
|
3.10% due 2023 | | 500 |
| | 500 |
|
2.90% due 2025 | | 750 |
| | 750 |
|
3.55% due 2026 | | 2,000 |
| | 2,000 |
|
3.60% due 2035 | | 500 |
| | 500 |
|
4.50% and 6.15% due 2036 | | 1,054 |
| | 1,152 |
|
4.85% due 2041 | | 239 |
| | 600 |
|
4.07% due 2042 | | 1,336 |
| | 1,336 |
|
3.80% due 2045 | | 1,000 |
| | 1,000 |
|
4.70% due 2046 | | 1,326 |
| | 2,000 |
|
4.09% due 2052 | | 1,578 |
| | — |
|
Other notes with rates from 5.50% to 8.50%, due 2023 to 2040 | | 1,415 |
| | 1,656 |
|
Total debt | | 15,498 |
| | 15,294 |
|
Less: unamortized discounts and issuance costs | | (1,235 | ) | | (1,012 | ) |
Total debt, net | | 14,263 |
| | 14,282 |
|
Less: current portion | | (750 | ) | | — |
|
Long-term debt, net | | $ | 13,513 |
| | $ | 14,282 |
|
| | | | | | | | | | | | | | |
| | 2021 | | 2020 |
Notes | | | | |
3.35% due 2021 | | $ | — | | | $ | 500 | |
3.10% due 2023 | | 500 | | | 500 | |
2.90% due 2025 | | 750 | | | 750 | |
3.55% due 2026 | | 2,000 | | | 2,000 | |
1.85% due 2030 | | 400 | | | 400 | |
3.60% due 2035 | | 500 | | | 500 | |
4.50% and 6.15% due 2036 | | 1,054 | | | 1,054 | |
4.07% due 2042 | | 1,336 | | | 1,336 | |
3.80% due 2045 | | 1,000 | | | 1,000 | |
4.70% due 2046 | | 1,326 | | | 1,326 | |
2.80% due 2050 | | 750 | | | 750 | |
4.09% due 2052 | | 1,578 | | | 1,578 | |
Other notes with rates from 4.85% to 9.13%, due 2022 to 2041 | | 1,605 | | | 1,605 | |
Total debt | | 12,799 | | | 13,299 | |
Less: unamortized discounts and issuance costs | | (1,123) | | | (1,130) | |
Total debt, net | | 11,676 | | | 12,169 | |
Less: current portion | | (6) | | | (500) | |
Long-term debt, net | | $ | 11,670 | | | $ | 11,669 | |
Revolving Credit FacilitiesFacility
On October 9, 2015,December 31, 2021, we entered intohad a $2.5$3.0 billion revolving credit facility (the 5-yearRevolving Credit Facility) with various banks. The 5‑year Facility was amended in October 2017 to extend itsbanks with an expiration date by one year from October 9, 2021 to October 9, 2022. The 5‑year Facilityof August 24, 2026 that is available for general corporate purposes. The undrawn portion of the 5-yearpurposes including supporting commercial paper borrowings. We entered into this Revolving Credit Facility is also available to serve as a backup facility for the issuance of commercial paper.effective August 24, 2021 and concurrently terminated our prior $2.5 billion revolving credit facility. We may request and the banks may grant, at their discretion, an increase in the borrowing capacity under the 5-yearRevolving Credit Facility of up to an additional $500 million. There were no0 borrowings outstanding under the 5-year Facilitycredit facility as of December 31, 20172021 and 2016.2020.
Borrowings under the 5-year Facilitycredit facility are unsecured and bear interest at rates based, at our option, on a Eurodollar Rate or a Base Rate, as defined in the 5-year Facility’scredit facility’s agreement. Each bank’s obligation to make loans under the 5-year Facilitycredit facility is subject to, among other things, our compliance with various representations, warranties and covenants, including covenants limiting our ability and certain of our subsidiaries’ ability to encumber assets and a covenant not to exceed a maximum leverage ratio, as defined in the 5‑year Facilitycredit facility agreement. As of December 31, 20172021 and 2016,2020, we were in compliance with all covenants contained in the 5-year Facilitycredit facility agreement, as well as in our debt agreements.
Long-Term Debt
In September 2017, we issued notes totaling approximately $1.6 billion with a fixed interest rate of 4.09% maturing in September 2052 (the New Notes) in exchange for outstanding notes totaling approximately $1.4 billion with fixed interest rates ranging from 4.70% to 8.50% maturing 2029 to 2046 (the Old Notes). In connection with the exchange of principal, we paid a premium of $237 million, substantially all of which was in the form of New Notes. This premium will be amortized as additional interest expense over the term of the New Notes using the effective interest method. We may, at our option, redeem some or all of the New Notes at any time by paying the principal amount of notes being redeemed plus a make-whole premium and accrued and unpaid interest. Interest on the New Notes is payable on March 15 and September 15 of each year, beginning on March 15, 2018. The New Notes are unsecured senior obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness.
We made interest payments of approximately $610 million, $600 million and $375 million during the years ended December 31, 2017, 2016 and 2015, respectively.
In September 2016, we repaid $500 million of long-term notes with a fixed interest rate of 2.13% according to their scheduled maturities. In May 2016, we repaid $452 million of long-term notes with a fixed interest rate of 7.65% according to their scheduled maturities. We also had related variable interest rate swaps with a notional amount of $450 million mature, which did not have a significant impact on net earnings or comprehensive income.
Commercial Paper
We have agreements in place with financial institutions to provide for the issuance of commercial paper backed by our $2.5 billion 5-year Facility. During 2017 and 2016, we borrowed and fully repaid amounts under ourpaper. The outstanding balance of commercial paper programs.can fluctuate daily and the amount outstanding during the period may be greater or less than the amount reported at the end of the period. There were no commercial paper borrowings outstanding as of December 31, 20172021 and 2016. However, we did not issue or repay any during 2021. We may, as conditions warrant, continue to issue commercial paper backed by our revolving credit facility to manage the timing of cash flows andflows.
Long-Term Debt
In September 2021, we repaid $500 million of long-term notes with a fixed interest rate of 3.35% according to fund a portion of our defined benefit pension contributionstheir scheduled maturities.
We made interest payments of approximately $5.0 billion in 2018.$543 million, $567 million and $625 million during the years ended December 31, 2021, 2020 and 2019, respectively.
Note 1112 – Postretirement Benefit Plans
Defined Benefit Pension Plans and Retiree Medical and Life Insurance PlansPlan Descriptions
Many of our employees are covered by qualifiedand retirees participate in various postretirement benefit plans including defined benefit pension plans, retiree medical and life insurance plans, defined contribution retirement savings plans, and other postemployment plans. Substantially all of our postretirement benefit obligations relate to U.S. based defined benefit pension plans and we provide certain health careretiree medical and life insurance benefits to eligible retirees (collectively, postretirement benefit plans). We also sponsor nonqualifiedplans. The majority of our U.S. defined benefit pension plans provide for benefits within limits imposed by federal tax law (referred to as qualified plans). However, certain of our U.S. defined benefit pension plans provide for benefits in excess of qualified plan limits. Non-unionlimits imposed by federal tax law (referred to as nonqualified plans).
Salaried employees hired after December 31, 2005 doare 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 plans. In June 2014, we amended certain of ourOur qualified and nonqualified defined benefit pension plans for non-union employees; comprising the majority of our benefit obligations; to freeze future retirement benefits. The calculation of retirementsalaried employees were fully frozen effective January 1, 2020, at which time such employees no longer earn additional benefits under the affected defined benefit pension plans is determined by a formula that takes into account the participants’ years of credited service and average compensation. The freeze will take effect in two stages. On January 1, 2016, the pay-based component of the formula used to determine retirement benefits was frozen so that future pay increases, annual incentive bonuses or other amounts earned for or related to periods after December 31, 2015 are not used to calculate retirement benefits. On January 1, 2020, the service-based component of the formula used to determine retirement benefits will also be frozen so that participants will no longer earn further credited service for any period after December 31, 2019. When the freeze is complete, the majority of our salaried employees will havewere transitioned to an enhanced defined contribution retirement savings plan.
On August 3, 2021, we purchased group annuity contracts to transfer $4.9 billion of gross defined benefit pension obligations and related plan assets from certain of our qualified defined benefit pension plans to an insurance company for approximately 18,000 U.S. retirees and beneficiaries. The group annuity contracts were purchased using assets from Lockheed Martin’s master retirement trust and no additional funding contribution was required by us. As parta result of this transaction, we were relieved of all responsibility for these pension obligations and the insurance company is now required to pay and administer the retirement benefits beginning on January 1, 2022. This transaction had no impact on the amount, timing, or form of the November 6, 2015 acquisitionmonthly retirement benefit payments to the affected retirees and beneficiaries. In connection with this transaction, we recognized a noncash pension settlement charge of Sikorsky,$1.7 billion ($1.3 billion, or $4.72 per share, after tax) for the affected plans in 2021, which represents the accelerated recognition of actuarial losses that were included in the AOCL account within stockholders’ equity.
On December 3, 2020, we establishedpurchased a newgroup annuity contract to transfer $1.4 billion of gross defined benefit pension obligations and related plan assets to an insurance company for approximately 13,500 U.S. retirees and beneficiaries. As a result of this transaction, we were relieved of all responsibility for these pension obligations and the insurance company is now required to pay and administer the retirement benefits. Although this transaction was treated as a settlement for accounting purposes, we were not required to recognize a settlement charge because the aggregate value of settlements for the affected plans in 2020 were less than each plan’s service and interest cost.
Also on December 3, 2020, we purchased a group annuity contract pursuant to which an insurance company will reimburse the affected qualified defined benefit pension plan for Sikorsky’s union workforce that provides benefits$793 million of gross defined benefit pension obligations for their prospective service with us. The Sikorsky salaried employees participate in a defined contribution plan. We did not assume any legacyapproximately 2,500 U.S. retirees and beneficiaries. Under the terms of the arrangement, the plan retains the obligation for paying the pension liability from UTC.
We have made contributions to trusts established to pay future benefits to eligiblethe covered retirees and dependents, including Voluntary Employees’ Beneficiary Association trustsbeneficiaries and 401(h) accounts, the assetsinsurance company will reimburse the plan as those benefits are paid. The group annuity contract provides us the option to transfer the defined benefit pension obligations to the insurance company at our discretion. Because the plan retains the obligation for paying the pension benefits to the covered retirees and beneficiaries this transaction was not treated as a settlement for accounting purpose and we were not required to recognize a settlement charge.
Qualified Defined Benefit Pension Plans and Retiree Medical and Life Insurance Plans
FAS Expense (Income)
The pretax FAS expense (income) related to pay expenses of certainour qualified defined benefit pension plans and retiree medical plans. We use December 31 as the measurement date. Benefit obligations as of the end of each year reflect assumptions in effect as of those dates. Net periodic benefit cost is based on assumptions in effect at the end of the respective preceding year.
The rules related to accounting for postretirement benefitand life insurance plans under GAAP require us to recognize on a plan-by-plan basis the funded status of our postretirement benefit plans as either an asset or a liability on our consolidated balance sheets. The funded status is measured as the difference between the fair value of the plan’s assets and the benefit obligation of the plan.
