UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 20192022
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from ______ to ______
Commission file number 1-11437
LOCKHEED MARTIN CORPORATION
(Exact name of registrant as specified in its charter)
| Maryland | 52-1893632 | |||||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| 6801 Rockledge Drive, | Bethesda, | Maryland | 20817 | |||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, $1 par value | LMT | New York Stock Exchange | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non–accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant computed by reference to the last sales price of such stock, as of the last business day of the registrant’s most recently completed second fiscal quarter, which was June 28, 2019,24, 2022, was approximately $102.1$110.7 billion.
There were 281,937,366255,297,298 shares of our common stock, $1 par value per share, outstanding as of January 31, 2020.20, 2023.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Lockheed Martin Corporation’s 20202023 Definitive Proxy Statement are incorporated by reference into Part III of this Form 10‑K. The 20202023 Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
Lockheed Martin Corporation
Form 10-K
For the Year Ended December 31, 20192022
Table of Contents
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| PART II | ||||||||
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| PART III | ||||||||
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| PART IV | ||||||||
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PART I
ITEM 1. Business
General
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. Our main areas of focus are in defense, space, intelligence, homeland security and information technology, including cybersecurity. We serve both U.S. and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S. Government. In 2019, 71% of our $59.8 billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 61% from the Department of Defense (DoD)), 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 operate in an environment characterized by both complexity ina complex and evolving global security environment. Our strategy consists of the design and continuing economic pressuresdevelopment of platforms and systems that meet the future requirements of 21st Century Security. Our vision for 21st Century Security is to accelerate the adoption of advanced networking and leading-edge technologies into our national defense enterprise, while enhancing the performance and value of our platforms and products for our customers. The aim of 21st Century Security is to integrate new and existing systems across all domains with advanced, open-architecture networking and operational technologies to make forces more agile, adaptive and unpredictable.
21st Century Security is an overarching vision that will guide our investment and strategy and we are also focused on four elements for potential growth in the U.S.near to mid-term: current programs of record, classified programs, hypersonics and globally. Anew awards. We have multiple programs of record from each business segment that are entering growth stages, including the F-35 sustainment activity (Aeronautics), increased PAC-3 production rates (Missiles and Fire Control), CH-53K heavy lift helicopter (Rotary and Mission Systems), and the modernization and enhancements to the Trident II D5 Fleet Ballistic Missile (Space). We are engaged in significant componentclassified development programs and pending successful achievement of the objectives within those programs, we expect to begin the transition from development to production over the next few years. We are currently performing on multiple hypersonic programs and following the successful completion of ongoing testing and evaluation activity, multiple programs are expected to enter early production phases between 2023 and 2026. Finally, we are always in pursuit of new program awards to develop future platforms that enable us to continue to place security capability into the market and expand our global reach.
Key to enabling success of our strategy in this environment is developing differentiating technologies, forging strategic partnerships, including with commercial companies, executing on our multi-year business transformation initiative to focus on program execution, improving the qualityenhance our digital infrastructure and predictability of the delivery ofincrease efficiencies and collaboration throughout our productsbusiness and services,maintaining fiscal discipline. Underpinning our ability to execute our strategy is our talent and placing security capability quickly into the hands of our U.S. and international customers at affordable prices. Recognizing that our customers are resource constrained, we are endeavoring to develop and extend our portfolio domestically in a disciplined manner with a focus on adjacent markets close to our core capabilities, as well as growing our international sales.culture. We continue to focus on affordability initiatives. We also expect to continue to innovate and invest in technologies to fulfill new mission requirements for our customers and investsubstantially in our people soto ensure that we haveour workforce has the technical skills necessary to succeed.succeed, and we expect to continue to invest internally in innovative technologies that address rapidly evolving mission requirements for our customers. We also will continue to evaluate our portfolio and will make strategic acquisitions or divestitures, as appropriate, while deepening our connection to commercial industry through cooperative partnerships, joint ventures, and equity investments.
We operate in four business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space. We organize our business segments based on the nature of the products and services offered.
Aeronautics 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 also has contracts with the U.S. Government for various classified programs. Aeronautics’ major programs include:
•F-35 Lightning II Joint Strike Fighter - international multi-role, multi-variant, fifth generation stealth fighter;
•C-130 Hercules - international tactical airlifter;
•F-16 Fighting Falcon - low-cost, combat-proven, international multi-role fighter; and
•F-22 Raptor - air dominance and multi-missionmulti-role fifth generation stealth fighter.
The F-35 program is our largest program, generating 27% of our total consolidated net sales, as well as 69%66% of Aeronautics’ net sales in 2019.2022. The F-35 program consists of multiple development, production and sustainment contracts. Development is focused on modernization of F-35’s capability and addressing emerging threats. Sustainment provides logistics and training support for the aircraft delivered to F-35 customers. The DoD authorized the F-35 Joint Program Office (JPO) to begin the Government-led Initial Operational Test and Evaluation (IOT&E) phase in December 2018. The full-rate production decision, also known formally as Milestone C, is expected to be delayed by the DoD until IOT&E activities are complete in the Naval Air Systems Command (NAVAIR)-led Joint Simulation Environment (JSE). The JSE is used to conduct simulated evaluations of the F-35 in a range of high-threat scenarios. Testing is expected to be completed by the end of 2020. The data will be utilized by the U.S. Government as part of their evaluation to transition the F-35 program from Low Rate Initial Production (LRIP) into full-rate production.
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the F‑35 Program” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. See also Item 1A - Risk Factors for a discussion of risks related to the F-35 program.
In addition to the aircraft programs discussed above, Aeronautics is involved in advanced development programs incorporating innovative design and rapid prototype applications. Our Advanced Development Programs (ADP) organization, also known as Skunk Works®Works®, is focused on future systems, including unmanned and manned aerial systems and next generation capabilities for advanced strike,air dominance, hypersonics, intelligence, surveillance, reconnaissance, situational awareness and air mobility. We continue to explore technology advancement and insertion into our existing aircraft. We also are involved in numerous network-enabled activities that allow separate systems to work together to increase effectiveness and we continue to invest in new technologies to maintain and enhance competitiveness in military aircraft design, development and production.
Missiles and Fire Control
MFC 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 also has contracts with the U.S. Government for various classified programs. MFC’s major programs include:
•The Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD) air and missile defense programs. PAC-3 is an advanced defensive missile for the U.S. Army and international customers designed to intercept and eliminate incoming airborne threats using kinetic energy. THAAD is a transportable defensive missile system for the U.S. Government and international customers designed to engage targets both within and outside of the Earth’s atmosphere.
•The Multiple Launch Rocket System (MLRS), Hellfire, Joint Air-to-Surface Standoff Missile (JASSM), and JavelinHellfire tactical and strike missile programs. MLRS is a highly mobile, automatic system that fires surface-to-surface rockets and missiles from the M270 and High Mobility Artillery Rocket System (HIMARS®) platforms produced for the U.S. Army and international customers. JASSM is an air-to-ground missile launched from fixed-wing aircraft, which is produced for the U.S. Air Force and international customers. Hellfire is an air-to-ground missile used on rotary and fixed-wing aircraft, which is produced for the U.S. Army, Navy, Marine Corps and international customers. JASSM
•The Apache, Sniper Advanced Targeting Pod (SNIPER®) and Infrared Search and Track (IRST21®) fire control systems programs. The Apache fire control system provides weapons-targeting capability for the Apache helicopter for the U.S. Army and international customers. SNIPER is an air-to-ground missile launched froma targeting system for several fixed-wing aircraft whichand is produced for the U.S. Air Force and international customers. JavelinIRST21provides long-range infrared detection and tracking of airborne threats and is a shoulder-fired anti-armor rocket system, whichused on several fixed-wing aircraft. IRST21 is produced for the U.S. Army, Marine CorpsAir Force, the U.S. Navy, the National Guard and international customers.
• |
The Special Operations Forces Global Logistics Support Services (SOF GLSS) program, which provides logistics support services to the special operations forces of the U.S. military.
•Hypersonics programs, which include several programs with the U.S. Air Force and U.S. Army to design, develop and build hypersonic strike weapons.
•The Javelin program, which is a one-man portable and platform-employable anti-tank and multi-target precision weapon system. Javelin was developed and is currently produced for the U.S. Army and U.S. Marine Corps by a joint venture between Lockheed Martin and Raytheon Technologies.
Rotary and Mission Systems
•Integrated warfare systems and sensors (IWSS) programs such as Aegis Combat System (Aegis) servesprograms that serve as an air and missile defense system for the U.S. Navy and international customers and is also a sea and land-based element of the U.S. missile defense system.
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an air operations center for the Ballistic Missile Defense System for the U.S. Government.
•Training and other countries along with commerciallogistics solutions (TLS) programs such as those providing sustainment services and programs that provide simulators and associated training to U.S. military and foreign government customers. In 2019, U.S. Government customers accounted for 86% and international customers accounted for 14% of Space’s net sales. Net sales from Space’s satellite products and services represented 11% of our total consolidated net sales in 2019 and 2018, and 12% in 2017.
Space
Space is engaged in the research and design, development, 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 United Kingdom’s nuclear deterrent program operated bySpace Based Infrared System (SBIRS) and Next Generation Overhead Persistent Infrared (Next Gen OPIR) system programs, which provide the AWE Management Limited (AWE) joint venture.U.S. Space Force with enhanced worldwide missile warning capabilities.
•The Trident II D5 Fleet Ballistic Missile (FBM), a program with the U.S. Navy for the only submarine-launched intercontinental ballistic missile currently in production in the U.S.
•The Orion Multi-Purpose Crew Vehicle (Orion), a spacecraft for the National Aeronautics and Space Administration (NASA)NASA utilizing new technology for human exploration missions beyond low earth orbit.
•Next Generation Interceptor (NGI), a program with the Missile Defense Agency (MDA) utilizing next generation propulsion and sensors to provide homeland missile defense.
•Global Positioning System (GPS) III, a program to modernize the GPS satellite system for the U.S. AirSpace Force.
•Hypersonics programs, which include several programs with the U.S. Air Force, U.S. Army and U.S. Navy to design, develop and build hypersonic strike weapons.
Intellectual Property
We routinely apply for and own a substantial number of U.S. and foreign patents and trademarks related to the products and services we provide. In addition to owning a large portfolio of patents and trademarks, weWe also develop and own other intellectual property, including copyrights, trade secrets and research, development and engineering know-how, which contributethat contributes significantly to our business. We alsoIn addition, we license intellectual property to and from third parties. The Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS) provide that the U.S. Government obtains certain rights in intellectual property, including patents, developed by us and our subcontractors and suppliers in performance of government contracts or with government funding. The U.S. Government may use or authorize others, including competitors, to use such intellectual property. See the discussion of matters related to our intellectual property withinin Item 1A - Risk Factors. Non-U.S. governments also may also have certain rights in patents and other intellectual property developed in performance of our contracts with these entities.for them. Although our intellectual property rights in the aggregate are important to the operation of our business, we do not believe that any existing patent, license or other intellectual property right is of such importance that its loss or termination would have a material adverse effect on our business taken as a whole.
Research and Development
We conduct research and development (R&D) activities using our own funds (referred to as company-funded R&D or independent research and development (IR&D)) and under contractual arrangements with our customers (referred to as customer-funded R&D) to enhance existing products and services and to develop future technologies. R&D costs include basic research, applied research, concept formulation studies, design, development, and related test activities. See “Note 1 – Organization and Significant Accounting Policies” (under the caption “Research and development and similar costs”) included in our Notes to Consolidated Financial Statements.
Raw Materials, Suppliers and Seasonality
Some of our products require relatively scarce raw materials. Historically, we have been successful in obtaining the raw materials and other supplies needed in our manufacturing processes. We seek to manage raw materials supply risk through long-term contracts and by maintaining an acceptable level of the key materials in inventories.
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such as the F-35 aircraft. We have been advised by some suppliers that pricing and the timing of availability of materials in some commodities markets can fluctuate widely. These fluctuations may negatively affect the price and availability of certain materials. While we do not anticipate material problems regarding the supply of our raw materials and believe that we have taken appropriate measures to mitigate these variations, if key materials become unavailable or if pricing fluctuates widely in the future, it could result in delay of one or more of our programs, increased costs or reduced operating profits or cash flows.
We rely on other companies to provide materials, major components and products, including advanced microelectronics such as semiconductors, and to perform a portion of the services that are provided to our customers under the terms of most of our contracts. A failure by one or more ofDuring 2022, the COVID-19 pandemic, supply chain challenges, and increased demand caused global semiconductor chip shortages, extended lead times and pricing escalations and these suppliers or subcontractorsare expected to provide the agreed-upon supplies or perform the agreed-upon services on a timely basis, according to specifications, or at all, may affect our ability to perform our obligations. While we believe we have taken appropriate measures to mitigate these risks,continue in 2023. These supplier disruptions could resulthave resulted in delays and increased costs or reducedand have adversely affected our program performance and operating profits or cash flows.
No material portion of our business is considered to be seasonal. Various factors, however, can affect the distribution of our sales between accounting periods, including the timing of government awards, the availability of government funding, product deliveries and customer acceptance.
Human Capital Resources
Due to the specialized nature of our business, our performance depends on identifying, attracting, developing, motivating and retaining a highly skilled workforce in multiple areas, including engineering, science, manufacturing, information technology, cybersecurity, business development and strategy and management. Our human capital management strategy, which we refer to as our people strategy, is tightly aligned with our business needs and technology strategy. During 2022, our human capital efforts were focused on continuing to accelerate the transformation of our technology for workforce management through investments in upgraded systems and processes, and continuing to increase our agility to meet the quickly changing needs of the business, all while maintaining a respectful, challenging, supportive and inclusive working environment. We use a variety of human capital measures in managing our business, including: workforce demographics; hiring metrics; talent management metrics, including retention rates of top talent; and diversity metrics with respect to representation, attrition, hiring, promotions and leadership.
Workforce Demographics
As of December 31, 2022, we had a highly skilled workforce made up of approximately 116,000 employees, including approximately 60,000 engineers, scientists and information technology professionals. As of December 31, 2022, approximately 93% of our workforce was located in the U.S. and approximately 19% of our employees were covered by collective bargaining agreements with various unions. A number of our existing collective bargaining agreements expire in any given year. Historically, we have been successful in negotiating renewals to expiring agreements without any material disruption of operating activities, and management considers employee and union relations to be good.
Diversity and Inclusion
Diversity and inclusion is a business imperative for us, as we believe that it is key to our future success. We have focused our diversity and inclusion initiatives on employee recruitment, including investments in minority-serving institutions and outreach, employee training and development, such as efforts focused on expanding the diverse talent pipeline, and employee engagement, including through participation in our employee Business Resource Groups. Our Business Resource Groups are voluntary, employee-led groups that are open to all employees while focusing on workplace issues specific to racial/ethnic, gender, sexual orientation/gender identity, disability or veteran status. The Business Resource Groups foster a diverse and inclusive workplace aligned with our organizational mission, values, goals and business practices and drive awareness and change within our organization. Through these and other focused efforts, we have improved the diversity of our overall U.S. workforce and within leadership positions, specifically in the representation of women, people of color and people with disabilities. Additionally, our representation of veterans remains outstanding, at almost four times the current annual national percentage of veterans in the civilian workforce.
Employee Profile (as of December 31, 2022):
Women(a) | People of Color(a) | Veterans(a) | People with Disabilities(a) | |||||||||||||||||||||||
| Overall | 23% | 30% | 21% | 11% | ||||||||||||||||||||||
Executives(b) | 25% | 16% | 21% | 11% | ||||||||||||||||||||||
(a)Based on employees who self-identify. Includes only U.S. employees and expatriates except for women, which also includes local country nationals. Excludes casual workers, interns/co-ops and employees of certain subsidiaries and joint ventures.
(b)Executive is defined as director-level (one level below vice president) or higher.
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Talent Acquisition, Retention and Development
We strive to hire, develop and retain the top talent in the industry. During 2022, we hired more than 14,000 employees, despite the continuing challenges presented by the COVID-19 pandemic. An integral part of our people strategy is early career hiring through college and intern pipelines, particularly in technical fields. In addition to efforts focused on recruitment, we also monitor employee attrition across a broad array of categories and segments of the population, including with respect to diversity and top talent. Critical to attracting and retaining top talent is employee satisfaction, and we regularly conduct employee engagement surveys to gauge employee satisfaction and to understand the effectiveness of our people strategy. We attract and reward our employees by providing market competitive compensation and benefits, including incentives and recognition plans that extend to nonrepresented employees of all levels in our organization and encourage excellence through our pay-for-performance philosophy. We also have continued a teleworking policy that encourages flexible working arrangements for employees who can meet our customer commitments remotely, which we believe helps recruit and retain talent. In addition, we invest in the development of our employees through training, apprenticeship programs, leadership development plans and offering tuition assistance programs for continuing education or industry certifications. This employee development helps to make us more competitive and also assists with leadership succession planning throughout the corporation.
Employee Safety and Health
Our safety and health program seeks to optimize our operations through targeted safety, health and wellness opportunities designed to ensure safe work conditions, a healthy work environment, promote workforce resiliency and enhance business value. As part of this program, we track employee health and safety measures, including quarterly and yearly targets related to the number of injury and illness incidents that occur at work, those incidents that result in days lost, and the number of days lost due to workplace injuries and illness. During 2022, these metrics continued to be negatively impacted by the absence from work and delays in the return to work related to COVID-19. We continue to take steps to protect our employees from COVID-19 while sustaining production and related services, including by establishing minimum staffing and social distancing and mask wearing policies consistent with current governmental guidance, cleaning common areas more frequently, implementing a flexible teleworking policy for employees who can work from home, encouraging employee vaccinations while monitoring potential vaccine mandates, and instituting other measures designed to mitigate and prevent the spread of COVID-19.
For information on the risks related to our human capital resources, see Item 1A - Risk Factors.
Competition
We compete with many different companies in the defense and aerospace industry. The Boeing Company, General Dynamics, L3Harris Technologies, Northrop Grumman, and Raytheon Technologies are some of our primary competitors. Key characteristics of our industry include long operating cycles and intense competition, which is evident through the number of competitors bidding on program opportunities and the number of bid protests (competitor protests of U.S. Government procurement awards).
We often collaborate with our competitors through teaming arrangements in efforts to provide our customers with the best mix of capabilities to address specific requirements. Additionally, a company competing to be a prime contractor may, upon ultimate award of the contract to another competitor, serve as a subcontractor to the ultimate prime contracting company. It is not unusual to compete for a contract award with a peer company and, simultaneously, perform as a supplier to or a customer of that same competitor on other contracts.
Our broad portfolio of products and services competes domestically and internationally against products and services of the companies listed above, numerous smaller competitors and startups, and increasingly, non-traditional defense contractors. In some areas of our business, customer requirements are changing to encourage or facilitate expanded competition. Principal factors of competition include: the technical excellence, reliability, safety and cost competitiveness of our products and services to the customer; technical and management capability; the ability to innovate and develop new products and technologies that improve mission performance and adapt to dynamic threats; successful program execution and on-time delivery of complex, integrated systems; the reputation and customer confidence derived from past performance; our demonstrated ability to execute and perform against contract requirements and successfully manage customer relationships; and our global footprint and accessibility to customers.
The competition for international sales for most of our products and services is subject to U.S. Government stipulations (e.g., export restrictions, market access, technology transfer, industrial cooperation and contracting practices). We compete against U.S. and non-U.S. companies (or teams) for contract awards by international governments. International competitions are also subject to different laws or contracting practices of international governments, which affects how we structure our bid
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for the procurement. In many international procurements, the purchasing government’s relationship with the U.S. and its industrial cooperation programs designed to enhance local industry are important factors in determining the outcome of a competition. It is common for international customers to require contractors to comply with their industrial cooperation regulations, sometimes referred to as offset requirements, and we have entered into foreign offset agreements as part of securing some international business. For more information concerning our international business, see Item 1A - Risk Factors.
Technological advances in such areas as additive manufacturing, data analytics, digital engineering, artificial intelligence, advanced materials, autonomy and robotics, and new business models such as commercial access to space, are enabling new factors of competition for both traditional and non-traditional competitors.
Government Contracts and Regulations
Our business is heavily regulated. We contract with numerous U.S. Government agencies and entities, principally all branches of the U.S. military and NASA. We also contract with similar government authorities in other countries, and they regulate our international efforts.sales that are not foreign military sales (FMS) contracted through the U.S. Government. Additionally, our commercial aircraft products are required to comply with U.S. and international regulations governing production and quality systems, airworthiness and installation approvals, repair procedures and continuing operational safety.
We must comply with, and are affected by, laws and regulations relating to the formation, administration and performance of U.S. Government and other governments’ contracts, including foreign governments. These laws and regulations, among other things:
•require certification and disclosure of all cost or pricing data in connection with certain types of contract negotiations;
•impose specific and unique cost accounting practices that may differ from U.S. generally accepted accounting principles (GAAP);
•impose acquisition regulations, which may change or be replaced over time, that define which costs can be charged to the U.S. Government, how and when costs can be charged, and otherwise govern our right to reimbursement under certain U.S. Government and foreign contracts;
•require specific security controls to protect U.S. Government controlled unclassified information and that our suppliers that have access to this type of information comply with cyber security regulations;
•restrict the use and dissemination of information classified for national security purposes and the export of certain products, services and technical data;
•Prohibit the acquisition from or use by contractors of materials, products or services procured from certain countries or entities located outside the United States (e.g., the prohibition on the acquisition of sensitive materials from non-allied foreign nations and prohibition on the acquisition and use of certain telecommunications and video surveillance services or equipment); and
•require the review and approval of contractor business systems, defined in the regulations as: (i) Accounting System; (ii) Estimating System; (iii) Earned Value Management System,including accounting systems, estimating systems, earned value management systems for managing cost and schedule performance on certain complex programs; (iv) Purchasing System; (v) Material Managementprograms, purchasing systems, material management and Accounting System,accounting systems for planning, controlling and accounting for the acquisition, use, issuing and disposition of material;material, and (vi) Property Management System.property management systems.
The U.S. Government and in limited cases certain other governments may terminate any of our government contracts and subcontracts either at itstheir convenience or for default based on our performance. If a contract is terminated for convenience, we generally are protected by provisions covering reimbursement for costs incurred on the contract and profit on those costs. If a contract is terminated for default, we generally are entitled to payments for our work that has been accepted by the U.S. Government or other governments; however, the U.S. Government and other governments could make claims to reduce the contract valueour recovery or recoverrecoup its procurement costs and could assess other special penalties. For more information regarding the U.S. Government’s and other governments’ right to terminate our contracts and the risks of doing work internationally, see Item 1A - Risk Factors. For more information regarding government contracting laws and regulations, see Item 1A - Risk Factors as well as “Critical Accounting Policies - Contract Accounting / Sales Recognition” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. For more information on the risks of doing work internationally, see Item 1A - Risk Factors.
Additionally, our programs for the U.S. Government often operate for periods of time under undefinitized contract actions (UCAs), which means that we begin performing our obligations before the terms, specifications or price are finally agreed to between the parties. Although in most cases we historically have reached mutual agreement to definitize our UCAs, the U.S. Government has the ability to unilaterally definitize contracts and has done so in the past. Absent a successful appeal of such action, the unilateral definitization of the contract obligates us to perform under terms and conditions imposed by the U.S. Government. The U.S. Government’s power to unilaterally definitize a contract can affect our ability to negotiate mutually
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agreeable contract terms and, if a contract is unilaterally imposed upon us, it may negatively affect our expected profit and cash flows on a program or impose burdensome terms.
A portion of our business is classified by the U.S. Government and cannot be specifically described. The operating results of these classified contracts are included in our consolidated financial statements. The business risks and capital requirements associated with classified contracts historically have not differed materially from those of our other U.S. Government contracts. However, under certain classified fixed price development and production contracts, we are unable to insure risk of loss to government property because of the classified nature of the contracts and the inability to disclose classified information necessary for underwriting and claims to commercial insurers. Our internal controls addressing the financial reporting of classified contracts are consistent with our internal controls for our non-classified contracts.
Our operations are subject to and affected by various federal, state, local and foreign environmental protection laws and regulations regarding the discharge of materials into the environment or otherwise regulating the protection of the environment. As a result of these environmental protection laws, we are involved in environmental remediation at some of our current and former facilities and at third-party-owned sites where we have been designated a potentially responsible party as a result of our prior activities and those of our predecessor companies. While the extent of our financial exposure cannot in all cases be reasonably estimated, the costs of environmental compliance have not had, and we do not expect that these costs will have, a material adverse effect on our earnings, financial position and
cash flow, primarily because substantially all of our environmental costs are allowable in establishing the price of our products and services under our contracts with the U.S. Government. For information regarding these matters, including current estimates of the amounts that we believe are required for remediation or cleanup to the extent that they are probable and estimable, see “Critical Accounting Policies - Environmental Matters” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Note 14 – Legal Proceedings, Commitments and Contingencies” included in our Notes to Consolidated Financial Statements. See also the discussion of environmental matters withinin Item 1A - Risk Factors.
Available Information
We are a Maryland corporation formed in 1995 by combining the businesses of Lockheed Corporation and Martin Marietta Corporation. Our principal executive offices are located at 6801 Rockledge Drive, Bethesda, Maryland 20817. Our telephone number is (301) 897-6000 and our website address is www.lockheedmartin.com.
We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Annual Report on Form 10-K (Form 10-K).
Throughout this Form 10-K, we incorporate by reference information from parts of other documents filed with the U.S. Securities and Exchange Commission (SEC). The SEC allows us to disclose important information by referring to it in this manner.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements for our annual stockholders’ meetings and amendments to those reports are available free of charge on our website, www.lockheedmartin.com/investor, as soon as reasonably practical after we electronically file the material with, or furnish it to, the SEC. In addition, copies of our annual report will be made available, free of charge, upon written request. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Lockheed Martin Corporation.
Forward-Looking Statements
This Form 10-K contains statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the federal securities laws and are based on our current expectations and assumptions. The words
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expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties.
Statements and assumptions with respect to future sales, income and cash flows, growth, program performance, the outcome of litigation, anticipated pension cost and funding, environmental remediation cost estimates, planned acquisitions or dispositions of assets, or the anticipated consequences are examples of forward-looking statements. Numerous factors, including the risk factors described in the following section, could cause our actual results to differ materially from those expressed in our forward-looking statements.
Our actual financial results likely will be different from those projectedany projections due to the inherent nature of projections. Given these uncertainties, forward-looking statements should not be relied on in making investment decisions. The forward-looking statements contained in this Form 10-K speak only as of the date of its filing. Except where required by applicable law, we expressly disclaim a duty to provide updates to forward-looking statements after the date of this Form 10-K to reflect subsequent events, changed circumstances, changes in expectations, or the estimates and assumptions associated with them. The forward-looking statements in this Form 10-K are intended to be subject to the safe harbor protection provided by the federal securities laws.
ITEM 1A. Risk Factors
An investment in our common stock or debt securities involves risks and uncertainties. We seek to identify, manage and mitigate risks to our business, but risk and uncertainty cannot be eliminated or necessarily predicted. The outcome of one or more of these risks could have a material effect on our operating results, financial position, or cash flows. You should carefully consider the following factors, in addition to the other information contained in this Annual Report on Form 10-K, before deciding to purchasetrade in our common stock or debt securities.
Risks Related to our Reliance on Government Contracts
We depend heavily on contracts with the U.S. Government including contracts related to the F-35 program, for a substantial portion of our business. Changes in the U.S. Government’s priorities, or delays or reductions in spending could have a material adverse effect on our business.
We derived 71%73% of our total consolidated net sales from the U.S. Government in 2019,2022, including 61%64% from the DoD. We expect to continue to derive most of our sales from work performed under U.S. Government contracts. ThoseBudget uncertainty, the potential for U.S. Government shutdowns, the use of continuing resolutions, and the federal debt ceiling can adversely affect our industry and the funding for our programs. If appropriations are delayed or a government shutdown were to occur and were to continue for an extended period of time, we could be at risk of program cancellations and other disruptions and nonpayment. When the U.S. Government operates under a continuing resolution, new contract and program starts are restricted and funding for our programs may be unavailable, reduced or delayed. Shifting funding priorities or federal budget compromises, also could result in reductions in overall defense spending on an absolute or inflation-adjusted basis, which could adversely impact our business.
We believe our diverse range of products and services generally make it less likely that cuts in any specific contract or program will affect our business on a long-term basis. However, termination of significant programs or contracts could adversely affect our business and future financial performance. DoD’s changes in funding priorities also could reduce opportunities in existing programs and in future programs or initiatives where we intend to compete and where we have made investments. While we would expect to compete and be well positioned as the incumbent on existing programs we may not be successful and, even if we are successful, the replacement programs may be funded at lower levels or result in lower margins. In addition, our ability to grow in key areas such as hypersonics programs, classified programs and next-generation franchise programs also will be affected by the overall budget environment and whether development programs transition to production and the timing of such transition, all of which are dependent on U.S. Government authorization and funding.
Our contracts with the U.S. Government are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds on a fiscal year (FY) basis even though contract performance may extend over many years. Consequently, contracts are often partially funded initially and additional funds are committed only as Congress makes further appropriations. Ifappropriations over time. To the extent we incur costs in excess of funds obligated on a contract or in advance of a contract award or contract definitization, we may beare at risk of not being reimbursed for reimbursement of those costs unless and until additional funds are obligated under the contract or the contract is successfully awarded, definitized and funded, which could adversely affect our results of operations, financial condition and cash flows.
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The F-35 program comprises a material portion of our revenue and reductions or delays in funding for this program and risks related to the contract.development, production, sustainment, performance, schedule, cost and requirements of the program could adversely affect our performance.
The F-35 program, which consists of multiple development, production and sustainment contracts, is our largest program. Itprogram and represented 27% of our total consolidated net sales in 2019 and is expected to represent a higher percentage of our sales in future years.2022. A decision by the U.S. Government or other governmentsinternational partner and FMS customer countries to cut spending on this program or reduce or delay planned orders would have an adverse impact on our business and results of operations. Given the size and complexity of the F-35 program, we anticipate that there will be continual reviews related to aircraft performance, program and delivery schedule, cost, and requirements as part of the DoD, Congressional, and international partners’countries’ oversight and budgeting processes. Current program challenges include but are not limited to, supplierour and partnerour suppliers’ performance (including COVID-19 performance-related challenges), software development, the availabilitydefinitizing and receipt ofreceiving funding for production contracts on a timely basis, execution of future flight tests and findings resulting from testing and operating the aircraft, the level of cost associated with life-cyclelife cycle operations and sustainment, and warranties, continuing to reduce the unit production costs, and achievinginflation-related cost targets.
We are subject to a number ofextensive procurement laws and regulations, including those that enable the U.S. Government’s abilityGovernment to terminate contracts for convenience. Our business and reputation could be adversely affected if we or those we do business with fail to comply with these laws.or adapt to existing or new procurement laws and regulations, which are regularly evolving.
We and others with which we do business must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. Government contracts. Government contract laws and regulations affect how we do business with our customers and impose certain risks and costs on our business. A violation of these laws and regulations by us, our employees, others working on our behalf, a supplier or a joint venture partner could harm our reputation and result in the imposition of fines and penalties, the termination of our contracts, suspension or debarment from bidding on or being awarded contracts, loss of our ability to export products or perform services and civil or criminal investigations or proceedings. In addition, costs to comply with new government regulations can increase our costs, reduce our margins and adversely affect our competitiveness.
only for default based on our performance, but also at its convenience. Upon terminationGenerally, prime contractors have a similar right under subcontracts related to government contracts. If a contract is terminated for convenience, of a fixed-price type contract,we typically we arewould be entitled to receive the purchase pricepayments for delivered items, reimbursement forour allowable costs incurred and the proportionate share of fees or earnings for work-in-process and an allowance for profit on the contract or adjustment for loss if completion of performance would have resulted in a loss.
Another significant difference from commercial contracting is the existence in government contracting of the concept of an undefinitized contract value or recover its procurement costs and could assess other special penalties. Under such circumstances we may have rights and there may be remedial actions available to us under applicable laws and the FAR.
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price are finally agreed to between the parties. TheWhen operating under a UCA, the U.S. Government has the ability to unilaterally definitize contracts, which it has exercised in the past and which absent a successful appeal, obligates us to perform under terms and conditions imposed by the U.S. Government. The U.S. Government has unilaterally definitized contracts with us in the past, most notably the F-35 LRIP 9 contract in 2016, and may do so in the future. The U.S. Government’s power to unilaterally definitize a contractThis can affect our ability to negotiate mutually agreeable contract terms and, ifterms. If a contract is unilaterally imposed upon us, it may negatively affect our expected profit and cash flows on a program or impose burdensome terms.
In addition to the unique risks associated with government contracts, the U.S. Government contracts span one or more base years and include multiple option years. The U.S. Government generally has the right not to exercise option periods and may not exercise an option period for various reasons. The U.S. Government also may decide to exercise option periods for contracts under which it is expected that our costs may exceed the contract price or ceiling, which could result in losses or unreimbursed costs.
Additionally, the DoD has stated that it will conduct a comprehensive assessment of the effect that DoD contract financingis increasingly pursuing rapid acquisition pathways and profit policies have on the defense industry. We have no assurance regarding the full scope and recurrence of any study and what changes will be proposed, if any, and their impact on our working capital, cash flow, profit or results of operation. Earlier changes proposed by the DoD in 2018 and later withdrawn would have had a negative effect on the timing of our cash flows.
Our profitability and cash flow may vary based on the mix of our contracts and programs, our performance, and our ability to control costs.
Our profitability and cash flow may vary materially depending on the types of government contracts undertaken, the nature of products produced or services performed under those contracts, the costs incurred in performing the work, the achievement of other performance objectives and the stage of performance at which the right to receive fees is determined, particularly under award and incentive-fee contracts. Failure to perform to customer expectations and contract requirements may result in reduced fees or losses and may adversely affect our financial performance. Our backlog includes a variety of contract types and represents the sales we expect to recognize for our products and services in the future.
Contract types primarily include fixed-price and cost-reimbursable contracts. Under each type of contract, if we are unable to control costs, our operating results could be adversely affected, particularly if we are unableaffected. Costs to justify ancomplete a contract may increase in contract value to our customers. Cost overruns or the failure to perform on existing programs also may adversely affect our ability to retain existing programs and win future contract awards.
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,Cost, schedule or technical performance issues with respect to cost-reimbursable contracts could result in reduced fees, lower profit rates, or program cancellation.
Fixed-price contracts are predominantly either firm fixed-price (FFP) contracts or fixed-price incentive (FPI) contracts. Under FFP contracts, we enter into three typesreceive a fixed price irrespective of cost-reimbursable contracts: cost-plus-award-fee, cost-plus-incentive-fee,the actual costs we incur and cost-plus-fixed-fee. Cost-plus-award-feewe therefore carry the burden of any cost overruns. Under FPI contracts, providewe generally share with the U.S. Government savings for an award fee that varies within specified limits based oncost underruns less than target costs and expenses for cost overruns exceeding target costs up to a negotiated ceiling price. We carry the customer’s assessmententire burden of cost overruns exceeding the ceiling price amount under FPI contracts. Due to the fixed-price nature of the contracts, if our performance againstactual costs exceed our estimates, our margins and profits are reduced and we could incur 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 thatreach-forward loss. A reach-forward loss is adjusted by a formula based on the relationshipwhen estimates of total allowable costs to be incurred on a contract exceed total target costs (i.e., incentive based on cost) or reimbursementestimates of costs plus an incentive to exceed stated performance targets (i.e., incentive based on performance). The fixed-fee inthe transaction price. When this occurs, a cost-plus-fixed-fee contractprovision for the entire loss is negotiateddetermined at the inception ofcontract level and is recorded in the contract and that fixed-fee does not vary with actual costs.period in which the loss is evident.
Contracts for development programs withinclude complex design and technical challengesrequirements and are often cost-reimbursable.contracted on a cost-reimbursable basis, however, some of our existing development programs are contracted on a fixed-price basis or include cost-type contracting for the development phase with fixed-price production options. We expect we also will bid on similar
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programs in the future. Fixed-price development work or fixed price production options, especially on competitively bid programs, is inherently riskier than cost-reimbursable work because the revenue is fixed, while the estimates of costs required to complete these contracts are subject to significant variability due to the complex and often experimental nature of development programs. The technical complexity coupled with the fixed-price contract structure of certain of our ongoing development programs or new programs increases the risk that our costs will be greater than anticipated, resulting in reduced margins, operating profit, or reach-forward losses during the period of contract performance or upon contract award, all of which could be significant to our operating results, cash flows, or financial condition. In these cases, the associated financial risks primarily relate to a reduction in feesaddition, we have certain contracts where we bid upfront on cost-reimbursable development work and the programfollow-on fixed-price production options in one submission. This increases the risk that we may experience lower margins than expected, or a loss, on the production options because we must estimate the cost of producing a product before it has been developed. These risks may cause us not to bid on certain future programs, which could be canceled if cost, schedule or technical performance issues arise. Other contractsadversely affect our future growth prospects and financial performance. See Note 1 – Organization and Significant Accounting Policies included in our backlog areNotes to Consolidated Financial Statements for further details about losses incurred on certain programs, including fixed-price development programs.
We also have contracts for the transition from development to production (e.g., LRIPlow rate initial production (LRIP) contracts), which includeswhere the challenge of starting and stabilizing a manufacturing production and test line while the final design is being validated and managing change in requirements or capabilities. Thesecapabilities create performance and financial risks to our business.
Many of our U.S. Government contracts frequently are cost-reimbursableinclude multiple option years and our expected sales or fixed-price incentive-fee contracts. Generally,profits may be adversely affected if the U.S. Government decides not to exercise the options. On the other hand, the U.S. Government may decide to exercise options for contracts under which it is expected that our costs may exceed the contract targetprice or ceiling, which could result in losses or unreimbursed costs.
We are routinely subject to audit by our customers on government contracts and the results of those audits could have an adverse effect on our business, reputation and results of operations.
U.S. Government agencies, including the Defense Contract Audit Agency, the Defense Contract Management Agency and various agency Inspectors General, routinely audit and investigate government contractors. These agencies review a contractor’s compliance with applicable laws, regulations and contract terms, regarding, among other things, contract pricing, contract performance, cost structure and business systems. U.S. Government audits and investigations often take years to complete, and many result in no adverse action against us. Like many U.S. Government contractors, we have received audit and investigative reports recommending the reduction of certain contract prices or that certain payments be repaid, delayed, or withheld, and may involve substantial amounts. Similarly, like other U.S. Government contractors, audits and investigations also occur related to cost reimbursements that are notbased upon our final allowable under the applicable regulations,incurred costs for each year. We have unaudited or unsettled incurred cost claims related to past years, which limits our ability to issue final billings on contracts for which authorized and appropriated funds may be expiring or can result in delays in final billings and our ability to close out a contract.
If an audit or investigation uncovers improper or illegal activities, we may not be ablesubject to obtain reimbursement for all costscivil or criminal penalties and may have our fees reduced or eliminated. There are also contracts for production, as well as operations and maintenanceadministrative sanctions, including reductions of the delivered products, thatvalue of contracts, contract modifications or terminations, forfeiture of profits, suspension of payments, penalties, fines or suspension or debarment from doing business with the U.S. Government. Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the challenge of achieving a stable production and delivery rate, while maintaining operability of the product after delivery. These contracts are mainly fixed-price.U.S. Government. In addition, certain contracts, primarily those associated withwe could suffer serious reputational harm if allegations of impropriety were made against us. Similar government oversight and risks to our Space business segment, contain provisions that require
Increased competition and bid protests in a budget-constrained environment may make it more difficult to maintain our financial performance and customer relationships.
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collaborating across our business segments, and adopting and integrating new digital manufacturing and operating technologies and tools into our product lifecycles and processes.
Additionally, a substantial portion of our business is awarded through competitive bidding. The U.S. Government increasingly has relied on competitive contract award types, including indefinite-delivery, indefinite-quantity and other multi-award contracts, which have the potential to create pricing pressure and to increase our costs by requiring us to submit multiple bids and proposals. Multi-award contracts require us to make sustained efforts to obtain task orders under the contract. Additionally, recent competitiveprocurements that do not evaluate whether the cost assumptions in the bids have not contained cost-realism evaluation criteria which has ledare realistic can lead to competitorsbidders taking aggressive pricing positions.positions, which could result in the winner realizing a loss upon contract award or an increased risk of lower margins or realizing a loss over the term of the contract. The competitive bidding process entails substantial costs and managerial time to prepare bids and proposals for contracts that may not be awarded to us or may be split among competitors. Additionally, the U.S. Government also may fail tonot award us large competitive contracts that we otherwise might have won in an effort to maintain a broader industrial base.
We may encounter bid protests from unsuccessful bidders on new program awards.awards seeking to overturn the award. Unsuccessful bidders also may protest inwith the hopegoal of being awarded a subcontract for a portion of the work in return for withdrawing the protest. Bid protests couldcan result in significant expenses to us, contract modifications or even loss of the contract award. Even where a bid protest does not result in the loss of a contract award and the resolution can extend the time until contract activity can begin and as a result, delay the recognition of sales. We also may not be successful insales and defer underlying cash flows and adversely affect our operating results. Our efforts to protest or challenge any bids for contracts that were not awarded to us and we could incur significant time and expense in such efforts.also may be unsuccessful, including, the December 2022 protest by Lockheed Martin Sikorsky, on behalf of Team DEFIANT, challenging the U.S. Army’s award under the Future Long Range Assault Aircraft competition.
Other Risks Related to our Operations
We are experiencing increased competition while, at the same time, many of our customers are facing budget pressures, trying to do more with less by cutting costs, identifying more affordable solutions, performing certain work internally rather than hiring contractors, and reducing product development cycles. Recent acquisitions in our industry, particularly vertical integration by tier-1 prime contractors, could also result in increased competition or limit our access to certain suppliers. To remain competitive, we must maintain consistently strong customer relationships, seek to understand customer priorities and provide superior performance, advanced technology solutions and service at an affordable cost with the agility that our customers require to satisfy their mission objectives in an increasingly price competitive environment.
We are the prime contractor on most of our contracts and rely on other companies to provide materials, major components and products, and to perform a portion of the services that are provided to our customers under the terms of most of our contracts. These arrangements may involve subcontracts, teaming arrangements, joint ventures or supply agreements with other companies upon which we rely (contracting parties). There is a risk that the and, in many cases, our contracting party does not perform at all or to our expectations or meet affordability targets and we mayparties in turn rely on lower-tier subcontractors. We occasionally have disputes with our contracting parties, including disputes regarding the quality and timeliness of work performed, the workshare provided to that party,workshares, customer concerns about the other party’s performance, issues related to lower-tier subcontractor performance, our failure to extend existing task ordersissue or issue newextend task orders, or our hiring the personnel of a subcontractor, teammate or joint venture partner or vice versa. We also could also be adversely affected by actions by or issues experienced by our contracting parties that are outside of our control, such as misconduct and reputational issues involving our contracting parties, which could subject us to liability or adversely affect our ability to compete for contract awards.
A failure for whatever reason, by one or more of our contracting parties to provide the agreed-upon suppliesmaterials, components or products or perform the agreed-upon services, on a timely basis, according to specifications, including compliance with regulatory requirements we flow down from our prime contracts, or at all, has and may adversely affect our ability to perform our obligations and require that we transition the work to other companies. Contracting party performance deficiencies may result in additional costs or delays in product deliveries and affect our operating results and could result in a customer terminating our contract for default or convenience. A default termination could expose us to liability and affect our ability to compete for future contracts and orders. A failure by our contracting parties to meet affordability targets could negatively affect our profitability, result in contract losses and affect our ability to win new business.
Additionally, we are affected by government procurement restrictions and issues affecting industry supply chains broadly. For example, U.S. Government statutes and regulations prohibit the sourcing of certain rare earth minerals from specified countries. We seek to manage raw materials supply risk through long-term contracts, identifying domestic or other U.S. allied alternative sources of materials that could be subject to embargo, efforts to increase visibility into our multi-tiered supply chain, and maintaining an acceptable level of our key materials in inventories. In addition, advanced microelectronics, including semiconductors, underpin many of our current and future critical technologies and platforms, and global shortages of these products due to COVID-19, increased demand or other supply chain challenges, as were experienced in 2022, could result in increased procurement lead times and increased costs and potential shortages, which could impact our performance. We also must comply with specific procurement requirements that can limit the number of eligible suppliers and a significant number of the components or supplies used are currently single or sole sourced. Because the identification and qualification of new or additional suppliers can take an extended period of time, issues with suppliers or trade actions that limit our ability to use certain suppliers, especially when single or sole sourced, can have an adverse impact on our business. Complying with U.S.
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Government contracting regulations that limit the source or manufacture of Contentssuppliers and impose stringent cybersecurity regulations also may create challenges for our supply chain and increase costs.
Our success depends, in part, on our ability to develop new technologies, products and services and efficiently produce and deliver existing products.
Many of the products and services we provide are highly engineered and involve sophisticated technologies with related complex manufacturing and systemsystems integration processes. Our customers’ requirements change and evolve regularly. Accordingly, our future performance depends, in part, on our ability to adapt to changing customer needs rapidly, identify emerging technological trends, develop and manufacture innovative products and services efficiently and bring those offerings to market quickly at cost-effective prices. This includes efforts to provide mission solutions that integrate capabilities and resources across all forces and domains, which we refer to as joint all domain operations, and to implement emerging digital and network technologies and capabilities. To advance our innovation and position us to meet our customers’ requirements, we make investments in emerging technologies that we believe are needed to keep pace with rapid industry innovation and seek to collaborate with commercial entities that we believe have complementary technologies to ours. These commercial entities may not be accustomed to government contracting and may be unwilling to agree to the government’s customary terms, including with respect to intellectual property, liability and indemnification terms. Due to the complex and often experimental nature of the products and services we offer, we may experience (and have experienced in the past) technical difficulties during the development of new products or technologies. These technical difficulties could result in delays and higher costs, which may negatively impact our financial results, and could divert resources from other projects, until such products or technologies are fully developed. See “NoteNote 1 – Organization and Significant Accounting Policies”Policies included in our Notes to Consolidated Financial Statements for further details about losses incurred on certain development programs. Additionally, there can be no assurance that our development projects will be successful or meet the needs of our customers.
Our future success in delivering innovative and affordable solutions to our customers relies, in part, on our multi-year business transformation initiative that seeks to significantly enhance our digital infrastructure to increase efficiencies and collaboration throughout our business while reducing costs. This digital transformation effort requires substantial investment and if we are unable to successfully implement the strategy, our results of operations and future competitiveness may be adversely affected.
Our competitors may also develop new technology,technologies, or offerings, or more efficient ways to produce existing products that could cause our existing offerings to become obsolete or that could gain market acceptance before our own competitive offerings. If we fail in our development projects or if our new products or technologies fail to achieve customer acceptance or competitors develop more capable technologies or offerings, we may be unsuccessful in obtaining new contracts or winning all or a portion of next generation programs, and this could adversely affect our future performance and financial results. We also may not be successful in our efforts to grow in key areas such as hypersonics, classified programs, and winning next generation franchise programs, which could adversely affect our future performance.
Adverse macro-economic conditions, including inflation, could adversely impact our operating results.
Heightened levels of inflation and the potential worsening of macro-economic conditions, including slower growth or recession, changes to fiscal and monetary policy, tighter credit, higher interest rates and currency fluctuations, present a risk for us, our suppliers and the stability of the broader defense industrial base. If inflation remains at current levels for an extended period, or increases, and we are unable to successfully mitigate the impact, our costs are likely to increase, resulting in pressure on our profits, margins and cash flows, particularly for existing fixed-price contracts. For new contract proposals, we are factoring into our pricing heightened levels of inflation based on accepted DoD escalation indices and other assumptions, and in some cases seeking the inclusion of economic price adjustment (EPA) clauses, which would permit, subject to the particular contractual terms, cost adjustments in fixed-price contracts for unexpected inflation.
In addition, our business could be adversely impacted by reductions or delays in spending by non-U.S. government customers that are facing budget, inflationary or other pressures, such as increases in the cost of borrowing from rising interest rates. Rising interest rates increase the borrowing costs on new debt and could affect the fair value of our investments. While rising interest rates reduce the measure of our gross pension obligations, they also can lead to decline in pension plan assets with offsetting impacts on our net pension liability. Although we believe defense spending is more resilient to adverse macro-economic conditions than many other industrial sectors, our suppliers and other partners, many of which are more exposed to
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commercial markets or have fewer resources, may be adversely impacted to a more significant degree than we are by an economic downturn, which could affect their performance and adversely impact our operations.
The effects of COVID-19 and other potential future public health crises, epidemics, pandemics or similar events on our business, operating results, financial condition and cash flows are uncertain.
In 2022, our performance was affected by supply chain disruptions and delays, as well as labor challenges associated with employee absences, travel restrictions, site access, quarantine restrictions, remote work, and adjusted work schedules. The ongoing impact of COVID-19 on our operational and financial performance in future periods, including our ability to procureexecute our programs in the expected timeframe, remains uncertain and will depend on future COVID-19-related developments, including the impact of COVID-19 infection or potential new contractsvariants or subvariants, the effectiveness and adoption of COVID-19 vaccines and therapeutics, supplier impacts and related government actions to prevent and manage disease spread, including the implementation of any federal, state, local or foreign COVID-19-related controls. The long-term impacts of COVID-19 on government budgets and other funding priorities, including international priorities, that impact demand for our products and services and our business also are difficult to predict but could negatively affect our future results and performance.
International sales may pose different economic, regulatory, competition and other risks.
International sales present risks that are different and potentially greater than those encountered in our U.S. business. In 2022, 26% of our total net sales were from international customers. International sales are subject to numerous political and economic factors, including changes in foreign national priorities, foreign government budgets, global economic conditions, and fluctuations in foreign currency exchange rates, including the impact of a strong U.S. dollar on the affordability of our products, the possibility of trade sanctions and other government actions, regulatory requirements, significant competition, taxation, and other risks associated with doing business outside the U.S. Sales of military products and any associated industrial cooperation agreements also are subject to U.S. export regulations and foreign policy, and there could be unsuccessfulsignificant delays or other issues in reaching definitive agreements for announced programs. Competition for international sales is intense, including from international manufacturers whose governments sometimes provide research and development assistance, marketing subsidies and other assistance for their products and services.
Our international business is conducted through foreign military sales (FMS) contracted through the U.S. Government and by direct commercial sales (DCS) to international customers. FMS contracts with the U.S. Government are subject to the FAR and the DFARS. Because the U.S. Government functions as an intermediary in FMS sales, we are reliant on the capacity and speed of the DoD’s administration of requests from non-U.S. countries to convert requests to sales. In contrast, DCS transactions represent sales directly to international customers and are subject to U.S. and foreign laws and regulations, including import-export control, technology transfer restrictions, investments, taxation, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act and other anti-corruption laws and regulations, and the anti-boycott provisions of the U.S. Export Control Reform Act of 2018. While we have extensive policies in place to comply with such laws and regulations, failure by us, our employees or others working on our behalf to comply with these laws and regulations could result in administrative, civil, or criminal liabilities, including suspension, debarment from bidding for or performing government contracts, or suspension of our export privileges, which could have a material adverse effect on us. We frequently team with international subcontractors and suppliers who also are exposed to similar risks.
We believe DCS transactions present a higher level of potential risks because they involve direct commercial relationships with parties with which we typically have less familiarity. Additionally, international procurement and local country rules and regulations, contract laws and judicial systems differ from those in the U.S. and, in some cases, may be less predictable than those in the U.S., which could impair our ability to enforce contracts and increase the risk of adverse or unpredictable outcomes, including the possibility that certain matters that would be considered civil matters in the U.S. are treated as criminal matters in other countries.
In conjunction with defense procurements, some international customers require contractors to comply with industrial cooperation regulations, including entering into industrial participation, industrial development or localization agreements, sometimes referred to as offset agreements or contracts, as a condition to obtaining orders for our products and services. These offset agreements or contracts generally extend over several years and obligate the contractor to perform certain commitments, which may include in-country purchases, technology transfers, local manufacturing support, consulting support to in-country projects, investments in joint ventures and financial support projects, and to prefer local suppliers or subcontractors. The customer’s expectations in respect of the scope of offset commitments can be substantial, including high-value content, and may exceed existing local technical capability. Failure to meet these commitments, which can be subjective and outside of our control, may result in significant penalties, and could lead to a reduction in sales to a country. Furthermore, certain of our existing industrial development agreements are dependent upon the successful operation of joint ventures that we do not control and involve products and services that are outside of our core business, which may increase the risk that we fail to meet our
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industrial cooperation agreements, expose us to compliance risks of the joint venture and impair our ability to recover our investment. For more information on our industrial development obligations, including the notional value of our remaining industrial development obligations and potential penalties for non-compliance, see “Contractual Commitments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Geopolitical issues and considerations could have a significant effect on our business.
Our business is highly sensitive to geopolitical issues and changes in regulations (including tariffs, sanctions, embargoes, export and import controls and other trade restrictions), political environments or security risks that may affect our ability to conduct business outside of the U.S., including those regarding investment, procurement, taxation and repatriation of earnings.
Russia’s invasion of Ukraine has significantly elevated global geopolitical tensions and security concerns. Although the conflict has resulted in increased demand for some of our products, the conflict poses certain risks. If we are unable to increase production to meet demand on the timeframe expected by potential customers, whether it be from supply constraints, government funding or otherwise, then we may lose sales opportunities as they seek alternatives, even less capable ones, that may be able to be delivered more quickly. In addition, the U.S. Government and other nations have implemented broad economic sanctions and export controls targeting Russia, which combined with the conflict have the potential to indirectly disrupt our supply chain and access to certain resources. The conflict also has increased the threat of malicious cyber activity from nation states and other actors.
During 2020, China announced it may impose sanctions against us in response to Congressional Notifications of potential Foreign Military Sales to Taiwan, which included sales of our products. We will continue to follow official U.S. Government guidance as it relates to sales to Taiwan and do not see a material impact on our sales at this time. China has not specified the nature of any such sanctions, but could negativelyseek to restrict our commercial sales or supply chain, including the supply of rare earth or other raw materials, and also could impose sanctions on our suppliers, teammates or partners. The nature, timing and potential impact of any sanctions that may be imposed by China or any other related actions that may be taken are uncertain.
International sales also may be adversely affected by actions taken by the U.S. Government in the exercise of foreign policy, Congressional oversight or the financing of particular programs, including the prevention or imposition of conditions upon the sale and delivery of our financialproducts, the imposition of sanctions, or Congressional action to block sales of our products. For example, the U.S. Government has imposed certain sanctions on Türkish entities and persons, which has affected our ability to perform under contracts supporting the Türkish Utility Helicopter Program (TUHP), our work with Türkish industry and our opportunity for sales in Türkiye generally. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on TUHP. In addition, U.S. Government representatives have raised concerns regarding relationships with the Kingdom of Saudi Arabia, where we have existing business and relationships that could be jeopardized if sanctions were imposed. Our inability to perform under contracts with international customers as a result of actions taken by the U.S. Government has resulted and may in the future result in claims and contract terminations by these customers and suppliers, which could have an adverse effect on our operating results.
We may be unable to benefit fully from or adequately protect our intellectual property rights or use third-party intellectual property, which could negatively affect our business.
We routinely apply for and own a substantial number of U.S. and foreign patents and trademarks related to the products and services we provide. In addition to owning a large portfolio of patents and trademarks, we develop and own other intellectual property, including copyrights, trade secrets and research, development and engineering know-how, which contribute significantly to our business. We also license intellectual property to and from third parties. The FAR and DFARS provide that the U.S. governmentGovernment obtains certain rights in intellectual property, including patents, developed by us and our subcontractors and suppliers in performance of government contracts or with government funding. The U.S. governmentGovernment may use or authorize others, including competitors, to use such intellectual property. Non-U.S. governments also may also have certain rights in patents and other intellectual property developed in performance of our contracts with these entities. The U.S. governmentGovernment is taking increasinglypursuing aggressive positions regarding the types of intellectual property to which government use rights apply and when it is appropriate for the government to insist on broad use rights. The DoD is also developingimplementing an overarching intellectual property acquisition policy that will require a greater focus and planning as to intellectual property rights for its programs, and we have no assurance as to the potential impacts of this policy or any associated regulatory changes on future acquisitions. The DoD’s efforts could affect our ability to protect and exploit our intellectual property and to leverage supplier intellectual property, for example, if we are unable to obtain necessary licenses from our suppliers to meet government requirements. Additionally, while we take measures to protect and enforcethird parties may assert that our products or services infringe their intellectual property rights, and to respect the intellectual property rights of others, our intellectual property and intellectual property licensed or obtained from third parties is subject to challenges (such as infringement and misappropriation claims) by third parties, which could result in costly and time-consuming disputes, subject us to damages and injunctions and adversely affect our ability to compete and perform on contracts.
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Our business and other risks.financial performance depends on us identifying, attracting and retaining a highly skilled workforce.
Workforce dynamics are constantly evolving. If we do not manage changing workforce dynamics effectively, it could adversely affect our culture, reputation and operational flexibility. Beginning with the COVID-19 pandemic, a significant portion of our workforce began working remotely and we expect a significant portion to continue to grow international sales, inclusive of sales of F-35 aircraft to our international partner countries and other countries. International sales are subject to numerous political and economic factors, regulatory requirements, significant competition, taxation, and other risks associated with doing business in foreign countries. Our exposure to such risks may further increase if our international sales grow as we anticipate.
It is also critical that we develop and train employees, hire new qualified personnel, and successfully manage the U.S. Government being subject to the FARshort and the DFARS. In contrast, DCS transactions represent sales by us directly to international customerslong-term transfer of critical knowledge and are not subject to the FAR or the DFARS.
Additionally, approximately 19% of our total costs to complete the contract and may impact our profitability and cash flows. The ability to recover investments that we makeworkforce is generally dependent upon the successful operationcomprised of joint ventures that we do not control and may involve products and servicesemployees that are dissimilar to our business activities. In these and other situations,covered by collective bargaining agreements with various unions. If we encounter difficulties with renegotiations or renewals of collective bargaining arrangements or are unsuccessful in those efforts, we could be liable for violations of law forincur additional costs and experience work stoppages. Union actions taken by these entities such as laws related to anti-corruption, import and export, taxation and anti-boycott restrictions. Offset agreements generally extend over several years and may provide for penalties in the event we fail to perform in accordance with the offset requirements, which are typically subjective andat suppliers also can be outside of our control.
Our efforts to minimize the likelihood and impact of adverse cybersecurity incidents and to protect data and intellectual property may not be successful and our business could be negatively affected by cyber or other security threats or other disruptions.
In addition to cyber threats, at customer sites that we operateface threats to the security of our facilities and manage.employees and threats from terrorist acts, which could materially disrupt our business if carried out. We could also be impacted by the improper conduct of our employees or others working on behalf of us who have access to export controlled or classified information, which could adversely affect our business and reputation.
The threats we face vary from attacks common to most industries, such as ransomware, to more advanced and persistent, highly organized adversaries, including nation states. These nation state actors, which target us and other defense contractors for several reasons, including because we protect national security information and develop advanced technology systems.other companies in industries that are part of U.S. critical infrastructure. These threats can cause disruptions to our business operations. If we are unable to protect sensitive information, including complying with evolving information security and data protection/privacy regulations, our customers or governmental authorities could question the adequacy of our threat mitigation and detection processes and procedures. Moreover, depending on the severity of an incident, our customers’ data, our employees’ data, our intellectual property (including trade secrets and research, development and engineering know-how), and other third-party data (such as teammates, joint venture partners, subcontractors, suppliers and vendors) could be compromised. Products and services we provide to customers also carry cybersecurity risks, including risks that they could be breached or fail to detect, prevent or combat attacks, which could result in losses to our customers and claims against us, and could harm our relationships with our customers.customers and financial results.
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We take a variety of precautionshave an extensive global security organization whose mission is to protect our systems and data, including a Computer Incident Response Team (CIRT) to defend against cyber attacks, and regular periodicconduct annual training of our employees on protection of sensitive information, including training intended to prevent the success of “phishing” attacks. However, as a consequence of the persistence, sophistication and volume of cyber attacks, we may not be successful in defending against all such attacks.information. We also have a corporate-wide counterintelligence and insider threat detection program to proactively identify external and internal threats, and mitigate those threats in a timely manner. Nevertheless,Additionally, we partner with our defense industrial base peers, government agencies and cyber associations to share intelligence to further defend against cyber attacks. However, because of the persistence, sophistication and volume of cyber attacks, we may not be successful in defending against an attack that could have a material adverse effect on us and due to the evolving nature of these security threats and the national security aspects of much of the data we protect, the impact of any future incident cannot be predicted. National security considerations may also preclude us from publicly disclosing a cybersecurity incident.
We also typically work cooperatively with our customers, suppliers, subcontractors, joint venture partners and entities we acquire, whomwho or which are subject to similar threats, to seek to minimize the impact of cyber threats, other security threats or business disruptions. However, we must rely on the safeguards put in place by theseThese entities, which are typically outside our control and other entities, none of which we control, whomay have access to our information, and thus may affect the security of our information or the information we are obligated to protect. These entities have varying levels of cybersecurity expertise and safeguards, and their relationships with government contractors, including us, may increase the likelihood that they are targeted by the same cyber threats we face. We have thousands of direct suppliers and even more indirect suppliers with a wide variety of systems and cybersecurity capabilities and adversaries actively seek to exploit security and cybersecurity weaknesses in our supply chain. A breach in our multi-tiered supply chain could impact our data or customer deliverables. We also must rely on this supply chain for detecting and reporting cyber incidents, which could affect our ability to report or respond to cybersecurity incidents effectively or in a timely manner. Because of the ongoing supply chain cyber security-related threats, our customers continue to seek that large prime contractors, like us, take steps to assure the cyber capabilities of their supply chain. Consequently, cyber security events in our supply chain could have an adverse impact on our relationships with our customers.
The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. Additionally, some cyber technologies we develop under contract for our customers, particularly those related to homeland security, may raise potential liabilities related to intellectual property and civil liberties, including privacy concerns, which may not be fully insured or indemnified by other means or involve reputational risk. Our enterprise risk management program includes threat detection and cybersecurity mitigation plans, and our disclosure controls and procedures address cybersecurity and include elements intended to ensure that there is an analysis of potential disclosure obligations arising from security breaches. We also maintain compliance programs to address the potential applicability of restrictions on trading while in possession of material, nonpublic information generally and in connection with a cybersecurity breach.
If we fail to successfully complete or manage acquisitions, divestitures, equity investments and other transactions successfully or if acquired entities or equity investments fail to perform as expected, our financial results, business and future prospects could be harmed.
In pursuing our business strategy, we routinely conduct discussions, evaluate companies, and enter into agreements regarding possible acquisitions, joint ventures, other investments and divestitures. We seek to identify acquisition or investment opportunities that will expand or complement our existing products and services or customer base, at attractivereasonable valuations. We often compete
Acquisition, divestiture, joint venture and investment transactions often require substantial management resources and have the potential to divert our attention from our existing business. Unidentified or identified but un-indemnified pre-closinguncertain liabilities that are not covered by indemnification or other coverage could adversely affect our future financial results,results. This is particularly throughthe case in respect of successor liability under procurement laws and regulations such as the False Claims Act or the Truthful Cost or Pricing Data Act (formerly the Truth in Negotiations Act,Act), anti-corruption, environmental, tax, import-export and technology transfer laws, which provide for civil and criminal penalties and the potential for debarment. We also may incur unanticipated costs or expenses, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, employee retention, transaction-related or other litigation, and other liabilities. Any of the foregoing could adversely affect our business and results of operations.
Joint ventures and other noncontrolling investments operate under shared control with other parties. These investments typically face many of the same risks and uncertainties as we do, but may expose us to additional risks not present if we retained full control. A joint venture partner may have economic or other business interests that are inconsistent with ours and we may be unable to prevent strategic decisions that may adversely affect our business, financial condition and results of
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operations. We also could be adversely affected by, or liable for, actions taken by these joint ventures that we do not control, including violations of anti-corruption, import and export, taxation and anti-boycott laws.
Depending on our rights and percentage of ownership, we may consolidate the financial results of such entities or account for our interests under the equity method. Under the equity method of accounting for nonconsolidated ventures and investments, we recognize our share of the operating profit or loss of these joint ventures in our results of operations. Our operating results may beare affected by the conduct and performance of businesses over which we do not exercise control which includes the inability to prevent strategic decisions that may adversely affect our business, financial condition and, results of operations. Asas a result, we may not be successful in achieving the growth or other intended benefits of strategic investments. Our joint ventures face many of the same risks and uncertainties as we do. The most significant impact of our equity investments is in our Space business segment where approximately 12% of its 2019 operating profit was derived from its share of earnings from equity method investees, particularly that in United Launch Alliance (ULA).
Risks Related to Significant Contingencies, Uncertainties and Estimates, including Pension, Taxes, Environmental and Litigation Costs
Pension funding requirements and costs are dependent on return on pension assets and other economic and actuarial assumptions which if changed may cause our future earnings and cash flow to fluctuate significantly and affect the affordability of our products and services.
Many of our employees and retirees participate in defined benefit pension plans, retiree medical and life insurance plans, and other postemployment plans (collectively, postretirement benefit plans). The impact of these plans on our earnings may be volatile in that the amount of expense or income we record for our postretirement benefit plans may materially change from year to year because the calculations are sensitive to changes in several key economic assumptions including interest rates and rates of return on plan assets, other actuarial assumptions including participant longevity (also known as mortality), as well as the timing of cash funding. Changes in these factors, including actual returns on plan assets, may also affect our plan funding, cash flows and stockholders’ equity. We could be required to make pension contributions earlier and/or in excess than planned if our return on pension assets is less than our assumptions, which would reduce our free cash flow.
With regard to cash flow, we have made substantial cash contributions to our plans as required by the Employee Retirement Income Security Act of 1974 (ERISA), as amended, and expect to make future contributions as required or when deemed prudent. We generally can recover a significant portion of these contributions related to our plans as allowable costs on our U.S. Government contracts, including FMS. However, there is a lag between the time when we contribute cash to our plans under pension funding rules and when we recover pension costs under U.S. Government Cost Accounting Standards (CAS), which can affect the timing of our cash flows. Our business segments’ results of operations include pension expense as calculated under CAS while our consolidated financial statements must present pension income or expense in accordance with U.S. GAAP Financial Accounting Standards (FAS); differences in these accounting rules may result in significant period adjustments referred to as our FAS/CAS pension adjustments.
In recent years, we have taken actions intended to mitigate the risk related to our defined benefit pension plans through pension risk transfer transactions whereby we purchase group annuity contracts (GACs) from insurance companies using assets from the pension trust. We expect to continue to increase our dividend orevaluate such transactions in the future. Although under the majority of the GACs we have purchased we are relieved of all responsibility for the associated pension obligations, we have purchased and may in the future purchase GACs whereby the insurance company reimburses the pension plans but we remain responsible for paying benefits under the plans to repurchase shares of our common stock at current levels.
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For more information on how these factors could impact earnings, financial position, cash flow and stockholders’ equity, see “Critical Accounting Policies - Postretirement Benefit Plans” in the MD&A and “Note 11 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements.
Our estimates and projections may prove to be inaccurate and certain of our assets may be at risk of future impairment.
The accounting for some of our most significant activities is based on judgments and estimates, which are complex and subject to many variables. For example, accounting for sales using the percentage-of-completion method requires that we assess risks and make assumptions regarding future schedule, cost, technical and performance issues for thousands of contracts, many of which are long-term in nature. This process can be especially difficult when estimating costs for development programs because of the inherent uncertainty in developing a new product or technology. Additionally, we initially allocate the purchase price of acquired businesses based on a preliminary assessment of the fair value of identifiable assets acquired and liabilities assumed. For significant acquisitions we may use a one-year measurement period to analyze and assess a number of factors used in establishing the asset and liability fair values as of the acquisition date which could result in adjustments to asset and liability balances.
We have $10.8 billion of goodwill assets recorded on our consolidated balance sheet as of December 31, 2022 from previous acquisitions, which represents approximately 20% of our total assets. These goodwill assets are subject to annual impairment testing and more frequent testing upon the occurrence of certain events or significant changes in circumstances that indicate goodwill may be impaired. If we experience changes or factors arise that negatively affect the expected cash flows of a reporting unit, we may be required to write off all or a portion of the reporting unit’s related goodwill assets. The carrying value and fair value of our Sikorsky reporting unit are closely aligned. Therefore, any business deterioration, including the outcome of upcoming contract awards, contract cancellations or terminations, or market pressures could cause our sales, earnings and cash flows to decline below current projections and could cause goodwill and intangible assets to be impaired. Goodwill and trademarks associated with Sikorsky were approximately $3.5 billion as of December 31, 2022. Additionally, Sikorsky may not perform as expected, or demand for its products may be adversely affected by global economic conditions, including oil and gas trends that are outside of our control.
Actual financial results could differ from our judgments and estimates. See “Critical Accounting Policies” in the MD&A and Results of Operations and “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for a complete discussion of our significant accounting policies and use of estimates.
Changes in tax laws and regulations or exposure to additional tax liabilities could adversely affect our financial results.
Changes in U.S. (federal or state) or foreign tax laws and regulations, or their interpretation and application, including those with retroactive effect, could result in increases in our tax expense and affect profitability and cash flows. For example, beginning in 2022, the discretionTax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for tax purposes. While the most significant impact of this provision is to cash tax liability for 2022, the tax year in which the provision took effect, the impact will decline annually over the five-year amortization period to an immaterial amount in year six.
The amount of net deferred tax assets will change periodically based on several factors, including the measurement of our Boardpostretirement benefit plan obligations, actual cash contributions to our postretirement benefit plans, change in the amount or reevaluation of Directorsuncertain tax positions, and future changes in tax laws. In addition, we are determined after considering then-existing conditions,regularly under audit or examination by tax authorities, including earnings, other operating resultsforeign tax authorities. The final determination of tax audits and capital requirements. Our payment of dividends and share repurchasesany related litigation could vary from historical practices or our stated expectations. Decreasessimilarly result in asset values orunanticipated increases in liabilities, including liabilities associated with benefit plansour tax expense and assetsaffect profitability and liabilities associated with taxes, can reduce net earnings and stockholders’ equity. A deficit in stockholders’ equity could limit our ability to pay dividends and make share repurchases under Maryland state law in the future. In addition, the timing and amount of share repurchases under board approved share repurchase plans is within the discretion of management and will depend on many factors, including results of operations, capital requirements and applicable law.cash flows.
Our business involves significant risks and uncertainties that may not be covered by indemnity or insurance.
A significant portion of our business relates to designing, developing and manufacturing advanced defense and technology products and systems. New technologies may be untested or unproven. Failure of some of these products and services could result in extensive loss of life or property damage. Accordingly, we may incur liabilities that are unique to our products and services. In some but not all circumstances, we may be entitled to certain legal protections or indemnifications from our customers, either through U.S. Government indemnifications under Public Law 85-804, 10 U.S.C. 3861, the Commercial Space Launch Act or the Price-Anderson Act, qualification of our products and services by the Department of Homeland Security under the SAFETY Act provisions of the Homeland Security Act of 2002, contractual provisions or otherwise.
We endeavorseek to obtain insurance coverage from established and reputable insurance carriers to the extent available in order to cover these
risks and liabilities. TheHowever, the amount of insurance coverage that we maintain or that is available to purchase in the market may not be adequate to cover all claims or liabilities. Insurance coverage is subject to the terms and conditions of the insurance contract and is further subject to any sublimits, exclusions, restrictions, or defenses, including standard exclusions for
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acts of war. Existing coverage is renewed annually and may be canceled pursuant to the terms of the policies while we remain exposed to the risk and it is not possible to obtain insurance to protect against all operational risks, natural hazards and liabilities. For example, we are limited in the amount of insurance we can obtain to cover unusually hazardous risks or certain natural hazards such as earthquakes, fires or extreme weather conditions.conditions, some of which may be exacerbated by climate change. We have significant operations in geographic areas prone to these risks, such as in California, Florida and Texas.Texas and certain of our properties have suffered damage from natural disasters in the past and may again in the future. We could incur significant costs to improve the climate resiliency of our infrastructure and supply chain and otherwise prepare for, respond to, and mitigate the effects of climate change. In addition, under certain classified fixed price development and production contracts, we are unable to insure risk of loss to government property because of the classified nature of the contracts and the inability to disclose classified information necessary for underwriting and claims to commercial insurers. Even if insurance coverage is available, we may not be able to obtain it in an amount, at a price or on terms acceptable to us. Some insurance providers may be unable or unwilling to provide us insurance given the nature of our business or products. Additionally, disputes with insurance carriers over coverage terms or the insolvency of one or more of our insurance carriers may significantly affect the amount or timing of our cash flows.
Substantial costs resulting from an accident; failure of or defect in our products or services; natural catastrophe or other incident; or liability arising from our products and services in excess of any legal protection, indemnity, and our insurance coverage (or for which indemnity or insurance is not available or not obtained) could adversely impact our financial condition, cash flows, and operating results. Any accident, failure of, or defect in our products or services, even if fully indemnified or insured, could negatively affect our reputation among our customers and the public and make it more difficult for us to compete effectively. It also could affect the cost and availability of adequate insurance in the future.
We manage and have managed various U.S. Government-owned facilities on behalf of the U.S. Government. At such facilities, environmental compliance and remediation costs historically have been the responsibility of the U.S. Government. We have relied, and continue to rely with respect to past practices, on U.S. Government funding to pay such costs, notwithstanding efforts by some U.S. Government representatives to limit this responsibility. Although the U.S. Government remains responsible for capital and operating costs associated with environmental compliance, responsibility for fines and penalties associated with environmental noncompliance typically is borne by either the U.S. Government or the contractor, depending on the contract and the relevant facts. Some environmental laws include criminal provisions. A conviction under environmental law could affect our ability to be awarded future or perform under existing U.S. Government contracts.
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GHG emission reduction targets, lower emission products or other climate risks, in evaluating bids could result in costly changes to our operations or affect our competitiveness on future bids, or our ability to bid at all. In addition to incurring direct costs to implement any climate-change related laws, regulations or policies, we may see indirect costs rise, such as increased energy or material costs, as a result of policies affecting other sectors of the economy. Although most of these increased costs likely would be reasonably estimated at this time. Amongrecoverable through pricing, to the variables management must assessextent that the increase in evaluatingour costs as a result of these policies are greater than our competitors we may be less competitive on future bids or the total increased cost in our industry’s products and services could result in lower demand from our customers. We monitor developments in climate change-related laws, regulations and policies for their potential effect on us, however, we currently are not able to accurately predict the materiality of any potential costs associated with these casessuch developments. In addition, climate change-related litigation and remediation sites generally are the status
We are involved in a number of legal proceedings. We cannot predict the outcome of litigation and other contingencies with certainty.
Our business may be adversely affected by the outcome of legal proceedings and other contingencies that cannot be predicted with certainty. As required by U.S. GAAP, we estimate loss contingencies and establish reserves based on our assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time. Subsequent developments in legal proceedings may affect our assessment and estimates of the loss contingency recorded as a liability or as a reserve against assets in our financial statements. For a description of our current legal proceedings, see Item 3 - Legal Proceedings, along with“Critical Accounting Policies - Environmental Matters” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and “Note 14 – Legal Proceedings, Commitments and Contingencies” included in our Notes to Consolidated Financial Statements.
Risks Related to Ownership of our Common Stock
There can be no assurance that we will continue to increase our dividend or to repurchase shares of our common stock.
Cash dividend payments and share repurchases are subject to limitations under applicable laws and the discretion of our Board of Directors and are determined after considering then-existing conditions, including earnings, other operating results and capital requirements and cash deployment alternatives. Our businesspayment of dividends and financial performance depends,share repurchases could vary from historical practices or our stated expectations. Decreases in part, onasset values or increases in liabilities, including liabilities associated with employee benefit plans and assets and liabilities associated with taxes, can reduce net earnings and stockholders’ equity. Under certain circumstances, a deficit in stockholders’ equity could limit our ability to identify, attractpay dividends and retain a highly skilled workforce.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
At December 31, 2019,2022, we owned or leased building space (including offices, manufacturing plants, warehouses, service centers, laboratories and other facilities) at approximately 375339 locations primarily in the U.S. Additionally, we managedmanage or occupied approximately 15occupy 10 government-owned facilities under lease and other arrangements. At December 31, 2019,2022, we had significant operations in the following locations:
•Aeronautics - Palmdale, California; Marietta, Georgia; Greenville, South Carolina; and Fort Worth, Texas. •Missiles and Fire Control - Camden, Arkansas; Ocala and Orlando, Florida; Lexington, Kentucky; and Grand Prairie, Texas. •Rotary and Mission Systems - Stratford, Connecticut; Orlando, Florida; Moorestown/Mt. Laurel, New Jersey; Owego and Syracuse, New York; Manassas, Virginia; and Mielec, Poland. •Space - Huntsville, Alabama; Sunnyvale, California; Denver, Colorado; Cape Canaveral, Florida; and Valley Forge, Pennsylvania. • |
Corporate activities - Bethesda, Maryland. |
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The following is a summary of our square feet of floor space owned, leased, or utilized by business segment at December 31, 20192022 (in millions):
| Owned | Leased | Government- Owned | Total | |||||||||||||
| Aeronautics | 5.0 | 2.7 | 14.5 | 22.2 | ||||||||||||
| Missiles and Fire Control | 6.7 | 3.0 | 1.8 | 11.5 | ||||||||||||
| Rotary and Mission Systems | 11.2 | 6.1 | 0.5 | 17.8 | ||||||||||||
| Space | 8.8 | 2.1 | 5.4 | 16.3 | ||||||||||||
| Corporate activities | 2.6 | 1.0 | — | 3.6 | ||||||||||||
| Total | 34.3 | 14.9 | 22.2 | 71.4 | ||||||||||||
| Owned | Leased | Government- Owned | Total | |||||||||||||||||||||||||||||||||||
| Aeronautics | 5.5 | 3.0 | 14.7 | 23.2 | ||||||||||||||||||||||||||||||||||
| Missiles and Fire Control | 7.8 | 2.6 | 2.2 | 12.6 | ||||||||||||||||||||||||||||||||||
| Rotary and Mission Systems | 11.2 | 4.7 | 0.2 | 16.1 | ||||||||||||||||||||||||||||||||||
| Space | 9.3 | 2.9 | 0.9 | 13.1 | ||||||||||||||||||||||||||||||||||
| Corporate activities | 2.4 | 0.9 | — | 3.3 | ||||||||||||||||||||||||||||||||||
| Total | 36.2 | 14.1 | 18.0 | 68.3 | ||||||||||||||||||||||||||||||||||
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.