The net periodic benefit cost recognized each year included the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Qualified Defined Benefit Pension Plans | | | Retiree Medical and Life Insurance Plans |
| | 2021 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2019 |
Operating: | | | | | | | | | | | | | |
Service cost | | $ | 106 | | | $ | 101 | | | $ | 516 | | | | $ | 13 | | | $ | 13 | | | $ | 14 | |
Non-operating: | | | | | | | | | | | | | |
Interest cost | | 1,220 | | | 1,538 | | | 1,806 | | | | 53 | | | 70 | | | 97 | |
Expected return on plan assets | | (2,146) | | | (2,264) | | | (2,300) | | | | (141) | | | (127) | | | (110) | |
Recognized net actuarial losses (gains) | | 902 | | | 849 | | | 1,404 | | | | — | | | (4) | | | 2 | |
Amortization of net prior service (credits) costs | | (349) | | | (342) | | | (333) | | | | 37 | | | 39 | | | 42 | |
Settlement charge | | 1,665 | | | — | | | — | | | | — | | | — | | | — | |
Non-service FAS pension expense (income) | | 1,292 | | | (219) | | | 577 | | | | (51) | | | (22) | | | 31 | |
Net periodic benefit expense (income) | | $ | 1,398 | | | $ | (118) | | | $ | 1,093 | | | | $ | (38) | | | $ | (9) | | | $ | 45 | |
We record the service cost component of FAS expense for our qualified defined benefit plans and retiree medical and life insurance plans in the cost of sales accounts on our consolidated statement of earnings; 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 on our consolidated statement of earnings; and the non-service components of our FAS expense (income) for our retiree medical and life insurance plans as part of the other non-operating income (expense), net account on our consolidated statement of earnings.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Qualified Defined Benefit Pension Plans (a) | | | Retiree Medical and Life Insurance Plans |
| | 2017 |
| | 2016 |
| | 2015 |
| | | 2017 |
| | 2016 |
| | 2015 |
|
Service cost | | $ | 820 |
| | $ | 827 |
| | $ | 836 |
| | | $ | 20 |
| | $ | 24 |
| | $ | 21 |
|
Interest cost | | 1,809 |
| | 1,861 |
| | 1,791 |
| | | 102 |
| | 119 |
| | 110 |
|
Expected return on plan assets | | (2,408 | ) | | (2,666 | ) | | (2,734 | ) | | | (128 | ) | | (138 | ) | | (147 | ) |
Recognized net actuarial losses | | 1,506 |
| | 1,359 |
| | 1,599 |
| | | 19 |
| | 34 |
| | 43 |
|
Amortization of net prior service (credit) cost (b) | | (355 | ) | | (362 | ) | | (365 | ) | | | 15 |
| | 22 |
| | 4 |
|
Total net periodic benefit cost | | $ | 1,372 |
| | $ | 1,019 |
| | $ | 1,127 |
| | | $ | 28 |
| | $ | 61 |
| | $ | 31 |
|
Funded Status | |
| Total net periodic benefit cost associated with our qualified defined benefit plans represents pension expense calculated in accordance with GAAP (FAS pension expense). We are required to calculate pension expense in accordance with both GAAP and CAS rules, each of which results in a different calculated amount of pension expense. The CAS pension cost is recovered through the pricing of our products and services on U.S. Government contracts and, therefore, is recognized in net sales and cost of sales for products and services. We include the difference between FAS pension expense and CAS pension cost, referred to as the FAS/CAS pension adjustment, as a component of other unallocated, net on our consolidated statements of earnings. The FAS/CAS pension adjustment, which was $876 million in 2017, $902 million in 2016, and $400 million in 2015, effectively adjusts the amount of CAS pension cost in the business segment operating profit so that pension expense recorded on our consolidated statements of earnings is equal to FAS pension expense. FAS pension expense and CAS pension costs reflect the reclassification for discontinued operations presentation of benefits related to former IS&GS salaried employees. |
| |
(b)
| Net of the reclassification for discontinued operations presentation of pension benefits related to former IS&GS salaried employees ($14 million in 2016 and $24 million in 2015). |
The following table provides a reconciliation of benefit obligations, plan assets and unfundednet (unfunded) funded status related to our qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | Qualified Defined Benefit Pension Plans | | | Retiree Medical and Life Insurance Plans |
| | 2021 | | 2020 | | | 2021 | | 2020 |
Change in benefit obligation | | | | | | | | | |
Beginning balance (a) | | $ | 51,352 | | | $ | 48,674 | | | | $ | 2,271 | | | $ | 2,226 | |
Service cost | | 106 | | | 101 | | | | 13 | | | 13 | |
Interest cost | | 1,220 | | | 1,538 | | | | 53 | | | 70 | |
Actuarial (gains) losses (b) | | (2,045) | | | 4,610 | | | | (352) | | | 117 | |
Settlements (c) | | (4,885) | | | (1,392) | | | | — | | | — | |
Plan amendments and curtailments | | 2 | | | 9 | | | | — | | | (8) | |
Benefits paid | | (2,303) | | | (2,188) | | | | (217) | | | (220) | |
Medicare Part D subsidy | | — | | | — | | | | 4 | | | 3 | |
| | | | | | | | | |
Participants’ contributions | | — | | | — | | | | 67 | | | 70 | |
Ending balance (a) | | $ | 43,447 | | | $ | 51,352 | | | | $ | 1,839 | | | $ | 2,271 | |
Change in plan assets | | | | | | | | | |
Beginning balance at fair value | | $ | 38,481 | | | $ | 35,442 | | | | $ | 2,085 | | | $ | 1,889 | |
Actual return on plan assets (d) | | 3,899 | | | 5,594 | | | | 224 | | | 298 | |
Settlements (c) | | (4,885) | | | (1,392) | | | | — | | | — | |
Benefits paid | | (2,303) | | | (2,188) | | | | (217) | | | (220) | |
Company contributions | | — | | | 1,025 | | | | 6 | | | 45 | |
Medicare Part D subsidy | | — | | | — | | | | 4 | | | 3 | |
Participants’ contributions | | — | | | — | | | | 67 | | | 70 | |
Ending balance at fair value | | $ | 35,192 | | | $ | 38,481 | | | | $ | 2,169 | | | $ | 2,085 | |
Unfunded status of the plans | | $ | (8,255) | | | $ | (12,871) | | | | $ | 330 | | | $ | (186) | |
(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 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 2021 and 2020 represent the transfer of gross defined benefit pension obligations and related plan assets to insurance companies pursuant to the group annuity contracts purchased on August 3, 2021 and December 3, 2020, respectively, 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 10.5% in 2021 and 16.5% in 2020.
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. The funded status is measured as the difference between the fair value of each plan’s assets and the benefit obligation. 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. For certain of our qualified defined benefit pension plans and retiree medical and life insurance plans the plan assets may exceed the benefit obligation, 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, which we recognize the net amount as a liability on our consolidated balance sheet.
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| | | | | | | | | | | | | | | | | |
| | Qualified Defined Benefit Pension Plans | | | Retiree Medical and Life Insurance Plans |
| | 2017 |
| | 2016 |
| | | 2017 |
| | 2016 |
|
Change in benefit obligation | | | | | | | | | |
Beginning balance | | $ | 45,064 |
| | $ | 43,702 |
| | | $ | 2,649 |
| | $ | 2,883 |
|
Service cost | | 820 |
| | 827 |
| | | 20 |
| | 24 |
|
Interest cost | | 1,809 |
| | 1,861 |
| | | 102 |
| | 119 |
|
Benefits paid | | (2,310 | ) | | (2,172 | ) | | | (232 | ) | | (222 | ) |
Actuarial losses (gains) | | 3,377 |
| | 1,402 |
| | | 23 |
| | (135 | ) |
Changes in longevity assumptions (a) | | (352 | ) | | (687 | ) | | | (24 | ) | | (53 | ) |
Plan amendments and acquisitions (b) | | 278 |
| | 110 |
| | | — |
| | (32 | ) |
Service cost related to discontinued operations | | — |
| | 21 |
| | | — |
| | — |
|
Medicare Part D subsidy | | — |
| | — |
| | | — |
| | 4 |
|
Participants’ contributions | | — |
| | — |
| | | 64 |
| | 61 |
|
Ending balance | | $ | 48,686 |
| | $ | 45,064 |
| | | $ | 2,602 |
| | $ | 2,649 |
|
Change in plan assets | | | | | | | | | |
Beginning balance at fair value | | $ | 31,417 |
| | $ | 32,096 |
| | | $ | 1,787 |
| | $ | 1,813 |
|
Actual return on plan assets | | 3,942 |
| | 1,470 |
| | | 224 |
| | 95 |
|
Benefits paid | | (2,310 | ) | | (2,172 | ) | | | (232 | ) | | (222 | ) |
Company contributions | | 46 |
| | 23 |
| | | 40 |
| | 36 |
|
Medicare Part D subsidy | | — |
| | — |
| | | — |
| | 4 |
|
Participants’ contributions | | — |
| | — |
| | | 64 |
| | 61 |
|
Ending balance at fair value | | $ | 33,095 |
| | $ | 31,417 |
| | | $ | 1,883 |
| | $ | 1,787 |
|
Unfunded status of the plans | | $ | (15,591 | ) | | $ | (13,647 | ) | | | $ | (719 | ) | | $ | (862 | ) |
| |
(a)
| As published by the Society of Actuaries. |
| |
(b)
| Includes special termination benefits of $27 million for qualified pension, and $9 million for retiree medical, recognized in 2016 related to former IS&GS salaried employees. |
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Qualified Defined Benefit Pension Plans | | | Retiree Medical and Life Insurance Plans |
| | 2021 | | 2020 | | | 2021 | | 2020 |
Other noncurrent assets | | $ | 64 | | | $ | 3 | | | | $ | 330 | | | $ | — | |
Accrued pension liabilities | | (8,319) | | | (12,874) | | | | — | | | — | |
Other noncurrent liabilities | | — | | | — | | | | — | | | (186) | |
Net (unfunded) funded status of the plans | | $ | (8,255) | | | $ | (12,871) | | | | $ | 330 | | | $ | (186) | |
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.
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): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Qualified Defined Benefit Pension Plans | | | Retiree Medical and Life Insurance Plans |
| | 2021 | | 2020 | | | 2021 | | 2020 |
Accumulated other comprehensive loss (pre-tax) related to: | | | | | | | | | |
Net actuarial losses | | $ | 14,675 | | | $ | 21,040 | | | | $ | (554) | | | $ | (119) | |
Prior service (credit) cost | | (884) | | | (1,235) | | | | 36 | | | 73 | |
Total | | $ | 13,791 | | | $ | 19,805 | | | | $ | (518) | | | $ | (46) | |
Estimated tax | | (2,947) | | | (4,230) | | | | 110 | | | 9 | |
Net amount recognized in accumulated other comprehensive loss | | $ | 10,844 | | | $ | 15,575 | | | | $ | (408) | | | $ | (37) | |
|
| | | | | | | | | | | | | | | | | |
| | Qualified Defined Benefit Pension Plans | | | Retiree Medical and Life Insurance Plans |
| | 2017 |
| | 2016 |
| | | 2017 |
| | 2016 |
|
Prepaid pension asset | | $ | 112 |
| | $ | 208 |
| | | $ | — |
| | $ | — |
|
Accrued postretirement benefit liabilities | | (15,703 | ) | | (13,855 | ) | | | (719 | ) | | (862 | ) |
Accumulated other comprehensive loss (pre-tax) related to: | | | | | | | | | |
Net actuarial losses | | 20,169 |
| | 20,184 |
| | | 331 |
| | 447 |
|
Prior service (credit) cost (a) | | (2,263 | ) | | (2,896 | ) | | | 81 |
| | 96 |
|
Total (b) | | $ | 17,906 |
| | $ | 17,288 |
| | | $ | 412 |
| | $ | 543 |
|
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): | |
(a) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incurred but Not Yet Recognized in FAS Expense | | | Recognition of Previously Deferred Amounts | | | 2021 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2019 | | | gains (losses) | | | (gains) losses | Actuarial gains and losses | | | | | | | | | | | | Qualified defined benefit pension plans | | $ | 2,987 | | | $ | (1,005) | | | $ | (2,283) | | | | $ | 2,019 | | | $ | 668 | | | $ | 1,104 | | Retiree medical and life insurance plans | | 342 | | | 43 | | | 238 | | | | — | | | (3) | | | 2 | | Other plans | | 76 | | | (104) | | | (133) | | | | 24 | | | 24 | | | 42 | | | | 3,405 | | | (1,066) | | | (2,178) | | | | 2,043 | | | 689 | | | 1,148 | | | | credit (cost) | | | (credit) cost | Net prior service credit and cost | | | | | | | | | | | | Qualified defined benefit pension plans | | (1) | | | (7) | | | (8) | | | | (274) | | | (269) | | | (263) | | Retiree medical and life insurance plans | | — | | | 6 | | | 4 | | | | 29 | | | 30 | | | 33 | | Other plans | | — | | | — | | | — | | | | (11) | | | (10) | | | (10) | | | | (1) | | | (1) | | | (4) | | | | (256) | | | (249) | | | (240) | | | | $ | 3,404 | | | $ | (1,067) | | | $ | (2,182) | | | | $ | 1,787 | | | $ | 440 | | | $ | 908 | |
| During 2016 pre-tax amounts of $210 million for qualified pension prior service credits and $9 million for retiree medical prior service costs were recognized from the divestiture of our IS&GS business (combined $134 million, net of tax). |
| |
(b)
| Accumulated other comprehensive loss related to postretirement benefit plans, after tax, of $12.6 billion and $12.0 billion at December 31, 2017 and 2016 (see “Note 12 – Stockholders’ Equity”) includes $17.9 billion ($11.8 billion, net of tax) and $17.3 billion ($11.2 billion, net of tax) for qualified defined benefit pension plans, $412 million ($252 million, net of tax) and $543 million ($351 million, net of tax) for retiree medical and life insurance plans and $705 million ($479 million, net of tax) and $677 million ($448 million, net of tax) for other plans. |
The accumulated benefit obligation (ABO) for all qualified defined benefit pension plans was $48.5$43.4 billion and $44.9$51.3 billion at December 31, 20172021 and 2016, of which $48.5 billion and $44.8 billion related to plans where the ABO was in excess of plan assets.2020. The ABO represents benefits accrued without assuming future compensation increases to plan participants. Certain key information relatedparticipants and is approximately equal to our qualified definedprojected benefit obligation. Plans where ABO was less than plan assets represent prepaid pension plans as of December 31, 2017 and 2016 is as follows (in millions):
|
| | | | | | | | |
| | 2017 |
| | 2016 |
|
Plans where ABO was in excess of plan assets | | | | |
Projected benefit obligation | | $ | 48,628 |
| | $ | 44,946 |
|
Less: fair value of plan assets | | 32,925 |
| | 31,091 |
|
Unfunded status of plans (a) | | (15,703 | ) | | (13,855 | ) |
Plans where ABO was less than plan assets | | | | |
Projected benefit obligation | | 58 |
| | 118 |
|
Less: fair value of plan assets | | 170 |
| | 326 |
|
Funded status of plans (b) | | $ | 112 |
| | $ | 208 |
|
| |
(a)
| Represents accrued pension liabilities, which are included on our consolidated balance sheets. |
| |
(b)
| Represents prepaid pension assets, which are included on our consolidated balance sheets in other noncurrent assets. |
We also sponsor nonqualified defined benefit plans to provide benefitsassets, which are included on our consolidated balance sheets in other noncurrent assets. Plans where ABO was in excess of qualified plan limits. The aggregateassets represent accrued pension liabilities, for these plans atwhich are included on our consolidated balance sheets.