ITEM 3. Legal Proceedings
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 will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings and cash flows in any particular interim reporting period. We cannot predict the outcome of legal or other proceedings with certainty.
We are subject to federal, state, local and foreign requirements for the protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. Due in part to the complexity and pervasiveness of these requirements, we are a party to or have property subject to various lawsuits, proceedings and remediation obligations. The extent of our financial exposure cannot in all cases be reasonably estimated at this time.
For information regarding the matters discussed above, including current estimates of the amounts that we believe are required for remediation or clean-up to the extent estimable, see “Critical Accounting Policies - Environmental Matters” in Management’s“Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations” and “Note 14 – Legal Proceedings, Commitments and Contingencies” included in our Notes to Consolidated Financial Statements.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 4(a). Information about our Executive Officers
Our executive officers as of February 7, 2020January 26, 2023 are listed below, with their ages on that date, positions and offices currently held, and principal occupation and business experience during at least the last five years. There wereare no family relationships among any of our executive officers and directors. All executive officers serve at the discretion of the Board of Directors.
Mr. AmbroseCahill has served as Executive Vice President for the Missiles and Fire Control (MFC) business segment, since November 2022. Mr. Cahill previously served as Senior Vice President of Global Business Development & Strategy (GBD&S) from March 2021 to October 2022. Prior to that, Mr. Cahill served as Senior Vice President Lockheed Martin International from October 2019 to March 2021; and as Vice President, Integrated Air and Missile Defense (IAMD) Systems for MFC from January 2016 to October 2019.
Stephanie C. Hill (age 58), Executive Vice President – Rotary and Mission Systems
Ms. Hill has served as Executive Vice President of SpaceRotary and Mission Systems (RMS) since April 2013.
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Maryanne R. Lavan (age 60)63), Senior Vice President, General Counsel and Corporate Secretary
Ms. Lavan has served as Senior Vice President, General Counsel and Corporate Secretary since September 2010.
Mr. Lightfoot has served as Executive Vice President of Space since January 2022. He previously served as Vice President, Operations of the Space business segment from June 2021 to December 2021. Prior to that, he served as Vice President, Strategy and Business Development of Space from May 2019 to June 2021. Prior to joining Lockheed Martin in 2019, Mr. Lightfoot served as President, LSINC Corporation, a provider of product development and engineering services, from May 2018 to May 2019. Prior to that, he was Associate Administrator at the National Aeronautics & Space Administration (NASA), the agency’s highest-ranking civil service position, from March 2012 to April 2018.
Jesus Malave (age 54), Chief Financial Officer
Mr. Malave has served as Chief Financial Officer since January 31, 2022. Prior to joining Lockheed Martin in 2022, Mr. Malave served as Senior Vice President and Chief Financial Officer of L3Harris Technologies, Inc. (L3Harris) from June 2019 to January 2022. Before joining L3Harris, Mr. Malave worked at United Technologies Corporation (UTC) as Vice President and Chief Financial Officer of UTC’s Carrier Corporation from April 2018 to June 2019; and as Chief Financial Officer of UTC’s Aerospace Systems from January 2015 to April 2018.
H. Edward Paul, III (age 47), Vice President and Controller
Mr. Paul has served as Vice President and Controller since June 2022. Previously, he served as Vice President Accounting from March 2015 to June 2022.
Evan T. Scott (age 45), Vice President and Treasurer
Mr. MollardScott has served as Vice President and Treasurer since April 2016. He previously served as Vice President, Corporate Financial Planning and Analysis from 2003 to April 2016.
June 2022. Previously, Mr. Possenriede has served as Executive Vice President and Chief Financial Officer since February 2019. He previously served as Vice President of Finance and Program Management in our Aeronautics segment from April 2016 to February 2019. Prior to that, heScott served as Vice President and Assistant Treasurer from 2011 through April 2016.August 2021 to June 2022. Prior to that, Mr. Scott was Vice President, Finance and Business Operations of the Space business segment from March 2019 to August 2021; and Vice President and Controller of the Missiles and Fire Control business segment from March 2015 to March 2019.
Frank A. St. John (age 53)56), Executive Vice President - Rotary and Mission SystemsChief Operating Officer
Mr. St. John has served as Executive Vice President of RMSChief Operating Officer since August 2019.June 2020. He previously served as Executive Vice President of MFCRMS from January 2018August 2019 to August 2019.June 2020. Prior to that, he served as Executive Vice President of the Missiles and Fire Control (MFC) business segment from January 2018 to August 2019; and as Executive Vice President and Deputy Programs in ourfor MFC segment from June 2017 to January 2018;2018.
James D. Taiclet (age 62), Chairman, President and Chief Executive Officer
Mr. Taiclet has served as Chairman since March 2021 and as President and Chief Executive Officer (CEO) of Lockheed Martin since June 2020. He has served on the Lockheed Martin Board of Directors since January 2018. Previously, he was Chairman, President and CEO of American Tower Corporation from February 2004 to March 2020; and Executive Chairman from March 2020 to May 2020.
Gregory M. Ulmer (age 58), Executive Vice President Orlando Operations– Aeronautics
Mr. Ulmer has served as Executive Vice President, Aeronautics since February 2021. He served as Vice President and Tactical Missiles/Combat Maneuver SystemsGeneral 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 in our MFC segmentunit from 2011March 2016 to May 2017.March 2018.
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PART II
ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
At January 31, 2020,20, 2023, we had 25,68323,358 holders of record of our common stock, par value $1 per share. Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol LMT.
Stockholder Return Performance Graph
The following graph compares the total return on a cumulative basis through December 31, 2022, assuming reinvestment of dividends, of $100 invested in Lockheed Martin common stock as of market close on December 31, 201429, 2017 to the Standard and Poor’s (S&P) 500 Index and the S&P Aerospace & Defense Index.
The S&P Aerospace & Defense Index comprises Arconic Inc.,The Boeing Company, General Dynamics Corporation, Howmet Aerospace Inc., Huntington Ingalls Industries, L3Harris Technologies, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Company,Technologies Corporation, Textron Inc., The Boeing Company, and Transdigm Group Inc., and United Technologies Corporation. The stockholder return performance indicated on the graph is not a guarantee of future performance.
This graph is not deemed to be “soliciting material” or 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.
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Purchases of Equity Securities
There were no sales of unregistered equity securities during the quarter ended December 31, 2019.2022.
The following table provides information about our repurchases of our common stock that is registered pursuant to Section 12 of the Securities Exchange Act of 1934 during the quarter ended December 31, 2019.2022.
Period (a) | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (b) | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
September 26, 2022 – October 30, 2022 (c) | 7,225,959 | $ | 408.50 | 7,224,954 | $ | 10,023 | ||||||||||||||||||||
| October 31, 2022 – November 27, 2022 | 961 | $ | 474.20 | — | $ | 10,023 | ||||||||||||||||||||
| November 28, 2022 – December 31, 2022 | 4,249 | $ | 482.93 | — | $ | 10,023 | ||||||||||||||||||||
Total (c)(d) | 7,231,169 | $ | 410.10 | 7,224,954 | ||||||||||||||||||||||
(a)We close our books and records on the last Sunday of each month to align our financial closing with our business processes, except for the month of December, as our fiscal year ends on December 31. As a result, our fiscal months often differ from the calendar months. For example, November 28, 2022 was the first day of our December 2022 fiscal month.
(b)In 2010, our Board of Directors approved a share repurchase program pursuant to which we are authorized to repurchase our common stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current market prices. From time to time, our Board of Directors authorizes increases to our share repurchase program. On October 17, 2022, the Board of Directors authorized an increase to the program by $14.0 billion. The total remaining authorization for future common share repurchases under our share repurchase program was $10.0 billion as of December 31, 2022. Under the program, management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. This includes purchases pursuant to Rule 10b5-1 plans, including accelerated share repurchases. The program does not have an expiration date.
(c)During the fourth quarter of 2022, we entered into an accelerated share repurchase (ASR) agreement to repurchase $4.0 billion of our common stock. Under the terms of the ASR agreement, we paid $4.0 billion and received an initial delivery of 6,995,147 shares of our common stock. We expect to receive additional shares upon final settlement, which is expected in March or April 2023. The total number of shares of common stock to be received under the ASR agreement will be based on an average volume-weighted average price (VWAP) of our common stock during the term of the ASR agreement, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR agreement. Average Price Paid Per Share in the table above does not include ASR shares.
(d)During the fourth quarter of 2022, the total number of shares purchased included 6,215 shares that were transferred to us by employees in satisfaction of tax withholding obligations associated with the vesting of restricted stock units. These purchases were made pursuant to a separate authorization by our Board of Directors and are not included within the share repurchase program described above.
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Period (a) | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b) | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (b) | ||||||||||
| (in millions) | ||||||||||||||
| September 30, 2019 – October 27, 2019 | 349,909 | $ | 375.53 | 349,909 | $ | 3,161 | ||||||||
October 28, 2019 – November 24, 2019(c) | 658,886 | $ | 381.99 | 658,886 | $ | 2,811 | ||||||||
November 25, 2019 – December 31, 2019(c)(d) | 268,914 | $ | 382.20 | 257,363 | $ | 2,811 | ||||||||
Total(c) | 1,277,709 | $ | 380.27 | 1,266,158 | ||||||||||
ITEM 6. Selected Financial Data
| (In millions, except per share data) | 2022 | 2021 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Operating results | ||||||||||||||||||||||||||||||||
| Net sales | $ | 65,984 | $ | 67,044 | $ | 65,398 | $ | 59,812 | $ | 53,762 | ||||||||||||||||||||||
Operating profit (a)(b) | 8,348 | 9,123 | 8,644 | 8,545 | 7,334 | |||||||||||||||||||||||||||
Net earnings from continuing operations (a)(b)(c)(d)(e)(f)(g)(h) | 5,732 | 6,315 | 6,888 | 6,230 | 5,046 | |||||||||||||||||||||||||||
| Net loss from discontinued operations | — | — | (55) | — | — | |||||||||||||||||||||||||||
Net earnings (a)(b)(c)(d)(e)(f)(g)(h) | 5,732 | 6,315 | 6,833 | 6,230 | 5,046 | |||||||||||||||||||||||||||
| Earnings from continuing operations per common share | ||||||||||||||||||||||||||||||||
Basic (a)(b)(c)(d)(e)(f)(g)(h) | 21.74 | 22.85 | 24.60 | 22.09 | 17.74 | |||||||||||||||||||||||||||
Diluted (a)(b)(c)(d)(e)(f)(g)(h) | 21.66 | 22.76 | 24.50 | 21.95 | 17.59 | |||||||||||||||||||||||||||
| Earnings (loss) from discontinued operations per common share | ||||||||||||||||||||||||||||||||
| Basic | — | — | (0.20) | — | — | |||||||||||||||||||||||||||
| Diluted | — | — | (0.20) | — | — | |||||||||||||||||||||||||||
| Earnings per common share | ||||||||||||||||||||||||||||||||
Basic (a)(b)(c)(d)(e)(f)(g)(h) | 21.74 | 22.85 | 24.40 | 22.09 | 17.74 | |||||||||||||||||||||||||||
Diluted (a)(b)(c)(d)(e)(f)(g)(h) | 21.66 | 22.76 | 24.30 | 21.95 | 17.59 | |||||||||||||||||||||||||||
| Cash dividends declared per common share | $ | 11.40 | $ | 10.60 | $ | 9.80 | $ | 9.00 | $ | 8.20 | ||||||||||||||||||||||
| Balance sheet | ||||||||||||||||||||||||||||||||
| Cash, cash equivalents and short-term investments | $ | 2,547 | $ | 3,604 | $ | 3,160 | $ | 1,514 | $ | 772 | ||||||||||||||||||||||
| Total current assets | 20,991 | 19,815 | 19,378 | 17,095 | 16,103 | |||||||||||||||||||||||||||
| Goodwill | 10,780 | 10,813 | 10,806 | 10,604 | 10,769 | |||||||||||||||||||||||||||
Total assets (i) | 52,880 | 50,873 | 50,710 | 47,528 | 44,876 | |||||||||||||||||||||||||||
| Total current liabilities | 15,887 | 13,997 | 13,933 | 13,972 | 14,398 | |||||||||||||||||||||||||||
| Total debt, net | 15,547 | 11,676 | 12,169 | 12,654 | 14,104 | |||||||||||||||||||||||||||
Total liabilities (c)(i) | 43,614 | 39,914 | 44,672 | 44,357 | 43,427 | |||||||||||||||||||||||||||
| Total equity | 9,266 | 10,959 | 6,038 | 3,171 | 1,449 | |||||||||||||||||||||||||||
| Common shares in stockholders’ equity at year-end | 254 | 271 | 279 | 280 | 281 | |||||||||||||||||||||||||||
| Cash flow information | ||||||||||||||||||||||||||||||||
Net cash provided by operating activities (b) | $ | 7,802 | $ | 9,221 | $ | 8,183 | $ | 7,311 | $ | 3,138 | ||||||||||||||||||||||
| Net cash used for investing activities | (1,789) | (1,161) | (2,010) | (1,241) | (1,075) | |||||||||||||||||||||||||||
| Net cash used for financing activities | (7,070) | (7,616) | (4,527) | (5,328) | (4,152) | |||||||||||||||||||||||||||
| Backlog | $ | 149,998 | $ | 135,355 | $ | 147,131 | $ | 143,981 | $ | 130,468 | ||||||||||||||||||||||
(a)Our operating profit and net earnings from continuing operations and earnings per share from continuing operations in 2022 were affected by $100 million ($79 million, or $0.31 per share, after-tax) of certain severance and other charges that relate to actions at our RMS business segment, which include severance costs for reduction of positions and asset impairment charges; severance and restructuring charges of $36 million ($28 million, or $0.10 per share, after-tax) in 2021; severance charges of $27 million ($21 million, or $0.08 per share, after-tax) in 2020; and severance and restructuring charges of $96 million ($76 million, or $0.26 per share, after-tax) in 2018. See “Note 16 – Severance and Other Charges” included in our Notes to Consolidated Financial Statements for more information.
(b)The impact of our postretirement benefit plans can cause our operating profit, net earnings, cash flows and certain amounts recorded on our consolidated balance sheets to fluctuate. Accordingly, our net earnings were affected by a FAS/CAS pension adjustment of $738 million in 2022, $668 million in 2021, $2.1 billion in 2020, $1.5 billion in 2019, and $1.0 billion in 2018. We made no pension contributions in both 2022 and 2021, $1.0 billion in both 2020 and 2019, and $5.0 billion in 2018. These contributions caused fluctuations in our operating cash flows and cash balance between each of those years. See “Critical Accounting Policies - Postretirement Benefit Plans” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information.
(c)Net earnings include a noncash, non-operating pension settlement charge of $1.5 billion ($1.2 billion, or $4.33 per share, after-tax) in 2022, and $1.7 billion ($1.3 billion, or $4.72 per share, after-tax) in 2021, related to the purchase of group annuity contracts to transfer $4.3 billion and $4.9 billion of gross pension obligations and related plan assets to an insurance company.
(d)Net earnings in 2022 and 2021 include net losses of $114 million ($86 million, or 0.33 per share, after-tax) and net gains of $265 million ($199 million, or $0.72 per share, after-tax) due to changes in the fair value of certain mark-to-market investments.
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| (In millions, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Operating results (a) | ||||||||||||||||||||
| Net sales | $ | 59,812 | $ | 53,762 | $ | 49,960 | $ | 47,290 | $ | 40,536 | ||||||||||
Operating profit (b)(c)(d)(e)(f) | 8,545 | 7,334 | 6,744 | 5,888 | 5,233 | |||||||||||||||
Net earnings from continuing operations (b)(c)(d)(e)(f)(g)(h) | 6,230 | 5,046 | 1,890 | 3,661 | 3,126 | |||||||||||||||
Net earnings from discontinued operations (i) | — | — | 73 | 1,512 | 479 | |||||||||||||||
Net earnings (c)(d)(e)(f)(g)(h) | 6,230 | 5,046 | 1,963 | 5,173 | 3,605 | |||||||||||||||
| Earnings from continuing operations per common share | ||||||||||||||||||||
Basic (b)(c)(d)(e)(f)(g)(h) | 22.09 | 17.74 | 6.56 | 12.23 | 10.07 | |||||||||||||||
Diluted (b)(c)(d)(e)(f)(g)(h) | 21.95 | 17.59 | 6.50 | 12.08 | 9.93 | |||||||||||||||
| Earnings from discontinued operations per common share | ||||||||||||||||||||
| Basic | — | — | 0.26 | 5.05 | 1.55 | |||||||||||||||
| Diluted | — | — | 0.25 | 4.99 | 1.53 | |||||||||||||||
| Earnings per common share | ||||||||||||||||||||
Basic (b)(c)(d)(e)(f)(g)(h) | 22.09 | 17.74 | 6.82 | 17.28 | 11.62 | |||||||||||||||
Diluted (b)(c)(d)(e)(f)(g)(h) | 21.95 | 17.59 | 6.75 | 17.07 | 11.46 | |||||||||||||||
| Cash dividends declared per common share | $ | 9.00 | $ | 8.20 | $ | 7.46 | $ | 6.77 | $ | 6.15 | ||||||||||
Balance sheet (a) | ||||||||||||||||||||
Cash, cash equivalents and short-term investments (c) | $ | 1,514 | $ | 772 | $ | 2,861 | $ | 1,837 | $ | 1,090 | ||||||||||
Total current assets (j) | 17,095 | 16,103 | 17,505 | 14,780 | 14,573 | |||||||||||||||
| Goodwill | 10,604 | 10,769 | 10,807 | 10,764 | 10,695 | |||||||||||||||
Total assets (c)(j)(k) | 47,528 | 44,876 | 46,620 | 47,560 | 49,304 | |||||||||||||||
Total current liabilities (j) | 13,972 | 14,398 | 12,913 | 12,456 | 13,918 | |||||||||||||||
| Total debt, net | 12,654 | 14,104 | 14,263 | 14,282 | 15,261 | |||||||||||||||
Total liabilities (c)(j)(k) | 44,357 | 43,427 | 47,396 | 46,083 | 46,207 | |||||||||||||||
Total equity (deficit) (c)(g) | 3,171 | 1,449 | (776 | ) | 1,477 | 3,097 | ||||||||||||||
| Common shares in stockholders’ equity at year-end | 280 | 281 | 284 | 289 | 303 | |||||||||||||||
| Cash flow information | ||||||||||||||||||||
Net cash provided by operating activities (c) | $ | 7,311 | $ | 3,138 | $ | 6,476 | $ | 5,189 | $ | 5,101 | ||||||||||
Net cash used for investing activities (l) | (1,241 | ) | (1,075 | ) | (1,147 | ) | (985 | ) | (9,734 | ) | ||||||||||
Net cash (used for) provided by financing activities (m) | (5,328 | ) | (4,152 | ) | (4,305 | ) | (3,457 | ) | 4,277 | |||||||||||
Backlog (a)(n) | $ | 143,981 | $ | 130,468 | $ | 105,493 | $ | 103,458 | $ | 94,756 | ||||||||||
(f)For the years ended December 31, 2020 and 2018, operating profit includes noncash asset impairment charges of $128 million ($96 million, or $0.34 per share, after-tax) and |
(g)In 2019, we recorded previously deferred noncash gains of $51 million ($38 million, or $0.13 per share, after-tax) related to properties sold in 2015 as a result of completing our remaining obligations. (h)Net earnings for the year ended December 31, 2019 include benefits of $127 million ($0.45 per share) for additional tax deductions for the prior year, primarily attributable to foreign derived intangible income treatment based on proposed tax regulations released on March 4, 2019 and a change in our tax accounting method. Net earnings for the year ended December 31, 2018 include benefits of $146 million ($0.51 per share) for additional tax deductions for the prior year, primarily attributable to true-ups to the net one-time charges related to the Tax Cuts and Jobs Act enacted on December 22, 2017 and our change in tax accounting method. (i)Effective January 1, 2019, we adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). Upon adoption, we recorded right-of-use operating lease assets of $1.0 billion and operating lease liabilities of $1.1 billion, approximately $855 million of which were classified as noncurrent. There was no impact to our consolidated statements of earnings or cash flows as a result of adopting this standard. Prior periods were not restated for the adoption of ASU 2016-02. |
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and notes thereto included in Item 8 - Financial Statements and Supplementary Data.
The MD&A generally discusses 20192022 and 20182021 items and year-to-year comparisons between 20192022 and 2018.2021. Discussions of 20172020 items and year-to-year comparisons between 20182021 and 20172020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results or Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20182021 filed with the SEC on February 8, 2019.January 25, 2022.
Business Overview
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. Our main areas of focus are in defense, space, intelligence, homeland security and information technology, including cybersecurity. We serve both U.S. and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S. Government. In 2019, 71%2022, 73% of our $59.8$66.0 billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 61%64% from the Department of Defense (DoD)), 28%26% 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 operate in four business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space. We organize our business segments based on the nature of the products and services offered.
We operate in an environment characterized by both complexity ina complex and evolving global security environment. Our strategy consists of the design and continuing economic pressuresdevelopment of platforms and systems that meet the future requirements of 21st Century Security. Our vision for 21st Century Security is to accelerate the adoption of advanced networking and leading-edge technologies into our national defense enterprise, while enhancing the performance and value of our platforms and products for our customers. The aim of 21st Century Security is to integrate new and existing systems across all domains with advanced, open-architecture networking and operational technologies to make forces more agile, adaptive and unpredictable.
21st Century Security is an overarching vision that will guide our investment and strategy and we are also focused on four elements for potential growth in the U.S.near to mid-term: current programs of record, classified programs, hypersonics and globally. Anew awards. We have multiple programs of record from each business segment that are entering growth stages, including the F-35 sustainment activity (Aeronautics), increased PAC-3 production rates (Missiles and Fire Control), CH-53K heavy lift helicopter (Rotary and Mission Systems), and the modernization and enhancements to the Trident II D5 Fleet Ballistic Missile (Space). We are engaged in significant componentclassified development programs and pending successful achievement of the objectives within those programs, we expect to begin the transition from development to production over the next few years. We are currently performing on multiple hypersonic programs and following the successful completion of ongoing testing and evaluation activity, multiple programs are expected to enter early production phases between 2023 and 2026. Finally, we are always in pursuit of new program awards to develop future platforms that enable us to continue to place security capability into the market and expand our global reach.
Key to enabling success of our strategy in this environment is developing differentiating technologies, forging strategic partnerships, including with commercial companies, executing on our multi-year business transformation initiative to focus on program execution, improving the qualityenhance our digital infrastructure and predictability of the delivery ofincrease efficiencies and collaboration throughout our productsbusiness and services,maintaining fiscal discipline. Underpinning our ability to execute our strategy is our talent and placing security capability quickly into the hands of our U.S. and international customers at affordable prices. Recognizing that our customers are resource constrained, we are endeavoring to develop and extend our portfolio domestically in a disciplined manner with a focus on adjacent markets close to our core capabilities, as well as growing our international sales.culture. We continue to focus on affordability initiatives. We also expect to continue to innovate and invest in technologies to fulfill new mission requirements for our customers and investsubstantially in our people soto ensure that we haveour workforce has the technical skills necessary to succeed, without limitingand we expect to continue to invest internally in innovative technologies that address rapidly evolving mission requirements for our customers. We also will continue to evaluate our portfolio and will make strategic acquisitions or divestitures, as appropriate, while deepening our connection to commercial industry through cooperative partnerships, joint ventures, and equity investments.
COVID-19
COVID-19 continued to cause business impacts in 2022. The emergence of the Omicron variant in late 2021 and resulting increase in COVID-19 cases in early 2022 adversely impacted our operations and our supply chain. Our performance was affected during 2022 by supply chain disruptions and delays, as well as labor challenges associated with employee absences, travel restrictions, site access, quarantine restrictions, remote work, and adjusted work schedules. The recovery from
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that disruption has been slower than originally anticipated, in particular within our supply chain, and some of those supply chain impacts are expected to continue into 2023. Attendance for employees required to be onsite fluctuated during 2022 based on COVID-19 developments. We are actively engaging with our customers and are continuing to take measures to protect the health and safety of our employees. In our on-going effort to mitigate supply chain risks, we accelerated payments of $1.5 billion to our suppliers as of December 31, 2022, that are due according to contractual terms in future periods, while consistently prioritizing small businesses, which make up over half of our active supply base, as well as at-risk businesses. Additionally, we have deployed resources at supplier sites to improve oversight and performance. We will continue to monitor supply chain risks, especially at small and at-risk related suppliers, and may continue to utilize accelerated payments in 2023 on an as needed basis.
The impact of COVID-19 on our operations and financial performance in future periods, including our ability to returnexecute our programs in the expected timeframe, remains uncertain and will depend on a substantial portionnumber of factors, including the impact of potential new COVID-19 variants or subvariants, the effectiveness and adoption of COVID-19 vaccines and therapeutics, and supplier impacts and related government actions to prevent and manage disease spread,. The long-term impacts of COVID-19 on government budgets and other funding priorities, including international priorities, that impact demand for our products and services also are difficult to predict, but could negatively affect our future results and performance.
Inflation
Heightened levels of inflation and the potential worsening of macro-economic conditions present risks for Lockheed Martin, our suppliers and the stability of the broader defense industrial base. During 2022, we have experienced impacts to our labor rates and suppliers have signaled inflation related cost pressures, which will flow through to our costs and pricing. Although inflation did not significantly impact our financial results in 2022, if inflation remains at current levels for an extended period, or increases, and we are unable to successfully mitigate the impact, our costs are likely to increase, resulting in pressure on our profits, margins and cash flows, particularly for existing fixed-price contracts. For new contract proposals, we are factoring into our pricing heightened levels of inflation based on accepted DoD escalation indices and other assumptions, and in some cases seeking the inclusion of economic price adjustment (EPA) clauses, which would permit, subject to the particular contractual terms, cost adjustments in fixed-price contracts for unexpected inflation. In addition, inflation and the increases in the cost of borrowing from rising interest rates could constrain the overall purchasing power of our free cash flowcustomers for our products and services, in particular in the near term to the extent inflation assumptions are less than current inflationary pressures. Rising interest rates will also increase our borrowing costs on new debt and could affect the fair value of our investments. While rising interest rates reduce the measure of our gross pension obligations, they can also lead to decline in pension plan assets with offsetting impacts on our net pension liability. We remain committed to our investors in the form of dividends and share repurchases. We define free cash flow as cash from operations as determined under U.S. generally accepted accounting principles (GAAP), less capital expenditures as presented on our consolidated statements of cash flows.
Conflict in Ukraine
Russia’s invasion of Ukraine has significantly elevated global geopolitical tensions and security concerns. As a result, we have received increased volume at all four business areas. Specifically, the increased growth is driveninterest for some of our products and services as countries seek to improve their security posture, particularly in Europe. In addition, security assistance provided by the F-35 programU.S. government to Ukraine has created U.S. government demand to replenish U.S. stockpiles, resulting in additional and potential future orders for our products. We are beginning to see this interest result in initiation of new contract discussions, however, given the long-cycle nature of our business and current industry capacity, we do not expect a significant increase in near term sales from new contracts in response to the conflict. We are evaluating capacity at Aeronautics, increased volume inour operations and the tacticalsupply chain to anticipate potential demand and strike missiles and air and missile defense businesses at MFC, Sikorsky volume at RMS, and hypersonics volume at Space. Total business segment operating profit margin in 2020 is expectedenable us to be approximately 10.8%; and cash from operations is expected to be greater than or equal to $7.6 billion. The preliminary outlook for 2020 assumesdeliver critical capabilities. In addition, the U.S. Government continuesand other nations have implemented broad economic sanctions and export controls targeting Russia, which combined with the conflict have the potential to supportindirectly disrupt our supply chain and fund our key programs. Changes in circumstances may require usaccess to revise our assumptions, which could materially change our current estimate of 2020 net sales, operating margincertain resources. We have not, however, experienced significant adverse impacts to date and cash flows.
Portfolio Shaping Activities
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, investments and investmentsventures at attractive valuations that will expand or complement our current portfolio and allow access to new customers or technologies. We also may explore the divestiture of
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businesses, investments or ventures that no longer meet our needs or strategy or that could perform better outside of our organization.organization or with a different owner. In pursuing our business strategy, we routinely conduct discussions, evaluate targets and enter into agreements regarding possible acquisitions, divestitures, joint ventures and equity investments.
On November 18, 2019, we completedJune 30, 2021, the saleUK 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 Distributed Energy Solutions (DES) business, a commercial energy service providerfinancial results as of that was partdate. Therefore, during 2021, AWE only generated sales of our MFC business segment. We received $225$885 million and operating profit of $18 million, which are included in cash from the sale and recognized a gain of $34 million (approximately $0 after-tax)Space’s financial results for the sale. Amounts related to this divestiture were not significant toyear ended December 31, 2021. During the corporationyear ended December 31, 2020, AWE generated sales of $1.4 billion and the sale did not represent a strategic shift, and accordingly, the operating profit of $35 million, which are included in Space’s financial results financial position and cash flows for the DES business have not been reclassified to discontinued operations.2020.
U.S. Government Funding
On March 28, 2022 the Administration submitted to Congress the President’s Fiscal Year (FY) 2023 budget request, which proposed $813.4 billion in total national defense spending, of which $773 billion was for the base budget of the Department of Defense (DoD).
On December 20, 2019,29, 2022, the President signed the annual fiscal year (FY) 2020 appropriations,FY 2023 Omnibus Appropriations Act into law, which provides $858 billion in total national defense funding, of which $816.7 billion is for the DoD and other government agencies (a U.S. Government fiscal year starts on October 1 and ends on September 30). The appropriations provide $738base budget. This reflects a $44.6 billion in discretionary fundingincrease over the FY 2023 request for national defense including $667spending, and a $43.7 billion in baseincrease for the DoD.
The FY 2023 Omnibus Appropriations Act also provided separate and additional funding and $71of $47 billion in Overseas Contingency Operations (OCO)/emergency funding (OCO and emergencyfor Ukraine, the fourth supplemental since March of 2022, bringing the total amount of supplemental funding do not count toward discretionary spending caps). Of the $738 billion, the DoD is allocated $709 billion; composed of $637 billion in base funding and $72 billion in OCO and emergency funding.authority provided to $113 billion.
The approved fundingPresident’s FY 2024 budget request is anticipated to be submitted to Congress in accordanceMarch 2023, initiating the FY 2024 defense authorization and appropriations legislative process. In addition to the FY 2024 budget process, Congress will have to contend with the Bipartisan Budget Actlegal limit on U.S. debt, commonly known as the debt ceiling. The current statutory limit of 2019 (BBA-19), which$31.4 trillion was enacted on August 2, 2019. The BBA-19 increasedreached in January, requiring the spending limits for both defense and non-defense discretionary funding forTreasury Department to take accounting measures to continue normally financing U.S. government obligations while avoiding exceeding the debt ceiling. It is expected, however, the U.S. Government FY 2020 and 2021 set under the Budget Control Act of 2011 (BCA). The defense spending limits were increasedgovernment will exhaust these measures by $90 billion to $667 billion for FY 2020 and by $81 billion to $672 billion for FY 2021. When combined with approved OCO/emergency funding, the agreement raised top-line spending for national defense to the $738 billion enacted in FY 2020 and $741 billion in FY 2021. By raising the spending limits, the BBA-19 essentially ended the budgetary constraints implemented by the 2011 BCA. Additionally, the BBA-19 also suspendedJune 2023. If the debt ceiling through July 31, 2021,is not raised, the U.S. government may not be able to fulfill its funding obligations and there could be significant disruption to all discretionary programs and wider financial and economic repercussions. The federal budget and debt ceiling are expected to continue to be the subject of considerable congressional debate. Although we believe DoD, intelligence, and homeland security programs will continue to receive consensus support for increased funding and would likely receive priority if this scenario came to fruition, the effect on individual programs or Lockheed Martin cannot be predicted at which time the debt limit will be increased to the amount of U.S. Government debt outstanding on that date.this time.
International Business
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 2022, approximately 74% of our business segments through either FMS or direct sales to international customers.customers were FMS and about 26% were DCS. Additionally, in 2022, substantially all of our sales from international customers were in our Aeronautics, MFC and RMS business segments. Space’s sales from international customers were not material in 2022. See Item 1A - Risk Factors for a discussion of risks related to international sales.
In August 2019, the Bulgarian government and the U.S. Government signed a letter of offer and acceptance worth $1.26 billion regarding Bulgaria’s planned procurement of eight new production F-16 Block 70 aircraft for the Bulgarian Air Force.
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Additionally, we continue to see international demand for our tactical missile and fire controlstrike missile products, where we received orders for Apache and Low Altitude Navigation and Targeting Infrared for Night (LANTIRN®) systems for Qatar, and precision fires systems from PolandGermany and Romania. Other MFC international customers include the United Kingdom, Germany, India, KuwaitTaiwan and Bahrain.for Long Range Anti-Ship Missiles (LRASM) from Australia.
In 2019,2022, international customers accounted for 25%28% of RMS’ net sales. Our RMS business segment continues to experience international interest in the Aegis Ballistic Missile Defense System (Aegis). We for which we perform activities in the development, production, modernization, ship integration, test and lifetime support for ships of international customers such as Japan, Spain, Republic of Korea, and Australia. We have ongoing combat systems programs associated with different classes of surface combatant ships for customers in Canada, Chile, and Chile for combat systems equipment upgrades on Halifax-class and Type 23 frigates.New Zealand. Our Multi-Mission Surface Combatant (MMSC) program provideswill provide surface combatant ships for international customers, such as the Kingdom of Saudi Arabia, designed to operate in shallow waters and the open ocean. In our training and logistics solutions portfolio, we have active programs and pursuits in the United Kingdom, the Kingdom of Saudi Arabia, Canada, Egypt, Singapore, Australia, Germany and Australia.France. We have active development, production, and sustainment support of the S-70iS-70 Black Hawk® and MH-60 Seahawk® aircraft helicopters to foreign militaryinternational customers, including Chile,India, Philippines, Australia, Denmark, Taiwan,Republic of Korea, Thailand, the Kingdom of Saudi Arabia, and Colombia.Greece. Additionally, in December 2021, the Israeli Ministry of Defense signed a Letter of Offer and Acceptance (LOA) to procure 12 CH-53K King Stallion heavy lift helicopters, of which the first four were awarded in 2022. Commercial aircraft are sold to international customers in theto support search and rescue missions as well as VIP and offshore oil and gas industry, emergency medical evacuation, search and rescue fleets, and VIP customers in over 30 countries.
Status of the F-35 Program
The F-35 program primarily consists of production contracts, sustainment activities, and new development efforts. Production of the aircraft is expected to continue for many years given the U.S. Government’s current inventory objective of 2,456 aircraft for the U.S. Air Force, U.S. Marine Corps, and U.S. Navy; commitments from our eightseven international partner countries and four internationalnine Foreign Military Sales (FMS) customers; as well as expressions of interest from other countries.
During the fourth quarter of 2022, we finalized the F-35 Low Rate Initial Operating Capability includingProduction (LRIP) Lots 15-17 production contract with the U.S. NavyGovernment for its F-35C variant, the United Kingdomup to 398 aircraft. The agreement includes 145 aircraft for its F-35B variant, JapanLot 15, 127 for its F-35A variant,Lot 16 and Norwayup to 126 for its F-35A variant.a Lot 17 contract option. In 2022 we delivered 141 aircraft and had a backlog of 345 production aircraft, including orders from our international partner countries and FMS customers. Since program inception we have delivered 491894 production F-35 aircraft to U.S. and international customers, including 648 F-35A variants, 178 F-35B variants, and 68 F-35C variants, demonstrating the F-35 program’s continued progress and longevity. The first 491 F-35 aircraft delivered to U.S.
COVID-19 and international customers include 347 F-35A variants, 108 F-35B variants, and 36 F-35C variants. The full-rate production decision, also known formally as Milestone C, is expected to be delayedother impacts experienced by the DoD until Initial Operational Test and Evaluation (IOT&E) activities are complete in the Naval Air Systems Command (NAVAIR)-led Joint Simulation Environment (JSE). The JSE is usedF-35 enterprise have continued to conduct simulated evaluations of the F-35 in a range of high-threat scenarios. Testing is expected to be completed byimpact our near-term production plans. At the end of 2020.2022, there was an issue with the Government Furnished Equipment (GFE) engine that resulted in a pause in flight operations and 2022 aircraft deliveries were impacted. The datadelivery pause continues as flight operations remain on hold and concurrently, GFE engine deliveries have been suspended. We will have greater clarity if changes to our 2023 aircraft delivery expectation are required once the pause in flight operations and the GFE engine delivery suspension have been resolved. As of January 2023, we plan on producing 147-153 aircraft in 2023 and 2024, and 2023 deliveries will be utilized bydetermined pending the U.S. Government as partresumption of their evaluation to transition the F-35 program from Low Rate Initial Production (LRIP) into full-rate production.
Given the size and complexity of the F-35 program, we anticipate that there will be continual reviews related to aircraft performance, program, and delivery schedule, cost, and requirements as part of the DoD, Congressional, and international partner countries’ oversight, and budgeting processes. Current program challenges include but are not limited to, supplierour and partnerour suppliers’ performance (including COVID-19 performance-related challenges), software development, execution of future flight tests and findings resulting from testing and operating the aircraft, the level of cost associated with life cycle operations, and sustainment and warranties, receiving funding for production contracts on a timely basis, executingpotential contractual obligations, inflation-related cost pressures, and the ability to improve affordability.
Backlog
At December 31, 2022, our backlog was $150.0 billion compared with $135.4 billion at December 31, 2021. Backlog is converted into sales in future flight tests, findings resulting from testing and operating the aircraft.
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of our backlog over the next 12 months and approximately 61% over the next 24 months as revenue, with the remainder recognized thereafter.
Our backlog includes both funded (firm orders for our products and services for which funding has been both authorized and appropriated by the customer) and unfunded (firm orders for which funding has not been appropriated) amounts. We do not include unexercised options or potential orders under indefinite-delivery, indefinite-quantity (IDIQ) agreements in our backlog. 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. Funded backlog was $95.5 billion at December 31, 2022, as compared to $88.5 billion at December 31, 2021. For backlog related to each of our business segments, see below.
Consolidated Results of Operations
Our operating cycle is primarily long term and involves many types of contracts for the design, development and manufacture of products and related activities with varying delivery schedules. Consequently, the results of operations of a particular year, or year-to-year comparisons of sales and profits, may not be indicative of future operating results. The following discussions of comparative results among years should be reviewed in this context. All per share amounts cited in these discussions are presented on a “per diluted share” basis, unless otherwise noted. Our consolidated results of operations were as follows (in millions, except per share data):
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Net sales | $ | 65,984 | $ | 67,044 | $ | 65,398 | ||||||||||||||
| Cost of sales | (57,697) | (57,983) | (56,744) | |||||||||||||||||
| Gross profit | 8,287 | 9,061 | 8,654 | |||||||||||||||||
| Other income (expense), net | 61 | 62 | (10) | |||||||||||||||||
| Operating profit | 8,348 | 9,123 | 8,644 | |||||||||||||||||
| Interest expense | (623) | (569) | (591) | |||||||||||||||||
| Non-service FAS pension (expense) income | (971) | (1,292) | 219 | |||||||||||||||||
| Other non-operating (expense) income, net | (74) | 288 | (37) | |||||||||||||||||
| Earnings from continuing operations before income taxes | 6,680 | 7,550 | 8,235 | |||||||||||||||||
| Income tax expense | (948) | (1,235) | (1,347) | |||||||||||||||||
| Net earnings from continuing operations | 5,732 | 6,315 | 6,888 | |||||||||||||||||
| Net loss from discontinued operations | — | — | (55) | |||||||||||||||||
| Net earnings | $ | 5,732 | $ | 6,315 | $ | 6,833 | ||||||||||||||
| Diluted earnings (loss) per common share | ||||||||||||||||||||
| Continuing operations | $ | 21.66 | $ | 22.76 | $ | 24.50 | ||||||||||||||
| Discontinued operations | — | — | (0.20) | |||||||||||||||||
| Total diluted earnings per common share | $ | 21.66 | $ | 22.76 | $ | 24.30 | ||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net sales | $ | 59,812 | $ | 53,762 | $ | 49,960 | ||||||
| Cost of sales | (51,445 | ) | (46,488 | ) | (43,589 | ) | ||||||
| Gross profit | 8,367 | 7,274 | 6,371 | |||||||||
| Other income, net | 178 | 60 | 373 | |||||||||
Operating profit (a)(b)(c)(d) | 8,545 | 7,334 | 6,744 | |||||||||
| Interest expense | (653 | ) | (668 | ) | (651 | ) | ||||||
| Other non-operating expense, net | (651 | ) | (828 | ) | (847 | ) | ||||||
| Earnings from continuing operations before income taxes | 7,241 | 5,838 | 5,246 | |||||||||
Income tax expense (e)(f) | (1,011 | ) | (792 | ) | (3,356 | ) | ||||||
| Net earnings from continuing operations | 6,230 | 5,046 | 1,890 | |||||||||
| Net earnings from discontinued operations | — | — | 73 | |||||||||
| Net earnings | $ | 6,230 | $ | 5,046 | $ | 1,963 | ||||||
| Diluted earnings per common share | ||||||||||||
| Continuing operations | $ | 21.95 | $ | 17.59 | $ | 6.50 | ||||||
| Discontinued operations | — | — | 0.25 | |||||||||
| Total diluted earnings per common share | $ | 21.95 | $ | 17.59 | $ | 6.75 | ||||||
Certain amounts reported in other income (expense), net, primarilyincluding our share of earnings or losses from equity method investees, are included in the operating profit of our business segments. Accordingly, such amounts are included in ourthe discussion of our business segment results of operations.
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Net Sales
We generate sales from the delivery of products and services to our customers. Our consolidated net sales were as follows (in millions):
| 2019 | 2018 | 2017 | |||||||||||||
| Products | $ | 50,053 | $ | 45,005 | $ | 42,502 | |||||||||
| % of total net sales | 83.7 | % | 83.7 | % | 85.1 | % | |||||||||
| Services | 9,759 | 8,757 | 7,458 | ||||||||||||
| % of total net sales | 16.3 | % | 16.3 | % | 14.9 | % | |||||||||
| Total net sales | $ | 59,812 | $ | 53,762 | $ | 49,960 | |||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| Products | $ | 55,466 | $ | 56,435 | $ | 54,928 | |||||||||||||||||||||||
| % of total net sales | 84.1 | % | 84.2 | % | 84.0 | % | |||||||||||||||||||||||
| Services | 10,518 | 10,609 | 10,470 | ||||||||||||||||||||||||||
| % of total net sales | 15.9 | % | 15.8 | % | 16.0 | % | |||||||||||||||||||||||
| Total net sales | $ | 65,984 | $ | 67,044 | $ | 65,398 | |||||||||||||||||||||||
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. Overall, our sales were negatively affected in 2022 because of supply chain impacts.
Product Sales
Product sales increased $5.0decreased $1.0 billion, or 11%2%, in 20192022 as compared to 2018,2021. The decrease is primarily attributable to lower product sales of approximately $670 million at RMS mostly due to lower production volume on Black Hawk and lower net sales for training and logistics solutions (TLS) programs due to the delivery of an international pilot training system in the first quarter of 2021; about $315 million at Space primarily due to the renationalization of AWE on June 30, 2021, partially offset by higher development volume (Next Generation Interceptor (NGI)); and approximately $220 million at MFC primarily due to lower volume on Terminal High Altitude Area Defense (THAAD) and air dominance weapon systems. These decreases were partially offset by higher product sales of $2.1 billionabout $240 million at Aeronautics $1.5 billion at MFC and $965 million at Space. The increase in product sales at Aeronautics was primarilymostly due to higher production volume for the F-35 program and higher volume on classified programs. The increase in product sales at MFC was primarily due to increasedcontracts that were partially offset by lower volume for tactical and strike missile programs (primarily precision fires, new hypersonic development programs, and classified programs), increased volume for integrated air and missile defense programs (primarily PAC-3 and THAAD), and increased volume for sensors and global sustainment programs (primarily Apache). The increase in product sales at Space was primarily due to higher volume for government satellite programs (primarily Next Generation Overhead Persistent Infrared (Next Gen OPIR) and Global Positioning System (GPS III)) and higher volume for strategic and missile defense programs (primarily new hypersonic development programs).on F-35 contracts.
Service Sales
Service sales increased $1.0 billion,decreased $91 million, or 11%1%, in 20192022 as compared to 2018, primarily due to an increase2021. The decrease in service sales of about $385 million at RMS, $340 million at Aeronautics and $190 million at MFC. The increase in service sales at RMS was primarily due to higher volumelower sales of various training and logistics solutions programs (primarily an army sustainment program), and integrated warfare systems and sensors (IWSS) programs (primarily Aegis Combat System (Aegis)). Higher service salesapproximately $155 million at Aeronautics wereMFC primarily due to higher sustainmentlower volume foron the F-35 and F-22 programs. The increase in service sales at MFC was primarily attributable to increased volume for sensors and global sustainment programs (primarily Special Operations Forces Global Logistics Support Services (SOF GLSS)) and higher sustainment volume for the PAC-3 program.
Cost of Sales
Cost of sales, for both products and services, consist of materials, labor, subcontracting costs and an allocation of indirect costs (overhead and general and administrative), as well as the costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers. For each of our contracts, we monitor the nature and amount of costs at the contract level, which form the basis for estimating our total costs to complete the contract. Our consolidated cost of sales were as follows (in millions):
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||
| Cost of sales – products | $ | (44,589 | ) | $ | (40,293 | ) | $ | (38,417 | ) | Cost of sales – products | $ | (49,577) | $ | (50,273) | $ | (48,996) | ||||||||||||||||||||||||||||
| % of product sales | 89.1 | % | 89.5 | % | 90.4 | % | % of product sales | 89.4 | % | 89.1 | % | 89.2 | % | |||||||||||||||||||||||||||||||
| Cost of sales – services | (8,731 | ) | (7,738 | ) | (6,673 | ) | Cost of sales – services | (9,280) | (9,463) | (9,371) | ||||||||||||||||||||||||||||||||||
| % of service sales | 89.5 | % | 88.4 | % | 89.5 | % | % of service sales | 88.2 | % | 89.2 | % | 89.5 | % | |||||||||||||||||||||||||||||||
| Severance and restructuring charges | — | (96 | ) | — | ||||||||||||||||||||||||||||||||||||||||
| Severance and other charges | Severance and other charges | (100) | (36) | (27) | ||||||||||||||||||||||||||||||||||||||||
| Other unallocated, net | 1,875 | 1,639 | 1,501 | Other unallocated, net | 1,260 | 1,789 | 1,650 | |||||||||||||||||||||||||||||||||||||
| Total cost of sales | $ | (51,445 | ) | $ | (46,488 | ) | $ | (43,589 | ) | Total cost of sales | $ | (57,697) | $ | (57,983) | $ | (56,744) | ||||||||||||||||||||||||||||
The following discussion of material changes in our consolidated cost of sales for products and services should be read in tandem with the preceding discussion of changes in our consolidated net sales and our business segment results of operations. WeExcept for potential impacts to our programs resulting from COVID-19, supply chain disruptions and inflation, we have not
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identified any additional developing trends in cost of sales for products and services that would have a material impact on our future operations.
Product Costs
Product costs increaseddecreased approximately $4.3 billion,$696 million, or 11%1%, in 20192022 as compared to 2018,2021. The decrease was primarily attributable to lower product costs of approximately $525 million at RMS mostly due to lower production volume on Black Hawk and the delivery of an international pilot training system in the first quarter of 2021; about $195 million at MFC primarily due to lower volume on air dominance weapon systems and THAAD; and approximately $165 million at Space primarily due to the renationalization of AWE, partially offset by higher development volume (NGI). These decreases were partially offset by higher product costs of approximately $1.9 billionabout $185 million at Aeronautics $1.3 billion at MFC and $750 million at Space. The increase in product costs at Aeronautics was primarilymostly due to higher production volume for the F-35 program and higher volume on classified programs. The increase in product costs at MFC was primarily due to increasedcontracts that were partially offset by lower volume for tactical and strike missile programs (primarily precision fires, classified programs and new hypersonic missile programs), contract mix and increased volume for integrated air and missile defense programs (primarily PAC-3 and THAAD) and increased volume for sensors and global sustainment programs (primarily Apache). The increase in product costs at Space was primarily attributable to higher volume for government satellite programs (primarily Next Gen OPIR and GPS III) and strategic and missile defense programs (primarily new hypersonic development programs).on F-35 contracts.
Service Costs
Service costs increaseddecreased approximately $1.0 billion,$183 million, or 13%2%, in 20192022 compared to 2018,2021. The decrease was primarily dueattributable to higherlower service costs of approximately $385$160 million at RMS, $315 million at Aeronautics and $195 million at MFC. The increase in service costs at RMS wasMFC primarily due to increasedlower volume for various trainingon the SOF GLSS program.
Severance and logistics solutions programs and IWSS programs (primarily Aegis). Higher service costs at Aeronautics were primarily due to higher sustainment volume forother charges
During the F-35 and F-22 programs. The increase in service costs at MFC was primarily attributable to increased volume for sensors and global sustainment programs (primarily SOF GLSS) and higher sustainment volume for the PAC-3 program.
Other Unallocated, Net
Other unallocated, net primarily includes the FAS/CAS pension operating adjustment as described(which represents the difference between CAS pension cost recorded in our business segments’ results of operations and the service cost component of Financial Accounting Standards (FAS) pension expense), stock-based compensation expense, changes in the “Business Segment Resultsfair value of Operations” section below, stock-basedinvestments and liabilities for deferred compensation plans and other corporate costs. These items are not allocated to the business segments and, therefore, are excluded from thenot allocated to cost of sales for products andor services. Other unallocated, net was a net reduction to expensereduced cost of $1.9sales by $1.3 billion in 2019 and $1.6 billion in 2018.
none of which were individually significant. See “Business Segment Results of Operations” and “Critical Accounting Policies - Postretirement Benefit Plans” discussion below for more information on our pension cost.
Other Income (Expense), Net
Other income (expense), net primarily includes our share of earnings or losses from equity method investees and gains or losses for acquisitions and divestitures. Other income, net in 2019 was $178 million, compared to $60 million in 2018. The increase in 2019 compared to 2018 was primarily attributable to the recognition in 2019 of a previously deferred non-cash gain of approximately $51 million ($38 million, or $0.13 per share, after-tax) related to properties sold in 2015 as a result of completing our remaining obligations, the recognition in 2019 of a $34 million gain (approximately $0 after-tax) for the sale of our Distributed Energy Solutions business, and the recognition in 2018 of a non-cash asset impairment charge of $110 million ($83 million, or $0.29 per share, after-tax) related to our equity method investee, Advanced Military Maintenance, Repair and Overhaul Center LLC (AMMROC). These increases were partially offset by lower earnings generated by equity method investees.
Interest Expense
Interest expense in 20192022 was $653$623 million, compared to $668$569 million in 2018.2021. The decreaseincrease in interest expense in 20192022 resulted primarily from our scheduled repaymentthe issuance of $750 millionnotes in October of debt during 2018.2022 to fund share repurchases. See “Capital Structure, Resources and Other” included within “Liquidity and Cash Flows” discussion below and “Note 10 – Debt” included in our Notes to Consolidated Financial Statements for a discussion of our debt.
Non-Service FAS Pension (Expense) Income
Non-service FAS pension expense was $1.0 billion in 2022, compared to $1.3 billion in 2021. Non-service FAS pension expense in 2022 includes a noncash, non-operating pension settlement charge of $1.5 billion ($1.2 billion, or $4.33 per share, after-tax), related to the transfer of $4.3 billion of our gross defined benefit pension obligations and related plan assets to an insurance company in the second quarter of 2022. Non-service FAS pension expense in 2021 includes a noncash, non-operating pension settlement charge of $1.7 billion ($1.3 billion, or $4.72 per share, after-tax), related to the transfer of $4.9 billion of our
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gross defined benefit pension obligations and related plan assets to an insurance company in the third quarter of 2021. See “Note 11 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements for additional information.
Other Non-Operating Expense,Non-operating (Expense) Income, Net
Other non-operating expense,(expense) income, net primarily includes the non-service cost components of FAS pension and other postretirement benefit plan expense (i.e., interest cost, expected return on plan assets, net actuarial gains or losses related to changes in the fair value of mark-to-market investments. See “Note 1 – Organization and amortization of prior service cost or credits).Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for additional information. Other non-operating expense, net in 2019 decreased2022 was $74 million, compared to 2018other non-operating income, net of $288 million in 2021. The decrease in 2022 was primarily due to a reductiondecreases in non-service FAS pension expense for our qualified defined benefit pension plans.the fair value of certain mark-to-market investments.
Income Tax Expense
Our effective income tax rate was 14.2% for 2022 and 16.4% for 2021. The rate for 2022 was lower than the rate for 2021 primarily due to increased research and development tax credits. The rates for both 2022 and 2021 benefited from continuing operations was 14.0% for 2019 and 13.6% for 2018. On December 22, 2017, the President signed the 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.
Changes in U.S. federal(federal or state) or foreign tax laws and regulations, or their interpretation and application including(including those with retroactive effect, includingeffect), such as the amortization for research or experimental expenditures, could significantly impact our provision for income taxes, the amount of taxes payable, our deferred tax asset and liability balances, and stockholders’ equity. TheIn addition to future changes in tax laws, the amount
of net deferred tax assets will change periodically based on several factors, including the measurement of our postretirement benefit plan obligations, actual cash contributions to our postretirement benefit plans and future changesthe change in the amount or reevaluation of uncertain tax laws. In addition, wepositions.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for tax purposes. This provision resulted in a cash tax liability for the 2022 tax year of approximately $660 million. Our net deferred tax assets increased in 2022 by approximately $660 million as a result as well. This provision is expected to increase our 2023 cash tax liability by approximately $575 million. The actual impact on 2023 cash tax liability will depend on the amount of research and development expenses paid or incurred in 2023 among other factors. While the largest impact of this provision will be to 2022 cash tax liability, the impact will continue over the five-year amortization period, but will decrease over the period and be immaterial in year six.
As of December 31, 2021, our liabilities associated with uncertain tax positions were not material. As of December 31, 2022, our liabilities associated with uncertain tax positions increased to $1.6 billion with a corresponding increase to net deferred tax assets primarily as a result of the provision described above from the Tax Cuts and Jobs Act of 2017. See “Note 9 – Income Taxes” included in our Notes to Consolidated Financial Statements for additional information.
We are regularly under audit or examination by tax authorities, including foreign tax authorities.authorities (including in, amongst others, Australia, Canada, India, Italy, Japan, Poland, and the United Kingdom). The final determination of tax audits and any related litigation could similarly result in unanticipated increases in our tax expense and affect profitability and cash flows.
On August 16, 2022, the President signed into law the Inflation Reduction Act of 2022 which contained provisions effective January 1, 2023, including a 15% corporate minimum tax and a 1% excise tax on stock buybacks, both of which we expect to be immaterial to our financial results, financial position and cash flows.
Net Earnings
We reported net earnings of $6.2$5.7 billion ($21.9521.66 per share) in 20192022 and $5.0$6.3 billion ($17.5922.76 per share) in 2018.2021. Both net earnings and earnings per share in 2022 were affected by the factors mentioned above. Earnings per share also benefited from a net decrease of approximately 112.8 million weighted average common shares outstanding from December 31, 2018in 2022, compared to December 31, 2019 as2021. The reduction in weighted average common shares was a result of share repurchases, partially offset by share issuancesissuance under our stock-based awards and certain defined contribution plans.
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Business Segment Results of Operations
We operate in four business segments: Aeronautics, MFC, RMS and Space. We organize our business segments based on the nature of products and services offered.
Net sales and operating profit of our business segments exclude intersegment sales, cost of sales, and profit as these activities are eliminated in consolidation.consolidation and not included in management’s evaluation of performance of each segment. Business segment operating profit includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments. United Launch Alliance (ULA), results of which are included in our Space business segment, is one of our largest equity method investees.investee.
Business segment operating profit also excludes the FAS/CAS pension operating adjustment described below, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. Government under CASthe applicable U.S. Government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance such as a portion of management and administration costs, legal fees and settlements, environmental costs, changes in the fair value of certain mark-to-market investments, stock-based compensation expense, changes in the fair value of investments and liabilities for deferred compensation plans, retiree benefits, significant severance and restructuring actions, (see “Note 15 – Severance and Restructuring Charges” included in our Notes to Consolidated Financial Statements),significant asset impairments, gains or losses from significant 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. See “Note“Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial StatementsPolicies” for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.
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Summary operating results for each of our business segments were as follows (in millions):
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Net sales | ||||||||||||||||||||
| Aeronautics | $ | 26,987 | $ | 26,748 | $ | 26,266 | ||||||||||||||
| Missiles and Fire Control | 11,317 | 11,693 | 11,257 | |||||||||||||||||
| Rotary and Mission Systems | 16,148 | 16,789 | 15,995 | |||||||||||||||||
| Space | 11,532 | 11,814 | 11,880 | |||||||||||||||||
| Total net sales | $ | 65,984 | $ | 67,044 | $ | 65,398 | ||||||||||||||
| Operating profit | ||||||||||||||||||||
| Aeronautics | $ | 2,866 | $ | 2,799 | $ | 2,843 | ||||||||||||||
| Missiles and Fire Control | 1,635 | 1,648 | 1,545 | |||||||||||||||||
| Rotary and Mission Systems | 1,673 | 1,798 | 1,615 | |||||||||||||||||
| Space | 1,045 | 1,134 | 1,149 | |||||||||||||||||
| Total business segment operating profit | 7,219 | 7,379 | 7,152 | |||||||||||||||||
| Unallocated items | ||||||||||||||||||||
| FAS/CAS pension operating adjustment | 1,709 | 1,960 | 1,876 | |||||||||||||||||
Severance and other charges (a) | (100) | (36) | (27) | |||||||||||||||||
Other, net (b) | (480) | (180) | (357) | |||||||||||||||||
| Total unallocated, net | 1,129 | 1,744 | 1,492 | |||||||||||||||||
| Total consolidated operating profit | $ | 8,348 | $ | 9,123 | $ | 8,644 | ||||||||||||||
(a)See “Consolidated Results of Operations – Severance and Other Charges” discussion above for information on charges related to certain severance and other actions across our organization.
(b)Other, net in 2020 includes a noncash impairment charge of $128 million recognized on our investment in the international equity method investee, Advanced Military Maintenance, Repair and Overhaul Center (AMMROC). (See “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for more information).
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 expense(expense) income calculated in accordance with FASFinancial Accounting Standards (FAS) requirements under U.S. GAAP. The operating portion of the nettotal FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension expense(expense) income and total CAS pension cost. The non-service FAS pension cost component is(expense) income components are included in other non-operating expense, netnon-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, which occurred for 2019 and 2018,(expense) income, we have a favorable FAS/CAS pension operating adjustment.
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| 2019 | 2018 | 2017 | ||||||||||
| Net sales | ||||||||||||
| Aeronautics | $ | 23,693 | $ | 21,242 | $ | 19,410 | ||||||
| Missiles and Fire Control | 10,131 | 8,462 | 7,282 | |||||||||
| Rotary and Mission Systems | 15,128 | 14,250 | 13,663 | |||||||||
| Space | 10,860 | 9,808 | 9,605 | |||||||||
| Total net sales | $ | 59,812 | $ | 53,762 | $ | 49,960 | ||||||
| Operating profit | ||||||||||||
| Aeronautics | $ | 2,521 | $ | 2,272 | $ | 2,176 | ||||||
| Missiles and Fire Control | 1,441 | 1,248 | 1,034 | |||||||||
| Rotary and Mission Systems | 1,421 | 1,302 | 902 | |||||||||
| Space | 1,191 | 1,055 | 980 | |||||||||
| Total business segment operating profit | 6,574 | 5,877 | 5,092 | |||||||||
| Unallocated items | ||||||||||||
FAS/CAS operating adjustment (a) | 2,049 | 1,803 | 1,613 | |||||||||
| Stock-based compensation | (189 | ) | (173 | ) | (158 | ) | ||||||
Severance and restructuring charges (b) | — | (96 | ) | — | ||||||||
Other, net (c) | 111 | (77 | ) | 197 | ||||||||
| Total unallocated, net | 1,971 | 1,457 | 1,652 | |||||||||
| Total consolidated operating profit | $ | 8,545 | $ | 7,334 | $ | 6,744 | ||||||
The |
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Total FAS (expense) income and CAS cost | ||||||||||||||||||||
| FAS pension (expense) income | $ | (1,058) | $ | (1,398) | $ | 118 | ||||||||||||||
| Less: CAS pension cost | 1,796 | 2,066 | 1,977 | |||||||||||||||||
| Total FAS/CAS pension adjustment | $ | 738 | $ | 668 | $ | 2,095 | ||||||||||||||
| Service and non-service cost reconciliation | ||||||||||||||||||||
| FAS pension service cost | $ | (87) | $ | (106) | $ | (101) | ||||||||||||||
| Less: CAS pension cost | 1,796 | 2,066 | 1,977 | |||||||||||||||||
| Total FAS/CAS pension operating adjustment | 1,709 | 1,960 | 1,876 | |||||||||||||||||
| Non-service FAS pension (expense) income | (971) | (1,292) | 219 | |||||||||||||||||
| Total FAS/CAS pension adjustment | $ | 738 | $ | 668 | $ | 2,095 | ||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Total FAS expense and CAS costs | ||||||||||||
| FAS pension expense | $ | (1,093 | ) | $ | (1,431 | ) | $ | (1,372 | ) | |||
| Less: CAS pension cost | 2,565 | 2,433 | 2,248 | |||||||||
| Net FAS/CAS pension adjustment | $ | 1,472 | $ | 1,002 | $ | 876 | ||||||
| Service and non-service cost reconciliation | ||||||||||||
| FAS pension service cost | (516 | ) | (630 | ) | (635 | ) | ||||||
| Less: CAS pension cost | 2,565 | 2,433 | 2,248 | |||||||||
| FAS/CAS operating adjustment | 2,049 | 1,803 | 1,613 | |||||||||
Non-operating FAS pension expense (a) | (577 | ) | (801 | ) | (737 | ) | ||||||
| Net FAS/CAS pension adjustment | $ | 1,472 | $ | 1,002 | $ | 876 | ||||||
The following segment discussions also include information relating to backlog for each segment. Backlog was approximately $144.0$150.0 billion and $130.5$135.4 billion at December 31, 20192022 and 2018.2021. 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 $94.5$95.5 billion at December 31, 2019.2022, as compared to $88.5 billion at December 31, 2021. 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 recovery of our actual costs plus a reasonable profit margin. We also may enter into long-term supply contracts for certain materials or components to coincide with the production schedule of certain products and to ensure their availability at known unit prices.
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.contract and variable considerations. Profit booking rates may increase during the performance of the contract if we successfully retire risks surroundingrelated to the technical,
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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.For further discussion on fixed-price contracts, see “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements.
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.
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 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,favorable profit adjustments, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract. 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.rate and are typically referred to as unfavorable profit adjustments. Increases or decreases in profit booking rates are recognized in the current period they are determined and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other 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; COVID-19 impacts or supply chain disruptions; restructuring charges except(except for significant severance actions, which are excluded from segment operating results;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.
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other items, net of state income taxes, increased segment operating profit by approximately $1.9$1.8 billion in both 20192022 and 2018.$2.0 billion in 2021. The consolidated net profit booking rate adjustments in 20192022 compared to 2018 were comparable2021 decreased primarily due to an increasedecreases in profit booking rate adjustments at Space, RMS and MFC offset by decreasesan increase in the other three business segments.Aeronautics. The consolidated net adjustments for 20192022 and 2021 are inclusive of approximately $930$780 million and $900 million in unfavorable items, which include reserves for various programs at RMS, the F-16a classified program at Aeronautics, performance matters on a sensors and global sustainment international military program at MFC and government satellite programs at Space. The consolidated net adjustments for 2018 are inclusive of approximately $900 million in unfavorable items, which
We periodically experience performance issues and record losses for certain programs. For further discussion on programs at Space.Aeronautics and RMS, see “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for more information.
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We have contracted with the Canadian Government for the Canadian Maritime Helicopter Program at our RMS business segment that provide for design, development, and production of CH-148 aircraft (the Original Equipment contract), which is a military variant of the S-92 helicopter, and for logistical support to the fleet (the In Service Support contract) over an extended time period. The program has experienced performance issues, including delays in the final aircraft deliveries from the original contract requirement, and to date the Royal Canadian Air Force’s flight hours have been less than originally anticipated, which has impacted program revenues and the recovery of our costs under this program. Future sales and recovery of existing and future costs under the program are highly dependent upon achieving a certain number of flight hours, which could be adversely impacted by aircraft availability and performance, and the availability of Canadian government resources. We are currently in discussions with the Canadian Government to potentially restructure certain contractual terms and conditions that may be beneficial to both parties. Future performance issues or changes in our estimates due to revised contract scope or customer requirements may affect our ability to recover our costs and may result in a loss that could be material to our operating results.
We also have a number of contracts with Türkish industry for the Türkish Utility Helicopter Program (TUHP), which anticipates co-production with Türkish industry for production of T70 helicopters for use in Türkiye, as well as the related provision of Türkish goods and services under buy-back or offset obligations, to include the future sales of helicopters built in Türkiye for sale globally. The U.S. Government has imposed certain sanctions on Türkish entities and persons that has affected our ability to perform under contracts supporting the Türkish Utility Helicopter Program. As a result of the sanctions, we have provided force majeure notices under the affected contracts and these contracts may be restructured or terminated, either in whole or in part, which could result in a further reduction in sales, the imposition of penalties or assessment of damages, and increased unrecoverable costs, which could have an adverse effect on our financial results.
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):
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| Net sales | $ | 26,987 | $ | 26,748 | $ | 26,266 | |||||||||||||||||||||||
| Operating profit | 2,866 | 2,799 | 2,843 | ||||||||||||||||||||||||||
| Operating margin | 10.6 | % | 10.5 | % | 10.8 | % | |||||||||||||||||||||||
| Backlog at year-end | $ | 56,630 | $ | 49,118 | $ | 56,551 | |||||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||
| Net sales | $ | 23,693 | $ | 21,242 | $ | 19,410 | |||||||||
| Operating profit | 2,521 | 2,272 | 2,176 | ||||||||||||
| Operating margin | 10.6 | % | 10.7 | % | 11.2 | % | |||||||||
| Backlog at year-end | $ | 55,636 | $ | 55,601 | $ | 35,692 | |||||||||
Aeronautics’ net sales in 20192022 increased $2.5 billion,$239 million, or 12%1%, compared to 2018. The increase was2021. Net sales increased by approximately $375 million on classified contracts primarily attributabledue to higher volume; about $80 million for the F-22 program due to higher net sales offavorable profit adjustments; and approximately $2.0 billion for the F-35 program due to increased volume on production, sustainment and development contracts; and about $350 million for higher volume on classified programs.
Aeronautics’ operating profit in 2022 increased $67 million, or 2%, compared to 2021. Operating profit increased approximately $145 million on classified contracts primarily due to lower unfavorable profit adjustments on a classified program ($45 million in 2022 compared to $225 million in 2021) that were partially offset by lower favorable profit adjustments; and about $100 million for the F-22 program due to higher net favorable profit adjustments. These increases were partially offset by lower risk retirements. Adjustments not relatedoperating profit of approximately $110 million for the F-16 program due to unfavorable profit adjustments in 2022 on a production contract and modernization contracts; and about $80 million for the F-35 program due to lower net favorable profit adjustments on production and sustainment contracts and volume including neton sustainment contracts. Net favorable profit booking rate adjustments were $25$30 million lowerhigher in 20192022 compared to 2018.2021.
Backlog
Backlog increased in 2019 was comparable2022 compared to 2018.
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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), Javelin, Apache SNIPERfire control system, Sniper Advanced Targeting Pod (SNIPER®), LANTIRNInfrared Search and SOF GLSS.Track (IRST21®) and Special Operations Forces Global Logistics Support Services (SOF GLSS). MFC’s operating results included the following (in millions):
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 10,131 | $ | 8,462 | $ | 7,282 | Net sales | $ | 11,317 | $ | 11,693 | $ | 11,257 | |||||||||||||||||||||||||||||||
| Operating profit | 1,441 | 1,248 | 1,034 | Operating profit | 1,635 | 1,648 | 1,545 | |||||||||||||||||||||||||||||||||||||
| Operating margin | 14.2 | % | 14.7 | % | 14.2 | % | Operating margin | 14.4 | % | 14.1 | % | 13.7 | % | |||||||||||||||||||||||||||||||
| Backlog at year-end | $ | 25,796 | $ | 21,363 | $ | 17,729 | Backlog at year-end | $ | 28,735 | $ | 27,021 | $ | 29,183 | |||||||||||||||||||||||||||||||
MFC’s net sales in 2019 increased $1.7 billion,2022 decreased $376 million, or 20%3%, compared to the same period in 2018. 2021. The increasedecrease was primarily attributable to higherlower net sales of approximately $940$280 million for tacticalsensors and strike missileglobal sustainment programs due to increasedlower volume (primarily precision fires, new hypersonic development programs,on SOF GLSS as a result of changes in mission requirements and classified development programs)lower volume on SNIPER®; and about $465$60 million for integrated air and missile defense programs due to increasedlower volume (primarily PAC-3(THAAD) and THAAD);lower net favorable profit adjustments (PAC-3) that were partially offset by higher volume (PAC-3). Net sales for tactical and about $300 million for sensors and global sustainmentstrike missile programs due to increasedwere comparable as higher volume (primarilySOF GLSS and Apache)(PrSM) was offset by lower volume (air dominance weapon systems).
MFC’s operating profit in 2019 increased $1932022 decreased $13 million, or 15%1%, compared to 2018. Operating2021. The decrease was primarily attributable to lower operating profit increasedof approximately $100$85 million for integrated air and missile defense programs due to higher volumelower net favorable profit adjustments for the PAC-3 program and higher risk retirements (primarily PAC-3an unfavorable profit adjustment of about $40 million on an air and THAAD); andmissile defense development program. This decrease was partially offset by an increase of about $60$50 million for tactical and strike missile programs due to contract mix and higher volume (primarily precision fires),
net favorable profit adjustments (an international tactical and strike missile program and HIMARS) that were partially offset by lower risk retirements (primarily Hellfire and Javelin).an unfavorable profit adjustment of about $25 million on an air-to-ground missile program. There also were unfavorable profit adjustments of approximately $25 million on an energy program in 2021 that did not recur in 2022. Operating profit onfor sensors and global sustainment programs was comparable as higher volume (primarily Apacheboth contract mix and SOF GLSS) wasthe net effect of favorable profit adjustments on an international program in 2022 were offset by lower risk retirements (primarily LANTIRN and SNIPER), after a net decrease in charges of $55 million on international military programs. Adjustments notthe closeout activities related to volume, including netthe Warrior program in 2021 that did not recur in 2022. Net favorable profit booking rate adjustments were $30$45 million lower in 20192022 compared to 2018.2021.
Backlog
Backlog increased in 20192022 compared to 20182021 primarily due to higher orders on THAAD, PAC-3 and precision fires programs.
Rotary and Mission Systems
On December 5, 2022, the U.S. Army selected Sikorsky’s competitor in the Future Long Range Assault Aircraft Competition, a component of its Future Vertical Lift initiative to replace a portion of its assault and utility helicopter fleet. On December 28, 2022, Sikorsky, on behalf of Team DEFIANT, filed a protest challenging the U.S. Army’s decision, and a ruling is expected on or before April 7, 2023 based on the 100-day deadline. Sikorsky remains one of two competitors for the other component of the Future Vertical Lift initiative, the Future Attack Reconnaissance Aircraft competition.
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RMS’ operating results included the following (in millions):
| 2019 | 2018 | 2017 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 15,128 | $ | 14,250 | $ | 13,663 | Net sales | $ | 16,148 | $ | 16,789 | $ | 15,995 | |||||||||||||||||||||||||||||||
| Operating profit | 1,421 | 1,302 | 902 | Operating profit | 1,673 | 1,798 | 1,615 | |||||||||||||||||||||||||||||||||||||
| Operating margin | 9.4 | % | 9.1 | % | 6.6 | % | Operating margin | 10.4 | % | 10.7 | % | 10.1 | % | |||||||||||||||||||||||||||||||
| Backlog at year-end | $ | 34,296 | $ | 31,320 | $ | 30,030 | Backlog at year-end | $ | 34,949 | $ | 33,700 | $ | 36,249 | |||||||||||||||||||||||||||||||
RMS’ net sales in 2019 increased $8782022 decreased $641 million, or 6%4%, compared to 2018. 2021. The increasedecrease was primarily attributable to higherlower net sales of approximately $535$280 million for IWSSTLS programs primarily due to higher volume (primarily LCS, radar surveillance systems programs, Multi Mission Surface Combatant (MMSC), and Aegis);the delivery of an international pilot training system in the first quarter of 2021 that did not recur in 2022; about $290 million for various training and logistics (TLS) programs due to higher volume (primarily an army sustainment program); and about $200$205 million for various C6ISR (command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance) programs due to higher volume (primarily undersea combat systemslower volume; and cyber solutions programs). These increases were partially offset by a decrease of approximately $145$170 million for Sikorsky helicopter programs due to lower production volume (primarily Black Hawk(Black Hawk) that was partially offset by higher production mission systems programs, and commercial aircraft)volume (CH-53K).
RMS’ operating profit in 2019 increased $1192022 decreased $125 million, or 9%7%, compared to 2018.2021. Operating profit increasedThe decrease was primarily attributable to approximately $105$70 million for Sikorsky helicopter programs primarily due to better cost performance across the portfolio, customer mix,lower production volume and net favorable profit adjustments (Black Hawk) that were partially offset by higher risk retirements; andnet favorable profit adjustments (CRH); about $55$50 million for IWSSvarious C6ISR programs due to lower net favorable profit adjustments; and approximately $15 million for integrated warfare systems and sensors (IWSS) programs due to lower net favorable profit adjustments (TPQ-53 and Aegis) that were partially offset by $30 million of unfavorable profit adjustments on a ground-based radar program in 2021 that did not recur in 2022. These decreases were partially offset by an increase of approximately $35 million for TLS programs due to higher net favorable profit adjustments that were partially offset by lower volume (primarily radar surveillance systems programs, LCS, and Aegis), after $50 million in chargesdue to the delivery of an international pilot training system in the first quarter of 2019 for a ground-based radar program. These increases were partially offset by a decrease of $50 million for TLS programs due to $80 million2021 that did not recur in charges primarily recorded in the second quarter of 2019 for an army sustainment program partially offset by lower charges on various other programs. Adjustments not related to volume, including net2022. Net favorable profit booking rate adjustments were $65 million lower in 20192022 compared to 2018.2021.
Backlog
Backlog increased in 20192022 compared to 20182021 primarily due to higher orders on IWSSSikorsky programs.
Space
Our Space business segment is engaged in the research and design, development, design, engineering and production of satellites, space transportation systems, and strategic, advanced strike and defensive missile systems and space transportation systems. Space provides network-enabled situational awareness and integrates complex space and ground-basedground 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) and Next Generation Overhead Persistent Infrared (Next Gen OPIR) system, Global Positioning System (GPS) III, Advanced Extremely High Frequency (AEHF),hypersonics programs and hypersonics.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.Government and commercial customers. Space’s operating results included the following (in millions):
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| Net sales | $ | 11,532 | $ | 11,814 | $ | 11,880 | |||||||||||||||||||||||
| Operating profit | 1,045 | 1,134 | 1,149 | ||||||||||||||||||||||||||
| Operating margin | 9.1 | % | 9.6 | % | 9.7 | % | |||||||||||||||||||||||
| Backlog at year-end | $ | 29,684 | $ | 25,516 | $ | 25,148 | |||||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||
| Net sales | $ | 10,860 | $ | 9,808 | $ | 9,605 | |||||||||
| Operating profit | 1,191 | 1,055 | 980 | ||||||||||||
| Operating margin | 11.0 | % | 10.8 | % | 10.2 | % | |||||||||
| Backlog at year-end | $ | 28,253 | $ | 22,184 | $ | 22,042 | |||||||||
Space’s net sales in 2019 increased $1.1 billion,2022 decreased $282 million, or 11%2%, compared to 2018. 2021. The increasedecrease was primarily attributable to lower net sales of approximately $885 million due to the renationalization of the AWE program on June 30, 2021, which was no longer included in our financial results beginning in the third quarter of 2021; and about $125 million for commercial civil space programs due to lower volume (Orion). These decreases were partially offset by higher net sales of approximately $690 million for government satellite programs due to higher volume (primarily Next Gen OPIR, GPS III and government satellite services); and about $355$495 million for strategic and missile defense programs due to higher development volume (primarily new hypersonic(NGI); and about $245 million for national security space programs due to higher development volume (classified programs).
Space’s operating profit in 2019 increased $1362022 decreased $89 million, or 13%8%, compared to 2018. Operating profit increased2021. The decrease was primarily attributable to approximately $125$85 million for government satellitenational security space programs primarily due to higher risk retirements (primarily AEHF)lower net favorable profit adjustments (classified programs and higher volume (primarily GPS III and government satellite services); and about $45 million for commercial satellite programs, which reflect a lower amount of charges recorded for performance matters. These increasesSBIRS) that were partially offset by a decreaselower net unfavorable profit adjustments of approximately $65$25 million on a
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ground solutions program; and about $40 million for commercial civil space programs due to lower net favorable profit adjustments (Human Lander System (HLS)) and lower volume (Orion). These decreases were partially offset by higher equity earnings of approximately $35 million from the company's investment in ULA due to higher launch volume and launch mix; and about $20 million for ULA. Operating profit on strategic and missile defense programs due to higher net favorable profit adjustments (primarily NGI). Operating profit for the AWE program was comparable as higher volume (primarily hypersonic development programs)its operating profit in 2021 was mostly offset by lower risk retirements (primarily missile defense programs). Adjustments not related to volume, including netaccelerated amortization expense for intangible assets as a result of the renationalization. Net favorable profit booking rate adjustments were $120$150 million higherlower in 20192022 compared to 2018.2021.
Equity earnings
Total equity earnings recognized by Space (primarily ULA) represented approximately $145$100 million and $210$65 million, or 12%10% and 20%6%, of this business segment’sSpace’s operating profit during 20192022 and 2018.2021.
Backlog
Backlog increased in 20192022 compared to 20182021 primarily due to new ordersthe exercise of the Orion Production Contract option for Artemis VI-VIII in strategiccommercial civil space and missile defense (hypersonic development programscontract awards in national security space (Southern Positioning Augmentation Network (SouthPan) and AWE) and space transportation (Orion)classified).