Assumptions Used to Determine Benefit Obligations and FAS Expense (Income)
We measure the fair value of each plan’s assets and benefit obligation on December 31, 2017 and 2016 were $1.3 billion and $1.2 billion, which also represent the plans’ unfunded status. We have set aside certain assets totaling $530 million and $460 millionconsistent with our fiscal year end. Benefit obligations as of December 31, 2017 and 2016the end of each year reflect assumptions in a separate trust which we expect to be used to pay obligations under our nonqualified defined benefit plans. In accordance with GAAP, those assets may not be used to offset the amount of the benefit obligation similar to the postretirement benefit plans in the table above. The unrecognized net actuarial losses at December 31, 2017 and 2016 were $646 million and $642 million. The unrecognized prior service credit at December 31, 2017 and 2016 were $61 million and $74 million. The expense associated with these plans totaled $126 million in 2017, $125 million in 2016 and $117 million in 2015. We also sponsor a small number of other postemployment plans and foreign benefit plans. The aggregate liability for the other postemployment plans was $60 million and $63 millioneffect as of December 31, 2017 and 2016. The expense for the other postemployment plans, as well as the liability and expense associated with the foreign benefit plans, was not material to our results of operations, financial position or cash flows. The actuarialthose dates. Expense is based on assumptions used to determine the benefit obligations and expense associated with our nonqualified defined benefit plans and postemployment plans are similar to those assumptions used to determine the benefit obligations and expense related to our qualified defined benefit pension plans and retiree medical and life insurance plans as described below.
The following table provides the amounts recognized in other comprehensive income (loss) related to postretirement benefit plans, net of tax, for the years ended December 31, 2017, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Incurred but Not Yet Recognized in Net Periodic Benefit Cost | | | Recognition of Previously Deferred Amounts |
| | 2017 |
| | 2016 |
| | 2015 |
| | | 2017 |
| | 2016 |
| | 2015 |
|
| | Gains (losses) | | | (Gains) losses |
Actuarial gains and losses | | | | | | | | | | | |
Qualified defined benefit pension plans | | $ | (1,172 | ) | | $ | (1,236 | ) | | $ | (291 | ) | | | $ | 974 |
| | $ | 879 |
| | $ | 1,034 |
|
Retiree medical and life insurance plans | | 77 |
| | 94 |
| | 46 |
| | | 12 |
| | 22 |
| | 28 |
|
Other plans | | (66 | ) | | (62 | ) | | 21 |
| | | 44 |
| | 37 |
| | 47 |
|
| | (1,161 | ) | | (1,204 | ) | | (224 | ) | | | 1,030 |
| | 938 |
| | 1,109 |
|
| | Credit (cost) | | | (Credit) cost (a) |
Net prior service credit and cost | | | | | | | | | | | |
Qualified defined benefit pension plans | | (219 | ) | | (54 | ) | | (18 | ) | | | (229 | ) | | (235 | ) | | (235 | ) |
Retiree medical and life insurance plans | | — |
| | 27 |
| | (102 | ) | | | 10 |
| | 14 |
| | 2 |
|
Other plans | | — |
| | (1 | ) | | (7 | ) | | | (9 | ) | | (9 | ) | | (10 | ) |
| | (219 | ) | | (28 | ) | | (127 | ) | | | (228 | ) | | (230 | ) | | (243 | ) |
| | $ | (1,380 | ) | | $ | (1,232 | ) | | $ | (351 | ) | | | $ | 802 |
| | $ | 708 |
| | $ | 866 |
|
| |
(a)
| Reflects the reclassification for discontinued operations presentation of benefits related to former IS&GS salaried employees ($9 million in 2016 and $16 million in 2015). In addition, we recognized $134 million in 2016 of prior service credits from the divestiture of our IS&GS business, which were reclassified as discontinued operations. |
We expect that approximately $1.5 billion, or about $1.2 billion net of tax, of actuarial losses and net prior service credit related to postretirement benefit plans included in accumulated other comprehensive losseffect at the end of 2017 to be recognized in net periodic benefit cost during 2018. Of this amount, $1.4 billion, or $1.1 billion net of tax, relates to our qualified defined benefit plans and is included in our expected 2018 pension expense of $1.4 billion.
Actuarial Assumptions
the preceding year. The actuarial assumptions used to determine the benefit obligations at December 31 of each year and to determine the net periodic benefit costFAS expense for each subsequent year were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Qualified Defined Benefit Pension Plans | | | Retiree Medical and Life Insurance Plans |
| | 2017 |
| | 2016 |
| | 2015 |
| | | 2017 |
| | 2016 |
| | 2015 |
|
Weighted average discount rate | | 3.625 | % | | 4.125 | % | | 4.375 | % | | | 3.625 | % | | 4.000 | % | | 4.250 | % |
Expected long-term rate of return on assets | | 7.50 | % | | 7.50 | % | | 8.00 | % | | | 7.50 | % | | 7.50 | % | | 8.00 | % |
Rate of increase in future compensation levels (for applicable bargained pension plans) | | 4.50 | % | | 4.50 | % | | 4.50 | % | | | | | | | |
Health care trend rate assumed for next year | | | | | | | | | 8.50 | % | | 8.75 | % | | 9.00 | % |
Ultimate health care trend rate | | | | | | | | | 5.00 | % | | 5.00 | % | | 5.00 | % |
Year that the ultimate health care trend rate is reached | | | | | | | | | 2032 |
| | 2032 |
| | 2032 |
|
The decrease in the discount rate from December 31, 2016 to December 31, 2017 resulted in an increase in the projected benefit obligations of our qualified defined benefit pension plans of approximately $2.9 billion at December 31, 2017. The decrease in the discount rate from December 31, 2015 to December 31, 2016 resulted in an increase in the projected benefit obligations of our qualified defined benefit pension plans of approximately $1.4 billion at December 31, 2016. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Qualified Defined Benefit Pension Plans | | | Retiree Medical and Life Insurance Plans |
| | 2021 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2019 |
Weighted average discount rate | | 2.875 | % | | 2.500 | % | | 3.250 | % | | | 2.750 | % | | 2.375 | % | | 3.250 | % |
Expected long-term rate of return on assets | | 6.50 | % | | 7.00 | % | | 7.00 | % | | | 6.50 | % | | 7.00 | % | | 7.00 | % |
Health care trend rate assumed for next year | | | | | | | | | 7.50 | % | | 7.75 | % | | 8.00 | % |
Ultimate health care trend rate | | | | | | | | | 4.50 | % | | 4.50 | % | | 4.50 | % |
Year ultimate health care trend rate is reached | | | | | | | | | 2034 | | 2034 | | 2034 |
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 return for our qualified defined benefit plans during 2021 of $3.9 billion based on an actual rate of approximately 10.5% improved plan assets more than the $2.1 billion expected return based on our long-term rate of return assumption. In connection with the August 3, 2021 plan remeasurements, we lowered our expected long-term rate of return on plan assets from 7.00% to 6.50%, which reflects recent changes in our asset allocation targets applicable to all qualified defined benefit pension and retiree medical and life insurance plans as of the December 31, 2021 remeasurement.
Plan Assets
Investment policies and strategies –Our wholly-owned subsidiary, Lockheed Martin Investment Management Company (LMIMCo), our wholly-owned subsidiary, has the fiduciary responsibility for making investment decisions related to the assets of our postretirement benefit plans. LMIMCo’s investment objectives for the assets of these plans are (1) to minimize the net present value of expected funding contributions; (2) to ensure there is a high probability that each plan meets or exceeds our actuarial long-term rate of return assumptions; and (3) to diversify assets to minimize the risk of large losses. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives. Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within prudent risk parameters. Risk management practices include the use of external investment managers; the maintenance of a portfolio diversified by asset class, investment approach and security holdings; and the maintenance of sufficient liquidity to meet benefit obligations as they come due.
LMIMCo’s investment policies require that asset allocations of postretirement benefit plans be maintained within the following approximate ranges:
|
| | | | |
Asset Class | Asset Allocation Ranges
|
Cash and cash equivalents | 0-20% |
Equity | 15-65% |
Fixed income | 10-60% |
Alternative investments: | |
Private equity funds | 0-15% |
Real estate funds | 0-10% |
Hedge funds | 0-20% |
Commodities | 0-15% |
96
Fair value measurements – The rules related to accounting for postretirement benefit plans under GAAP require certain fair value disclosures related to postretirement benefit plan assets, even though those assets are not separately presented on our consolidated balance sheets.
The following table presents the fair value of the assets (in millions) 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 has three levels basedwe are required to disclose even though these assets are not separately recorded on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets, Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs.our consolidated balance sheet. Certain other investments are measured at their Net Asset Value (NAV) per share andbecause such investments do not have readily determineddeterminable fair values and, therefore, are thus not subjectrequired to levelingbe categorized in the fair value hierarchy. TheAssets measured at NAV ishave been included in the total value of the fund divided by the number of the fund’s shares outstanding. We recognize transfers between levelstable below to permit reconciliation of the fair value hierarchy to amounts presented in the funded status table above. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | December 31, 2020 |
| Total | | Level 1 | | Level 2 | | Level 3 | | | Total | | Level 1 | | Level 2 | | Level 3 |
Investments measured at fair value | | | | | | | | | | | | | | | | |
Cash and cash equivalents (a) | $ | 991 | | | $ | 991 | | | $ | — | | | $ | — | | | | $ | 1,109 | | | $ | 1,109 | | | $ | — | | | $ | — | |
Equity (a): | | | | | | | | | | | | | | | | |
U.S. equity securities | 6,479 | | | 6,444 | | | 5 | | | 30 | | | | 7,535 | | | 7,467 | | | 8 | | | 60 | |
International equity securities | 4,882 | | | 4,880 | | | — | | | 2 | | | | 6,844 | | | 6,836 | | | — | | | 8 | |
Commingled equity funds | 869 | | | 36 | | | 833 | | | — | | | | 1,671 | | | 442 | | | 1,228 | | | 1 | |
Fixed income (a): | | | | | | | | | | | | | | | | |
Corporate debt securities | 6,397 | | | — | | | 6,295 | | | 102 | | | | 5,732 | | | — | | | 5,730 | | | 2 | |
U.S. Government securities | 2,864 | | | — | | | 2,864 | | | — | | | | 2,506 | | | — | | | 2,506 | | | — | |
U.S. Government-sponsored enterprise securities | 228 | | | — | | | 228 | | | — | | | | 230 | | | — | | | 230 | | | — | |
Other fixed income investments (b) | 4,736 | | | 49 | | | 3,071 | | | 1,616 | | | | 5,873 | | | 37 | | | 4,063 | | | 1,773 | |
Total | $ | 27,446 | | | $ | 12,400 | | | $ | 13,296 | | | $ | 1,750 | | | | $ | 31,500 | | | $ | 15,891 | | | $ | 13,765 | | | $ | 1,844 | |
Investments measured at NAV | | | | | | | | | | | | | | | | |
Commingled equity funds | 130 | | | | | | | | | | 92 | | | | | | | |
Other fixed income investments | 701 | | | | | | | | | | 541 | | | | | | | |
Private equity funds | 5,386 | | | | | | | | | | 4,672 | | | | | | | |
Real estate funds | 3,059 | | | | | | | | | | 2,650 | | | | | | | |
Hedge funds | 556 | | | | | | | | | | 1,111 | | | | | | | |
Total investments measured at NAV | 9,832 | | | | | | | | | | 9,066 | | | | | | | |
Receivables, net | 83 | | | | | | | | | | — | | | | | | | |
Total | $ | 37,361 | | | | | | | | | | $ | 40,566 | | | | | | | |
(a)Cash and cash equivalents, equity securities and fixed income securities included derivative assets and liabilities whose fair values were not material as of December 31, 2021 and 2020. LMIMCo’s investment policies restrict the dateuse of derivatives to either establish long or short exposures for purposes consistent with applicable investment mandate guidelines or to hedge risks to the change in circumstances that causesextent of a plan’s current exposure to such risks. Most derivative transactions are settled on a daily basis.