Liquidity and Cash Flows
Cash received from customers, either from the payment of invoices for work performed or for advances from non-U.S. Governmentgovernment customers in excess of costs incurred, is our primary source of cash.cash from operations. We generally do not begin work on contracts until funding is appropriated by the customer. However, from time to time, we may determine to fund customer programs ourselves pending government appropriations. If we incur costs in excess of funds obligated on the contract or in advance of a contract award, this negatively affects our cash flows and we may be at risk for reimbursement of the excess costs.
Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type. We generally bill and collect cash more frequently under cost-reimbursable contracts, which represented approximately 39%38% of the sales we recorded in 2019,2022, 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 our incurrencethe 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.contract and are invoiced regularly as costs are incurred. 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 delaysmay delay the receipt of cash, the cumulative amount of cash collected during the life of the contract willshould not vary.
To date, the effects of COVID-19 have resulted in some negative impacts on our cash flows, partially due to supplier disruptions and delays. The majorityU.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 accelerating payments to the supply chain with a focus on small and at risk businesses. As of December 31, 2022, we have accelerated $1.5 billion of payments to our suppliers that are due by their terms in future periods. We will continue to monitor supply chain risks, especially at small and at-risk related suppliers, and may continue to utilize accelerated payments in 2023 on an as needed basis.
In addition, we have a balanced cash deployment strategy to invest in our business and key technologies to provide our customers with enhanced capabilities, enhance stockholder value, and position ourselves to take advantage of new business
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opportunities when they arise. Consistent with that strategy, we have continued to invest in our business and technologies through capital expenditures, independent research and development, and selective business acquisitions and investments.
We have returned cash to stockholders through dividends and share repurchases. On October 17, 2022, the Board of Directors authorized an additional $14.0 billion to the program. During the fourth quarter of 2022, we entered into an accelerated share repurchase (ASR) agreement to repurchase $4.0 billion of our capital expenditurescommon stock and issued $4.0 billion of senior unsecured notes. As of December 31, 2022, the total remaining authorization for 2019future common share repurchases under our program was $10.0 billion, which is expected to be utilized over a three-year period. We expect to fund the repurchases through a combination of cash from operations and those plannedthe issuance of additional debt. The stock repurchase program does not have an expiration date and may be amended or terminated by the Board of Directors at any time. The amount of shares ultimately purchased and the timing of purchases are at the discretion of management and subject to compliance with applicable law and regulation.
We continue to actively manage our debt levels, including maturities and interest rates, as evidenced by the debt transaction in the second quarter of 2022, the proceeds of which were used to refinance certain upcoming debt maturities between 2023 and 2026. We also actively manage our pension obligations and expect to continue to opportunistically manage our pension liabilities through the purchase of group annuity contracts for 2020 are for equipment, facilities infrastructure and information technology. Expenditures for equipment and facilities infrastructure are generally incurred to support new and existing programs across allportions of our business segments. For example,outstanding defined benefit pension obligations using assets from the pension trust as we have projects underwaydid in the second quarter of 2022. See “Note 11 – Postretirement Benefit Plans” included in our Aeronautics business segmentNotes to Consolidated Financial Statements for facilitiesadditional information. Future pension risk transfer transactions could also be significant and equipmentresult in us making additional contributions 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.pension trust.
The following table provides a summary of our cash flow information followed by a discussion of the key elements (in millions):
| 2019 | 2018 | 2017 | ||||||||||
| Cash and cash equivalents at beginning of year | $ | 772 | $ | 2,861 | $ | 1,837 | ||||||
| Operating activities | ||||||||||||
| Net earnings | 6,230 | 5,046 | 1,963 | |||||||||
| Non-cash adjustments | 1,549 | 1,186 | 4,530 | |||||||||
| Changes in working capital | (672 | ) | (1,401 | ) | (427 | ) | ||||||
| Other, net | 204 | (1,693 | ) | 410 | ||||||||
| Net cash provided by operating activities | 7,311 | 3,138 | 6,476 | |||||||||
| Net cash used for investing activities | (1,241 | ) | (1,075 | ) | (1,147 | ) | ||||||
| Net cash used for financing activities | (5,328 | ) | (4,152 | ) | (4,305 | ) | ||||||
| Net change in cash and cash equivalents | 742 | (2,089 | ) | 1,024 | ||||||||
| Cash and cash equivalents at end of year | $ | 1,514 | $ | 772 | $ | 2,861 | ||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Cash and cash equivalents at beginning of year | $ | 3,604 | $ | 3,160 | $ | 1,514 | ||||||||||||||
| Operating activities | ||||||||||||||||||||
| Net earnings | 5,732 | 6,315 | 6,833 | |||||||||||||||||
| Noncash adjustments | 2,455 | 3,109 | 1,726 | |||||||||||||||||
| Changes in working capital | (733) | 9 | 101 | |||||||||||||||||
| Other, net | 348 | (212) | (477) | |||||||||||||||||
| Net cash provided by operating activities | 7,802 | 9,221 | 8,183 | |||||||||||||||||
| Net cash used for investing activities | (1,789) | (1,161) | (2,010) | |||||||||||||||||
| Net cash used for financing activities | (7,070) | (7,616) | (4,527) | |||||||||||||||||
| Net change in cash and cash equivalents | (1,057) | 444 | 1,646 | |||||||||||||||||
| Cash and cash equivalents at end of year | $ | 2,547 | $ | 3,604 | $ | 3,160 | ||||||||||||||
Operating Activities
Net cash provided by operating activities increased $4.2decreased $1.4 billion in 20192022 compared to 2018 primarily due to a reduction in cash contributions made to our qualified defined benefit pension plans and an improvement in cash used for working capital, partially offset by an increase in cash paid for income taxes. During 2019, we made cash contributions to our qualified defined benefit pension plans of $1.0 billion compared to $5.0 billion in 2018.2021. The $729 million improvement in cash flows used for working capital (defined as receivables, contract assets, and inventories less accounts payable and contract liabilities)decrease was primarily attributable to lower cash at Aeronautics, MFC and RMS. The decrease at Aeronautics was primarily due to timing of production and billing cycles affectingimpacting contract assets (primarily the F-35 program) and contract liabilities (primarily C-130 programF-35). The decrease at Aeronautics and IWSS programs at RMS), partially offset by theMFC was primarily due to timing of cash payments for accounts payable (primarily Aeronautics) and growth inreceivables collections. The decrease at RMS was primarily due to liquidation of inventories (primarily classified programs at AeronauticsTLS and Sikorsky at RMS)helicopter programs) in 2021 that did not recur in 2022. As of December 31, 2022, we accelerated $1.5 billion of payments to suppliers that were due in the first quarter of 2023, compared to $2.2 billion of payments to suppliers as of December 31, 2021 that were due in the first quarter of 2022. Our federal and foreign income tax payments, net of refunds, were $1.6 billion in 2022, compared to $1.4 billion in 2021.
Non-GAAP Financial Measure - Free Cash Flow
Free cash flow is a non-GAAP financial measure that we define as cash from operations less capital expenditures. Our capital expenditures are comprised of equipment and facilities infrastructure and information technology (inclusive of costs for the development or purchase of internal-use software that are capitalized). We madeuse free cash flow to evaluate our business performance and overall liquidity, as well as a performance goal in our annual and long-term incentive plans. We believe free cash flow is a useful measure for investors because it represents the amount of cash generated from operations after reinvesting in the business and that may be available to return to stockholders and creditors (through dividends, stock repurchases and debt repayments) or available to fund acquisitions and other investments. The entire amount of free cash flow is not necessarily available for discretionary expenditures, however, because it does not account for certain mandatory expenditures, such as the
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repayment of maturing debt and pension contributions. While management believes that free cash flow as a non-GAAP financial measure may be useful in evaluating our financial performance, it should be considered supplemental to, and not a substitute for, financial information prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies.
The following table reconciles net cash tax payments of approximately $940 million in 2019 comparedprovided by operating activities to receiving net tax refunds of approximately $41 million in 2018.free cash flow (in millions):
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||
| Cash from operations | $ | 7,802 | $ | 9,221 | $ | 8,183 | ||||||||||||||||||||
| Capital expenditures | (1,670) | (1,522) | (1,766) | |||||||||||||||||||||||
| Free cash flow | $ | 6,132 | $ | 7,699 | $ | 6,417 | ||||||||||||||||||||
Investing Activities
Net cash used for investing activities increased $628 million in 2022 compared to 2021. The increase in cash used for investing activities is due to an increase in capital expenditures and the receipt of $307 million in 2021 from the sale of our ownership interest in the Advanced Military Maintenance, Repair and Overhaul Center (AMMROC) joint venture. Capital expenditures totaled $1.7 billion and $1.5 billion in 2022 and 2021.
Financing Activities
Net cash used for financing activities increased $1.2 billiondecreased $546 million in 20192022 compared to 2018,2021, primarily driven by net repaymentsdue to repayment of $600 million for commercial paper in 2019 compared to net proceeds received of $600 million of commercial paper in 2018.
We paid dividends totaling $3.0 billion ($11.40 per share) in 2022 and $2.9 billion ($10.60 per share) in 2021. We paid quarterly dividends of 4.25% according$2.80 per share during each of the first three quarters of 2022 and $3.00 per share during the fourth quarter of 2022. 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.
During 2022, we paid $7.9 billion to their scheduled maturities. repurchase 18.3 million shares of our common stock. See “Note 12 – Stockholders’ Equity” included in our Notes to Consolidated Financial Statements for additional information. During 2021, we paid $4.1 billion to repurchase 11.7 million shares of our common stock.
In November 2018,October 2022, we repaid $750 millionreceived net proceeds of long-term$3.9 billion from issuance of senior unsecured notes with a fixed interest rateand used the net proceeds from the offering to enter into an ASR agreement to repurchase $4.0 billion of 1.85% according to their scheduled maturities.our common stock
In May 2022, we received net proceeds of $2.3 billion from issuance of senior unsecured notes and used the net proceeds from the offering to redeem all of the outstanding $500 million Notes due 2023, $750 million Notes due 2025 and used the remaining balance of the net proceeds to redeem $1.0 billion of our repurchasesoutstanding $2.0 billion Notes due 2026.
In September 2021, we repaid $500 million of common stock.long-term notes with a fixed interest rate of 3.35% according to their scheduled maturities.
Capital Structure, Resources and Other
At December 31, 2019,2022, we held cash and cash equivalents of $1.5$2.5 billion that waswere generally available to fund ordinary business operations without significant legal, regulatory, or other restrictions.
Our outstanding debt, net of unamortized discounts and issuance costs, amounted to $12.7was $15.5 billion atas of December 31, 20192022 and mainly is in the form of publicly-issued notes that bear interest at fixed rates. As of December 31, 2019, we had $1.3 billion of short-term borrowings due within one year, which are scheduled to mature in November 2020. As of December 31, 2018, we had $1.5 billion of short-term borrowings due within one year, of which $900 million was composed of a scheduled debt maturity due in November 2019 and $600 million was composed of commercial paper with a weighted-average rate of 2.89% outstanding, all of which were repaid during 2019. As of December 31, 2019,2022, we were in compliance with all covenants contained in our debt and credit agreements.See “Note 10 – Debt”included in our Notes to Consolidated Financial Statements for more information on our long-term debt and revolving credit facilities.
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We actively seek to finance our business in a manner that preserves financial flexibility while minimizing borrowing costs to the extent practicable. 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.
Long-Term Debt
On occasion, our customers may seek deferred payment terms to purchase our products. In connectionOctober 24, 2022, we issued a total of $4.0 billion of senior unsecured notes, consisting of $500 million aggregate principal amount of 4.95% Notes due 2025 (the “2025 Notes”), $750 million aggregate principal amount of 5.10% Notes due 2027 (the “2027 Notes”), $1.0 billion aggregate principal amount of 5.25% Notes due 2033 (the “2033 Notes”), $1.0 billion aggregate principal amount of 5.70% Notes due 2054 (the “2054 Notes”) and $750 million aggregate principal amount of 5.90% Notes due 2063 (the “2063 Notes” and, together with these transactions, wethe 2025 Notes, the 2027 Notes, the 2033 Notes and the 2054 Notes, the “October 2022 Notes”). We will pay interest on the 2025 Notes semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2023. We will pay interest on the 2033 Notes semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2023. We will pay interest on each of 2027 Notes, 2054 Notes and 2063 Notes semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2023. We may, at our customer’s request, enter into arrangements foroption, redeem the non-recourse saleOctober 2022 Notes of customer receivablesany series, in whole or in part, at any time at the redemption prices equal to unrelated third–party financial institutions. For accounting purposes, these transactions are not discounted and are treated as a salethe greater 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. We sold approximately $387 million in 2019 and $532 million in 2018 of customer receivables. There were no gains or losses related to sales of these receivables.
On May 11, 2022, we used the net proceeds from the May 2022 Notes is payable on March 15 and September 15 of each year and began on March 15, 2018. The New Notes are unsecured senior obligations and rank equally in right of payment withto redeem all of the outstanding $500 million in aggregate principal amount of our existing3.10% Notes due 2023, $750 million in aggregate principal amount of our 2.90% Notes due 2025, and future unsecured and unsubordinated indebtedness.
$1.0 billion of our outstanding $2.0 billion in aggregate principal amount of our 3.55% Notes due 2026 at their redemption price. We have an effective shelf registration statement on Form S-3 on filepaid make-whole premiums of $13.9 million in connection with the U.S. Securities and Exchange Commissionearly extinguishments of debt. We incurred losses of $34 million ($26 million, or $0.10 per share, after tax) on these transactions related to provide for the issuance of an indeterminate amountearly extinguishments of debt, securities.
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Contractual Commitments and Off-Balance Sheet Arrangements
At December 31, 2019,2022, 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 | $ | 16,842 | $ | 118 | ||||||||||||||||||||||||||||
| Interest payments | 15,028 | 768 | ||||||||||||||||||||||||||||||
| Other liabilities | 3,520 | 222 | ||||||||||||||||||||||||||||||
| Operating lease obligations | 1,342 | 327 | ||||||||||||||||||||||||||||||
| Purchase obligations: | ||||||||||||||||||||||||||||||||
| Operating activities | 59,101 | 27,925 | ||||||||||||||||||||||||||||||
| Capital expenditures | 671 | 472 | ||||||||||||||||||||||||||||||
| Total contractual cash obligations | $ | 96,504 | $ | 29,832 | ||||||||||||||||||||||||||||
| Payments Due By Period | ||||||||||||||||||||
| Total | Less Than 1 Year | Years 2 and 3 | Years 4 and 5 | After 5 Years | ||||||||||||||||
Total debt (a) | $ | 13,799 | $ | 1,250 | $ | 906 | $ | 786 | $ | 10,857 | ||||||||||
| Interest payments | 9,277 | 571 | 1,048 | 979 | 6,679 | |||||||||||||||
| Other liabilities | 2,914 | 252 | 567 | 400 | 1,695 | |||||||||||||||
| Operating lease obligations | 1,287 | 280 | 344 | 217 | 446 | |||||||||||||||
| Purchase obligations: | ||||||||||||||||||||
| Operating activities | 55,491 | 28,564 | 22,528 | 3,483 | 916 | |||||||||||||||
| Capital expenditures | 839 | 446 | 309 | 84 | — | |||||||||||||||
| Total contractual cash obligations | $ | 83,607 | $ | 31,363 | $ | 25,702 | $ | 5,949 | $ | 20,593 | ||||||||||
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 forrelated to our qualified defined benefit pension plans. For additional information about obligations and our future minimum contributionscontribution requirements 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, 2019.2022. 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 $49.9$53.7 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.
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
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ventures that we do not control and may involve products and services that are dissimilar to our business activities. At December 31, 2019,2022, the notional value of remaining obligations under our outstanding offset agreements totaled approximately $15.1$16.1 billion, which primarily relate to our Aeronautics, MFC and RMS business segments, most of which extend through 2049.2044. To the extent we have entered into purchase or other obligations at December 31, 20192022 that also satisfy offset agreements, those amounts are included in the preceding table.contractual commitments table above. Offset programs usually extend over several years and may provide for penalties, estimated at approximately $1.9$1.8 billion at December 31, 2019,2022, 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, 2019,2022, 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) | $ | 2,504 | $ | 966 | ||||||||||||||||||||||||||||
| Surety bonds | 342 | 342 | ||||||||||||||||||||||||||||||
| Third-party Guarantees | 904 | 230 | ||||||||||||||||||||||||||||||
| Total commitments | $ | 3,750 | $ | 1,538 | ||||||||||||||||||||||||||||
| 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) | $ | 2,233 | $ | 1,030 | $ | 779 | $ | 298 | $ | 126 | ||||||||||
| Surety bonds | 359 | 350 | 9 | — | — | |||||||||||||||
| Third-party Guarantees | 996 | 199 | 317 | 151 | 329 | |||||||||||||||
| Total commitments | $ | 3,588 | $ | 1,579 | $ | 1,105 | $ | 449 | $ | 455 | ||||||||||
At December 31, 2019,2022, third-party guarantees totaled $996$904 million, of which approximately 76%71% related to guarantees of contractual performance of joint ventures to which we currently are or previously were a party. These amounts represent our estimate of the maximum amounts we would expect to incur upon the contractual non-performance of the joint venture, joint venture partners or divested businesses. Generally, we also have cross-indemnities in place that may enable us to recover amounts that may be paid on behalf of a joint venture partner.
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, 2022 and 2021, 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 based on the likelihood of obtainingwhen it is probable that we will receive regulatory approvals based upon all known facts and circumstances. We provide our products and services under fixed-price and cost-reimbursable contracts.
Under fixed-price contracts, we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Some fixed-price contracts have a performance-based component under which we may earn incentive payments or incur financial penalties based on our performance.
Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract plus a fee up to a ceiling based on the amount that has been funded. Typically, we enter into three types of cost-reimbursable contracts: cost-plus-award-fee, cost-plus-incentive-fee, and cost-plus-fixed-fee. Cost-plus-award-fee contracts provide for an award fee that varies within specified limits based on the customer’s assessment of our performance against a predetermined set of criteria, such as targets based on cost, quality, technical and schedule criteria. Cost-plus-incentive-fee contracts provide for reimbursement of costs plus a fee, which is adjusted by a formula based on the relationship of total allowable costs to total target costs (i.e., incentive based on cost) or reimbursement of costs plus an incentive to exceed stated performance targets (i.e.,
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incentive based on performance). The fixed-fee inCost-plus-fixed-fee contracts provide a cost-plus-fixed-fee contractfixed fee that is negotiated at the inception of the contract and that fixed-fee does not vary with actual costs.
We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.
We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The products and services in our contracts are typically not distinct from one another due to their complex relationships and the significant contract management functions required to perform under the contract. Accordingly, our contracts are typically accounted for as one performance obligation. In limited cases, our contracts have more than one distinct performance obligation, which occurs when we perform activities that are not highly complex or interrelated or involve different product lifecycles. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded in a given period. We classify net sales as products or services on our consolidated statements of earnings based on the predominant attributes of the performance obligations.
We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. For contracts where a portion of the price may vary (e.g. awards, incentive fees and claims), we estimate variable consideration at the most likely amount, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. We analyze the risk of a significant revenue reversal and if necessary constrain the amount of variable consideration recognized in order to mitigate this risk.
At the inception of a contract we estimate the transaction price based on our current rights and do not contemplate future modifications (including unexercised options) or follow-on contracts until they become legally enforceable. Contracts are often subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the context of the contract. Therefore, such modifications are accounted for as if they were part of the existing contract and recognized as a cumulative adjustment to revenue.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis (i.e., not bundled with any other products or services). Our contracts with the U.S. Government, including FMS contracts, are subject to FAR and the price is typically based on estimated or actual costs plus a reasonable profit margin. As a result of these regulations, the standalone selling price of products or services in our contracts with the U.S. Government and FMS contracts are typically equal to the selling price stated in the contract.
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.
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For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the percentage-of-completion cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation(s). For performance obligations to provide services to the customer, revenue is recognized over time based on costs incurred or the right to invoice method (in situations where the value transferred matches our billing rights) as our customer receives and consumes the benefits.
For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point.
Significant estimates and assumptions are made in estimating contract sales, costs, and profit. We estimate profit as the difference between estimated revenues and total estimated costs includingto complete the profit booking rate.contract. At the outset of a long-term contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract, as well as our ability to earn variable consideration, and assess the effects of those risks on our estimates of sales and total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead, general and administrative and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset or localization agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding therelated to technical, schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract or may increase the variable consideration we expect to receive on the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase or our estimates of variable consideration we expect to receive decrease. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate. 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.evident, which we refer to as a reach-forward loss.
Comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts for which we recognize revenue over time using the percentage-of-completion cost-to-cost method to measure progress towards completion. Increases in the profit booking rates, typically referred to as risk retirements,favorable profit adjustments, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract. 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.rate and are typically referred to as unfavorable profit adjustments. Increases or decreases in profit booking rates are recognized in the current period they are determined and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other 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; COVID-19 impacts or supply chain disruptions; restructuring charges except(except for significant severance actions, which are excluded from segment operating results;results); reserves for disputes; certain asset impairments; and losses on sales of 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.
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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.
Postretirement 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 11 – 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.
Inclusive of the transactions described above, since December 2019,2018, Lockheed Martin, through its master retirement trust, has purchased an irrevocable group annuity contract from an insurance company (referredtotal contracts for approximately $15.9 billion related to as a buy-out contract) for $1.9 billion to transfer $1.9 billion of our outstanding defined benefit pension obligations related to certain U.S. retirees and beneficiaries. The group annuity contract was purchased using assets from theeliminating pension trust. As a result of this transaction, we were relieved of all responsibilityplan volatility for these pension obligations and the insurance company is now required to pay and administer the retirement benefits owed to approximately 20,000 U.S.109,000 retirees and beneficiaries with no change to the amount, timing or form of monthly retirement benefit payments. Although the transaction was treated as a settlement for accounting purposes, we did not recognize a loss on the settlement in earnings associated with the transaction because total settlements during 2019 for the affected pension plans were less than the plans’ service and interest cost in 2019. Accordingly, the transaction had no impact on our 2019 FAS pension expense or CAS pension cost, and the differenceannually required Pension Benefit Guarantee Corporation (PBGC) premiums of approximately $45$79 million between the amount paid to the insurance company and the amount of the pension obligations settled was recognized in other comprehensive income and will be amortized to FAS pension expense in future periods. per year.
We expect to continue to look for opportunities to manage our pension liabilities through additional buy out contractspension risk transfer transactions in future years and the amounts involved could be material to a particular reporting period.years. Future transactions could result in a non-cashnoncash 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 and participant longevity, employee turnover and the health care cost trend rates for our retiree medical plans.longevity. The assumptions we make affect both the calculation of the benefit obligations as of the measurement date and the calculation of net periodic benefit
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 3.25%5.250% at December 31, 2019,2022, compared to 4.25%2.875% at December 31, 2018.
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2021. We utilized a single weighted average discount rate of 3.25%5.25% when calculating our benefit obligations related to our retiree medical and life insurance plans at December 31, 2019,2022, compared to 4.25%2.75% at December 31, 2018.2021. 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 decreaseincrease in the discount rate from December 31, 20182021 to December 31, 20192022 resulted in an approximate $5.8 billion increasea decrease in the projected benefit obligations of our qualified defined benefit pension plans.plans of approximately $10.2 billion at December 31, 2022.
We utilized an expected long-term rate of return on plan assets of 7.00%6.50% at both December 31, 2019 compared to 7.00% for2022 and December 31, 2018.2021. 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 20192022 of $6.7$(5.9) billion, based on an actual rate of approximately 21% improved(18)%, reduced plan assets more than the $2.3$1.9 billion expected return based on our 7.00% long-term rate of return assumption.
Our stockholders’ equity has been reduced cumulatively by $15.5$7.9 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 declineschanges in discount rates, investment lossesexperience, 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 an average period of approximately twenty years as of December 31, 2019. This amortization period extended (approximately doubled from the prior nine years) in 2020 due to the freeze of our salaried pension plans to use the average remaining life expectancy of the participants instead of average future service.2022. During 2019, $908 million2022, $1.2 billion of these amounts, along with amortization of net prior service credit, were recognized as a component of postretirement benefit plans expense and about $441 million is expected to be recognized as expense in 2020.inclusive of the noncash pension settlement charge of $1.2 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 3.25%5.25% discount rate assumption at December 31, 2019,2022, 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 20192022 by approximately $1.5 billion,$800 million, which would result in an after-tax increase or decrease in stockholders’ equity at the end of the year of approximately $1.2 billion.$600 million. If the 3.25%5.25% discount rate at December 31, 20192022 that was used to compute the expected 20202023 FAS pension expenseincome 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 expenseincome projected for 20202023 would be lower or higher bychange approximately $15$5 million. The impact of changes in the discount rate on FAS pension expense is significantly less than in prior years (i.e., $15 million for 2020 compared to $120 million for 2019) due to the freeze of our salaried pension plans effective January 1, 2020, and resulting service cost reduction and extended loss amortization period discussed above. If the 7.00%6.50% expected long-term rate of return on plan assets assumption at December 31, 20192022 that was used to compute the expected 20202023 FAS pension expenseincome 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 expenseincome projected for 20202023 would be lowerhigher or higherlower by approximately $80$65 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.pension income. Every 100 basis points differenceincrease (decrease) in return during 20192022 between our actual rate of return of approximately 21%(18)% and our expected long-term rate of return of 7.00% impacted 2020increased (decreased) 2023 expected FAS pension expenseincome by approximately $15$10 million.
Funding Considerations
We made no contributions of $1.0 billion in 20192022 and $5.0 billion in 20182021 to our qualified defined benefit pension 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.in accordance with ERISA. The ERISA funded status of our qualified defined benefit pension plans was approximately 82% and 81%92% as of December 31, 20192022 and 2018;2021; which is calculated on a different basis than under GAAP.GAAP and reflects the impact of the American Rescue Plan Act of 2021.
Contributions to our defined benefit pension plans are recovered over time through the pricing of our products and services on U.S. Government contracts, including FMS, and are recognized in our cost of sales and net sales. CAS govern the extent to
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which our pension costs are allocable to and recoverable under contracts with the U.S. Government, including FMS. Pension cost recoveries under CAS occur in different periods from when pension contributions are made under the PPA. The CAS rules fully transitioned in 2017 to better align the recovery of pension costsaccordance with the minimum funding requirements of the PPA (referred to as CAS Harmonization).ERISA.
We recovered $2.6$1.8 billion in 20192022 and $2.4$2.1 billion in 20182021 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. Our prepayment credits were approximately $8.5$4.3 billion and $7.0 billion at both December 31, 20192022 and 2018.2021. The prepayment credit balance will increase or decrease based on our actual investment return on plan assets.
Environmental Matters
We are a party to various agreements, proceedings and potential proceedings for environmental remediation issues, including matters at various sites where we have been designated a potentially responsible party (PRP). At December 31, 20192022 and 2018,2021, the total amount of liabilities recorded on our consolidated balance sheet for environmental matters was $810$696 million and $864$742 million. We have recorded assets totaling $703$618 million and $750$645 million at December 31, 20192022 and 20182021 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 remediation 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 14 – 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 costs that are probable of future recovery by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and contract mix, our history of receiving reimbursement of such costs, and efforts by some U.S. Government representatives to limit such reimbursement.
As disclosed above, we may record changes in the amount of environmental remediation liabilities as a result of our quarterly reviews of the status of our environmental remediation sites, which would result in a change to the corresponding amount that is probable of future recovery and a charge to earnings. For example, if we were to determine that the liabilities should be increased by $100 million, the corresponding amount that is probable of future recovery would be increased by approximately $87$89 million, with the remainder recorded as a charge to earnings. This allocation is determined annually, based upon our existing and projected business activities with the U.S. 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
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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 remediation 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 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 andprogram. Intangible assets are amortized on a straight-line basis over a period of expected cash flows used to measure fair value, which typically ranges from ninefive to 20 years.
Our goodwill balance was $10.6 billion at December 31, 2019 and $10.8 billion at both December 31, 2018.2022 and 2021. 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 2019,2022, we performed our annual goodwill impairment test for each of our reporting units. The results of that test indicated that for each of our reporting units no impairment existed. As of the date of our annual impairment test,existed, including Sikorsky. Based on this, the fair value
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of our Sikorsky reporting unit exceeded its carrying value, which included goodwill of $2.7 billion, by a margin of approximately 40%. While the margin between theThe fair value and carrying value of both our Sikorsky reporting unit improved sinceand the prior year impairment test, the fair value of our Sikorsky reporting unitindefinite-lived trademark intangible asset can be significantly impacted by its performance, the amount and timing of expected future cash flows, contract terminations, changes in expected future orders, general market pressures, including U.S. Government budgetary constraints, discount rates, and 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 isand the indefinite-lived trademark intangible asset at our Sikorsky reporting unit are at risk for impairment should there be a significant deterioration of projected cash flows of the reporting unit. We do not currently anticipate any material impairments on our assets as a result of COVID-19 or inflation.
Impairment assessments inherently involve management judgments regarding a number of assumptions such as those described above. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of our recorded goodwill, differences in assumptions could have a material effect on the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.
Acquired intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment testing.testing or more frequently if events or change in circumstance indicate that it is more likely than not that the asset is impaired. This testing compares carrying value to fair value and, when appropriate, the carrying value of these assets is reduced to fair value.
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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 and commercial paper, if issued. The estimated fair value of our outstanding debt was $15.9$16.0 billion at December 31, 20192022 and the outstanding principal amount was $13.8$16.8 billion, excluding unamortized discounts and issuance costs of $1.2$1.3 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, 2019.2022.
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, the 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 mitigateminimize fluctuations in our earnings and cash flows associated with changes in foreign currency exchange rates. As a result, we do not have material foreign currency exposure, including exposure to the pound sterling or euro should there be material foreign currency fluctuations due to the United Kingdom departing from the European Union (commonly referred to as Brexit). 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 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 mitigateminimize 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 mitigateminimize 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 highly effective 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 not highly effective, if any, are immediately recognized in earnings. The aggregate notional amount of our outstanding interest rate swaps at December 31, 20192022 and 20182021 was $750 million$1.3 billion and $1.3 billion.$500 million. The increase in 2022 was designated on the additional debt we issued during the fourth quarter. The aggregate notional amount of our outstanding foreign currency hedges at December 31, 20192022 and 20182021 was $3.8$7.3 billion and $3.5$4.0 billion. The increase in 2022 is due to the timing of foreign denominated international contract awards. At December 31, 20192022 and 2018,2021, the net fair value of our derivative instruments was not material (see “Note 1615 – 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 contracts 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 severalmany banks. We periodicallyregularly 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, 2019,2022, investments in the trust totaled $1.8$1.6 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, 2019.
58
We are exposed to equity market risk through certain marketable securities. The fair value of these marketable securities was $24 million as of December 31, 2022. A 10% decrease in the market price of our marketable equity securities as of December 31, 2022 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 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) as of December 31, 20192022 and 2018,2021, the related consolidated statements of earnings, comprehensive income, equitycash flows and cash flowsequity for each of the three years in the period ended December 31, 2019,2022, 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 at December 31, 20192022 and 2018,2021, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, 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, 2019,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 7, 2020January 26, 2023 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 included 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.
60
| Revenue recognition based on the percentage of completion method | ||||||||
| Description of the Matter | For the year ended December 31, The percentage-of-completion cost-to-cost method requires management to make significant estimates and assumptions to estimate contract sales 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 | |||||||
| 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 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, | |||||||
| Defined Benefit Pension Plan Obligation | ||||||||
| Description of the Matter | At December 31, 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 the discount rate | |||||||
61
| 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, | |||||||
/s/ Ernst & Young LLP
We have served as the Corporation’s auditor since 1994.