(b)Level 3 investments include $1.5 billion at December 31, 2021 and $1.7 billion at December 31, 2020 related to the transfer. We did not have any transfers of assets between Level 1 and Level 2 of the fair value hierarchy during 2017.buy-in contracts discussed above.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | December 31, 2016 |
| Total |
| | Level 1 |
| | Level 2 |
| | Level 3 |
| | | Total |
| | Level 1 |
| | Level 2 |
| | Level 3 |
|
Investments measured at fair value | | | | | | | | | | | | | | | | |
Cash and cash equivalents (a) | $ | 1,419 |
| | $ | 1,419 |
| | $ | — |
| | $ | — |
| | | $ | 2,301 |
| | $ | 2,301 |
| | $ | — |
| | $ | — |
|
Equity (a): |
| | | | | | | | | | | | | | | |
U.S. equity securities | 4,922 |
| | 4,905 |
| | 14 |
| | 3 |
| | | 4,166 |
| | 4,139 |
| | 23 |
| | 4 |
|
International equity securities | 5,370 |
| | 5,355 |
| | 13 |
| | 2 |
| | | 3,971 |
| | 3,927 |
| | 40 |
| | 4 |
|
Commingled equity funds | 4,453 |
| | 1,493 |
| | 2,960 |
| | — |
| | | 2,332 |
| | 788 |
| | 1,544 |
| | — |
|
Fixed income (a): |
| | | | | | | | | | | | | | | |
Corporate debt securities | 4,910 |
| | — |
| | 4,905 |
| | 5 |
| | | 4,333 |
| | — |
| | 4,316 |
| | 17 |
|
U.S. Government securities | 3,775 |
| | — |
| | 3,775 |
| | — |
| | | 6,811 |
| | — |
| | 6,811 |
| | — |
|
U.S. Government-sponsored enterprise securities | 817 |
| | — |
| | 817 |
| | — |
| | | 919 |
| | — |
| | 919 |
| | — |
|
Other fixed income investments | 2,412 |
| | — |
| | 2,401 |
| | 11 |
| | | 2,215 |
| | — |
| | 2,214 |
| | 1 |
|
Alternative investments: |
| | | | | | | | | | | | | | | |
Hedge funds | 7 |
| | — |
| | 7 |
| | — |
| | | 33 |
| | — |
| | 33 |
| | — |
|
Commodities (a) | 2 |
| | 1 |
| | 1 |
| | — |
| | | 523 |
| | 525 |
| | (2 | ) | | — |
|
Total | $ | 28,087 |
| | $ | 13,173 |
| | $ | 14,893 |
| | $ | 21 |
| | | $ | 27,604 |
| | $ | 11,680 |
| | $ | 15,898 |
| | $ | 26 |
|
Investments measured at NAV (b) | | | | | | | | | | | | | | | | |
Commingled equity funds | 99 |
| | | | | | | | | 60 |
| | | | | | |
Other fixed income investments | 68 |
| | | | | | | | | — |
| | | | | | |
Private equity funds | 4,334 |
| | | | | | | | | 3,614 |
| | | | | | |
Real estate funds | 1,611 |
| | | | | | | | | 1,411 |
| | | | | | |
Hedge funds | 711 |
| | | | | | | | | 462 |
| | | | | | |
Total investments measured at NAV | 6,823 |
| | | | | | | | | 5,547 |
| | | | | | |
Receivables, net | 68 |
| | | | | | | | | 53 |
| | | | | | |
Total | $ | 34,978 |
| | | | | | | | | $ | 33,204 |
| | | | | | |
| |
(a)
| Cash and cash equivalents, equity securities, fixed income securities and commodities included derivative assets and liabilities whose fair values were not material as of December 31, 2017 and 2016. LMIMCo’s investment policies restrict the use of derivatives to either establish long exposures for purposes of expediency or capital efficiency 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)
| Certain investments that are valued using the net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy and are included in the table to permit reconciliation of the fair value hierarchy to the aggregate postretirement benefit plan assets. |
As of December 31, 20172021 and 2016,2020, the assets associated with our foreign defined benefit pension plans were not material and have not been included in the table above. The changes during 2017 and 2016Changes in the fair value of plan assets categorized as Level 3 during 2021 and 2020 were insignificant.not significant.
Valuation techniques – Cash equivalents are mostly comprised of short-term money-market instruments and are valued at cost, which approximates fair value.
U.S. equity securities and international equity securities 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. For U.S. equity securities and international equity securities not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment manager. 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.
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. For commingled equity funds not traded on an active exchange, or if
the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment manager. These securities are categorized as Level 2 if the custodian obtains corroborated quotes from a pricing vendor.
Fixed income investments categorized as Level 1 are publicly exchange-traded. Fixed income investments categorized as Level 2 are valued by the trustee using pricing models that use verifiable observable market data (e.g., interest rates and yield curves observable at commonly quoted intervals and credit spreads), bids provided by brokers or dealers or quoted prices of securities with similar characteristics. Fixed income investments are categorized atas Level 3 when valuations using observable inputs are unavailable. The trustee typically obtains pricing based on indicative quotes or bid evaluations from vendors, brokers or the investment manager.
Commodities are traded on an active commodity exchange and In addition, certain other fixed income investments categorized as Level 3 are valued at their closing prices onusing a discounted cash flow approach. Significant inputs include projected annuity payments and the last trading day of the year.discount rate applied to those payments.
Certain commingled equity and fixed income funds, consisting of underlying equity mutual funds,and fixed income securities, respectively, are valued using the NAV.NAV practical expedient. The NAV valuations are based on the underlying investments and typically redeemable within 90 days. The NAV is the total value of the fund divided by the number of the fund’s shares outstanding.
Private equity funds consist of partnership and co-investment funds. The NAV is based on valuation models of the underlying securities, which includes unobservable inputs that cannot be corroborated using verifiable observable market data. These funds typically have redemption periods between eight and 12 years.
Real estate funds consist of partnerships, most of which are closed-end funds, 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 direct hedge funds for which the NAV is generally based on the valuation of the underlying investments. Redemptions in hedge funds are based on the specific terms of each fund, and generally range from a minimum of one month to several months.
Contributions and Expected Benefit Payments
The required funding of our qualified defined benefit pension plans is determined in accordance with ERISA, as amended, by the PPA, and in a manner consistent with CAS and Internal Revenue Code rules. There wereWe made no material contributions to our qualified defined benefit pension plans during 2017. We willin 2021 and do not plan to make contributions of $5.0 billion to our qualified defined benefit pension plans in 2018, including required and discretionary contributions. As a result of these contributions, we do not expect any material qualified defined benefit cash funding will be required until 2021. We plan to fund these contributions using a mix of cash on hand and commercial paper. While we do not anticipate a need to do so, our capital structure and resources would allow us to issue new debt if circumstances change.2022.
The following table presents estimated future benefit payments which reflect expected future employee service, as of December 31, 20172021 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 – 2031 |
Qualified defined benefit pension plans | | $ | 1,980 | | | $ | 2,080 | | | $ | 2,160 | | | $ | 2,230 | | | $ | 2,290 | | | $ | 11,700 | |
Retiree medical and life insurance plans | | 140 | | | 140 | | | 140 | | | 130 | | | 130 | | | 570 | |
| | | | | | | | | | | | |
We maintain various trusts to fund the obligations of our qualified defined benefit pension plans and retiree medical and life insurance plans. We expect the estimated future benefit payments will be paid using assets in the trusts established for the plans.
Nonqualified Defined Benefit Pension Plans and Other Postemployment Plans
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 $1.3 billion and $1.4 billion as of December 31, 2021 and 2020, most of which was recorded in the other noncurrent liabilities account on our consolidated balance sheet. We have set aside certain assets totaling $872 million and $877 million as of December 31, 2021 and 2020 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. We record the gross assets on our consolidated balance sheet, rather than netting such assets with the benefit obligation for our nonqualified defined benefit pension plans, because the assets held are diversified and legally the assets may be used to settle other obligations or claims (although that is not our intent). Actuarial losses and unrecognized prior service credits related to our nonqualified defined benefit pension plans that were recorded in accumulated other comprehensive loss, pretax, totaled $625 million and $697 million at December 31, 2021 and 2020. We recognized pretax pension expense of $56 million in 2021, $59 million in 2020 and $108 million in 2019 related to our nonqualified defined benefit pension plans. The assumptions used to determine the benefit obligations and FAS expense for our nonqualified defined benefit pension plans are similar to the assumptions used to determine the benefit obligations and FAS expense for our qualified defined benefit pension plans described above.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 |
| | 2019 |
| | 2020 |
| | 2021 |
| | 2022 |
| | 2023 – 2027 |
|
Qualified defined benefit pension plans | | $ | 2,450 |
| | $ | 2,480 |
| | $ | 2,560 |
| | $ | 2,630 |
| | $ | 2,700 |
| | $ | 14,200 |
|
Retiree medical and life insurance plans | | 180 |
| | 180 |
| | 180 |
| | 180 |
| | 180 |
| | 820 |
|
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.Defined Contribution Retirement Savings Plans
We maintain a number of defined contribution retirement savings plans, most with 401(k) features, that cover substantially all of our employees. Under the provisions of our 401(k)these plans, employees can make contributions on a before-tax and after-tax basis to investment funds to save for retirement. For most plans, we match most employees’ eligiblemake employer contributions at rates specifiedto the employee accounts that comprise of a company non-elective contribution and a matching contribution. Company contributions are automatically invested in the plan documents. Our contributions were $613 millionan Employee Stock Ownership Plan (ESOP) fund, which primarily invests in 2017, $617 million in 2016 and $393 million in 2015, the majorityshares of which were funded using 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 2021, $984 million in 2020 and $741 million in 2019. Our defined contribution retirement savings plans held approximately 35.528.9 million and 36.930.5 million shares of our common stock as of December 31, 20172021 and 2016.2020.
Note 1213 – Stockholders’ Equity
At December 31, 20172021 and 2016,2020, our authorized capital was composed of 1.5 billion shares of common stock and 50 million shares of series preferred stock. Of the 285272 million and 280 million shares of common stock issued and outstanding as of December 31, 2017, 284 million shares were considered outstanding for consolidated balance sheet presentation purposes; the remaining shares were held in a separate trust. Of the 290 million shares of common stock issued2021 and outstanding as of December 31, 2016, 2892020, 271 million and 279 million shares were considered outstanding for consolidated balance sheet presentation purposes; the remaining shares were held in a separate trust. No shares of preferred stock were issued and outstanding at December 31, 20172021 or 2016.2020.
Repurchases of Common Stock
During 2017,2021, we repurchased 7.19.4 million shares of our common stock for $4.1 billion, which included 9.2 million shares of our common stock repurchased for $4.0 billion under accelerated share repurchase (ASR) agreements. The 9.2 million shares of our common stock repurchased under ASR agreements during 2021 included the ASR agreement we entered into in October 2021 to repurchase $2.0 billion. During 2016 and 2015,billion of our common stock through January 21, 2022. Under the terms of the October 2021 ASR agreement, we paid $2.1$2.0 billion and $3.1received an initial delivery of 3.6 million shares of our common stock. Subsequent to our fourth quarter 2021, upon final settlement of the ASR agreement on January 21, 2022, we received an additional 2.2 million shares of our common stock for no additional consideration. During 2020, we paid $1.1 billion to repurchase 8.93.0 million and 15.2shares of our common stock, including 1.4 million shares of our common stock repurchased for $500 million under an ASR agreement. During 2019, we paid $1.2 billion to repurchase 3.5 million shares of our common stock.
On September 28, 2017, our Board of Directors approved a $2.0 billion increase to our share repurchase program. Inclusive of this increase, theThe total remaining authorization for future common share repurchases under our share repurchase program was $3.5$3.9 billion as of December 31, 2017.2021, including a $5.0 billion increase to the program authorized by our Board of Directors on September 23, 2021. 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. If additional paid-in capital is reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings. Due to the volume of repurchases made under our share repurchase program, additional paid-in capital was reduced to zero, with the remainder of the excess purchase price over par value of $1.6 billion and $1.7 billion recorded as a reduction of retained earnings in 2017 and 2016.
Dividends
We paid dividends totaling $2.2$2.9 billion ($7.4610.60 per share) in 2017, $2.02021, $2.8 billion ($6.779.80 per share) in 20162020 and $1.9$2.6 billion ($6.159.00 per share) in 2015.2019. We paid quarterly dividends of $1.82$2.60 per share during each of the first three quarters of 20172021 and $2.00$2.80 per share during the fourth quarter of 2017; $1.652021; $2.40 per share during each of the first three quarters of 20162020 and $1.82$2.60 per share during the fourth quarter of 2016;2020; and $1.50$2.20 per share during each of the first three quarters of 20152019 and $1.65$2.40 per share during the fourth quarter of 2015.2019.
Accumulated Other Comprehensive Loss
Changes in the balance of AOCL, net of income taxes, consisted of the following (in millions): | | | | | | | | | | | | | | | | | | | | |
| | Postretirement Benefit Plans (a) | | Other, net | | AOCL |
Balance at December 31, 2018 | | $ | (14,254) | | | $ | (67) | | | $ | (14,321) | |
Other comprehensive (loss) income before reclassifications | | (2,182) | | | 18 | | | (2,164) | |
Amounts reclassified from AOCL | | | | | | |
Recognition of net actuarial losses | | 1,148 | | | — | | | 1,148 | |
Amortization of net prior service credits | | (240) | | | — | | | (240) | |
Other | | — | | | 23 | | | 23 | |
Total reclassified from AOCL | | 908 | | | 23 | | | 931 | |
Total other comprehensive (loss) income | | (1,274) | | | 41 | | | (1,233) | |
| | | | | | |
Balance at December 31, 2019 | | (15,528) | | | (26) | | | (15,554) | |
Other comprehensive (loss) income before reclassifications | | (1,067) | | | 56 | | | (1,011) | |
Amounts reclassified from AOCL | | | | | | |
Recognition of net actuarial losses | | 689 | | | — | | | 689 | |
Amortization of net prior service credits | | (249) | | | — | | | (249) | |
Other | | — | | | 4 | | | 4 | |
Total reclassified from AOCL | | 440 | | | 4 | | | 444 | |
Total other comprehensive (loss) income | | (627) | | | 60 | | | (567) | |
Balance at December 31, 2020 | | (16,155) | | | 34 | | | (16,121) | |
Other comprehensive income 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 | |
Amortization of net prior service credits | | (256) | | | — | | | (256) | |
Other | | — | | | 9 | | | 9 | |
Total reclassified from AOCL | | 1,787 | | | 9 | | | 1,796 | |
Total other comprehensive income (loss) | | 5,191 | | | (76) | | | 5,115 | |
Balance at December 31, 2021 | | $ | (10,964) | | | $ | (42) | | | $ | (11,006) | |
| | | | | | |
(a)AOCL related to postretirement benefit plans is shown net of tax benefits of $3.0 billion at December 31, 2021,$4.4 billion at December 31, 2020 and $4.2 billion at December 31, 2019. These tax benefits include amounts recognized on our income tax returns as current deductions and deferred income taxes, which will be recognized on our tax returns in future years. See “Note 10 – Income Taxes” and “Note 12 – Postretirement Benefit Plans” for more information on our income taxes and postretirement benefit plans.
(b)During 2021, we recognized a noncash pension settlement charge of $1.7 billion ($1.3 billion 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 12 – Postretirement Benefit Plans”).
|
| | | | | | | | | | | | |
| | Postretirement Benefit Plans (a) | | Other, net |
| | AOCL |
|
Balance at December 31, 2014 | | $ | (11,813 | ) | | $ | (57 | ) | | $ | (11,870 | ) |
Other comprehensive loss before reclassifications | | (351 | ) | | (73 | ) | | (424 | ) |
Amounts reclassified from AOCL | | | | | |
|
Recognition of net actuarial losses | | 1,109 |
| | — |
| | 1,109 |
|
Amortization of net prior service credits | | (259 | ) | | — |
| | (259 | ) |
Total reclassified from AOCL | | 850 |
| | — |
| | 850 |
|
Total other comprehensive income (loss) | | 499 |
| | (73 | ) | | 426 |
|
Balance at December 31, 2015 | | (11,314 | ) | | (130 | ) | | (11,444 | ) |
Other comprehensive loss before reclassifications | | (1,232 | ) | | — |
| | (1,232 | ) |
Amounts reclassified from AOCL | | | | | |
|
Recognition of net actuarial losses | | 938 |
| | — |
| | 938 |
|
Amortization of net prior service credits | | (239 | ) | | — |
| | (239 | ) |
Recognition of net prior service credits from divestiture of IS&GS segment (b) | | (134 | ) | | — |
| | (134 | ) |
Other | | — |
| | 9 |
| | 9 |
|
Total reclassified from AOCL | | 565 |
| | 9 |
| | 574 |
|
Total other comprehensive (loss) income | | (667 | ) | | 9 |
| | (658 | ) |
Balance at December 31, 2016 | | (11,981 | ) | | (121 | ) | | (12,102 | ) |
Other comprehensive (loss) income before reclassifications | | (1,380 | ) | | 120 |
| | (1,260 | ) |
Amounts reclassified from AOCL | | | | | |
|
Recognition of net actuarial losses | | 1,030 |
| | — |
| | 1,030 |
|
Amortization of net prior service credits | | (228 | ) | | — |
| | (228 | ) |
Other | | — |
| | 20 |
| | 20 |
|
Total reclassified from AOCL | | 802 |
| | 20 |
| | 822 |
|
Total other comprehensive (loss) income | | (578 | ) | | 140 |
| | (438 | ) |
Balance at December 31, 2017 | | $ | (12,559 | ) | | $ | 19 |
| | $ | (12,540 | ) |
| |
| AOCL related to postretirement benefit plans is shown net of tax benefits of $6.5 billion at both December 31, 2017and 2016 and $6.2 billion at December 31, 2015. These tax benefits include amounts recognized on our income tax returns as current deductions and deferred income taxes, which will be recognized on our tax returns in future years. See “Note 9 – Income Taxes” and “Note 11 – Postretirement Benefit Plans” for more information on our income taxes and postretirement benefit plans.
|
| |
(b)
| Associated with the 2016 divestiture of the IS&GS business and included in net gain on divestiture of discontinued operations. |
Note 1314 – Stock-Based Compensation
During 2017, 2016 and 2015, we recorded non-cash stock-based compensation expense totaling $158 million, $149 million and $133 million, which is included as a component of other unallocated, net on our consolidated statements of earnings. The net impact to earnings for the respective years was $103 million, $97 million and $86 million.
As of December 31, 2017, we had $91 million of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 1.7 years. We received cash from the exercise of stock options totaling $71 million, $106 million and $174 million during 2017, 2016 and 2015. In addition, our income tax liabilities for 2017, 2016 and 2015 were reduced by $203 million, $219 million and $213 million due to recognized tax benefits on stock-based compensation arrangements.
Stock-Based Compensation Plans
Under plans approved by our stockholders, we are authorized to grant key employees stock-based incentive awards, including options to purchase common stock, stock appreciation rights, RSUs, PSUs or other stock units.
At December 31, 2021, inclusive of the shares reserved for outstanding stock options, RSUs and PSUs, we had approximately 9.9 million shares reserved for issuance under the plans. At December 31, 2021, approximately 7.5 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. No award of stock options may become fully vested prior to the third anniversary of the grant and no portion of a stock option grant may become vested in less than one year. 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.
AtDuring 2021, 2020 and 2019, we recorded noncash stock-based compensation expense totaling $227 million, $221 million and $189 million, which is included as a component of other unallocated, net on our consolidated statements of earnings. The net impact to earnings for the respective years was $179 million, $175 million and $149 million.
As of December 31, 2017, inclusive of the shares reserved for outstanding stock options, RSUs and PSUs,2021, we had approximately 10 million shares reserved for issuance under the plans. At December 31, 2017, approximately six$177 million of the shares reserved for issuance remained available for grant under our stock-basedunrecognized compensation plans.cost related to nonvested awards, which is expected to be recognized over a weighted average period of 1.7 years. We issue new shares uponreceived cash from the exercise of stock options or when restrictionstotaling $28 million, $41 million and $66 million during 2021, 2020 and 2019. In addition, our income tax liabilities for 2021, 2020 and 2019 were reduced by $67 million, $63 million and $103 million due to recognized tax benefits on RSUs and PSUs have been satisfied.stock-based compensation arrangements.
RSUs
The following table summarizes activity related to nonvested RSUs:
|
| | | | | | | |
| | Number of RSUs (In thousands) | | Weighted Average Grant-Date Fair Value Per Share |
Nonvested at December 31, 2014 | | 2,326 |
| | $ | 97.80 |
|
Granted | | 595 |
| | 192.47 |
|
Vested | | (1,642 | ) | | 103.30 |
|
Forfeited | | (43 | ) | | 132.28 |
|
Nonvested at December 31, 2015 | | 1,236 |
| | $ | 134.87 |
|
Granted | | 679 |
| | 206.69 |
|
Vested | | (1,009 | ) | | 137.62 |
|
Forfeited | | (118 | ) | | 203.65 |
|
Nonvested at December 31, 2016 | | 788 |
| | $ | 183.00 |
|
Granted | | 519 |
| | 254.58 |
|
Vested | | (624 | ) | | 201.65 |
|
Forfeited | | (32 | ) | | 223.23 |
|
Nonvested at December 31, 2017 | | 651 |
| | $ | 220.21 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Number of RSUs (In thousands) | | Weighted Average Grant-Date Fair Value Per Share |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Nonvested at December 31, 2020 | | 733 | | | | $ | 348.60 | | |
Granted | | 612 | | | | 341.76 | | |
Vested | | (500) | | | | 345.73 | | |
Forfeited | | (35) | | | | 344.81 | | |
Nonvested at December 31, 2021 | | 810 | | | | $ | 345.37 | | |
| | | | | | |
In 2017,2021, we granted certain employees approximately 0.50.6 million RSUs with a weighted average grant-date fair value of $254.58$341.76 per RSU. The grant-date fair value of these RSUs is equal to the closing market price of our common stock on the grant date less a discount to reflect the delay in payment of dividend-equivalent cash payments that are made only upon vesting, which is generallyoccurs at least one year from the grant date and most often occurs three years from the grant date. We recognize the grant-date fair value of RSUs, less estimated forfeitures, as compensation expense ratably over the requisite service period, which is shorter than the vesting period if the employee is retirement eligible on the date of grant or will become retirement eligible before the end of the vesting period.
Stock Options
We generally recognize compensation cost for stock options ratably over the three-year vesting period. At December 31, 2017 and 2016, there were 2.2 million (weighted average exercise price of $82.71) and 3.0 million (weighted average exercise price of $85.82) stock options outstanding. All of the stock options outstanding are vested as of December 31, 2017 and have a weighted average remaining contractual life of approximately 2.5 years and an aggregate intrinsic value of $533 million. There were 0.8 million (weighted average exercise price of $95.06) stock options exercised during 2017. We have not granted stock options to employees since 2012.