Tysons, Virginia
January 26, 2023
62
Lockheed Martin Corporation
Consolidated Statements of Earnings
(in millions, except per share data)
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net sales | ||||||||||||
| Products | $ | 50,053 | $ | 45,005 | $ | 42,502 | ||||||
| Services | 9,759 | 8,757 | 7,458 | |||||||||
| Total net sales | 59,812 | 53,762 | 49,960 | |||||||||
| Cost of sales | ||||||||||||
| Products | (44,589 | ) | (40,293 | ) | (38,417 | ) | ||||||
| Services | (8,731 | ) | (7,738 | ) | (6,673 | ) | ||||||
| Severance and restructuring charges | — | (96 | ) | — | ||||||||
| Other unallocated, net | 1,875 | 1,639 | 1,501 | |||||||||
| Total cost of sales | (51,445 | ) | (46,488 | ) | (43,589 | ) | ||||||
| Gross profit | 8,367 | 7,274 | 6,371 | |||||||||
| Other income, net | 178 | 60 | 373 | |||||||||
| Operating profit | 8,545 | 7,334 | 6,744 | |||||||||
| Interest expense | (653 | ) | (668 | ) | (651 | ) | ||||||
| Other non-operating expense, net | (651 | ) | (828 | ) | (847 | ) | ||||||
| Earnings from continuing operations before income taxes | 7,241 | 5,838 | 5,246 | |||||||||
| Income tax expense | (1,011 | ) | (792 | ) | (3,356 | ) | ||||||
| Net earnings from continuing operations | 6,230 | 5,046 | 1,890 | |||||||||
| Net earnings from discontinued operations | — | — | 73 | |||||||||
| Net earnings | $ | 6,230 | $ | 5,046 | $ | 1,963 | ||||||
| Earnings per common share | ||||||||||||
| Basic | ||||||||||||
| Continuing operations | $ | 22.09 | $ | 17.74 | $ | 6.56 | ||||||
| Discontinued operations | — | — | 0.26 | |||||||||
| Basic earnings per common share | $ | 22.09 | $ | 17.74 | $ | 6.82 | ||||||
| Diluted | ||||||||||||
| Continuing operations | $ | 21.95 | $ | 17.59 | $ | 6.50 | ||||||
| Discontinued operations | — | — | 0.25 | |||||||||
| Diluted earnings per common share | $ | 21.95 | $ | 17.59 | $ | 6.75 | ||||||
| Years Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Net sales | |||||||||||||||||||||||||||||||||||
| Products | $ | 55,466 | $ | 56,435 | $ | 54,928 | |||||||||||||||||||||||||||||
| Services | 10,518 | 10,609 | 10,470 | ||||||||||||||||||||||||||||||||
| Total net sales | 65,984 | 67,044 | 65,398 | ||||||||||||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||||||||||||||
| Products | (49,577) | (50,273) | (48,996) | ||||||||||||||||||||||||||||||||
| Services | (9,280) | (9,463) | (9,371) | ||||||||||||||||||||||||||||||||
| Severance and other charges | (100) | (36) | (27) | ||||||||||||||||||||||||||||||||
| Other unallocated, net | 1,260 | 1,789 | 1,650 | ||||||||||||||||||||||||||||||||
| Total cost of sales | (57,697) | (57,983) | (56,744) | ||||||||||||||||||||||||||||||||
| Gross profit | 8,287 | 9,061 | 8,654 | ||||||||||||||||||||||||||||||||
| Other income (expense), net | 61 | 62 | (10) | ||||||||||||||||||||||||||||||||
| Operating profit | 8,348 | 9,123 | 8,644 | ||||||||||||||||||||||||||||||||
| Interest expense | (623) | (569) | (591) | ||||||||||||||||||||||||||||||||
| Non-service FAS pension (expense) income | (971) | (1,292) | 219 | ||||||||||||||||||||||||||||||||
| Other non-operating (expense) income, net | (74) | 288 | (37) | ||||||||||||||||||||||||||||||||
| Earnings from continuing operations before income taxes | 6,680 | 7,550 | 8,235 | ||||||||||||||||||||||||||||||||
| Income tax expense | (948) | (1,235) | (1,347) | ||||||||||||||||||||||||||||||||
| Net earnings from continuing operations | 5,732 | 6,315 | 6,888 | ||||||||||||||||||||||||||||||||
| Net loss from discontinued operations | — | — | (55) | ||||||||||||||||||||||||||||||||
| Net earnings | $ | 5,732 | $ | 6,315 | $ | 6,833 | |||||||||||||||||||||||||||||
| Earnings (loss) per common share | |||||||||||||||||||||||||||||||||||
| Basic | |||||||||||||||||||||||||||||||||||
| Continuing operations | $ | 21.74 | $ | 22.85 | $ | 24.60 | |||||||||||||||||||||||||||||
| Discontinued operations | — | — | (0.20) | ||||||||||||||||||||||||||||||||
| Basic earnings per common share | $ | 21.74 | $ | 22.85 | $ | 24.40 | |||||||||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||||||||||||||
| Continuing operations | $ | 21.66 | $ | 22.76 | $ | 24.50 | |||||||||||||||||||||||||||||
| Discontinued operations | — | — | (0.20) | ||||||||||||||||||||||||||||||||
| Diluted earnings per common share | $ | 21.66 | $ | 22.76 | $ | 24.30 | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
63
Lockheed Martin Corporation
Consolidated Statements of Comprehensive Income
(in millions)
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net earnings | $ | 6,230 | $ | 5,046 | $ | 1,963 | ||||||
| Other comprehensive income (loss), net of tax | ||||||||||||
| Postretirement benefit plans | ||||||||||||
| Net other comprehensive loss recognized during the period, net of tax benefit of $586 million in 2019, $136 million in 2018 and $375 million in 2017 | (2,182 | ) | (501 | ) | (1,380 | ) | ||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax expense of $247 million in 2019, $327 million in 2018 and $437 million in 2017 | 908 | 1,202 | 802 | |||||||||
| Other, net | 41 | (75 | ) | 141 | ||||||||
| Other comprehensive income (loss), net of tax | (1,233 | ) | 626 | (437 | ) | |||||||
| Comprehensive income | $ | 4,997 | $ | 5,672 | $ | 1,526 | ||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Net earnings | $ | 5,732 | $ | 6,315 | $ | 6,833 | ||||||||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||||||
| Postretirement benefit plans | ||||||||||||||||||||
| Net actuarial gain (loss) recognized due to plan remeasurements, net of tax of $518 million in 2022, $925 million in 2021 and $292 million in 2020 | 1,873 | 3,404 | (1,067) | |||||||||||||||||
| Amortization of actuarial losses and prior service credits, net of tax of $18 million in 2022, $130 million in 2021 and $119 million in 2020 | 69 | 477 | 440 | |||||||||||||||||
| Pension settlement charge, net of tax of $314 million in 2022 and $355 million in 2021 | 1,156 | 1,310 | — | |||||||||||||||||
| Other, net, net of tax of $2 million in 2022, $11 million in 2021 and $5 million in 2020 | (115) | (76) | 60 | |||||||||||||||||
| Other comprehensive income (loss), net of tax | 2,983 | 5,115 | (567) | |||||||||||||||||
| Comprehensive income | $ | 8,715 | $ | 11,430 | $ | 6,266 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
64
Lockheed Martin Corporation
Consolidated Balance Sheets
(in millions, except par value)
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,514 | $ | 772 | ||||
| Receivables, net | 2,337 | 2,444 | ||||||
| Contract assets | 9,094 | 9,472 | ||||||
| Inventories | 3,619 | 2,997 | ||||||
| Other current assets | 531 | 418 | ||||||
| Total current assets | 17,095 | 16,103 | ||||||
| Property, plant and equipment, net | 6,591 | 6,124 | ||||||
| Goodwill | 10,604 | 10,769 | ||||||
| Intangible assets, net | 3,213 | 3,494 | ||||||
| Deferred income taxes | 3,319 | 3,208 | ||||||
| Other noncurrent assets | 6,706 | 5,178 | ||||||
| Total assets | $ | 47,528 | $ | 44,876 | ||||
| Liabilities and equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 1,281 | $ | 2,402 | ||||
| Contract liabilities | 7,054 | 6,491 | ||||||
| Salaries, benefits and payroll taxes | 2,466 | 2,122 | ||||||
| Current maturities of long-term debt and commercial paper | 1,250 | 1,500 | ||||||
| Other current liabilities | 1,921 | 1,883 | ||||||
| Total current liabilities | 13,972 | 14,398 | ||||||
| Long-term debt, net | 11,404 | 12,604 | ||||||
| Accrued pension liabilities | 13,234 | 11,410 | ||||||
| Other postretirement benefit liabilities | 337 | 704 | ||||||
| Other noncurrent liabilities | 5,410 | 4,311 | ||||||
| Total liabilities | 44,357 | 43,427 | ||||||
| Stockholders’ equity | ||||||||
| Common stock, $1 par value per share | 280 | 281 | ||||||
| Additional paid-in capital | — | — | ||||||
| Retained earnings | 18,401 | 15,434 | ||||||
| Accumulated other comprehensive loss | (15,554 | ) | (14,321 | ) | ||||
| Total stockholders’ equity | 3,127 | 1,394 | ||||||
| Noncontrolling interests in subsidiary | 44 | 55 | ||||||
| Total equity | 3,171 | 1,449 | ||||||
| Total liabilities and equity | $ | 47,528 | $ | 44,876 | ||||
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Assets | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | 2,547 | $ | 3,604 | ||||||||||
| Receivables, net | 2,505 | 1,963 | ||||||||||||
| Contract assets | 12,318 | 10,579 | ||||||||||||
| Inventories | 3,088 | 2,981 | ||||||||||||
| Other current assets | 533 | 688 | ||||||||||||
| Total current assets | 20,991 | 19,815 | ||||||||||||
| Property, plant and equipment, net | 7,975 | 7,597 | ||||||||||||
| Goodwill | 10,780 | 10,813 | ||||||||||||
| Intangible assets, net | 2,459 | 2,706 | ||||||||||||
| Deferred income taxes | 3,744 | 2,290 | ||||||||||||
| Other noncurrent assets | 6,931 | 7,652 | ||||||||||||
| Total assets | $ | 52,880 | $ | 50,873 | ||||||||||
| Liabilities and equity | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable | $ | 2,117 | $ | 780 | ||||||||||
| Salaries, benefits and payroll taxes | 3,075 | 3,108 | ||||||||||||
| Contract liabilities | 8,488 | 8,107 | ||||||||||||
| Other current liabilities | 2,207 | 2,002 | ||||||||||||
| Total current liabilities | 15,887 | 13,997 | ||||||||||||
| Long-term debt, net | 15,429 | 11,670 | ||||||||||||
| Accrued pension liabilities | 5,472 | 8,319 | ||||||||||||
| Other noncurrent liabilities | 6,826 | 5,928 | ||||||||||||
| Total liabilities | 43,614 | 39,914 | ||||||||||||
| Stockholders’ equity | ||||||||||||||
| Common stock, $1 par value per share | 254 | 271 | ||||||||||||
| Additional paid-in capital | 92 | 94 | ||||||||||||
| Retained earnings | 16,943 | 21,600 | ||||||||||||
| Accumulated other comprehensive loss | (8,023) | (11,006) | ||||||||||||
| Total stockholders’ equity | 9,266 | 10,959 | ||||||||||||
| Total liabilities and equity | $ | 52,880 | $ | 50,873 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
65
Lockheed Martin Corporation
Consolidated Statements of Cash Flows
(in millions)
| Years Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Operating activities | ||||||||||||
| Net earnings | $ | 6,230 | $ | 5,046 | $ | 1,963 | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities | ||||||||||||
| Depreciation and amortization | 1,189 | 1,161 | 1,195 | |||||||||
| Stock-based compensation | 189 | 173 | 158 | |||||||||
| Deferred income taxes | 222 | (244 | ) | 3,448 | ||||||||
| Severance and restructuring charges | — | 96 | — | |||||||||
| Gain on property sale | (51 | ) | — | (198 | ) | |||||||
| Gain on divestiture of IS&GS business | — | — | (73 | ) | ||||||||
| Changes in assets and liabilities | ||||||||||||
| Receivables, net | 107 | (179 | ) | (902 | ) | |||||||
| Contract assets | 378 | (1,480 | ) | 390 | ||||||||
| Inventories | (622 | ) | (119 | ) | (79 | ) | ||||||
| Accounts payable | (1,098 | ) | 914 | (189 | ) | |||||||
| Contract liabilities | 563 | (537 | ) | 353 | ||||||||
| Postretirement benefit plans | 81 | (3,574 | ) | 1,316 | ||||||||
| Income taxes | (151 | ) | 1,077 | (1,210 | ) | |||||||
| Other, net | 274 | 804 | 304 | |||||||||
| Net cash provided by operating activities | 7,311 | 3,138 | 6,476 | |||||||||
| Investing activities | ||||||||||||
| Capital expenditures | (1,484 | ) | (1,278 | ) | (1,177 | ) | ||||||
| Other, net | 243 | 203 | 30 | |||||||||
| Net cash used for investing activities | (1,241 | ) | (1,075 | ) | (1,147 | ) | ||||||
| Financing activities | ||||||||||||
| Repurchases of common stock | (1,200 | ) | (1,492 | ) | (2,001 | ) | ||||||
| Dividends paid | (2,556 | ) | (2,347 | ) | (2,163 | ) | ||||||
| Proceeds from issuance of commercial paper, net | (600 | ) | 600 | — | ||||||||
| Repayments of long-term debt | (900 | ) | (750 | ) | — | |||||||
| Other, net | (72 | ) | (163 | ) | (141 | ) | ||||||
| Net cash used for financing activities | (5,328 | ) | (4,152 | ) | (4,305 | ) | ||||||
| Net change in cash and cash equivalents | 742 | (2,089 | ) | 1,024 | ||||||||
| Cash and cash equivalents at beginning of year | 772 | 2,861 | 1,837 | |||||||||
| Cash and cash equivalents at end of year | $ | 1,514 | $ | 772 | $ | 2,861 | ||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Operating activities | ||||||||||||||||||||
| Net earnings | $ | 5,732 | $ | 6,315 | $ | 6,833 | ||||||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities | ||||||||||||||||||||
| Depreciation and amortization | 1,404 | 1,364 | 1,290 | |||||||||||||||||
| Stock-based compensation | 238 | 227 | 221 | |||||||||||||||||
| Equity method investment impairment | — | — | 128 | |||||||||||||||||
| Tax resolution related to former IS&GS business | — | — | 55 | |||||||||||||||||
| Deferred income taxes | (757) | (183) | 5 | |||||||||||||||||
| Pension settlement charge | 1,470 | 1,665 | — | |||||||||||||||||
| Severance and other charges | 100 | 36 | 27 | |||||||||||||||||
| Changes in: | ||||||||||||||||||||
| Receivables, net | (542) | 15 | 359 | |||||||||||||||||
| Contract assets | (1,739) | (1,034) | (451) | |||||||||||||||||
| Inventories | (107) | 564 | 74 | |||||||||||||||||
| Accounts payable | 1,274 | (98) | (372) | |||||||||||||||||
| Contract liabilities | 381 | 562 | 491 | |||||||||||||||||
| Income taxes | 148 | 45 | (19) | |||||||||||||||||
| Qualified defined benefit pension plans | (412) | (267) | (1,197) | |||||||||||||||||
| Other, net | 612 | 10 | 739 | |||||||||||||||||
| Net cash provided by operating activities | 7,802 | 9,221 | 8,183 | |||||||||||||||||
| Investing activities | ||||||||||||||||||||
| Capital expenditures | (1,670) | (1,522) | (1,766) | |||||||||||||||||
| Other, net | (119) | 361 | (244) | |||||||||||||||||
| Net cash used for investing activities | (1,789) | (1,161) | (2,010) | |||||||||||||||||
| Financing activities | ||||||||||||||||||||
| Issuance of long-term debt, net of related costs | 6,211 | — | 1,131 | |||||||||||||||||
| Repayments of long-term debt | (2,250) | (500) | (1,650) | |||||||||||||||||
| Repurchases of common stock | (7,900) | (4,087) | (1,100) | |||||||||||||||||
| Dividends paid | (3,016) | (2,940) | (2,764) | |||||||||||||||||
| Other, net | (115) | (89) | (144) | |||||||||||||||||
| Net cash used for financing activities | (7,070) | (7,616) | (4,527) | |||||||||||||||||
| Net change in cash and cash equivalents | (1,057) | 444 | 1,646 | |||||||||||||||||
| Cash and cash equivalents at beginning of year | 3,604 | 3,160 | 1,514 | |||||||||||||||||
| Cash and cash equivalents at end of year | $ | 2,547 | $ | 3,604 | $ | 3,160 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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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’ Equity (Deficit) | Noncontrolling Interests in Subsidiary | Total Equity (Deficit) | |||||||||||||||||||
| Balance at December 31, 2016 | $ | 289 | $ | — | $ | 13,195 | $ | (12,102 | ) | $ | 1,382 | $ | 95 | $ | 1,477 | ||||||||||
| Net earnings | — | — | 1,963 | — | 1,963 | — | 1,963 | ||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (437 | ) | (437 | ) | — | (437 | ) | |||||||||||||||
| 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 | $ | — | $ | 11,405 | $ | (12,539 | ) | $ | (850 | ) | $ | 74 | $ | (776 | ) | ||||||||
| Net earnings | — | — | 5,046 | — | 5,046 | — | 5,046 | ||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 626 | 626 | — | 626 | ||||||||||||||||||
| Repurchases of common stock | (5 | ) | (404 | ) | (1,083 | ) | — | (1,492 | ) | — | (1,492 | ) | |||||||||||||
| Dividends declared ($8.20 per share) | — | — | (2,342 | ) | — | (2,342 | ) | — | (2,342 | ) | |||||||||||||||
| Stock-based awards, ESOP activity and other | 2 | 404 | — | — | 406 | — | 406 | ||||||||||||||||||
| Reclassification of income tax effects from tax reform | — | — | 2,408 | (2,408 | ) | — | — | — | |||||||||||||||||
| Net decrease in noncontrolling interests in subsidiary | — | — | — | — | — | (19 | ) | (19 | ) | ||||||||||||||||
| 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 | ||||||||||
| 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, 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 income, 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 | |||||||||||||||||||||||||||
| Net earnings | — | — | 5,732 | — | 5,732 | — | 5,732 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 2,983 | 2,983 | — | 2,983 | ||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (18) | (503) | (7,379) | — | (7,900) | — | (7,900) | ||||||||||||||||||||||||||||||||||
| Dividends declared ($11.40 per share) | — | — | (3,010) | — | (3,010) | — | (3,010) | ||||||||||||||||||||||||||||||||||
| Stock-based awards, ESOP activity and other | 1 | 501 | — | — | 502 | — | 502 | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | 254 | $ | 92 | $ | 16,943 | $ | (8,023) | $ | 9,266 | $ | — | $ | 9,266 | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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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 3 – Information on Business Segments”, we operate in four 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. Therefore, during 2021, AWE only generated sales of $885 million and operating profit of $18 million, which are included in Space’s financial results for the year ended December 31, 2021. During the year ended December 31, 2020, AWE generated sales of $1.4 billion and operating profit of $35 million, which are included in Space’s financial results for 2020.
Basis of presentation – 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 contract liabilities. We classify all other assets and current liabilities. Unless otherwise noted, we present all per share amounts cited in these consolidated financial statementsliabilities based on a “per diluted share” basis.whether the asset will be realized or the liability will be paid within one year.
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 liabilities and assets for the portion of environmental costs that are probable of future recovery and liabilities,recovery; evaluation of goodwill, intangible assets, investments and other assets for impairment,impairment; income taxes including deferred income taxes,taxes; fair value measurementsmeasurements; and contingencies.
Revenue Recognition – The majority of our net sales are generated from long-term contracts with the U.S. Government and international customers (including foreign military sales (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 based on the likelihood of obtainingwhen 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 3three 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
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target costs (i.e., incentive based on cost) or reimbursement of costs plus an incentive to exceed stated performance targets (i.e., incentive based on performance). The fixed-fee inCost-plus-fixed-fee contracts provide a cost-plus-fixed-fee contractfixed fee that is negotiated at the inception of the contract and that fixed-fee does not vary with actual costs.
We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.
We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The products and services in our contracts are typically not distinct from one another due to their complex relationships and the significant contract management functions required to perform under the contract. Accordingly, our contracts are typically accounted for as one performance obligation. In limited cases, our contracts have more than one distinct performance obligation, which occurs when we perform activities that are not highly complex or interrelated or involve different product lifecycles. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded in a given period. We classify net sales as products or services on our consolidated statements of earnings based on the predominant attributes of the performance obligations.
We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. For contracts where a portion of the price may vary (e.g. awards, incentive fees and claims), we estimate variable consideration at the most likely amount, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. We analyze the risk of a significant revenue reversal and if necessary constrain the amount of variable consideration recognized in order to mitigate this risk.
At the inception of a contract we estimate the transaction price based on our current rights and do not contemplate future modifications (including unexercised options) or follow-on contracts until they become legally enforceable. Contracts are often subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the context of the contract. Therefore, such modifications are accounted for as if they were part of the existing contract and recognized as a cumulative adjustment to revenue.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis (i.e., not bundled with any other products or services). Our contracts with the U.S. Government, including FMS contracts, are subject to 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 because control of the work in process transfers continuously to the customer. For most contracts with the U.S. Government and FMS contracts, this continuous transfer of control of the work in process to the customer is supported by clauses in the contract that give the customer ownership of work in process and allow the customer to unilaterally terminate the contract for convenience and pay us for costs incurred plus a reasonable profit. For most non-U.S. Government contracts, primarily international direct commercial contracts, continuous transfer of control to our customer is supported because we deliver products that do not have an alternative use to us and if our customer were to terminate the contract for reasons other than our non-performance we would have the right to recover damages which would include, among other potential damages, the right to payment for our work performed to date plus a reasonable profit.
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For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the percentage-of-completion cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation(s). For performance obligations to provide services to the customer, revenue is recognized over time based on costs incurred or the right to invoice method (in situations where the value transferred matches our billing rights) as our customer receives and consumes the benefits.
For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point.
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, 2019,2022, our ending backlog was $144.0$150.0 billion. We expect to recognize approximately 39%37% of our backlog over the next 12 months and approximately 65%61% over the next 24 months as revenue, with the remainder recognized thereafter.
For arrangements with the U.S. Government and FMS contracts, we generally do not begin work on contracts until funding is appropriated by the customer. Billing timetables and 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. Typical payment terms under cost-reimbursable contracts with the U.S Government provide for billing of allowable costs incurred plus applicable fee on a monthly or semi-monthly basis. 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 milestone 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 protect the customer from our failure to adequately complete some or all of the obligations under the contract. Payments received from customers in advance of revenue 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 in excess of billings as contract assets on the balance sheet. Amounts billed and due from our customers under both contract types are classified as receivables on the balance sheet.
Significant estimates and assumptions are made in estimating contract sales, costs, and profit. We estimate profit as the difference between estimated revenues and total estimated costs includingto complete the profit booking rate.contract. At the outset of a long-term contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract, as well as our ability to earn variable consideration, and assess the effects of those risks on our estimates of sales and total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead, general and administrative and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset or localization agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding therelated to technical, schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract or may increase the variable consideration we expect to receive on the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase or our estimates of variable consideration we expect to receive decrease. All of the estimates are subject to change during the performance of the
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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.evident, which we refer to as a reach-forward loss.
Comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts for which we recognize revenue over time using the percentage-of-completion cost-to-cost method to measure progress towards completion. Increases in the profit booking rates, typically referred to as risk retirements,favorable profit adjustments, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract. 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.rate and are typically referred to as unfavorable profit adjustments. Increases or decreases in profit booking rates are recognized in the current period they are determined and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other 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; COVID-19 impacts or supply chain disruptions; restructuring
charges except(except for significant severance actions, which are excluded from segment operating results;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 items, increased segment operating profit by approximately $1.9$1.8 billion in each of 2019 and 2018, and $1.62022, $2.0 billion in 2017.2021 and $1.8 billion in 2020. These adjustments increased net earnings by approximately $1.5$1.4 billion ($5.29 per share in 2019 and $5.23 per share in 2018), and $1.1 billion ($3.795.40 per share) in 2017.2022 and $1.6 billion ($5.81 per share) in 2021 and $1.5 billion ($5.33 per share) in 2020. We recognized net sales from performance obligations satisfied in prior periods of approximately $2.0 billion in both 2022 and 2020, and $2.2 billion $2.0 billion and $1.8 billion in 2019, 2018 and 2017,2021, which primarily relate to changes in profit booking rates that impacted revenue.
However, some of our existing development programs are contracted on a fixed-price basis or include cost-type contracting for the development phase with fixed-price production options and our customers are increasingly implementing procurement policies such as these that shift risk to contractors. Competitively bid programs with fixed-price development work or fixed-price production options increase the risk of a reach-forward loss upon contract award and during the period of contract performance. Due to the complex and often experimental nature of development programs, we may experience (and have experienced in the past) technical and quality issues during the development of new products or technologies for a variety of reasons. Our development programs are ongoing, and while we believe the cost and fee estimates incorporated in the financial statements are appropriate, the technical complexity of these programs and fixed-price contract structure creates financial risk as estimated completion costs may exceed the current contract value, which could trigger earnings charges, termination provisions, or other financially significant exposures. These programs have risk for reach-forward losses if our estimated costs exceed our estimated contract revenues, and such losses could be significant to our financial results, cash flows, or financial condition. Any such losses are recorded in the period in which the loss is evident.
We have experienced performance issues on a classified fixed-price incentive fee contract that involves highly complex design and systems integration at our Aeronautics business segment and have periodically recognized reach-forward losses. We continue to monitor the technical requirements, remaining work, schedule, and estimated costs to complete the program. During the fourth quarter of 2022, we revised our estimated costs to complete the program by reviewing the design and system integration requirements, remaining work, and schedule and recorded an additional charge of approximately $20 million. Based on this and the revised schedule, which was agreed to in 2021, cumulative losses were approximately $270 million as of December 31, 2022. We will continue to monitor our performance, any future changes in scope, and estimated costs to complete the program and may have to record additional losses in future periods if we experience further performance issues, increases in scope, or cost growth, which could be material to our financial results. In addition, we and our industry team will incur advanced procurement costs (also referred to as pre-contract costs) in order to enhance our ability to achieve the revised schedule and certain milestones. We will monitor the recoverability of pre-contract costs, which could be impacted by the customer’s decision regarding future phases of the program.
We are responsible for a program 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. In 2019, we revisedrecognized reach-forward losses. As of December 31, 2022, cumulative losses remained at approximately $280 million. We will continue to monitor our performance, any future changes in scope, and estimated costs to complete the program and recorded a charge of approximately $60 million ($47 million, or $0.17 per share, after-tax) at our RMS business segment, which resulted in cumulative losses of approximately $205 million on this program as of December 31, 2019. We may continue to experience issues related to customer requirements and our performance under this contract and have to record additional charges.losses in future
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periods if we experience further performance issues, increases in scope, or cost growth. However, based on the losses previously recorded and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional losses, if any, would be material to our operating results or financial condition.
Research and development and similar costs – We conduct research and development (R&D) activities using our own funds (referred to as company-funded R&D or independent research and development (IR&D)) and under contractual arrangements with our customers (referred to as customer-funded R&D) to enhance existing products and services and to develop future technologies. 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 and are generally recoverable onto the extent allocable to our cost-reimbursable customer contracts with the U.S. Government. These costs also may be recoverable to the extent allocable to certain fixed-price incentive contracts with the U.S. Government. Customer-funded R&D costs are charged directly to the related customer contract.contracts. Substantially all R&D costs are charged to cost of sales as incurred. Company-funded R&D costs charged to cost of sales totaled $1.7 billion, $1.5 billion and $1.3 billion in each of 20192022, 2021 and 2018 and $1.2 billion in 2017.2020.
Stock-based compensation – We issue stock-based compensation awards in the form of restricted stock units (RSUs) and performance stock units (PSUs) that generally vest three years from the grant date and are settled in 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 for awards that vest based on service and performance conditions or using a Monte Carlo model for awards that vest based on service and market 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.
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.material during 2022, 2021 or 2020.
In accordance with the regulations that govern cost accounting requirements for government contracts, current state and local income and franchise taxes are generally considered allowable and allocable costs and, consistent with industry practice, are recorded in operating costs and expenses. 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. The amountsReceivables, net are statedrecorded at theirthe net estimated realizable value.amount expected to be collected. There were no significant impairment losses related to our receivables in 2019, 2018,2022, 2021 or 2017.2020.
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Contract assets – Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. The amounts may not exceed their estimatedContract assets are recorded at the net realizable value.amount expected to be billed and collected. Contract assets are classified as current based on our contract operating cycle.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. The 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 overhead costs. In addition, costs incurred to 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 to an anticipated contract that we can specifically identify and contract award is probable, the costs generate or enhance resources that will be used in satisfying performance obligations, and the costs are recoverable (referred to as pre-contract costs). Pre-contract costs that are initially capitalized in inventory are generally recognized as cost of sales consistent with the transfer of products and services to the customer upon the receipt of the anticipated contract. All other pre-contract costs, including start-up costs, are expensed as incurred. We determine the costs of other inventories such as materials, spares and supplies by using the first-in first-out or average cost methods. If events or changes in circumstances indicate that pre-contract costs are no longer recoverable or the utility of our inventories have diminished through damage, deterioration, obsolescence, changes in price or other causes, a loss is recognized in the period in which it occurs. We capitalize labor, material, subcontractor and overhead costs as work-in-process for contracts where control has not yet passed to the customer. In addition, we capitalize costs incurred to fulfill a contract in advance of contract award in inventories as work-in-process if we determine that contract award is probable. We determine the costs of other product and supply inventories by using the first-in first-out or average cost methods.
Contract liabilities – Contract liabilities (formerly referred to as customer advances and amounts in excess of costs incurred) 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 $794 million in 2019, $759 million in 2018, and $760 million in 2017.
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 to six15 years. As of December 31, 20192022 and 2018,2021, capitalized software totaled $511$919 million and $447$777 million, net of accumulated amortization of $2.2$2.6 billion and $2.1$2.3 billion. No amortization expense is recorded until the software is ready for its intended use. Amortization expense related to capitalized software was $111$253 million in 2019, $1062022, $175 million in 20182021 and $123$166 million in 2017.2020.
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 – We hold a portfolio of marketable securities to fund our non-qualified employee benefit plans. A portion of these securities are held in common/collective trust funds and are measured at fair value using Net Asset Value (NAV) per share as a practical expedient. Marketable securities accounted for as trading are recorded at fair value on a recurring basis and are included in other noncurrent assets on our consolidated balance sheets. Gains and losses on these investments are included in other unallocated, net within cost of sales on our consolidated statements of earnings.
We make investments in certain companies that we believe are advancing or developing new technologies applicable to our business. These investments may be in the form of common or preferred stock, warrants, convertible debt securities or investments in funds. Most of the investments are in equity securities without readily determinable fair values, which are measured initially at cost and are then adjusted to fair value only if there is an observable price change or reduced for impairment, if applicable. Investments with quoted market prices in active markets (Level 1) are recorded at fair value at the
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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 andprogram. Intangible assets are amortized on a straight-line basis over a period of expected cash flows used to measure fair value, which typically ranges from ninefive to 20 years.
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
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based on the respective reporting unit’s weighted average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the respective reporting unit. The carrying value of each reporting unit includes the assets and liabilities employed in its operations, goodwill and allocations of certain assets and liabilities held at the business segment and corporate levels.
During the fourth quarters of 2019, 20182022, 2021 and 2017,2020, we performed our annual goodwill impairment test for each of our reporting units. The results of our annual impairment tests of goodwill indicated that no impairment existed.
Acquired intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment testing.testing or more frequently if events or change in circumstance indicate that it is more likely than not that the asset is impaired. This testing compares carrying value to fair value and, when appropriate, the carrying value of these assets is reduced to fair value. Finite-lived intangibles are amortized to expense over the applicable useful lives, ranging from 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.
Leases – We evaluate whether our contractual arrangements contain leases at the inception of such arrangements. Specifically, we consider whether we can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset. Substantially all of our leases are long-term operating leases with fixed payment terms. We 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 noncurrent 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 single 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 theObligation amounts we record related to our postretirement benefit plans beare 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), and 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. This amortization period extended (approximately doubled from the prior nine years) in 2020 due to the freeze of our salaried pension plans to use the average remaining life expectancy of the participants instead of average future service.
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.
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Postemployment plans –We record a liability for postemployment benefits, such as severance or job training, typically when payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated.
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 receivableassets 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 continuouslycontinually evaluate the recoverability of our assets for the portion of environmental costs that are probable of future recovery by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and contract mix, our history of receiving reimbursement of such costs, and recent efforts by some U.S. Government representatives to limit such reimbursement. We include the portionportions 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 costs 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.
Note 2 – Earnings Per Share
The weighted average number of shares outstanding used to compute earnings per common share were as follows (in millions):
| 2019 | 2018 | 2017 | |||||||
| Weighted average common shares outstanding for basic computations | 282.0 | 284.5 | 287.8 | ||||||
| Weighted average dilutive effect of equity awards | 1.8 | 2.3 | 2.8 | ||||||
| Weighted average common shares outstanding for diluted computations | 283.8 | 286.8 | 290.6 | ||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Weighted average common shares outstanding for basic computations | 263.7 | 276.4 | 280.0 | |||||||||||||||||
| Weighted average dilutive effect of equity awards | 0.9 | 1.0 | 1.2 | |||||||||||||||||
| Weighted average common shares outstanding for diluted computations | 264.6 | 277.4 | 281.2 | |||||||||||||||||
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. There were 0no significant anti-dilutive equity awards for the years ended December 31, 2019, 20182022, 2021 and 2017.2020. Basic and diluted weighted average common shares outstanding decreased in 2022 compared to 2021 due to share repurchases.
Note 3 – GoodwillInformation on Business Segments
Overview
We operate in four business segments: Aeronautics, MFC, RMS and Acquired IntangiblesSpace. We organize our business segments based on the nature of products and services offered. Following is a brief description of the activities of our business segments:
•Aeronautics – Engaged in the carrying amountresearch, design, development, manufacture, integration, sustainment, support and upgrade of goodwilladvanced 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.
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•Rotary and Mission Systems – Designs, manufactures, services and supports various military and commercial helicopters, surface ships, sea and land-based missile defense systems, radar systems, sea and air-based mission and combat systems, command and control mission solutions, cyber solutions, and simulation and training solutions.
•Space – Engaged in the research and design, development, 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. Operating profit for 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 and commercial customers. Our investment in ULA totaled $571 million and $585 million at December 31, 2022 and 2021.
Selected Financial Data by Business Segment
Net sales of our business segments in the following tables exclude intersegment sales as these activities are eliminated in consolidation and thus are not included in management’s evaluation of performance of each segment. Business segment operating profit includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments.
Summary Operating Results
Sales and operating profit for each of our business segments were as follows (in millions):
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Net sales | ||||||||||||||||||||
| Aeronautics | $ | 26,987 | $ | 26,748 | $ | 26,266 | ||||||||||||||
| Missiles and Fire Control | 11,317 | 11,693 | 11,257 | |||||||||||||||||
| Rotary and Mission Systems | 16,148 | 16,789 | 15,995 | |||||||||||||||||
| Space | 11,532 | 11,814 | 11,880 | |||||||||||||||||
| Total net sales | $ | 65,984 | $ | 67,044 | $ | 65,398 | ||||||||||||||
| Operating profit | ||||||||||||||||||||
| Aeronautics | $ | 2,866 | $ | 2,799 | $ | 2,843 | ||||||||||||||
| Missiles and Fire Control | 1,635 | 1,648 | 1,545 | |||||||||||||||||
| Rotary and Mission Systems | 1,673 | 1,798 | 1,615 | |||||||||||||||||
| Space | 1,045 | 1,134 | 1,149 | |||||||||||||||||
| Total business segment operating profit | 7,219 | 7,379 | 7,152 | |||||||||||||||||
| Unallocated items | ||||||||||||||||||||
| FAS/CAS pension operating adjustment | 1,709 | 1,960 | 1,876 | |||||||||||||||||
Severance and other charges (a) | (100) | (36) | (27) | |||||||||||||||||
Other, net (b) | (480) | (180) | (357) | |||||||||||||||||
| Total unallocated, net | 1,129 | 1,744 | 1,492 | |||||||||||||||||
| Total consolidated operating profit | $ | 8,348 | $ | 9,123 | $ | 8,644 | ||||||||||||||
(a)Severance and other charges in 2022 include $100 million ($79 million, or $0.31 per share, after-tax) charge related to actions at our RMS business segment, which include severance costs for reduction of positions and asset impairment charges; $36 million ($28 million, or $0.10 per share, after-tax) charge during 2021 associated with plans to close and consolidate certain facilities and reduce total workforce within our RMS business segment; and $27 million ($21 million, or $0.08 per share, after-tax) charge during 2020 related to the planned elimination of certain positions primarily at our corporate functions.
(b)Other, net in 2020 includes a noncash impairment charge of $128 million ($96 million, or $0.34 per share, after-tax) for our investment in the international equity method investee, AMMROC. (See “Note 1 – Organization and Significant Accounting Policies”).
Unallocated Items
Business segment operating profit excludes the FAS/CAS pension operating adjustment described below, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. 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, changes in the fair value of investments held in a
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| Aeronautics | MFC | RMS | Space | Total | ||||||||||||||||
| Balance at December 31, 2017 | $ | 171 | $ | 2,265 | $ | 6,784 | $ | 1,587 | $ | 10,807 | ||||||||||
| Other | — | (3 | ) | (33 | ) | (2 | ) | (38 | ) | |||||||||||
| Balance at December 31, 2018 | 171 | 2,262 | 6,751 | 1,585 | 10,769 | |||||||||||||||
| Distributed Energy Solutions divestiture | — | (175 | ) | — | — | (175 | ) | |||||||||||||
| Other | — | 2 | 7 | 1 | 10 | |||||||||||||||
| Balance at December 31, 2019 | $ | 171 | $ | 2,089 | $ | 6,758 | $ | 1,586 | $ | 10,604 | ||||||||||
FAS/CAS Pension Operating Adjustment
Our business segments’ results of operations include pension expense only as calculated under U.S. Government Cost Accounting Standards (CAS), which we divestedrefer to as CAS pension cost. We recover CAS pension and other postretirement benefit plan cost through the pricing of our Distributed Energy Solutionsproducts and services on U.S. Government contracts and, therefore, recognize CAS pension cost in each of our business segment’s net sales and cost of sales. Our consolidated financial statements must present pension and other postretirement benefit plan (expense) income calculated in accordance with Financial Accounting Standards (FAS) requirements under U.S. GAAP. The operating portion of the total FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension (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 commercial energyresult, to the extent that CAS pension cost exceeds the service providercost component of FAS pension (expense) income, we have a favorable FAS/CAS pension operating adjustment.
The total FAS/CAS pension adjustments, including the service and non-service cost components of FAS pension (expense) income for our qualified defined benefit pension plans, were as follows (in millions):
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Total FAS (expense) income and CAS cost | ||||||||||||||||||||
| FAS pension (expense) income | $ | (1,058) | $ | (1,398) | $ | 118 | ||||||||||||||
| Less: CAS pension cost | 1,796 | 2,066 | 1,977 | |||||||||||||||||
| Total FAS/CAS pension adjustment | $ | 738 | $ | 668 | $ | 2,095 | ||||||||||||||
| Service and non-service cost reconciliation | ||||||||||||||||||||
| FAS pension service cost | $ | (87) | $ | (106) | $ | (101) | ||||||||||||||
| Less: CAS pension cost | 1,796 | 2,066 | 1,977 | |||||||||||||||||
| Total FAS/CAS pension operating adjustment | 1,709 | 1,960 | 1,876 | |||||||||||||||||
| Non-service FAS pension (expense) income | (971) | (1,292) | 219 | |||||||||||||||||
| Total FAS/CAS pension adjustment | $ | 738 | $ | 668 | $ | 2,095 | ||||||||||||||
The total FAS/CAS pension adjustment in 2022 reflects a noncash, non-operating pension settlement charge of $1.5 billion ($1.2 billion, or $4.33 per share, after-tax) recognized in connection with the transfer of $4.3 billion of our gross defined benefit pension obligations and related plan assets to an insurance company in the second quarter of 2022. The total FAS/CAS pension adjustment in 2021 reflects a noncash, non-operating pension settlement charge of $1.7 billion ($1.3 billion, or $4.72 per share, after-tax) in connection with the transfer of $4.9 billion of our gross defined benefit pension obligations and related plan assets to an insurance company in the third quarter of 2021. See “Note 11 – Postretirement Benefit Plans” included in our MFCNotes to Consolidated Financial Statements.
Intersegment Sales
Sales between our business segment. As a result of the divestiture, MFC’s goodwill decreased by the $175 million allocated to the Distributed Energy Solutions business.
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Intersegment sales | ||||||||||||||||||||
| Aeronautics | $ | 249 | $ | 219 | $ | 243 | ||||||||||||||
| Missiles and Fire Control | 627 | 618 | 562 | |||||||||||||||||
| Rotary and Mission Systems | 1,930 | 1,895 | 1,903 | |||||||||||||||||
| Space | 381 | 360 | 377 | |||||||||||||||||
| Total intersegment sales | $ | 3,187 | $ | 3,092 | $ | 3,085 | ||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||
| Finite-Lived: | |||||||||||||||||||||||||||
| Customer programs | $ | 3,184 | $ | (967 | ) | $ | 2,217 | $ | 3,184 | $ | (735 | ) | $ | 2,449 | |||||||||||||
| Customer relationships | 344 | (243 | ) | 101 | 344 | (199 | ) | 145 | |||||||||||||||||||
| Other | 53 | (45 | ) | 8 | 53 | (40 | ) | 13 | |||||||||||||||||||
| Total finite-lived intangibles | 3,581 | (1,255 | ) | 2,326 | 3,581 | (974 | ) | 2,607 | |||||||||||||||||||
| Indefinite-Lived: | |||||||||||||||||||||||||||
| Trademark | 887 | — | 887 | 887 | — | 887 | |||||||||||||||||||||
| Total acquired intangibles | $ | 4,468 | $ | (1,255 | ) | $ | 3,213 | $ | 4,468 | $ | (974 | ) | $ | 3,494 | |||||||||||||
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Disaggregation of Net Sales
Net sales by products and services, contract type, customer category and geographic region for each of our business segments were as follows (in millions):
| 2022 | ||||||||||||||||||||||||||||||||
| Aeronautics | MFC | RMS | Space | Total | ||||||||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||||||||
| Products | $ | 22,870 | $ | 10,048 | $ | 12,811 | $ | 9,737 | $ | 55,466 | ||||||||||||||||||||||
| Services | 4,117 | 1,269 | 3,337 | 1,795 | 10,518 | |||||||||||||||||||||||||||
| Total net sales | $ | 26,987 | $ | 11,317 | $ | 16,148 | $ | 11,532 | $ | 65,984 | ||||||||||||||||||||||
| Net sales by contract type | ||||||||||||||||||||||||||||||||
| Fixed-price | $ | 19,431 | $ | 8,014 | $ | 10,460 | $ | 3,064 | $ | 40,969 | ||||||||||||||||||||||
| Cost-reimbursable | 7,556 | 3,303 | 5,688 | 8,468 | 25,015 | |||||||||||||||||||||||||||
| Total net sales | $ | 26,987 | $ | 11,317 | $ | 16,148 | $ | 11,532 | $ | 65,984 | ||||||||||||||||||||||
| Net sales by customer | ||||||||||||||||||||||||||||||||
| U.S. Government | $ | 18,026 | $ | 7,814 | $ | 11,331 | $ | 11,344 | $ | 48,515 | ||||||||||||||||||||||
International (a) | 8,811 | 3,496 | 4,470 | 154 | 16,931 | |||||||||||||||||||||||||||
| U.S. commercial and other | 150 | 7 | 347 | 34 | 538 | |||||||||||||||||||||||||||
| Total net sales | $ | 26,987 | $ | 11,317 | $ | 16,148 | $ | 11,532 | $ | 65,984 | ||||||||||||||||||||||
| Net sales by geographic region | ||||||||||||||||||||||||||||||||
| United States | $ | 18,176 | $ | 7,821 | $ | 11,678 | $ | 11,378 | $ | 49,053 | ||||||||||||||||||||||
| Europe | 4,303 | 1,020 | 857 | 87 | 6,267 | |||||||||||||||||||||||||||
| Asia Pacific | 2,970 | 461 | 1,994 | 54 | 5,479 | |||||||||||||||||||||||||||
| Middle East | 1,103 | 1,858 | 823 | 12 | 3,796 | |||||||||||||||||||||||||||
| Other | 435 | 157 | 796 | 1 | 1,389 | |||||||||||||||||||||||||||
| Total net sales | $ | 26,987 | $ | 11,317 | $ | 16,148 | $ | 11,532 | $ | 65,984 | ||||||||||||||||||||||
| 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 | ||||||||||||||||||||||
79
| 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 following estimated useful lives: customer programs, from nine to 20 years; customer relationships, from four to 10 years;U.S. Government, direct commercial sales with international governments and commercial and other intangibles, from threesales to 10 years.international customers.
Capital Expenditures, PP&E Depreciation and Software Amortization, and Amortization of December 31, 2019, the estimated liquidationPurchased Intangibles
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||
| Aeronautics | $ | 461 | $ | 477 | $ | 534 | ||||||||||||||
| Missiles and Fire Control | 253 | 304 | 391 | |||||||||||||||||
| Rotary and Mission Systems | 266 | 279 | 311 | |||||||||||||||||
| Space | 391 | 305 | 403 | |||||||||||||||||
| Total business segment capital expenditures | 1,371 | 1,365 | 1,639 | |||||||||||||||||
| Corporate activities | 299 | 157 | 127 | |||||||||||||||||
| Total capital expenditures | $ | 1,670 | $ | 1,522 | $ | 1,766 | ||||||||||||||
PP&E depreciation and software amortization (a) | ||||||||||||||||||||
| Aeronautics | $ | 383 | $ | 348 | $ | 348 | ||||||||||||||
| Missiles and Fire Control | 160 | 153 | 136 | |||||||||||||||||
| Rotary and Mission Systems | 245 | 250 | 244 | |||||||||||||||||
| Space | 201 | 205 | 182 | |||||||||||||||||
| Total business segment depreciation and amortization | 989 | 956 | 910 | |||||||||||||||||
| Corporate activities | 167 | 123 | 109 | |||||||||||||||||
| Total depreciation and amortization | $ | 1,156 | $ | 1,079 | $ | 1,019 | ||||||||||||||
| Amortization of purchased intangibles | ||||||||||||||||||||
| Aeronautics | $ | 1 | $ | 1 | $ | — | ||||||||||||||
| Missiles and Fire Control | 2 | 2 | 2 | |||||||||||||||||
| Rotary and Mission Systems | 233 | 232 | 232 | |||||||||||||||||
| Space | 12 | 50 | 37 | |||||||||||||||||
| Total amortization of purchased intangibles | $ | 248 | $ | 285 | $ | 271 | ||||||||||||||
(a)Excludes amortization of the customer contractual obligation is approximated as follows: $55 million in 2020, $25 million in 2021, $5 million in 2022, $20 million in 2023, $5 million in 2024 and $7 million thereafter.purchased intangibles.