The following table pertains to stock options granted through 2012, in addition to stock options that vested and were exercised in 2017, 2016 and 2015 (in millions):
|
| | | | | | | | | | | | |
| | 2017 |
| | 2016 |
| | 2015 |
|
Grant-date fair value of all stock options that vested | | $ | — |
| | $ | — |
| | $ | 8 |
|
Intrinsic value of all stock options exercised | | 139 |
| | 172 |
| | 265 |
|
In 2012, we estimated the fair value for stock options at the date of grant using the Black-Scholes option pricing model, which required us to make certain assumptions. We used the following weighted average assumptions in the model: risk-free interest rate of 0.78%, dividend yield of 5.40%, a five year historical volatility factor of 0.28 and an expected option life of five years.
PSUs
In 2017,2021, we granted certain employees PSUs with an aggregate target award of approximately 0.1 million shares of our common stock. The PSUs generally vest three years from the grant date based on continuous service, with the number of shares earned (0% to 200% of the target award) depending upon the extent to which we achieve certain financial and market performance targets measured over the period from January 1, 20172021 through December 31, 2019.2023. About half of the PSUs were valued at $254.53a weighted average grant-date fair value of $341.53 per PSU in a manner similar to RSUs mentioned above as the financial targets are based on our operating results. We recognize the grant-date fair value of these PSUs, less estimated forfeitures, as compensation expense ratably over the vesting period based on the number of awards expected to vest at each reporting date. The remaining PSUs were valued at $266.44a weighted-average grant-date fair value of $301.38 per PSU using a Monte Carlo model as the performance target is related to our total shareholder return relative to our peer group. We recognize the grant-date fair value of these awards, less estimated forfeitures, as compensation expense ratably over the vesting period.
Note 1415 – Legal Proceedings, Commitments and Contingencies
We are a party to or have property subject 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
previously owned. 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. 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.
As a U.S. 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. U.S. 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. 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 recorded at each balance sheet date is based generally 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. We follow a thorough process in which we seek to estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. 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. Patzer; Cimma v. Sikorsky Aircraft Corp., et al
As a result of our acquisition of Sikorsky Aircraft Corporation (Sikorsky), we assumed the defense of and any potential liability for two2 civil False Claims Act lawsuits pending in the U.S. District Court for the Eastern District of Wisconsin. In October 2014, the U.S. Government filed a complaint in intervention in the first suit, which was brought by qui tam relator Mary Patzer, a former Derco Aerospace (Derco) employee. In May 2017, the U.S. Government filed a complaint in intervention in thea second suit, which was brought by qui tam
relator Peter Cimma, a former Sikorsky Support Services, Inc. (SSSI) employee. In November 2017, the Court consolidated the cases into a single action for discovery and trial.
The U.S. Government alleges that Sikorsky and two2 of its wholly-owned subsidiaries, Derco and SSSI, violated the civil False Claims Act, the Anti-Kickback Act and the Truth in Negotiations Act in connection with a contract the U.S. Navy awarded to SSSI in June 2006 to support the Navy’s T-34 and T-44 fixed-wing turboprop training aircraft. SSSI subcontracted with Derco, primarily to procure and manage spare parts for the training aircraft. The U.S. Government allegescontends that SSSI overbilled the Navy on the contract as the result of Derco’s use of prohibited cost-plus-percentage-of-cost (CPPC) pricing to add profit and overhead costs as a percentage of the price of the spare parts that Derco procured and then sold to SSSI. The U.S. Government also alleges that Derco’s claims to SSSI, SSSI’s claims to the Navy, and SSSI’s yearly Certificates of Final Indirect Costs from 2006 through 2012 were false. In addition to violations of the False Claims Act, the U.S. Government alleges violations of the Anti-Kickback Act based on a monthly “chargeback,” through which SSSI billed Derco for the cost of certain SSSI personnel, allegedly in exchange for SSSI’s permitting a pricing arrangement that was “highly favorable” to Derco. The U.S. Government also claimsfalse and that SSSI submitted inaccurate cost or pricing data in violation of the Truth in Negotiations Act for a sole-sourced, follow-on “bridge” contract. The U.S. Government’s complaints assert common law claims for breach of contract and unjust enrichment. On January 12, 2018,November 29, 2021, the Corporation filedDistrict Court granted the U.S. Government’s motion for partial summary judgment, finding that the Derco-SSSI agreement was a partial motion to dismiss intended to narrow the Government’s claims. The Corporation also moved to dismiss Cimma as a party under the False Claims Act’s first-to-file rule, which permits only the first relator to recover in a pending case.CPPC contract.
The U.S. Government currently seeks damages in these lawsuits of approximately $52 million, subject to trebling, plus statutory penalties. We believe that we have legal and factual defenses to the U.S. Government’s remaining claims. The U.S. Government seeks damages of approximately $52 million, subject to trebling, plus statutory penalties. 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
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.
Lockheed Martin v. Metropolitan Transportation Authority
On April 24, 2009, we filed a declaratory judgment action against the MTANew York Metropolitan Transportation Authority and its Capital Construction Company (collectively, the MTA) asking the U.S. District Court for the Southern District of New York to find that the MTA is in material breach of our agreement based on the MTA’s failure to provide access to sites where work must be performed and the customer-furnished equipment necessary to complete the contract. The MTA filed an answer and counterclaim alleging that we breached the contract and subsequently terminated the contract for alleged default. The primary damages sought by the MTA are the costcosts 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. We dispute the MTA’s allegations and are defending against them. Additionally, following an investigation, our sureties on a performance bond related to this matter, who were represented by independent counsel, concluded that the MTA’s termination of the contract was improper. Finally, our declaratory judgment action was later amended to include claims for monetary damages against the MTA of approximately $95 million. This matter was taken under submission by the District Court in December 2014, after a five-week bench trial and the filing of post-trial pleadings by the parties. We continue to await a decision from the District Court. Although this matter relates to our former IS&GSInformation Systems & Global Solutions (IS&GS) business, we retained responsibility for the litigation when we divested IS&GS.&GS in 2016.
Environmental Matters
We are involved in proceedings and potential proceedings relating to soil, sediment, surface water, and groundwater contamination, disposal of hazardous wastesubstances, 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 a receivable 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 environmental receivables by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and contract mix, our history of receiving reimbursement of such costs, and efforts by some U.S. Government representatives to limit such reimbursement. We include the portion of those environmental costs expected to be allocated to our non-U.S. Government contracts, or that is determined not to be recoverable under U.S. Government contracts, in our cost of sales at the time the liability is established.
At December 31, 20172021 and 2016,2020, the aggregate amount of liabilities recorded relative to environmental matters was $920$742 million and $1.0 billion,$789 million, most of which are recorded in other noncurrent liabilities on our consolidated balance sheets. We have recorded receivablesassets for the portion of environmental costs that are probable of future recovery totaling $799$645 million and $870$685 million at December 31, 20172021 and 2016,2020, most of which are recorded in other noncurrent assets on our consolidated balance sheets,sheets. See “Note 1 – Organization and Significant Accounting Policies” for the estimated future recovery of these costs, as we consider the recovery probable based on the factors previously mentioned. We project costs and recovery of costs over approximately 20 years.
more information.
Environmental remediation activities usually span many years, which makes estimating liabilities a matter of judgment because of uncertainties with respect to assessing the extent of the contamination as well as such factors as changing remediation technologies and changing regulatory environmental standards. ThereWe are monitoring or investigating a number of former and present operating facilities that we are monitoring or investigating for potential future remediation. We perform quarterly reviews of the status of our environmental remediation sites and the related liabilities and receivables. Additionally, in our quarterly reviews, we consider these and other factors in estimating the timing and amount of any future costs that may be required for remediation activities, and we record a liability when it is probable that a loss has occurred or will occur for a particular site and the loss can be reasonably estimated. The amount of liability recorded is based on our estimate of the costs to be incurred for remediation at a particularfor that site. We do not discount the recorded liabilities, as the amount and timing of future cash payments are not fixed or cannot be reliably determined. We cannot reasonably cannot determine the extent of our financial exposure in all cases as, although a loss may be probable or reasonably possible, in some cases it is not possible at this time to estimate the loss or reasonably possible loss or range of loss. We project costs and recovery of costs over approximately 20 years.
We also pursue claims for recovery of costs incurred or for contribution to site cleanupremediation costs against other PRPs, including the U.S. Government, and are conducting remediation activities under various consent decrees, orders, and agreements relating to soil, groundwater, sediment, or surface water contamination at certain sites of former or current operations. Under agreements related to certain sites in California, and New York, United States Virgin Islands and Washington, the U.S. Government and/or a private party reimburses us an amount equal to a percentage, specific to each site, of expenditures for certain remediation activities in the U.S. Government’stheir capacity as a PRPPRPs under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).
In addition to the proceedings and potential proceedings discussed above, the California previously establishedState Water Resources Control Board, a branch of the California Environmental Protection Agency, has indicated it will work to re-establish a maximum level of the contaminant hexavalent chromium in drinking water after a prior standard of 10 parts per billion (ppb). Recently, this standard was successfully challenged by the California Manufacturers
and Technology Association (CMTA) for failure to conduct the required economic feasibility analysis. In response to the court’s ruling, the State Water Resources Control Board (State Board), a branch of the California Environmental Protection Agency, withdrew the hexavalent chromium standard from the published regulations, leaving only the 50 ppb standard for total chromium. The State Board has indicated it will work to re-establish a hexavalent chromium standard. If the standard for hexavalent chromium is re-established at 10 ppb or above, it will not have a material impact on our existing remediation costs in California. Further, the U.S. Environmental Protection Agency (U.S. EPA) is considering whether to regulate hexavalent chromium.
Californiawithdrawn, and is also reevaluating its existing drinking water standard of 6 ppb for perchlorate, and theperchlorate. The U.S. EPA is taking stepsEnvironmental Protection Agency decided in June 2020 not to regulate perchlorate in drinking water. water at the federal level, although this decision has been challenged, and is considering whether to regulate hexavalent chromium.
If substantially lower standards are adopted in eitherfor perchlorate (in California) or for hexavalent chromium (in California or at the federal level for perchlorate or for hexavalent chromium,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. Government. The amount that would be allocable to our non-U.S. Government contracts or that is determined not to be recoverable under U.S. Government contracts would be expensed, which may have a material effect on our earnings in any particular interim reporting period.
Operating LeasesWe also are evaluating the potential impact of existing and contemplated legal requirements addressing a class of chemicals known generally as per- and polyfluoroalkyl substances (PFAS). PFAS have been used ubiquitously, such as in fire-fighting foams, manufacturing processes, and stain- and stick-resistant products (e.g., Teflon, stain-resistant fabrics). Because we have used products and processes over the years containing some of those compounds, they likely exist as contaminants at many of our environmental remediation sites. Governmental authorities have announced plans, and in some instances have begun, to regulate certain of these compounds at extremely low concentrations in drinking water, which could lead to increased cleanup costs at many of our environmental remediation sites.
We rent certain equipment and facilities under operating leases. Certain major plant facilities and equipment are furnished by the U.S. Government under short-term or cancelable arrangements. Our total rental expense under operating leases was $169 million, $202 million and $195 million for 2017, 2016 and 2015. Future minimum lease commitments at December 31, 2017 for long-term non-cancelable operating leases were $623 million ($162 million in 2018, $154 million in 2019, $116 million in 2020, $82 million in 2021, $54 million in 2022 and $55 million in later years).
Letters of Credit, Surety Bonds and Third-Party Guarantees
We have entered into standby letters of credit and surety bonds issued on our behalf by financial institutions, and otherwe have directly issued guarantees to third parties primarily relating to advances received from customers and the guarantee of future performance on certain contracts. 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 $3.3$3.6 billion and $3.4 billion at December 31, 20172021 and $3.7 billion at December 31, 2016.2020. Third-party guarantees do not include guarantees issued on behalf of subsidiaries and other consolidated entities.
At December 31, 20172021 and 2016,2020, third-party guarantees totaled $750$838 million and $709$871 million, of which approximately 62%69% and 56%71% related to guarantees of contractual performance of joint ventures to which we currently are or previously were a party. This amount representsThese amounts represent our estimate of the maximum amountamounts 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.
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. ThereAt December 31, 2021 and 2020, there were no material amounts recorded in our financial statements related to third-party guarantees or novation agreements.
United Launch Alliance
104
In connection with our 50% ownership interest
In addition, both we and Boeing have cross-indemnified each other for guarantees by us and Boeing of the performance and financial obligations of ULA under certain launch service contracts. We believe ULA will be able to fully perform its obligations, as it has done through December 31, 2017, and that it will not be necessary to make payments under the cross-indemnities or guarantees.
Our share of ULA’s net earnings are reported as equity in net earnings (losses) of equity investees in other income, net on our consolidated statements of earnings. Our investment in ULA totaled $794 million and $788 million at December 31, 2017 and 2016.
Note 15 – Restructuring Charges
2016 Actions
During 2016, we recorded severance charges totaling approximately $80 million related to our Aeronautics business segment. The charges consisted of severance costs associated with the planned elimination of certain positions through either voluntary or involuntary actions. Upon separation, terminated employees 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. As of the end of the first quarter of 2017, we had substantially paid the severance costs associated with these actions.
2015 Actions
During 2015, we recorded severance charges totaling $82 million, of which $67 million related to our RMS business segment and $15 million related to businesses that were reported in our former IS&GS business prior to our fourth quarter 2015 program realignment. The charges consisted of severance costs associated with the planned elimination of certain positions through either voluntary or involuntary actions. Upon separation, terminated employees receive lump-sum severance payments primarily based on years of service. As of December 31, 2016, we substantially paid the severance costs associated with these actions.
In connection with the Sikorsky acquisition, we assumed obligations related to certain restructuring actions committed to by Sikorsky in June 2015. Net of amounts we anticipate to recover through the pricing of our products and services to our customers, we incurred and paid $40 million of costs in 2016 related to these actions.
We have recovered a substantial amount of the restructuring charges through the pricing of our products and services to the U.S. Government and other customers in future periods, with the impact included in the respective business segment’s results of operations.
Note 16 – Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following (in millions):
| | | | December 31, 2017 | | December 31, 2016 | | | December 31, 2021 | | December 31, 2020 |
| | Total |
| | Level 1 |
| | Level 2 |
| | Total |
| | Level 1 |
| | Level 2 |
| | Total | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 |
Assets | | | | | | | | | | | Assets | | |
Equity securities | | $ | 39 |
| | $ | 39 |
| | $ | — |
| | $ | 79 |
| | $ | 79 |
| | $ | — |
| |
Mutual funds | | 917 |
| | 917 |
| | — |
| | 856 |
| | 856 |
| | — |
| Mutual funds | | $ | 1,434 | | | $ | 1,434 | | | $ | — | | | $ | 1,335 | | | $ | 1,335 | | | $ | — | |
U.S. Government securities | | 116 |
| | — |
| | 116 |
| | 113 |
| | — |
| | 113 |
| U.S. Government securities | | 121 | | | — | | | 121 | | | 92 | | | — | | | 92 | |
Other securities | | 170 |
| | — |
| | 170 |
| | 151 |
| | — |
| | 151 |
| Other securities | | 684 | | | 492 | | | 192 | | | 555 | | | 341 | | | 214 | |
Derivatives | | 23 |
| | — |
| | 23 |
| | 27 |
| | — |
| | 27 |
| Derivatives | | 15 | | | — | | | 15 | | | 52 | | | — | | | 52 | |
Liabilities | | | | | | | | | | | | | Liabilities | |
Derivatives | | 106 |
| | — |
| | 106 |
| | 85 |
| | — |
| | 85 |
| Derivatives | | 60 | | | — | | | 60 | | | 22 | | | — | | | 22 | |
Assets measured at NAV | | | | | | | | | | | | | Assets measured at NAV | |
Other commingled funds | | 19 |
| | | | | | — |
| | | | | Other commingled funds | | 20 | | | 20 | | |
|
Substantially all assets measured at fair value, other than derivatives, represent investments classified as trading securities held in a separate trust to fund certain of our non-qualified deferred compensation plans and are recorded in other noncurrent assets on our consolidated balance sheets. The fair values of equity securities and mutual funds and certain other securities are determined by reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs. The fair values of U.S. Government and certain other securities are determined using pricing models that use observable inputs (e.g., interest rates and yield curves observable at commonly quoted intervals), bids provided by brokers or dealers or quoted prices of securities with similar characteristics. The fair values of derivative instruments, which consist of foreign currency exchange forward contracts, including embedded derivatives, and interest rate swap contracts, are primarily are determined based on the present value of future cash flows using model-derived valuations that use observable inputs such as interest rates, credit spreads and foreign currency exchange rates. Certain other investments are measured at fair value using their NAV per share
We use derivative instruments principally to reduce our exposure to market risks from changes in foreign currency exchange rates and interest rates. We do not have readily determined valuesenter into or hold derivative instruments for speculative trading purposes. We transact business globally and are thus not subject to levelingrisks associated with changing foreign currency exchange rates. We enter into foreign currency hedges such as forward and option contracts that change in value as foreign currency exchange rates change. Our most significant foreign currency exposures relate to the British pound sterling, the euro, the Canadian dollar, the Australian dollar, the Norwegian Kroner and the Polish Zloty. These contracts hedge forecasted foreign currency transactions in order to mitigate fluctuations in our earnings and cash flows associated with changes in foreign currency exchange rates. We designate foreign currency hedges as cash flow hedges. We also are exposed to the impact of interest rate changes primarily through our borrowing activities. For fixed rate borrowings, we may use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings in order to hedge changes in the fair value hierarchy.of the debt. These swaps are designated as fair value hedges. For variable rate borrowings, we may use fixed interest rate swaps, effectively converting variable rate borrowings to fixed rate borrowings in order to mitigate the impact of interest rate changes on earnings. These swaps are designated as cash flow hedges. We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are intended to mitigate certain economic exposures.
The aggregate notional amount of our outstanding interest rate swaps at December 31, 2021 and 2020 was $500 million and $572 million. The aggregate notional amount of our outstanding foreign currency hedges at December 31, 2021 and 2020 was $4.0 billion and $3.4 billion. The fair values of our outstanding interest rate swaps and foreign currency hedges at December 31, 2021 and 2020 were not significant. Derivative instruments did not have any transfersa material impact on net earnings and comprehensive income during the years ended December 31, 2021 and 2020. The impact of assets or liabilities between levelsderivative instruments on our consolidated statements of the fair value hierarchy during 2017.cash flows is included in net cash provided by operating activities. Substantially all of our derivatives are designated for hedge accounting. See “Note 1 – Organization and Significant Accounting Policies - Derivative financial instruments”.
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. The carrying amounts for cash and cash equivalents, receivables and accounts payable approximated their fair values. The estimated fair value of our outstanding debt was $16.8$15.4 billion and $16.2$16.9 billion at December 31, 20172021 and 2016.2020. The outstanding principal amount was $15.5$12.8 billion and $15.3$13.3 billion at December 31, 20172021 and 2016,2020, excluding $1.2 billion and $1.0$1.1 billion of unamortized discounts and issuance costs.costs at both December 31, 2021 and 2020. 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 for similar instruments in active markets (Level 2).
In connection with the Sikorsky acquisition, we1) are recorded the assets acquired and liabilities assumed at fair value.value at the end of each reporting period and reflected in other securities in the table above. See “Note 31 – AcquisitionsOrganization and Divestitures” for further information about the fair values assigned.Significant Accounting Policies - Investments”.
Note 17 – Summary of Quarterly Information (Unaudited)
A summary of quarterly information is as follows (in millions, except per share data):
|
| | | | | | | | | | | | | | | | |
| | 2017 Quarters |
| | First(b) |
| | Second |
| | Third |
| | Fourth(c)(d) |
|
Net sales | | $ | 11,057 |
| | $ | 12,685 |
| | $ | 12,169 |
| | $ | 15,137 |
|
Operating profit | | 1,149 |
| | 1,485 |
| | 1,428 |
| | 1,859 |
|
Net earnings (loss) from continuing operations | | 763 |
| | 942 |
| | 939 |
| | (715 | ) |
Net earnings from discontinued operations | | — |
| | — |
| | — |
| | 73 |
|
Net earnings (loss) | | 763 |
| | 942 |
| | 939 |
| | (642 | ) |
Earnings (loss) per common share from continuing operations (a): | | | | | | | | |
Basic | | 2.63 |
| | 3.27 |
| | 3.27 |
| | (2.50 | ) |
Diluted | | 2.61 |
| | 3.23 |
| | 3.24 |
| | (2.50 | ) |
Earnings per common share from discontinued operations: | | | | | | | | |
Basic | | — |
| | — |
| | — |
| | 0.25 |
|
Diluted | | — |
| | — |
| | — |
| | 0.25 |
|
Basic earnings (loss) per common share (a) | | 2.63 |
| | 3.27 |
| | 3.27 |
| | (2.25 | ) |
Diluted earnings (loss) per common share (a) | | 2.61 |
| | 3.23 |
| | 3.24 |
| | (2.25 | ) |
| | | | | | | | |
| | 2016 Quarters |
| | First |
| | Second |
| | Third(d)(e) |
| | Fourth(e) |
|
Net sales | | $ | 10,368 |
| | $ | 11,577 |
| | $ | 11,551 |
| | $ | 13,752 |
|
Operating profit | | 1,158 |
| | 1,375 |
| | 1,588 |
| | 1,428 |
|
Net earnings from continuing operations | | 806 |
| | 899 |
| | 1,089 |
| | 959 |
|
Net earnings from discontinued operations | | 92 |
| | 122 |
| | 1,306 |
| | 29 |
|
Net earnings | | 898 |
| | 1,021 |
| | 2,395 |
| | 988 |
|
Earnings per common share from continuing operations (a): | | | | | | | | |
Basic | | 2.65 |
| | 2.97 |
| | 3.64 |
| | 3.29 |
|
Diluted | | 2.61 |
| | 2.93 |
| | 3.61 |
| | 3.25 |
|
Earnings per common share from discontinued operations (a): | | | | | | | | |
Basic | | 0.30 |
| | 0.40 |
| | 4.38 |
| | 0.10 |
|
Diluted | | 0.30 |
| | 0.39 |
| | 4.32 |
| | 0.10 |
|
Basic earnings per common share (a) | | 2.95 |
| | 3.37 |
| | 8.02 |
| | 3.39 |
|
Diluted earnings per common share (a) | | 2.91 |
| | 3.32 |
| | 7.93 |
| | 3.35 |
|
| |
| The sum of the quarterly earnings per share amounts do not equal the earnings per share amounts included on our consolidated statements of earnings. The difference in 2017 is primarily due the net loss in the fourth quarter causing any potentially dilutive securities to have an anti-dilutive effect, which resulted in the weighted average shares outstanding for basic and dilutive earnings per share being equivalent. In addition, the differences in 2017 and 2016 also relate to the timing of our share repurchases during each respective year. |
| |
(b)
| The first quarter of 2017 includes a $120 million ($74 million or $0.25 per share, after tax) charge on our EADGE-T program and a $64 million ($40 million or $0.14 per share, after tax) charge, which represents our portion of a non-cash asset impairment charge recorded by our equity method investee, AMMROC (see “Note 1 – Significant Accounting Policies”). |
| |
(c)
| In the fourth quarter of 2017, we recorded a net one-time tax charge of $1.9 billion ($6.80 per share), substantially all of which was non-cash, primarily related to the estimated impact of the Tax Act (see “Note 9 – Income Taxes”). In addition, the fourth quarter of 2017 includes a previously deferred non-cash gain of $198 million ($122 million or $0.43 per share, after tax) related to properties sold in 2015 as a result of completing our remaining obligations.
|
| |
(d)
| The fourth quarter of 2017 and the third quarter of 2016 include a net gain of $73 million and $1.2 billion, respectively, reported in net earnings from discontinued operations, related to the 2016 divestiture of our former IS&GS business. |
| |
(e)
| The third quarter of 2016 includes the results of AWE from August 26, 2016, the date we obtained controlling interest, including $103 million in net sales and $104 million in net earnings. Net earnings during the third quarter of 2016 are primarily the result of a non-cash gain recognized on the step acquisition of AWE (see “Note 3 – Acquisitions and Divestitures”). The fourth quarter of 2016 includes the results of AWE for the entire quarter, including $307 million in net sales and $3 million in net earnings. |
ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We performed an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2017.2021. The evaluation was performed with the participation of senior management of each business segment and key corporate functions, under the supervision of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based on this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective.effective as of December 31, 2021.
Management, including our CEO (principal executive officer) and CFO (principal financial officer), believes the consolidated financial statements included in this Annual Report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes.
Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2017.2021. This assessment was based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 framework). Based on this assessment, management determinedconcluded that our internal control over financial reporting was effective as of December 31, 2017.2021.
Our independent registered public accounting firm has issued a report on the effectiveness of our internal control over financial reporting, which is below.