80
Assets
Total assets for each of our business segments were as follows (in millions):
| 2022 | 2021 | |||||||||||||
| Assets | ||||||||||||||
| Aeronautics | $ | 12,055 | $ | 10,756 | ||||||||||
| Missiles and Fire Control | 5,788 | 5,243 | ||||||||||||
| Rotary and Mission Systems | 17,988 | 17,664 | ||||||||||||
| Space | 6,351 | 6,199 | ||||||||||||
| Total business segment assets | 42,182 | 39,862 | ||||||||||||
Corporate assets (a) | 10,698 | 11,011 | ||||||||||||
| Total assets | $ | 52,880 | $ | 50,873 | ||||||||||
(a)Corporate assets primarily include cash and cash equivalents, deferred income taxes, assets for the portion of environmental costs that are probable of future recovery, property, plant and equipment, investments held in a separate trust for deferred compensation plans and other marketable investments.
Note 4 – Information on Business Segments
| 2019 | 2018 | 2017 | ||||||||||
| Net sales | ||||||||||||
| Aeronautics | $ | 23,693 | $ | 21,242 | $ | 19,410 | ||||||
| Missiles and Fire Control | 10,131 | 8,462 | 7,282 | |||||||||
| Rotary and Mission Systems | 15,128 | 14,250 | 13,663 | |||||||||
| Space | 10,860 | 9,808 | 9,605 | |||||||||
| Total net sales | $ | 59,812 | $ | 53,762 | $ | 49,960 | ||||||
| Operating profit | ||||||||||||
| Aeronautics | $ | 2,521 | $ | 2,272 | $ | 2,176 | ||||||
| Missiles and Fire Control | 1,441 | 1,248 | 1,034 | |||||||||
| Rotary and Mission Systems | 1,421 | 1,302 | 902 | |||||||||
| Space | 1,191 | 1,055 | 980 | |||||||||
| Total business segment operating profit | 6,574 | 5,877 | 5,092 | |||||||||
| Unallocated items | ||||||||||||
FAS/CAS operating adjustment (a) | 2,049 | 1,803 | 1,613 | |||||||||
| Stock-based compensation | (189 | ) | (173 | ) | (158 | ) | ||||||
Severance and restructuring charges (b) | — | (96 | ) | — | ||||||||
Other, net (c) | 111 | (77 | ) | 197 | ||||||||
| Total unallocated, net | 1,971 | 1,457 | 1,652 | |||||||||
| Total consolidated operating profit | $ | 8,545 | $ | 7,334 | $ | 6,744 | ||||||
| 2019 | 2018 | 2017 | ||||||||||
| Total FAS expense and CAS costs | ||||||||||||
| FAS pension expense | $ | (1,093 | ) | $ | (1,431 | ) | $ | (1,372 | ) | |||
| Less: CAS pension cost | 2,565 | 2,433 | 2,248 | |||||||||
| Net FAS/CAS pension adjustment | $ | 1,472 | $ | 1,002 | $ | 876 | ||||||
| Service and non-service cost reconciliation | ||||||||||||
| FAS pension service cost | (516 | ) | (630 | ) | (635 | ) | ||||||
| Less: CAS pension cost | 2,565 | 2,433 | 2,248 | |||||||||
| FAS/CAS operating adjustment | 2,049 | 1,803 | 1,613 | |||||||||
Non-operating FAS pension expense (a) | (577 | ) | (801 | ) | (737 | ) | ||||||
| Net FAS/CAS pension adjustment | $ | 1,472 | $ | 1,002 | $ | 876 | ||||||
| 2019 | 2018 | 2017 | ||||||||||
| Intersegment sales | ||||||||||||
| Aeronautics | $ | 217 | $ | 120 | $ | 122 | ||||||
| Missiles and Fire Control | 515 | 423 | 355 | |||||||||
Rotary and Mission Systems (a) | 1,872 | 1,759 | 1,801 | |||||||||
| Space | 352 | 237 | 111 | |||||||||
| Total intersegment sales | $ | 2,956 | $ | 2,539 | $ | 2,389 | ||||||
| Depreciation and amortization | ||||||||||||
| Aeronautics | $ | 318 | $ | 304 | $ | 311 | ||||||
| Missiles and Fire Control | 124 | 105 | 99 | |||||||||
| Rotary and Mission Systems | 464 | 458 | 468 | |||||||||
| Space | 213 | 229 | 245 | |||||||||
| Total business segment depreciation and amortization | 1,119 | 1,096 | 1,123 | |||||||||
| Corporate activities | 70 | 65 | 72 | |||||||||
| Total depreciation and amortization | $ | 1,189 | $ | 1,161 | $ | 1,195 | ||||||
| Capital expenditures | ||||||||||||
| Aeronautics | $ | 526 | $ | 460 | $ | 371 | ||||||
| Missiles and Fire Control | 300 | 244 | 156 | |||||||||
| Rotary and Mission Systems | 272 | 255 | 308 | |||||||||
| Space | 258 | 255 | 179 | |||||||||
| Total business segment capital expenditures | 1,356 | 1,214 | 1,014 | |||||||||
| Corporate activities | 128 | 64 | 163 | |||||||||
| Total capital expenditures | $ | 1,484 | $ | 1,278 | $ | 1,177 | ||||||
| 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 | ||||||||||
| Asia Pacific | 3,882 | 420 | 1,451 | 73 | 5,826 | |||||||||||||||
| Europe | 3,224 | 516 | 769 | 1,419 | 5,928 | |||||||||||||||
| 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 | ||||||||||
| 2018 | ||||||||||||||||||||
| Aeronautics | MFC | RMS | Space | Total | ||||||||||||||||
| Net sales | ||||||||||||||||||||
| Products | $ | 18,207 | $ | 6,945 | $ | 11,714 | $ | 8,139 | $ | 45,005 | ||||||||||
| Services | 3,035 | 1,517 | 2,536 | 1,669 | 8,757 | |||||||||||||||
| Total net sales | $ | 21,242 | $ | 8,462 | $ | 14,250 | $ | 9,808 | $ | 53,762 | ||||||||||
| Net sales by contract type | ||||||||||||||||||||
| Fixed-price | $ | 15,719 | $ | 5,653 | $ | 9,975 | $ | 1,892 | $ | 33,239 | ||||||||||
| Cost-reimbursable | 5,523 | 2,809 | 4,275 | 7,916 | 20,523 | |||||||||||||||
| Total net sales | $ | 21,242 | $ | 8,462 | $ | 14,250 | $ | 9,808 | $ | 53,762 | ||||||||||
| Net sales by customer | ||||||||||||||||||||
| U.S. Government | $ | 13,321 | $ | 6,088 | $ | 10,083 | $ | 8,224 | $ | 37,716 | ||||||||||
International (a) | 7,735 | 2,190 | 3,693 | 1,538 | 15,156 | |||||||||||||||
| U.S. commercial and other | 186 | 184 | 474 | 46 | 890 | |||||||||||||||
| Total net sales | $ | 21,242 | $ | 8,462 | $ | 14,250 | $ | 9,808 | $ | 53,762 | ||||||||||
| Net sales by geographic region | ||||||||||||||||||||
| United States | $ | 13,507 | $ | 6,272 | $ | 10,557 | $ | 8,270 | $ | 38,606 | ||||||||||
| Asia Pacific | 3,335 | 427 | 1,433 | 85 | 5,280 | |||||||||||||||
| Europe | 2,837 | 321 | 829 | 1,416 | 5,403 | |||||||||||||||
| Middle East | 1,380 | 1,404 | 781 | 37 | 3,602 | |||||||||||||||
| Other | 183 | 38 | 650 | — | 871 | |||||||||||||||
| Total net sales | $ | 21,242 | $ | 8,462 | $ | 14,250 | $ | 9,808 | $ | 53,762 | ||||||||||
| 2017 | ||||||||||||||||||||
| Aeronautics | MFC | RMS | Space | Total | ||||||||||||||||
| Net sales | ||||||||||||||||||||
| Products | $ | 16,981 | $ | 5,940 | $ | 11,398 | $ | 8,183 | $ | 42,502 | ||||||||||
| Services | 2,429 | 1,342 | 2,265 | 1,422 | 7,458 | |||||||||||||||
| Total net sales | $ | 19,410 | $ | 7,282 | $ | 13,663 | $ | 9,605 | $ | 49,960 | ||||||||||
| Net sales by contract type | ||||||||||||||||||||
| Fixed-price | $ | 13,828 | $ | 5,102 | $ | 10,059 | $ | 2,058 | $ | 31,047 | ||||||||||
| Cost-reimbursable | 5,582 | 2,180 | 3,604 | 7,547 | 18,913 | |||||||||||||||
| Total net sales | $ | 19,410 | $ | 7,282 | $ | 13,663 | $ | 9,605 | $ | 49,960 | ||||||||||
| Net sales by customer | ||||||||||||||||||||
| U.S. Government | $ | 12,609 | $ | 4,467 | $ | 9,715 | $ | 8,088 | $ | 34,879 | ||||||||||
International (a) | 6,641 | 2,672 | 3,575 | 1,446 | 14,334 | |||||||||||||||
| U.S. commercial and other | 160 | 143 | 373 | 71 | 747 | |||||||||||||||
| Total net sales | $ | 19,410 | $ | 7,282 | $ | 13,663 | $ | 9,605 | $ | 49,960 | ||||||||||
| Net sales by geographic region | ||||||||||||||||||||
| United States | $ | 12,769 | $ | 4,610 | $ | 10,088 | $ | 8,159 | $ | 35,626 | ||||||||||
| Asia Pacific | 2,823 | 516 | 1,344 | 92 | 4,775 | |||||||||||||||
| Europe | 2,331 | 305 | 927 | 1,270 | 4,833 | |||||||||||||||
| Middle East | 1,316 | 1,798 | 572 | 81 | 3,767 | |||||||||||||||
| Other | 171 | 53 | 732 | 3 | 959 | |||||||||||||||
| Total net sales | $ | 19,410 | $ | 7,282 | $ | 13,663 | $ | 9,605 | $ | 49,960 | ||||||||||
| 2019 | 2018 | |||||||
Assets (a) | ||||||||
| Aeronautics | $ | 9,109 | $ | 8,435 | ||||
| Missiles and Fire Control | 5,030 | 5,017 | ||||||
| Rotary and Mission Systems | 18,751 | 18,333 | ||||||
| Space | 5,844 | 5,445 | ||||||
| Total business segment assets | 38,734 | 37,230 | ||||||
Corporate assets (b) | 8,794 | 7,646 | ||||||
| Total assets | $ | 47,528 | $ | 44,876 | ||||
Receivables, net, contract assets and contract liabilities were as follows (in millions):
| 2019 | 2018 | |||||||
| Receivables, net | $ | 2,337 | $ | 2,444 | ||||
| Contract assets | 9,094 | 9,472 | ||||||
| Contract liabilities | 7,054 | 6,491 | ||||||
| 2022 | 2021 | |||||||||||||
| Receivables, net | $ | 2,505 | $ | 1,963 | ||||||||||
| Contract assets | 12,318 | 10,579 | ||||||||||||
| Contract liabilities | 8,488 | 8,107 | ||||||||||||
Receivables, net consist of approximately $1.7$1.8 billion from the U.S. Government and $648$732 million from other governments and commercial customers as of December 31, 2019.
Contract assets are net of $33.0progress payments and performance based payments from our customers as well as advance payments from non-U.S. Government customers totaling approximately $47.0 billion and $30.2$43.9 billion of customer advances and progress payments as of December 31, 20192022 and 2018.2021. Contract assets decreased $378 millionincreased $1.7 billion during 2019,2022, primarily due to billingsthe recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during 2019 exceeding2022 for which we have not yet billed our customers (primarily on the revenue recognized.F-35 program at Aeronautics). There were 0no significant credit or impairment losses related to our contract assets during 20192022 and 2018.2021. We expect to bill our customers for the majority of the December 31, 20192022 contract assets during 2020.2023.
Contract liabilities increased $563$381 million during 2019,2022, primarily due to payments received in excess of revenue recognized on these performance obligations. During 2019 and 2018,2022, we recognized $3.9$4.8 billion of our contract liabilities at December 31, 2018 and 2017, respectively,2021 as revenue. During 2017,2021, we recognized $3.3$4.5 billion of our contract liabilities at December 31, 20162020 as revenue. During 2020, we recognized $4.0 billion of our contract liabilities at December 31, 2019 as revenue.
Note 65 – Inventories
Inventories consisted of the following (in millions):
| 2019 | 2018 | |||||||
| Materials, spares and supplies | $ | 532 | $ | 446 | ||||
| Work-in-process | 2,783 | 2,161 | ||||||
| Finished goods | 304 | 390 | ||||||
| Total inventories | $ | 3,619 | $ | 2,997 | ||||
| 2022 | 2021 | |||||||||||||
| Materials, spares and supplies | $ | 599 | $ | 624 | ||||||||||
| Work-in-process | 2,297 | 2,163 | ||||||||||||
| Finished goods | 192 | 194 | ||||||||||||
| Total inventories | $ | 3,088 | $ | 2,981 | ||||||||||
Costs incurred to fulfill a contract in advance of the contract being awarded are included in inventories as work-in-process if we determine that those costs relate directly to a contract or to an anticipated contract that we can specifically identify and determine that contract award is probable, the costs generate or enhance resources that will be used in satisfying performance obligations, and the costs are recoverable (referred to as pre-contract costs). Pre-contract costs that are initially capitalized in inventory are generally recognized as cost of sales consistent with the transfer of products and services to the customer upon the
81
receipt of the anticipated contract. All other pre-contract costs, including start-up costs, are expensed as incurred. As of December 31, 20192022 and 2018, $4932021, $791 million and $443$634 million of pre-contract costs were included in inventories.
Note 6 – Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following (in millions):
| 2022 | 2021 | |||||||||||||
| Land | $ | 147 | $ | 144 | ||||||||||
| Buildings | 8,555 | 8,003 | ||||||||||||
| Machinery and equipment | 9,400 | 9,053 | ||||||||||||
| Construction in progress | 2,036 | 1,900 | ||||||||||||
| Total property, plant and equipment | 20,138 | 19,100 | ||||||||||||
| Less: accumulated depreciation | (12,163) | (11,503) | ||||||||||||
| Total property, plant and equipment, net | $ | 7,975 | $ | 7,597 | ||||||||||
Depreciation expense related to plant and equipment was $903 million in 2022, $904 million in 2021 and $853 million in 2020.
Note 7 – Property, PlantGoodwill and Equipment, netAcquired Intangibles
| Aeronautics | MFC | RMS | Space | Total | ||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||
| Acquisitions | — | — | 3 | — | 3 | |||||||||||||||||||||||||||
| Other | 9 | (7) | (36) | (2) | (36) | |||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | 196 | $ | 2,083 | $ | 6,726 | $ | 1,775 | $ | 10,780 | ||||||||||||||||||||||
The gross carrying amounts and equipment, netaccumulated amortization of our acquired intangible assets consisted of the following (in(useful life in years, $ in millions):
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Estimated Useful Lives | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Finite-Lived: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer programs | 9 - 20 | $ | 3,186 | $ | (1,664) | $ | 1,522 | $ | 3,184 | $ | (1,431) | $ | 1,753 | |||||||||||||||||||||||||||||||||||||
| Customer relationships | 4 - 10 | 94 | (78) | 16 | 120 | (96) | 24 | |||||||||||||||||||||||||||||||||||||||||||
| Other | 3 - 10 | 72 | (38) | 34 | 76 | (34) | 42 | |||||||||||||||||||||||||||||||||||||||||||
| Total finite-lived intangibles | 3,352 | (1,780) | 1,572 | 3,380 | (1,561) | 1,819 | ||||||||||||||||||||||||||||||||||||||||||||
| Indefinite-Lived: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Trademark | 887 | — | 887 | 887 | — | 887 | ||||||||||||||||||||||||||||||||||||||||||||
| Total acquired intangibles | $ | 4,239 | $ | (1,780) | $ | 2,459 | $ | 4,267 | $ | (1,561) | $ | 2,706 | ||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||
| Land | $ | 136 | $ | 135 | ||||
| Buildings | 7,013 | 6,553 | ||||||
| Machinery and equipment | 8,128 | 7,871 | ||||||
| Construction in progress | 1,701 | 1,530 | ||||||
| Total property, plant and equipment | 16,978 | 16,089 | ||||||
| Less: accumulated depreciation and amortization | (10,387 | ) | (9,965 | ) | ||||
| Total property, plant and equipment, net | $ | 6,591 | $ | 6,124 | ||||
Amortization expense for acquired finite-lived intangible assets was $248 million, $285 million and $271 million in 2022, 2021 and 2020. Estimated future amortization expense is includedas follows: $248 million in cost of sales on our consolidated statement of earnings.2023; $244 million in 2024; $220 million in 2025; $154 million in 2026; and $153 million in 2027.
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Note 18 – Significant Accounting Policies).
We generally enter into operating lease agreements for facilities, land and equipment. Our ROU operating lease assets were $1.0$1.1 billion at December 31, 2019.2022. Operating lease liabilities were $1.1$1.2 billion, of which $855$916 million were classified as noncurrent, at December 31, 2019.2022. New ROU operating lease assets and liabilities entered into during 20192022 were $209$25 million. The weighted average remaining lease term and discount rate for our operating leases were approximately 97.4 years and 3.2%2.4% at December 31, 2019.2022.
We recognized operating lease expense of $239 million, $247 million and $169$275 million in 2019, 2018both 2022 and 2017.2021 and $223 million in 2020. In addition, we made cash payments of $223$269 million for operating leases during 2019,2022, which are included in cash flows from operating activities in our consolidated statement of cash flows.
Future minimum lease commitments at December 31, 20192022 were as follows (in millions):
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | ||||||||||||||||||||||||||||||||||||||
| Operating leases | $ | 1,342 | $ | 327 | $ | 226 | $ | 178 | $ | 131 | $ | 101 | $ | 379 | ||||||||||||||||||||||||||||||
| Less: imputed interest | 125 | |||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,217 | ||||||||||||||||||||||||||||||||||||||||||
| Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | ||||||||||||||||||||||
| Operating leases | $ | 1,287 | $ | 280 | $ | 190 | $ | 154 | $ | 119 | $ | 98 | $ | 446 | ||||||||||||||
| Less: imputed interest | $ | 182 | ||||||||||||||||||||||||||
| Total | $ | 1,105 | ||||||||||||||||||||||||||
Note 9 – Income Taxes
Income Tax Provisions
Federal and foreign income tax expense for continuing operations consisted of the following (in millions):
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Federal income tax expense (benefit): | ||||||||||||||||||||
| Current | $ | 1,618 | $ | 1,325 | $ | 1,292 | ||||||||||||||
| Deferred | (776) | (194) | 21 | |||||||||||||||||
| Total federal income tax expense | 842 | 1,131 | 1,313 | |||||||||||||||||
| Foreign income tax expense (benefit): | ||||||||||||||||||||
| Current | 87 | 93 | 50 | |||||||||||||||||
| Deferred | 19 | 11 | (16) | |||||||||||||||||
| Total foreign income tax expense | 106 | 104 | 34 | |||||||||||||||||
| Total federal and foreign income tax expense | $ | 948 | $ | 1,235 | $ | 1,347 | ||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Federal income tax expense (benefit): | ||||||||||||
| Current | ||||||||||||
| Operations | $ | 698 | $ | 975 | $ | (189 | ) | |||||
One-time charge due to tax legislation (a) | — | (6 | ) | 43 | ||||||||
| Deferred | ||||||||||||
| Operations | 235 | (194 | ) | 1,607 | ||||||||
One-time charge due to tax legislation (a) | — | (37 | ) | 1,843 | ||||||||
| Total federal income tax expense | 933 | 738 | 3,304 | |||||||||
| Foreign income tax expense (benefit): | ||||||||||||
| Current | 91 | 67 | 53 | |||||||||
| Deferred | (13 | ) | (13 | ) | (1 | ) | ||||||
| Total foreign income tax expense | 78 | 54 | 52 | |||||||||
| Total income tax expense | $ | 1,011 | $ | 792 | $ | 3,356 | ||||||
2020. 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 istax expenses are included in our net sales and cost of sales.sales, as general and administrative costs. 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 $96 million for 2019, $83 million for 2018, and $103 million for 2017.
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A reconciliation of the U.S. federal statutory income tax rate (21% in 2019 and 2018 and 35% in 2017)expense to actual income tax expense for continuing operations is as follows (dollars in(in millions):
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||||||||||||||||
| Income tax expense at the U.S. federal statutory tax rate | $ | 1,403 | 21.0 | % | $ | 1,585 | 21.0 | % | $ | 1,729 | 21.0 | % | ||||||||||||||||||||||||||
| Research and development tax credit | (178) | (2.7) | (118) | (1.6) | (97) | (1.2) | ||||||||||||||||||||||||||||||||
| Foreign derived intangible income deduction | (176) | (2.6) | (170) | (2.3) | (170) | (2.1) | ||||||||||||||||||||||||||||||||
| Tax deductible dividends | (67) | (1.0) | (65) | (0.9) | (64) | (0.8) | ||||||||||||||||||||||||||||||||
| Excess tax benefits for stock-based payment awards | (42) | (0.6) | (28) | (0.4) | (52) | (0.6) | ||||||||||||||||||||||||||||||||
| Other, net | 8 | 0.1 | 31 | 0.6 | 1 | 0.1 | ||||||||||||||||||||||||||||||||
| Income tax expense | $ | 948 | 14.2 | % | $ | 1,235 | 16.4 | % | $ | 1,347 | 16.4 | % | ||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | ||||||||||||||||
| Income tax expense at the U.S. federal statutory tax rate | $ | 1,521 | 21.0 | % | $ | 1,226 | 21.0 | % | $ | 1,836 | 35.0 | % | |||||||||
| Research and development tax credit | (148 | ) | (2.0 | ) | (138 | ) | (2.4 | ) | (115 | ) | (2.2 | ) | |||||||||
| Foreign derived intangible income deduction | (122 | ) | (1.7 | ) | (61 | ) | (1.0 | ) | — | — | |||||||||||
| Excess tax benefits for share-based payment awards | (63 | ) | (0.9 | ) | (55 | ) | (0.9 | ) | (106 | ) | (2.0 | ) | |||||||||
| Tax deductible dividends | (62 | ) | (0.9 | ) | (59 | ) | (1.0 | ) | (94 | ) | (1.8 | ) | |||||||||
Tax accounting method change (a) | (15 | ) | (0.2 | ) | (61 | ) | (1.0 | ) | — | — | |||||||||||
Deferred tax write-down and transition tax (b) | — | — | (43 | ) | (0.7 | ) | 1,886 | 35.9 | |||||||||||||
U.S. manufacturing deduction benefit (c) | — | — | — | — | (7 | ) | (0.1 | ) | |||||||||||||
Other, net (d) | (100 | ) | (1.3 | ) | (17 | ) | (0.4 | ) | (44 | ) | (0.8 | ) | |||||||||
| Income tax expense | $ | 1,011 | 14.0 | % | $ | 792 | 13.6 | % | $ | 3,356 | 64.0 | % | |||||||||
Uncertain Tax Positions
The benefitchange in unrecognized tax benefits were as follows (in millions):
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Balance at January 1 | $ | 69 | $ | 50 | $ | 56 | ||||||||||||||
| Additions based on tax positions related to the current year | 1,572 | 23 | 14 | |||||||||||||||||
| Additions for tax positions of prior years | 5 | 30 | 1 | |||||||||||||||||
| Reductions for tax positions of prior years | (2) | (19) | (20) | |||||||||||||||||
| Settlements with tax authorities | (23) | (14) | — | |||||||||||||||||
| Other, net | 1 | (1) | (1) | |||||||||||||||||
| Balance at December 31 | $ | 1,622 | $ | 69 | $ | 50 | ||||||||||||||
As of December 31, 2021, our liabilities associated with uncertain tax positions were not material. For the year ended December 31, 2022, our liabilities associated with uncertain tax positions increased to $1.6 billion with a corresponding increase to net deferred tax assets primarily resulting from the Tax Cuts and Jobs Act of 2017’s elimination of the option for taxpayers to deduct research and development expenditures immediately in the year incurred and instead requiring taxpayers to amortize such expenditures over five years. It is reasonably possible that within the next twelve months, our liabilities associated with uncertain tax deduction has declined in both 2019 and 2018 from 2017, principally duepositions may increase by approximately $1.3 billion related to the lowerthis provision.
This uncertain tax position will have an immaterial impact to our effective tax rate enacted by the Tax Act.if recognized.
We recognized arecognize accrued interest and penalties related to unrecognized tax benefitbenefits as part of $15 million in 2019our income tax expense. As of December 31, 2022 and $61 million in 2018 from2021, our change in aaccrued interest and penalties related to unrecognized tax accounting method reflecting a 2012 Courtbenefits were not material.
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Deferred Income Taxes
The primary components of Federal Claims decision, which held that theour federal and foreign deferred income tax basis in certain assets should be increased and realized upon the assets’ disposition.liabilities at December 31 were as follows (in millions):
| 2022 | 2021 | |||||||||||||
| Deferred tax assets related to: | ||||||||||||||
| Pensions | $ | 1,340 | $ | 1,985 | ||||||||||
| Accrued compensation and benefits | 718 | 957 | ||||||||||||
| Contract accounting methods | 510 | 470 | ||||||||||||
| Research and development expenditures | 2,268 | — | ||||||||||||
| Foreign company operating losses and credits | 20 | 40 | ||||||||||||
Other (a) | 471 | 473 | ||||||||||||
| Valuation allowance | (31) | (15) | ||||||||||||
| Deferred tax assets, net | 5,296 | 3,910 | ||||||||||||
| Deferred tax liabilities related to: | ||||||||||||||
| Goodwill and intangible assets | 449 | 401 | ||||||||||||
| Property, plant and equipment | 503 | 518 | ||||||||||||
Exchanged debt securities and other (a) | 605 | 709 | ||||||||||||
| Deferred tax liabilities | 1,557 | 1,628 | ||||||||||||
| Net deferred tax assets | $ | 3,739 | $ | 2,282 | ||||||||||
(a)Includes deferred tax assets and liabilities related to lease liability and ROU asset.
We participateand our subsidiaries file federal income tax returns in the U.S. and income tax returns in various foreign jurisdictions. With few exceptions, the statute of limitations for these jurisdictions is no longer open for audit or examination for the years before 2015 with respect to various foreign jurisdictions and before 2018 for federal income taxes in the U.S.
We withdrew from the IRS Compliance Assurance Process program.(CAP) program in 2022 starting with our 2021 tax return. Examinations of the years 2018 and 2019to 2020 remain under IRS review.review under the CAP program. We are also subject to taxation in various states and foreign jurisdictions including Australia, Canada, India, Italy,
Japan, Poland, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments by the relevant authorities.
| 2019 | 2018 | |||||||
| Deferred tax assets related to: | ||||||||
| Accrued compensation and benefits | $ | 659 | $ | 584 | ||||
| Pensions | 3,057 | 2,623 | ||||||
| Other postretirement benefit obligations | 71 | 148 | ||||||
| Contract accounting methods | 349 | 539 | ||||||
| Foreign company operating losses and credits | 49 | 38 | ||||||
Other (a) | 345 | 160 | ||||||
Valuation allowance (b) | (28 | ) | (20 | ) | ||||
| Deferred tax assets, net | 4,502 | 4,072 | ||||||
| Deferred tax liabilities related to: | ||||||||
| Goodwill and purchased intangibles | 330 | 296 | ||||||
| Property, plant and equipment | 340 | 296 | ||||||
Exchanged debt securities and other (a) | 525 | 294 | ||||||
| Deferred tax liabilities | 1,195 | 886 | ||||||
| Net deferred tax assets | $ | 3,307 | $ | 3,186 | ||||
Our federal and foreign income tax payments, net of refunds, were $940 million in 2019 and $1.1$1.6 billion in 2017. We received net federal2022 and foreign income tax refunds of $41 million$1.4 billion in 2018, primarily due to a 2017 net operating loss carryback arising from our accelerated pension contributions.2021 and 2020.
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Note 10 – Debt
Our total debt consisted of the following (in millions):
| 2019 | 2018 | |||||||
| Notes | ||||||||
| 4.25% due 2019 | $ | — | $ | 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 | 1,054 | ||||||
| 4.07% due 2042 | 1,336 | 1,336 | ||||||
| 3.80% due 2045 | 1,000 | 1,000 | ||||||
| 4.70% due 2046 | 1,326 | 1,326 | ||||||
| 4.09% due 2052 | 1,578 | 1,578 | ||||||
| Other notes with rates from 4.85% to 9.13%, due 2022 to 2041 | 1,618 | 1,618 | ||||||
| Commercial paper | — | 600 | ||||||
| Total debt | 13,812 | 15,312 | ||||||
| Less: unamortized discounts and issuance costs | (1,158 | ) | (1,208 | ) | ||||
| Total debt, net | 12,654 | 14,104 | ||||||
| Less: current portion | (1,250 | ) | (1,500 | ) | ||||
| Long-term debt, net | $ | 11,404 | $ | 12,604 | ||||
| 2022 | 2021 | |||||||||||||
| Notes | ||||||||||||||
| 3.10% due 2023 | $ | — | $ | 500 | ||||||||||
| 2.90% due 2025 | — | 750 | ||||||||||||
| 4.95% due 2025 | 500 | — | ||||||||||||
| 3.55% due 2026 | 1,000 | 2,000 | ||||||||||||
| 5.10% due 2027 | 750 | — | ||||||||||||
| 1.85% due 2030 | 400 | 400 | ||||||||||||
| 3.90% due 2032 | 800 | — | ||||||||||||
| 5.25% due 2033 | 1,000 | — | ||||||||||||
| 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 | ||||||||||||
| 4.15% due 2053 | 850 | — | ||||||||||||
| 5.70% due 2054 | 1,000 | — | ||||||||||||
| 4.30% due 2062 | 650 | — | ||||||||||||
| 5.90% due 2063 | 750 | — | ||||||||||||
| Other notes with rates from 4.85% to 8.5%, due 2023 to 2029 | 1,598 | 1,605 | ||||||||||||
| Total debt | 16,842 | 12,799 | ||||||||||||
| Less: unamortized discounts and issuance costs | (1,295) | (1,123) | ||||||||||||
| Total debt, net | 15,547 | 11,676 | ||||||||||||
| Less: current portion | (118) | (6) | ||||||||||||
| Long-term debt, net | $ | 15,429 | $ | 11,670 | ||||||||||
Revolving Credit FacilitiesFacility
borrowings. Borrowings under the 5-year FacilityRevolving Credit Agreement are unsecured and bear interest at rates based, at our option, on a Eurodollar Rate or a Base Rate, as definedset forth 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 variousRevolving Credit Agreement. The Revolving Credit Agreement contains customary representations, warranties and covenants, including covenants limiting our abilityrestricting ours and certain of our subsidiaries’ ability to encumber assets and our ability to merge or consolidate with another entity. The Revolving Credit Agreement replaces our revolving credit agreement (the “Former Credit Agreement”), which had been scheduled to mature on August 24, 2026. The Former Credit Agreement, which had a covenant not to exceed a maximum leverage ratio, as defined intotal capacity of $3.0 billion and was undrawn, was terminated effective August 24, 2022. There were no borrowings under the 5‑year Facility agreement.Revolving Credit Agreement or the Former Credit Agreement at December 31, 2022 and 2021. As of December 31, 20192022 and 2018,2021, we were in compliance with all covenants contained in the 5-year Facility agreement,Revolving Credit Agreement and Former Credit Agreement, as well as in our debt agreements.
We have agreements in place with financial institutions to provide for the issuance of commercial paper. The outstanding balance of commercial paper can fluctuate daily and the amount outstanding during the period may be greater or less than the
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amount reported at the end of the period. During 2019, we borrowed and fully repaid amounts under our commercial paper program. There were 0no commercial paper borrowings outstanding as of December 31, 2019. All of our commercial paper borrowings had maturities of up to three months2022 and we did not issue or less from the date of issuance.repay any during 2022. We may, as conditions warrant, continue to issue commercial paper backed by our revolving credit facilityagreement to manage the timing of cash flows.
On October 24, 2022, we issued a total of $4.0 billion of senior unsecured notes, consisting of $500 million aggregate principal amount of 4.95% Notes due 2025 (the “2025 Notes”), $750 million aggregate principal amount of 5.10% Notes due 2027 (the “2027 Notes”), $1.0 billion aggregate principal amount of 5.25% Notes due 2033 (the “2033 Notes”), $1.0 billion aggregate principal amount of 5.70% Notes due 2054 (the “2054 Notes”) and $750 million aggregate principal amount of 5.90% Notes due 2063 (the “2063 Notes” and, together with the 2025 Notes, the 2027 Notes, the 2033 Notes and the 2054 Notes, the “October 2022 Notes”) in a registered public offering. We will pay interest on the 2025 Notes semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2023. We will pay interest on the 2033 Notes semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2023. We will pay interest on each of 2027 Notes, 2054 Notes and 2063 Notes semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2023. We may, at our option, redeem the October 2022 Notes of any series, in whole or in part, at any time at the redemption prices equal to the greater of 100% of the principal amount of the October 2022 Notes to be redeemed or an applicable “make-whole” amount, plus accrued and unpaid interest to the date of redemption. We used the net proceeds from this offering to enter into an accelerated share repurchase (ASR) agreement to repurchase $4.0 billion of our common stock.
On May 5, 2022, we issued a total of $2.3 billion of senior unsecured notes, consisting of $800 million aggregate principal amount of 3.90% Notes due June 15, 2032 (the “2032 Notes”), $850 million aggregate principal amount of 4.15% Notes due June 15, 2053 (the “2053 Notes”) and $650 million aggregate principal amount of 4.30% Notes due June 15, 2062 (the “2062 Notes” and, together with the 2032 Notes and 2053 Notes, the “May 2022 Notes”) in a registered public offering. Net proceeds received from the offering were, after deducting pricing discounts and debt issuance costs, which are being amortized and recorded as interest expense over the term of the May 2022 Notes. We will pay interest on the May 2022 Notes semi-annually in arrears on June 15 and December 15 of each year with the first payment made on June 15, 2022. We may, at our option, redeem the May 2022 Notes of any series, in whole or in part, at any time and from time to time, at a redemption price equal to the greater of 100% of the principal amount of the May 2022 Notes to be redeemed or an applicable make-whole amount, plus accrued and unpaid interest to the date of redemption.
On May 11, 2022, we used the net proceeds from the May 2022 Notes to redeem all of the outstanding $500 million in aggregate principal amount of our 3.10% Notes due 2023, $750 million in aggregate principal amount of our 2.90% Notes due 2025, and the remaining balance of the net proceeds to redeem $1.0 billion of our outstanding $2.0 billion in aggregate principal amount of our 3.55% Notes due 2026 at their redemption price. We paid make-whole premiums of $13.9 million in connection with the early extinguishments of debt. We incurred losses of $34 million ($26 million, or $0.10 per share, after tax) on these transactions related to early extinguishments of debt, additional interest expense and other related charges, which was recorded in other non-operating (expense) income, net in our consolidated statements of earnings.
In September 2021, we repaid $500 million of long-term notes with a fixed interest rate of 3.35% according to their scheduled maturities.
We made interest payments of approximately $573 million, $543 million and $567 million during the years ended December 31, 2022, 2021 and 2020.
Note 11 – Postretirement Benefit Plans
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
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plans. We completed the final step of the previously announced planned freeze of our qualified and nonqualifiedOur defined benefit pension plans for salaried employees effective January 1, 2020. The freeze took effect in two stages. Effective January 1, 2016, the pay-based component of the formula used to determine retirement benefits was frozen. Effective January 1, 2020, the service-based component of the formula was frozen. As a result of these changes, the qualified defined benefit pension plans for salaried employees arewere fully frozen effective January 1, 2020. With2020, at which time such employees no longer earn additional benefits under the freeze complete, the majority of our salaried employees participate indefined benefit pension plans and were transitioned to an enhanced defined contribution retirement savings plan.
Qualified Defined Benefit Pension Plans and Retiree Medical and Life Insurance Plans
FAS (Expense) Income
The pretax FAS (expense) income related to eligible retireesour qualified defined benefit pension plans and dependents, including Voluntary Employees’ Beneficiary Association trusts and 401(h) accounts, the assets of which will be used to pay expenses of certain retiree medical plans. and life insurance plans included the following (in millions):
| Qualified Defined Benefit Pension Plans | Retiree Medical and Life Insurance Plans | ||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| Operating: | |||||||||||||||||||||||||||||||||||||||||
| Service cost | $ | (87) | $ | (106) | $ | (101) | $ | (9) | $ | (13) | $ | (13) | |||||||||||||||||||||||||||||
| Non-operating: | |||||||||||||||||||||||||||||||||||||||||
| Interest cost | (1,289) | (1,220) | (1,538) | (49) | (53) | (70) | |||||||||||||||||||||||||||||||||||
| Expected return on plan assets | 1,854 | 2,146 | 2,264 | 136 | 141 | 127 | |||||||||||||||||||||||||||||||||||
| Recognized net actuarial (losses) gains | (425) | (902) | (849) | 46 | — | 4 | |||||||||||||||||||||||||||||||||||
| Amortization of prior service credits (costs) | 359 | 349 | 342 | (27) | (37) | (39) | |||||||||||||||||||||||||||||||||||
| Settlement charge | (1,470) | (1,665) | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Non-service FAS (expense) income | (971) | (1,292) | 219 | 106 | 51 | 22 | |||||||||||||||||||||||||||||||||||
| Total FAS (expense) income | $ | (1,058) | $ | (1,398) | $ | 118 | $ | 97 | $ | 38 | $ | 9 | |||||||||||||||||||||||||||||
We use December 31 asrecord the measurement date. Benefit obligations asservice cost component 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.