Remediation of Material Weakness
During the year ended December 31, 2016, management completed its initial assessment of the effectiveness of our internal control over financial reporting for our Sikorsky business, which was acquired on November 6, 2015. During 2016, we performed our first comprehensive assessment of the design and operating effectiveness of internal controls at Sikorsky and determined that Sikorsky’s internal control over financial reporting was ineffective as of December 31, 2016. Specifically, Sikorsky did not adequately identify, design and implement appropriate process-level controls for its accounting processes, including Sikorsky’s contract accounting and sales recognition processes, inventory accounting process and payroll process, and appropriate information technology controls for its information technology systems.
During 2017, management improved controls at Sikorsky in order to remediate the material weakness in Lockheed Martin’s internal control over financial reporting. To accomplish this we implemented several actions at Sikorsky, including increasing the number of individuals responsible for implementing and monitoring controls; training individuals responsible for designing, executing, testing and monitoring controls; expanding the scope of the internal controls program to include additional information technology systems; adding new process-level and information technology controls; modifying existing controls; and enhancing documentation that evidences that controls are performed. During the third quarter of 2017, we substantially completed our evaluation of the design of process-level and information technology controls. We successfully completed testing of the improved controls during the fourth quarter of 2017, and we have concluded that the material weakness has been remediated as of December 31, 2017. There were no material errors in our financial results or balances and there was no restatement of prior period financial statements and no change in previously released financial results as a result of the material weakness in internal controls over financial reporting.
Changes in Internal Control Over Financial Reporting
Other than the remediation efforts identified above to address the material weakness, thereThere were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d‑15(d) of the Exchange Act that occurred during the quarter ended December 31, 20172021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Ernst & Young,
Independent Registered Public Accounting Firm
Regarding Internal Control Over Financial Reporting
Board of Directors and Stockholders
Lockheed Martin Corporation
Opinion on Internal Control over Financial Reporting
We have audited Lockheed Martin Corporation’s internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Lockheed Martin Corporation (the Corporation) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Lockheed Martinthe Corporation as of December 31, 20172021 and 2016, and2020, the related consolidated statements of earnings, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2017 of2021, and the Corporationrelated notes and our report dated February 6, 2018January 25, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control overOver Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tysons, Virginia
February 6, 2018January 25, 2022
ITEM 9B.Other Information
None.
ITEM 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information concerning directors required by Item 401 of Regulation S-K is included under the caption “Proposal 1 - Election of Directors” in our definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year to which this report relates (the 20182022 Proxy Statement), and that information is incorporated by reference in this Annual Report on Form 10-K (Form 10-K). Information concerning executive officers required by Item 401 of Regulation S-K is located under Part I, Item 4(a) of this Form 10-K. The information required by Item 405 of Regulation S-K is included under the caption “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” in the 20182022 Proxy Statement, and that information is incorporated by reference in this Form 10-K. The information required by Items 407(c)(3), (d)407(d)(4) and (d)(5) of Regulation S-K is included under the captions “Committees of the Board of Directors” and “Audit Committee Report” in the 20182022 Proxy Statement, and that information is incorporated by reference in this Form 10-K.
We have had a written code of ethics in place since our formation in 1995. Setting the Standard, our Code of Ethics and Business Conduct, applies to all our employees, including our principal executive officer, principal financial officer, and principal accounting officer and controller, and to members of our Board of Directors. A copy of our Code of Ethics and Business Conduct is available on our investor relations website: www.lockheedmartin.com/investor. Printed copies of our Code of Ethics and Business Conduct may be obtained, without charge, by contacting Investor Relations, Lockheed Martin Corporation, 6801 Rockledge Drive, Bethesda, Maryland 20817. We are required to disclose any change to, or waiver from, our Code of Ethics and Business Conduct for our Chief Executive Officer and senior financial officers. We use our website to disseminate this disclosure as permitted by applicable SEC rules.
ITEM 11.Executive Compensation
The information required by Item 402 of Regulation S-K is included in the text and tables under the captions “Executive Compensation” and “Director Compensation” in the 20182022 Proxy Statement and that information is incorporated by reference in this Annual Report on Form 10-K (Form 10-K).10-K. The information required by Item 407(e)(5) of Regulation S-K is included under the caption “Compensation Committee Report” in the 20182022 Proxy Statement, and that information is furnished by incorporationincorporated by reference in this Form 10-K.
ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 related to the security ownership of management and certain beneficial owners is included under the heading “Security Ownership of Management and Certain Beneficial Owners” in the 20182022 Proxy Statement, and that information is incorporated by reference in this Annual Report on Form 10-K.
Equity Compensation Plan Information
The following table provides information required by this Item 12 related toabout our equity compensation plans that authorize the issuance of shares of Lockheed Martin common stock to employees and directorsdirectors. The information is includedprovided as of December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
Equity compensation plans approved by security holders (1) | | 2,431,610 | | | $ | 82.50 | | | 7,452,708 | | |
Equity compensation plans not approved by security holders (2) | | 626,769 | | | — | | | 2,478,905 | | |
Total | | 3,058,379 | | | $ | 82.50 | | | 9,931,613 | | |
(1)Column (a) includes, as of December 31, 2021: 1,609,681 shares that have been granted as restricted stock units (RSUs), 640,770 shares that could be earned pursuant to grants of performance stock units (PSUs) (assuming the maximum number of PSUs are earned and payable at the end of the three-year performance period) and 87,683 shares granted as options under the heading “Executive Compensation -Lockheed Martin Corporation 2020 Incentive Performance Award Plan (2020 IPA Plan) or predecessor plans and 6,329 shares granted as options and 87,147 stock units payable in stock or cash under the Lockheed Martin Corporation Amended and Restated Directors Equity Plan (Directors Plan) or predecessor plans for non-employee directors. Column (c) includes, as of December 31, 2021, 7,072,103 shares available for future issuance under the 2020 IPA Plan as options, stock appreciation rights, restricted stock awards, RSUs or PSUs and 380,605 shares available for future issuance under the Directors Plan as stock options and stock units. Vested stock units are payable to directors upon their termination of service from our Board, except that directors who have satisfied the stock ownership guidelines may elect to have payment of awards made after January 1, 2018 (together with any dividend equivalents thereon) made on the first business day of April following the one-year anniversary of the grant. The weighted average price does not take into account shares issued pursuant to RSUs or PSUs.
(2)The shares represent annual incentive bonuses and Long-Term Incentive Performance (LTIP) payments earned and voluntarily deferred by employees. The deferred amounts are payable under the Deferred Management Incentive Compensation Plan Information”(DMICP). Deferred amounts are credited as phantom stock units at the closing price of our stock on the date the deferral is effective. Amounts equal to our dividend are credited as stock units at the time we pay a dividend. Following termination of employment, a number of shares of stock equal to the number of stock units credited to the employee’s DMICP account are distributed to the employee. There is no discount or value transfer on the stock distributed. Distributions may be made from newly issued shares or shares purchased on the open market. Historically, all distributions have come from shares held in a separate trust and, therefore, do not further dilute our common shares outstanding. As a result, these shares also were not considered in calculating the total weighted average exercise price in the 2018 Proxy Statement, and that information is incorporated by referencetable. Because the DMICP shares are outstanding, they should be included in this Form 10-K.the denominator (and not the numerator) of a dilution calculation.
ITEM 13.Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13404 and 407(a) of Regulation S-K is included under the captions “Corporate Governance - Related Person Transaction Policy,” “Corporate Governance - Certain Relationships and Related Person Transactions of Directors, Executive Officers and 5 Percent Stockholders,” and “Corporate Governance - Director Independence” in the 20182022 Proxy Statement, and that information is incorporated by reference in this Annual Report on Form 10-K.
ITEM 14.Principal AccountantAccounting Fees and Services
The information required by this Item 14 is included under the caption “Proposal 2 - Ratification of Appointment of Independent Auditors” in the 20182022 Proxy Statement, and that information is incorporated by reference in this Annual Report on Form 10-K.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
List of financial statements filed as part of this Form 10-K
The following financial statements of Lockheed Martin Corporation and consolidated subsidiaries are included in Item 8 of this Annual Report on Form 10-K (Form 10-K) at the page numbers referenced below:
The report of Lockheed Martin Corporation’s independent registered public accounting firm (PCAOB ID:42)with respect to the above-referenced financial statements and their report on internal control over financial reporting are included in Item 8 and Item 9A of this Form 10-K at the page numbers referenced below. Their consent appears as Exhibit 23 of this Form 10-K.
List of financial statement schedules filed as part of this Form 10-K
All schedules have been omitted because they are not applicable, not required or the information has been otherwise supplied in the consolidated financial statements or notes to consolidated financial statements.
Exhibits
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2.1 | | Stock Purchase Agreement and Plan of Merger by and among Lockheed Martin Corporation, Mizar Sub, Inc. and Aerojet Rocketdyne Holdings, Inc., dated as of July 19, 2015 by and among United Technologies Corporation, the other Sellers identified therein and Lockheed Martin CorporationDecember 20, 2020 (incorporated by reference to Exhibit 2.1 to Lockheed Martin Corporation’s Current Report on Form 8-K filed with the SEC on July 20, 2015)December 21, 2020). The schedules and exhibits to the Stock Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Lockheed Martin agrees to furnish supplementally a copy of such schedules and exhibits, or any section thereof, to the SEC upon request. |
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| | See also Exhibits 3.1 and 3.2. | |
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| | NoPursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining the rights of certain holders of long-term debt that isare not registered are filed because the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of Lockheed Martinfiled. The Corporation on a consolidated basis. Lockheed Martin Corporation agrees towill furnish a copy of such instrumentscopies thereof to the SEC upon request. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | |
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*104 | Exhibits 10.4 through 10.31 constitute management contracts or compensatory plans or arrangements. | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document contained in Exhibit 101 | |
* Exhibits 10.2 through 10.37 constitute management contracts or compensatory plans or arrangements.
ITEM 16.Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | Lockheed Martin Corporation |
| | (Registrant) |
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Data: February 6, 2018Date: January 25, 2022 | | By: | | /s/ Brian P. Colan |
| | | | Brian P. Colan |
| | | | Vice President, Controller, and Chief Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signatures | | | Titles | | Date |
| /s/ Marillyn A. HewsonJames D. Taiclet | | | Chairman, President and Chief Executive Officer (Principal Executive Officer) | | February 6, 2018January 25, 2022 |
| Marillyn A. HewsonJames D. Taiclet | | | | |
| /s/ Bruce L. TannerJohn W. Mollard | | | Executive Vice President andActing Chief Financial Officer (Principal Financial Officer) | | February 6, 2018January 25, 2022 |
| Bruce L. TannerJohn W. Mollard | | | | |
| /s/ Brian P. Colan | | | Vice President, Controller, and Chief Accounting Officer (Principal Accounting Officer) | | February 6, 2018January 25, 2022 |
| Brian P. Colan | | | | |
| * | | | Director | | February 6, 2018January 25, 2022 |
| Daniel F. Akerson | | | | | |
| * | | | Director | | February 6, 2018January 25, 2022 |
| Nolan D. Archibald | | | | |
| * | | | Director | | February 6, 2018 |
| David B. Burritt | | | | |
| * | | | Director | | February 6, 2018January 25, 2022 |
| Bruce A. Carlson | | | | |
| * | | | Director | | February 6, 2018January 25, 2022 |
| John M. Donovan | | | | |
| * | | | Director | | January 25, 2022 |
| Joseph F. Dunford, Jr. | | | | |
| * | | | Director | | January 25, 2022 |
| James O. Ellis, Jr. | | | | |
| * | | | Director | | February 6, 2018January 25, 2022 |
| Thomas J. Falk | | | | |
| * | | | Director | | February 6, 2018January 25, 2022 |
| Ilene S. Gordon | | | | |
| * | | | Director | | February 6, 2018January 25, 2022 |
| Vicki A. Hollub | | | | |
| * | | | Director | | January 25, 2022 |
| Jeh C. Johnson | | | | |
| * | | | Director | | February 6, 2018January 25, 2022 |
| James M. LoyDebra L. Reed-Klages | | | | |
| * | | | Director | | February 6, 2018January 25, 2022 |
| Joseph W. RalstonPatricia E. Yarrington | | | | |
| * | | | Director | | February 6, 2018 |
| James D. Taiclet, Jr. | | | | |
*By Maryanne R. Lavan pursuant to a Power of Attorney executed by the Directors listed above, which has been filed with this Annual Report on Form 10-K.
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Date: February 6, 2018January 25, 2022 | | By: | | /s/ Maryanne R. Lavan |
| | | | Maryanne R. Lavan |
| | | | Attorney-in-fact |