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Qualified Defined Benefit Pension Plans (a) | Retiree Medical and Life Insurance Plans | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||
| Service cost | $ | 516 | $ | 630 | $ | 635 | $ | 14 | $ | 19 | $ | 19 | |||||||||||||
| Interest cost | 1,806 | 1,740 | 1,835 | 97 | 91 | 103 | |||||||||||||||||||
| Expected return on plan assets | (2,300 | ) | (2,395 | ) | (2,249 | ) | (110 | ) | (135 | ) | (128 | ) | |||||||||||||
| Recognized net actuarial losses | 1,404 | 1,777 | 1,506 | 2 | 5 | 19 | |||||||||||||||||||
| Amortization of net prior service (credit) cost | (333 | ) | (321 | ) | (355 | ) | 42 | 15 | 15 | ||||||||||||||||
| Total net periodic benefit cost | $ | 1,093 | $ | 1,431 | $ | 1,372 | $ | 45 | $ | (5 | ) | $ | 28 | ||||||||||||
The following table provides a reconciliation of benefit obligations, plan assets and unfundednet (unfunded) funded status related toof 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 | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
| Change in benefit obligation | |||||||||||||||||||||||||||||
Beginning balance (a) | $ | 43,447 | $ | 51,352 | $ | 1,839 | $ | 2,271 | |||||||||||||||||||||
| Service cost | 87 | 106 | 9 | 13 | |||||||||||||||||||||||||
| Interest cost | 1,289 | 1,220 | 49 | 53 | |||||||||||||||||||||||||
Actuarial (gains) losses (b) | (10,270) | (2,045) | (396) | (352) | |||||||||||||||||||||||||
Settlements (c) | (4,309) | (4,885) | — | — | |||||||||||||||||||||||||
| Plan amendments | 186 | 2 | 1 | — | |||||||||||||||||||||||||
| Benefits paid | (1,732) | (2,303) | (207) | (217) | |||||||||||||||||||||||||
| Medicare Part D subsidy | — | — | 3 | 4 | |||||||||||||||||||||||||
| Participants’ contributions | — | — | 61 | 67 | |||||||||||||||||||||||||
Ending balance (a) | $ | 28,698 | $ | 43,447 | $ | 1,359 | $ | 1,839 | |||||||||||||||||||||
| Change in plan assets | |||||||||||||||||||||||||||||
| Beginning balance at fair value | $ | 35,192 | $ | 38,481 | $ | 2,169 | $ | 2,085 | |||||||||||||||||||||
Actual return on plan assets (d) | (5,923) | 3,899 | (381) | 224 | |||||||||||||||||||||||||
Settlements (c) | (4,309) | (4,885) | — | — | |||||||||||||||||||||||||
| Benefits paid | (1,732) | (2,303) | (207) | (217) | |||||||||||||||||||||||||
| Company contributions | — | — | 11 | 6 | |||||||||||||||||||||||||
| Medicare Part D subsidy | — | — | 3 | 4 | |||||||||||||||||||||||||
| Participants’ contributions | — | — | 61 | 67 | |||||||||||||||||||||||||
| Ending balance at fair value | $ | 23,228 | $ | 35,192 | $ | 1,656 | $ | 2,169 | |||||||||||||||||||||
| (Unfunded) funded status of the plans | $ | (5,470) | $ | (8,255) | $ | 297 | $ | 330 | |||||||||||||||||||||
Qualified Defined Benefit Pension Plans | Retiree Medical and Life Insurance Plans | ||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||||
| Change in benefit obligation | |||||||||||||||||
| Beginning balance | $ | 43,305 | $ | 48,686 | $ | 2,348 | $ | 2,602 | |||||||||
| Service cost | 516 | 630 | 14 | 19 | |||||||||||||
| Interest cost | 1,806 | 1,740 | 97 | 91 | |||||||||||||
| Benefits paid | (2,294 | ) | (2,379 | ) | (229 | ) | (224 | ) | |||||||||
| Settlements | (1,933 | ) | (1,821 | ) | — | — | |||||||||||
| Actuarial losses (gains) | 6,403 | (3,281 | ) | (1 | ) | (311 | ) | ||||||||||
| Changes in longevity assumptions | 860 | (162 | ) | (70 | ) | (8 | ) | ||||||||||
Plan amendments and curtailments (a) | 11 | (108 | ) | (6 | ) | 101 | |||||||||||
| Medicare Part D subsidy | — | — | 2 | 9 | |||||||||||||
| Participants’ contributions | — | — | 71 | 69 | |||||||||||||
| Ending balance | $ | 48,674 | $ | 43,305 | $ | 2,226 | $ | 2,348 | |||||||||
| Change in plan assets | |||||||||||||||||
| Beginning balance at fair value | $ | 32,002 | $ | 33,095 | $ | 1,644 | $ | 1,883 | |||||||||
| Actual return on plan assets | 6,667 | (1,893 | ) | 342 | (94 | ) | |||||||||||
| Benefits paid | (2,294 | ) | (2,379 | ) | (229 | ) | (224 | ) | |||||||||
| Settlements | (1,933 | ) | (1,821 | ) | — | — | |||||||||||
| Company contributions | 1,000 | 5,000 | 59 | 1 | |||||||||||||
| Medicare Part D subsidy | — | — | 2 | 9 | |||||||||||||
| Participants’ contributions | — | — | 71 | 69 | |||||||||||||
| Ending balance at fair value | $ | 35,442 | $ | 32,002 | $ | 1,889 | $ | 1,644 | |||||||||
| Unfunded status of the plans | $ | (13,232 | ) | $ | (11,303 | ) | $ | (337 | ) | $ | (704 | ) | |||||
(b)Actuarial gains for our qualified defined benefit pension plans in 2022 primarily reflect an increase in the discount rate from 2.875% at December 31, 2021 to 5.25% at December 31, 2022, which decreased benefit obligations by $10.2 billion. Actuarial gains for our retiree medical and life insurance plans in 2022 reflect an increase in the discount rate from 2.750% at December 31, 2021 to 5.25% at December 31, 2022, which decreased benefit obligations by $335 million. Actuarial gains for our qualified defined benefit pension plans in 2021 primarily reflect an increase in the discount rate from 2.50% at December 31, 2020 to 2.875% at December 31, 2021, which decreased benefit obligations by $2.3 billion, partially offset by an increase of approximately $250 million due to changes in longevity assumptions and participant data. Actuarial gains for our retiree medical and life insurance plans in 2021 reflect an increase in the discount rate from 2.375% at December 31, 2020 to 2.75% at December 31, 2021, which decreased benefit obligations by $70 million, and $282 million due to changes in plan participation assumptions and claims data. |
(d)Actual return on plan assets from the pension trust. 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 owed to approximately 20,000 U.S. retirees and
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 contractsmeasurement date as described below. For certain of our qualified defined benefit pension plans and retiree medical and life insurance plans the plan assets may exceed the benefit obligation, for which we purchased was a buy-out contract,recognize the net amount as an asset on our consolidated balance sheet. Conversely, for most of our qualified defined benefit pension plans the benefit obligation exceeds plan assets, for which relieved us of all responsibility forwe recognize the pension obligations related to approximately 32,000 U.S. retirees and beneficiaries. The second contract was structurednet amount as a buy-in contract (that will reimburse the pension plan for all future benefit payments related to defined benefit obligations for approximately 9,000 U.S retirees and beneficiaries). The buy-in contract is accounted for at fair value as an investment of the trust.liability on our consolidated balance sheet.
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The following table provides amounts recognized on our consolidated balance sheets related to our qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):
| Qualified Defined Benefit Pension Plans | Retiree Medical and Life Insurance Plans | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
| Other noncurrent assets | $ | 2 | $ | 64 | $ | 297 | $ | 330 | |||||||||||||||||||||
| Accrued pension liabilities | (5,472) | (8,319) | — | — | |||||||||||||||||||||||||
| Net (unfunded) funded status of the plans | $ | (5,470) | $ | (8,255) | $ | 297 | $ | 330 | |||||||||||||||||||||
| Qualified Defined Benefit Pension Plans | Retiree Medical and Life Insurance Plans | ||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||||
| Prepaid pension asset | $ | 2 | $ | 107 | $ | — | $ | — | |||||||||
| Accrued postretirement benefit liabilities | (13,234 | ) | (11,410 | ) | (337 | ) | (704 | ) | |||||||||
| Accumulated other comprehensive loss (pre-tax) related to: | |||||||||||||||||
| Net actuarial losses | 20,609 | 19,117 | (69 | ) | 236 | ||||||||||||
| Prior service (credit) cost | (1,586 | ) | (1,931 | ) | 120 | 167 | |||||||||||
Total (a) | $ | 19,023 | $ | 17,186 | $ | 51 | $ | 403 | |||||||||
The accumulated benefit obligation (ABO) for all qualified defined benefit pension plans was $48.6$28.6 billion and $43.3$43.4 billion at December 31, 20192022 and 2018.2021. The ABO represents benefits accrued without assuming future compensation increases to plan participants and is approximately equal to our projected benefit obligation. Plans where ABOthe benefit obligation was less than plan assets represent prepaid pension assets, which are included on our consolidated balance sheets in other noncurrent assets. Plans where ABOthe obligation was in excess of plan assets represent accrued pension liabilities, which are included on our consolidated balance sheets.
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 | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
| Accumulated other comprehensive (loss) pre-tax related to: | |||||||||||||||||||||||||||||
| Net actuarial (losses) | $ | (10,287) | $ | (14,675) | $ | 387 | $ | 554 | |||||||||||||||||||||
| Prior service credit (cost) | 339 | 884 | (10) | (36) | |||||||||||||||||||||||||
Total | $ | (9,948) | $ | (13,791) | $ | 377 | $ | 518 | |||||||||||||||||||||
| Estimated tax | 2,117 | 2,947 | (79) | (110) | |||||||||||||||||||||||||
| Net amount recognized in accumulated other comprehensive (loss) | $ | (7,831) | $ | (10,844) | $ | 298 | $ | 408 | |||||||||||||||||||||
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The following table provides the amountschanges recognized in other comprehensive income (loss) related to postretirement benefit plans, net of tax, for the years ended December 31, 2019, 2018 and 2017 (in millions):
Incurred but Not Yet Recognized in Net Periodic Benefit Cost | Recognition of Previously Deferred Amounts | ||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||
| Gains (losses) | (Gains) losses | ||||||||||||||||||||||||
| Actuarial gains and losses | |||||||||||||||||||||||||
| Qualified defined benefit pension plans | $ | (2,283 | ) | $ | (570 | ) | $ | (1,172 | ) | $ | 1,104 | $ | 1,396 | $ | 974 | ||||||||||
| Retiree medical and life insurance plans | 238 | 71 | 77 | 2 | 4 | 12 | |||||||||||||||||||
| Other plans | (133 | ) | 83 | (66 | ) | 42 | 55 | 44 | |||||||||||||||||
| (2,178 | ) | (416 | ) | (1,161 | ) | 1,148 | 1,455 | 1,030 | |||||||||||||||||
| Credit (cost) | (Credit) cost | ||||||||||||||||||||||||
| Net prior service credit and cost | |||||||||||||||||||||||||
| Qualified defined benefit pension plans | (8 | ) | (6 | ) | (219 | ) | (263 | ) | (255 | ) | (229 | ) | |||||||||||||
| Retiree medical and life insurance plans | 4 | (79 | ) | — | 33 | 12 | 10 | ||||||||||||||||||
| Other plans | — | — | — | (10 | ) | (10 | ) | (9 | ) | ||||||||||||||||
| (4 | ) | (85 | ) | (219 | ) | (240 | ) | (253 | ) | (228 | ) | ||||||||||||||
| $ | (2,182 | ) | $ | (501 | ) | $ | (1,380 | ) | $ | 908 | $ | 1,202 | $ | 802 | |||||||||||
| Incurred but Not Yet Recognized in FAS Expense | Recognition of Previously Deferred Amounts | ||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| Actuarial gains and (losses) | |||||||||||||||||||||||||||||||||||||||||
| Qualified defined benefit pension plans | $ | 1,952 | $ | 2,987 | $ | (1,005) | $ | (1,490) | $ | (2,019) | $ | (668) | |||||||||||||||||||||||||||||
| Retiree medical and life insurance plans | (95) | 342 | 43 | 36 | — | 3 | |||||||||||||||||||||||||||||||||||
| Other plans | 165 | 76 | (104) | (39) | (24) | (24) | |||||||||||||||||||||||||||||||||||
| 2,022 | 3,405 | (1,066) | (1,493) | (2,043) | (689) | ||||||||||||||||||||||||||||||||||||
| Net prior service credit and (cost) | |||||||||||||||||||||||||||||||||||||||||
| Qualified defined benefit pension plans | (146) | (1) | (7) | 283 | 274 | 269 | |||||||||||||||||||||||||||||||||||
| Retiree medical and life insurance plans | (1) | — | 6 | (22) | (29) | (30) | |||||||||||||||||||||||||||||||||||
| Other plans | (2) | — | — | 7 | 11 | 10 | |||||||||||||||||||||||||||||||||||
| (149) | (1) | (1) | 268 | 256 | 249 | ||||||||||||||||||||||||||||||||||||
| Total | $ | 1,873 | $ | 3,404 | $ | (1,067) | $ | (1,225) | $ | (1,787) | $ | (440) | |||||||||||||||||||||||||||||
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, consistent with our fiscal year end. Benefit obligations as of the end of each year reflect assumptions in effect as of those dates. Expense is based on assumptions in effect at the end of 2019 to be recognized in net periodic benefit cost during 2020. Of this amount, $507 million,the preceding year or $399 million net of tax, relates to our qualified defined benefit plans and is included in our expected 2020 pension income of $115 million.
from the most recent interim remeasurement. 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 | ||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||
| Weighted average discount rate | 3.250 | % | 4.250 | % | 3.625 | % | 3.250 | % | 4.250 | % | 3.625 | % | |||||||
| Expected long-term rate of return on assets | 7.00 | % | 7.00 | % | 7.50 | % | 7.00 | % | 7.00 | % | 7.50 | % | |||||||
| Health care trend rate assumed for next year | 8.00 | % | 8.25 | % | 8.50 | % | |||||||||||||
| Ultimate health care trend rate | 4.50 | % | 5.00 | % | 5.00 | % | |||||||||||||
| Year that the ultimate health care trend rate is reached | 2034 | 2032 | 2032 | ||||||||||||||||
| Qualified Defined Benefit Pension Plans | Retiree Medical and Life Insurance Plans | ||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
Weighted average discount rate (a) | 5.250 | % | 2.875 | % | 2.500 | % | 5.250 | % | 2.750 | % | 2.375 | % | |||||||||||||||||||||||||||||
Expected long-term rate of return on assets (a) | 6.50 | % | 6.50 | % | 7.00 | % | 6.50 | % | 6.50 | % | 7.00 | % | |||||||||||||||||||||||||||||
| Health care trend rate assumed for next year | 7.25 | % | 7.50 | % | 7.75 | % | |||||||||||||||||||||||||||||||||||
| 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 returnlosses for our qualified defined benefit
plans during 20192022 of $6.7$(5.9) billion based on an actual rate of return of approximately 21% improved(18)% reduced plan assets more than the $2.3$1.9 billion expected return based on our 7.00% long-term rate of return assumption.
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Plan Assets
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% | ||||
| Global Equity | 15-65% | ||||
| Fixed income | 10-60% | ||||
| Alternative investments: | |||||
| Private equity funds | |||||
| Real estate funds | |||||
| Hedge funds | 0-20% | ||||
| Commodities | |||||
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| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||||
| Investments measured at fair value | ||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents (a) | $ | 1,952 | $ | 1,952 | $ | — | $ | — | $ | 991 | $ | 991 | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
Equity (a): | ||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. equity securities | 3,162 | 3,060 | 6 | 96 | 6,479 | 6,444 | 5 | 30 | ||||||||||||||||||||||||||||||||||||||||||
| International equity securities | 2,298 | 2,245 | 17 | 36 | 4,882 | 4,880 | — | 2 | ||||||||||||||||||||||||||||||||||||||||||
| Commingled equity funds | 459 | 183 | 276 | — | 869 | 36 | 833 | — | ||||||||||||||||||||||||||||||||||||||||||
Fixed income (a): | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt securities | 4,491 | — | 4,272 | 219 | 6,397 | — | 6,295 | 102 | ||||||||||||||||||||||||||||||||||||||||||
| U.S. Government securities | 2,219 | — | 2,219 | — | 2,864 | — | 2,864 | — | ||||||||||||||||||||||||||||||||||||||||||
| U.S. Government-sponsored enterprise securities | 572 | — | 572 | — | 228 | — | 228 | — | ||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps, net | (1,165) | — | (1,165) | — | 636 | — | 636 | — | ||||||||||||||||||||||||||||||||||||||||||
Other fixed income investments (b) | 1,980 | 81 | 680 | 1,219 | 4,100 | 49 | 2,435 | 1,616 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 15,968 | $ | 7,521 | $ | 6,877 | $ | 1,570 | $ | 27,446 | $ | 12,400 | $ | 13,296 | $ | 1,750 | ||||||||||||||||||||||||||||||||||
| Investments measured at NAV | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Commingled equity funds | — | 130 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other fixed income investments | 730 | 701 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Private equity funds | 4,703 | 5,386 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Real estate funds | 3,383 | 3,059 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Hedge funds | 689 | 556 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total investments measured at NAV | 9,505 | 9,832 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loan, net (c) | (497) | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| (Payables) Receivables, net | (92) | 83 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 24,884 | $ | 37,361 | ||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Investments measured at fair value | ||||||||||||||||||||||||||||||||
Cash and cash equivalents (a) | $ | 1,961 | $ | 1,961 | $ | — | $ | — | $ | 1,727 | $ | 1,727 | $ | — | $ | — | ||||||||||||||||
Equity (a): | ||||||||||||||||||||||||||||||||
| U.S. equity securities | 7,189 | 7,182 | — | 7 | 3,936 | 3,927 | 3 | 6 | ||||||||||||||||||||||||
| International equity securities | 7,244 | 7,217 | 23 | 4 | 5,406 | 5,400 | — | 6 | ||||||||||||||||||||||||
| Commingled equity funds | 1,933 | 582 | 1,351 | — | 3,587 | 1,436 | 2,151 | — | ||||||||||||||||||||||||
Fixed income (a): | ||||||||||||||||||||||||||||||||
| Corporate debt securities | 5,208 | — | 5,206 | 2 | 4,890 | — | 4,888 | 2 | ||||||||||||||||||||||||
| U.S. Government securities | 2,260 | — | 2,260 | — | 3,399 | — | 3,399 | — | ||||||||||||||||||||||||
| U.S. Government-sponsored enterprise securities | 530 | — | 530 | — | 571 | — | 571 | — | ||||||||||||||||||||||||
Other fixed income investments (b) | 3,134 | 35 | 2,135 | 964 | 2,926 | — | 1,988 | 938 | ||||||||||||||||||||||||
| Total | $ | 29,459 | $ | 16,977 | $ | 11,505 | $ | 977 | $ | 26,442 | $ | 12,490 | $ | 13,000 | $ | 952 | ||||||||||||||||
Investments measured at NAV (c) | ||||||||||||||||||||||||||||||||
| Commingled equity funds | 181 | 144 | ||||||||||||||||||||||||||||||
| Other fixed income investments | 32 | 29 | ||||||||||||||||||||||||||||||
| Private equity funds | 4,019 | 4,014 | ||||||||||||||||||||||||||||||
| Real estate funds | 2,493 | 2,117 | ||||||||||||||||||||||||||||||
| Hedge funds | 1,069 | 828 | ||||||||||||||||||||||||||||||
| Total investments measured at NAV | 7,794 | 7,132 | ||||||||||||||||||||||||||||||
| Receivables, net | 78 | 72 | ||||||||||||||||||||||||||||||
| Total | $ | 37,331 | $ | 33,646 | ||||||||||||||||||||||||||||
(b)Level 3 investments include $1.1 billion at December 31, 2022 and have not been included$1.5 billion at December 31, 2021 related to buy-in contracts.
(c)The Lockheed Martin Corporation Master Retirement Trust (MRT) obtained a loan from a third party financial institution, collateralized by private equity investments, to invest in the table above. fixed income securities.
Changes in the fair value of plan assets categorized as Level 3 during 20192022 and 20182021 were insignificant.not significant.
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.
93
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, including interest rate swaps, 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 as 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. In addition, certain other fixed income investments categorized as Level 3 are valued using a discounted cash flow approach. Significant inputs include projected annuity payments and the 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 partnershippartnerships and co-investment funds.similar vehicles. 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 periodsterms between eight and 12 years.
Real estate funds consist of partnerships most of which are closed-end funds,and similar vehicles, for which the NAV is based on valuation models and periodic appraisals. These funds typically have redemption periods between eight and 10 years.
Hedge funds consist of direct hedgeseparate accounts and commingled 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. We made no contributions to our qualified defined benefit pension plans of $1.0 billion in 20192022 and $5.0 billion in 2018, including required and discretionary contributions. As a result of these contributions, we do not expectplan to make contributions to our qualified defined benefit pension plans in 2020. 2023.
The following table presents estimated future benefit payments which reflect expected future employee service, as of December 31, 20192022 (in millions):
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 – 2032 | |||||||||||||||||||||||||||||||||
| Qualified defined benefit pension plans | $ | 1,720 | $ | 1,810 | $ | 1,890 | $ | 1,950 | $ | 2,000 | $ | 10,150 | ||||||||||||||||||||||||||
| Retiree medical and life insurance plans | 140 | 130 | 130 | 120 | 120 | 530 | ||||||||||||||||||||||||||||||||
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.
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025 – 2029 | |||||||||||||||||||
| Qualified defined benefit pension plans | $ | 2,300 | $ | 2,360 | $ | 2,450 | $ | 2,530 | $ | 2,600 | $ | 13,540 | ||||||||||||
| Retiree medical and life insurance plans | 160 | 160 | 160 | 160 | 150 | 700 | ||||||||||||||||||
We sponsor nonqualified defined benefit pension plans to provide benefits in excess of qualified plan limits imposed by federal tax law. The gross benefit obligation for these plans was $1.0 billion and $1.3 billion as of December 31, 2022 and 2021, most of which was recorded in the other noncurrent liabilities account on our consolidated balance sheet. We have set aside certain assets totaling $595 million and $872 million as of December 31, 2022 and 2021 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 $331 million and $625 million at December 31, 2022 and 2021. We recognized pretax pension expense of $81 million in 2022, $56 million in 2021 and $59 million in 2020 related to our nonqualified defined benefit pension plans. The assumptions used to determine the benefit obligations and FAS expense for
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our nonqualified defined benefit pension plans are similar to the assumptions for our qualified defined benefit pension plans described above.
We also sponsor other postemployment plans and foreign benefit plans, which are accounted for similar to defined benefit pension plans. The benefit obligations, assets, expense, and amounts recorded in accumulated other comprehensive loss for other postemployment plans and foreign benefit plans were not material to our results of operations, financial position or cash flows.
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 specified into the plan documents. Our 401(k)employee accounts that comprise of a company non-elective contribution and a matching contribution. Company contributions are comprisedautomatically invested in an Employee Stock Ownership Plan (ESOP) fund, which primarily invests in shares of (i) company match, the majority of which was funded using our common stock,stock. Plan participants can transfer from the ESOP fund into any investment option provided by the respective plan. Our contributions to defined contribution retirement savings plans were $1.1 billion in 2022 and (ii) company contributions. Total 401(k) contributions were $7412021 and $984 million in 2019, $658 million in 2018 and $613 million in 2017.2020. Our defined contribution retirement savings plans held approximately 31.927.4 million and 33.328.9 million shares of our common stock as ofat December 31, 20192022 and 2018.2021.
Note 12 – Stockholders’ Equity
At December 31, 20192022 and 2018,2021, our authorized capital was composed of 1.5 billion shares of common stock and 50 million shares of series preferred stock. Of the 281255 million and 272 million shares of common stock issued and outstanding as of December 31, 2019, 2802022 and December 31, 2021, 254 million and 271 million shares were considered outstanding for consolidated balance sheet presentation purposes; the remaining shares were held in a separate trust. Of the 283 million shares of common stock issued and outstanding as of December 31, 2018, 281 million shares were considered outstanding for consolidated balance sheet presentation purposes; the remaining shares were held in a separate trust. NaNNo shares of preferred stock were issued and outstanding at December 31, 20192022 or 2018.2021.
Repurchases of Common Stock
During 2019,2022, we repurchased 3.518.3 million shares of our common stock for $1.2 billion. During 2018 and 2017, we paid $1.5$7.9 billion, and $2.0 billion to repurchase 4.7 million and 7.1including 13.9 million shares of our common stock.
stock repurchased pursuant to ASR agreements and the remainder in open market purchases. During the fourth quarter of 2019,2022, under the terms of an ASR agreement, we entered into an accelerated share repurchase (ASR) agreement to repurchase $350 million of our common stock. We paid $350 million$4.0 billion and received an initial delivery of 658,8867.0 million shares on October 30, 2019. Uponof our common stock. We expect to receive additional shares upon final settlement, which is expected in March or April 2023. In addition, we repurchased 4.7 million shares for $2.0 billion under an ASR agreement that we entered into in the first quarter of 2022. As previously disclosed, in January 2022, we received 2.2 million shares of our common stock for no additional consideration upon final settlement of the ASR agreement on December 20, 2019, we received an additional deliveryentered into in the fourth quarter of 257,3632021. During 2021, we paid $4.1 billion to repurchase 9.4 million shares of our common stock, based on the average price paid per share of $381.99, calculated with reference to the volume weighted average price per shareincluding 9.2 million shares of our common stock over the term of the agreement, less a negotiated discount. The transaction was accountedrepurchased for as$4.0 billion under an equity transaction and recognized as a reduction of common stock and additional paid-in-capital, with the excess purchase price over par value recorded as a reduction of additional paid-in capital.ASR agreement.
Dividends
We paid dividends totaling $2.6$3.0 billion ($9.0011.40 per share) in 2019, $2.32022, $2.9 billion ($8.2010.60 per share) in 20182021 and $2.2$2.8 billion ($7.469.80 per share) in 2017.2020. We paid quarterly dividends of $2.20$2.80 per share during each of the first three quarters of 20192022 and $2.40$3.00 per share during the fourth quarter of 2019; $2.002022; $2.60 per share during each of the first three quarters of 20182021 and $2.20$2.80 per share during the fourth quarter of 2018;2021; and $1.82$2.40 per share during each of the first three quarters of 20172020 and $2.00$2.60 per share during the fourth quarter of 2017.
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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, 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 (loss) before reclassifications | 3,404 | (85) | 3,319 | |||||||||||||||||
| Amounts reclassified from AOCL | ||||||||||||||||||||
Pension settlement charge (b) | 1,310 | 1,310 | ||||||||||||||||||
| Recognition of net actuarial losses | 733 | — | 733 | |||||||||||||||||
| 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) | |||||||||||||||||
Other comprehensive income (loss) before reclassifications | 1,873 | (159) | 1,714 | |||||||||||||||||
| Amounts reclassified from AOCL | ||||||||||||||||||||
Pension settlement charge (b) | 1,156 | — | 1,156 | |||||||||||||||||
| Recognition of net actuarial losses | 337 | — | 337 | |||||||||||||||||
| Amortization of net prior service credits | (268) | — | (268) | |||||||||||||||||
| Other | — | 44 | 44 | |||||||||||||||||
| Total reclassified from AOCL | 1,225 | 44 | 1,269 | |||||||||||||||||
| Total other comprehensive income (loss) | 3,098 | (115) | 2,983 | |||||||||||||||||
| Balance at December 31, 2022 | $ | (7,866) | $ | (157) | $ | (8,023) | ||||||||||||||
(a)AOCL related to postretirement benefit plans is shown net of tax benefits of $2.1 billion at December 31, 2022,$3.0 billion at December 31, 2021 and $4.4 billion at December 31, 2020. 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)During 2022 and 2021, we recognized a noncash, non-operating pension settlement charge of $1.5 billion ($1.2 billion, or $4.33 per share, after-tax) and $1.7 billion ($1.3 billion, $4.72 per share, after-tax) related to the accelerated recognition of actuarial losses included in AOCL for certain defined benefit pension plans that purchased a group annuity contract from an insurance company (see “Note 11 – Postretirement Benefit Plans”).
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Postretirement Benefit Plans (a) | Other, net | AOCL | ||||||||||
| 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 | — | 21 | 21 | |||||||||
| Total reclassified from AOCL | 802 | 21 | 823 | |||||||||
| Total other comprehensive (loss) income | (578 | ) | 141 | (437 | ) | |||||||
| Balance at December 31, 2017 | (12,559 | ) | 20 | (12,539 | ) | |||||||
| Other comprehensive loss before reclassifications | (501 | ) | (105 | ) | (606 | ) | ||||||
| Amounts reclassified from AOCL | ||||||||||||
| Recognition of net actuarial losses | 1,455 | — | 1,455 | |||||||||
| Amortization of net prior service credits | (253 | ) | — | (253 | ) | |||||||
| Other | — | 30 | 30 | |||||||||
| Total reclassified from AOCL | 1,202 | 30 | 1,232 | |||||||||
| Total other comprehensive (loss) income | 701 | (75 | ) | 626 | ||||||||
Reclassification of income tax effects from tax reform(b) | (2,396 | ) | (12 | ) | (2,408 | ) | ||||||
| Balance at December 31, 2018 | (14,254 | ) | (67 | ) | (14,321 | ) | ||||||
| Other comprehensive loss 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 income (loss) | (1,274 | ) | 41 | (1,233 | ) | |||||||
| Balance at December 31, 2019 | $ | (15,528 | ) | $ | (26 | ) | $ | (15,554 | ) | |||
Note 13 – Stock-Based Compensation
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, 2022, inclusive of the shares reserved for outstanding RSUs and PSUs, we had approximately 9.1 million shares reserved for issuance under the plans. At December 31, 2022, approximately 6.8 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.
As of December 31, 2019, inclusive of the shares reserved for outstanding stock options, RSUs and PSUs,2022, we had approximately 7 million shares reserved for issuance under the plans. At December 31, 2019, approximately 4$181 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 $8 million, $28 million and $41 million during 2022, 2021 and 2020. In addition, our income tax liabilities for 2022, 2021 and 2020 were reduced by $124 million, $67 million and $63 million due to recognized tax benefits on RSUs and PSUs have been satisfied.stock-based compensation arrangements.
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, 2016 | 788 | $ | 183.00 | ||||||
| Granted | 519 | 254.58 | |||||||
| Vested | (624 | ) | 201.65 | ||||||
| Forfeited | (32 | ) | 223.23 | ||||||
| Nonvested at December 31, 2017 | 651 | $ | 220.21 | ||||||
| Granted | 406 | 353.99 | |||||||
| Vested | (470 | ) | 271.50 | ||||||
| Forfeited | (24 | ) | 282.07 | ||||||
| Nonvested at December 31, 2018 | 563 | $ | 271.23 | ||||||
| Granted | 581 | 305.30 | |||||||
| Vested | (523 | ) | 269.00 | ||||||
| Forfeited | (21 | ) | 302.78 | ||||||
| Nonvested at December 31, 2019 | 600 | $ | 305.06 | ||||||
| Number of RSUs (In thousands) | Weighted Average Grant-Date Fair Value Per Share | |||||||||||||||||||
| Nonvested at December 31, 2021 | 810 | $ | 345.37 | |||||||||||||||||
| Granted | 562 | 388.82 | ||||||||||||||||||
| Vested | (461) | 347.37 | ||||||||||||||||||
| Forfeited | (34) | 371.01 | ||||||||||||||||||
| Nonvested at December 31, 2022 | 877 | $ | 371.17 | |||||||||||||||||
In 2019,2022, we granted certain employees approximately 0.6 million RSUs with a weighted average grant-date fair value of $305.30$388.82 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.
Performance Stock Options
In 2019,2022, 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, 20192022 through December 31, 2021.2024. About half of the PSUs were valued at $303.59a weighted average grant-date fair value of $388.07 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 $301.03a weighted-average grant-date fair value of $537.32 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 14 – 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
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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 is generally based on the number of months of warranty coverage remaining for the products delivered and the average historical monthly warranty payments. Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion.
Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may have been incurred, GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. 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 2two 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 2two of its wholly-owned subsidiaries, Derco and SSSI, violated the civil False Claims 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 contends 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 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.
We believe that we have legal and dismissing Cimma as a partyfactual defenses to the litigation.
U.S. Government’s remaining claims. The U.S. Government seeks damages 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. Although we continue to evaluate our liability and exposure, we do not currently believe that it is probable that we will incur a material loss. If, contrary to our
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expectations, the U.S. 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 Lockheed Martin Services, Inc. (LMSI) and a current Lockheed Martin vice president. The dollar amount of damages sought is not specified but DOJ seeks treble damages with respect to the False Claims Act and penalties that are subject to doubling under the Anti-Kickback Act. The allegations relate primarily to information technology services performed by LMSI under a subcontract to MSA and the pricing by MSA and LMSI of those services as well as Lockheed Martin’s payment of standard incentive compensation to certain employees who were seconded to MSA, including the vice president. MSA is a joint venture that holds a prime contract to provide infrastructure support services at DOE’s Hanford facility. On April 23, 2019, the parties each filed partial motions to dismiss the U.S. Government’s False Claims Act and Anti-Kickback Act allegations. On January 13, 2020, the court dismissed the Anti-Kickback Act claim against all defendants with prejudice and denied the motions to dismiss the False Claims Act claims.
On April 24, 2009, we filed a declaratory judgment action against the New 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 costs to complete the contract and potential re-procurement costs. While we are unable to estimate the cost of another contractor to complete the contract and the costs of re-procurement, we note that our contract with the MTA had a total value of $323 million, of which $241 million was paid to us, and that the MTA is seeking damages of approximately $190 million. 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 in 2016.
Environmental Matters
We are involved in proceedings and potential proceedings relating to soil, sediment, surface water, and groundwater contamination, disposal of hazardous substances, and other environmental matters at several of our current or former facilities, facilities for which we may have contractual responsibility, and at third-party sites where we have been designated as a potentially responsible party (PRP). A substantial portion of environmental costs will be included in our net sales and cost of sales in future periods pursuant to U.S. Government regulations. At the time a liability is recorded for future environmental costs, we record assets for estimated future recovery considered probable through the pricing of products and services to agencies of the U.S. Government, regardless of the contract form (e.g., cost-reimbursable, fixed-price). We continually evaluate the recoverability of our assets for the portion of environmental costs that are probable of future recovery by assessing, among other factors, U.S. Government regulations, our U.S. Government business base and contract mix, our history of receiving reimbursement of such costs, and efforts by some U.S. Government representatives to limit such reimbursement. We include the portions of those environmental costs expected to be allocated to our non-U.S. Government contracts, or determined not to be recoverable under U.S. Government contracts, in our cost of sales at the time the liability is established.
At December 31, 20192022 and 2018,2021, the aggregate amount of liabilities recorded relative to environmental matters was $810$696 million and $864$742 million, most of which are recorded in other noncurrent liabilities on our consolidated balance sheets. We have recorded assets for the portion of environmental costs that are probable of future recovery totaling $703$618 million and $750$645 million at December 31, 20192022 and 2018,2021, 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 remediation 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, 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, California previously established a maximum levelpotential new regulations of the contaminantperchlorate and hexavalent chromium in drinking water of 10 parts per billion (ppb). This standard was successfully challenged byat the California Manufacturersfederal and Technology Association (CMTA) for failure to conduct the required economic feasibility analysis.state level could adversely affect us. 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. Further,particular, the U.S. Environmental Protection
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Agency (U.S. EPA)(EPA) is considering whether to regulate hexavalent chromium.
chromium at the federal level and the California is also reevaluatingState Water Resources Control Board continues to reevaluate its existing drinking water standard of 6 ppb for perchlorate, and the U.S. EPA is taking steps to regulate perchlorate in drinking water. perchlorate.
If substantially lower standards are adopted for perchlorate in either California or for hexavalent chromium at the federal level, for perchlorate or for hexavalent chromium, we expect a material increase in our estimates for environmental liabilities and the related assets for the portion of the increased costs that are probable of future recovery in the pricing of our products and services for the U.S. 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.
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 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. We had total outstanding letters of credit, surety bonds and third-party guarantees aggregating $3.8 billion and $3.6 billion at December 31, 20192022 and December 31, 2018.2021. Third-party guarantees do not include guarantees toissued on behalf of subsidiaries and other consolidated entities.
At December 31, 20192022 and 2018,2021, third-party guarantees totaled $996$904 million and $850$838 million, of which approximately 76%71% and 65%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. ThereAt December 31, 2022 and 2021, there were no material amounts recorded in our financial statements related to third-party guarantees or novation agreements.
Note 1615 – Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following (in millions):
| December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Total | Level 1 | Level 2 | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Mutual funds | $ | 1,363 | $ | 1,363 | $ | — | $ | 978 | $ | 978 | $ | — | ||||||||||||
| U.S. Government securities | 99 | — | 99 | 105 | — | 105 | ||||||||||||||||||
| Other securities | 319 | 171 | 148 | 144 | 28 | 116 | ||||||||||||||||||
| Derivatives | 18 | — | 18 | 22 | — | 22 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Derivatives | 23 | — | 23 | 61 | — | 61 | ||||||||||||||||||
| Assets measured at NAV | ||||||||||||||||||||||||
| Other commingled funds | 19 | 18 | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Mutual funds | $ | 897 | $ | 897 | $ | — | $ | — | $ | 1,434 | $ | 1,434 | $ | — | $ | — | ||||||||||||||||||||||||||||||||||
| U.S. Government securities | 118 | — | 118 | — | 121 | — | 121 | — | ||||||||||||||||||||||||||||||||||||||||||
| Other securities | 660 | 333 | 264 | 63 | 684 | 492 | 192 | — | ||||||||||||||||||||||||||||||||||||||||||
| Derivatives | 18 | — | 18 | — | 15 | — | 15 | — | ||||||||||||||||||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives | 196 | — | 196 | — | 60 | — | 60 | — | ||||||||||||||||||||||||||||||||||||||||||
| Assets measured at NAV | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other commingled funds | — | 20 | ||||||||||||||||||||||||||||||||||||||||||||||||
Substantially all assets measured at fair value, other than derivatives, represent investments held in a separate trust to fund certain of our non-qualified deferred compensation plansplan liabilities. As of December 31, 2022 and are recorded2021, the fair value of our investments held in trust totaled $1.6 billion and $2.1 billion and was included in other noncurrent assets on our
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consolidated balance sheets. Net losses on these securities were $323 million in 2022 and net gains of $205 million and $231 million in 2021 and 2020. 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.
The fair values of 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 forward contracts, including embedded derivatives, and interest rate swap contracts, are primarily 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.
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, 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 minimize 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 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 minimize 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 minimize certain economic exposures.
The aggregate notional amount of our outstanding interest rate swaps at December 31, 2022 and 2021 was $1.3 billion and $500 million and the increase from 2021 was due to interest rate swaps being designated on the additional debt we issued during the fourth quarter. The aggregate notional amount of our outstanding foreign currency hedges at December 31, 2022 and 2021 was $7.3 billion and $4.0 billion and the increase from 2021 is due to the timing of contract awards denominated in foreign currencies. The fair values of our outstanding interest rate swaps and foreign currency hedges at December 31, 2022 and 2021 were not significant. Derivative instruments did not have a material impact on net earnings and comprehensive income during the years ended December 31, 2022 and 2021. The impact of derivative instruments on our consolidated statements of 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 and commercial paper.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 and commercial paper was $15.9$16.0 billion and $15.4 billion at December 31, 20192022 and 2018.2021. The outstanding principal amount was $13.8$16.8 billion and $15.3$12.8 billion at December 31, 20192022 and 2018, respectively,2021, excluding $1.2$1.3 billion and $1.1 billion of unamortized discounts and issuance
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Note 1716 – SummarySeverance and Other Charges
During the fourth quarter of Quarterly Information (Unaudited)
During 2021, we recognized severance charges totaling $36 million ($28 million, or $0.10 per share, after-tax) related to workforce reductions and facility exit costs within our RMS business segment. 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.
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2019 Quarters (a) | ||||||||||||||||
First (c) | Second | Third (d) | Fourth | |||||||||||||
| Net sales | $ | 14,336 | $ | 14,427 | $ | 15,171 | $ | 15,878 | ||||||||
| Operating profit | 2,283 | 2,008 | 2,105 | 2,149 | ||||||||||||
| Net earnings | 1,704 | 1,420 | 1,608 | 1,498 | ||||||||||||
Basic earnings per common share (b) | 6.03 | 5.03 | 5.70 | 5.32 | ||||||||||||
Diluted earnings per common share (b) | 5.99 | 5.00 | 5.66 | 5.29 | ||||||||||||
2018 Quarters (a) | ||||||||||||||||
| First | Second(e) | Third | Fourth(f) | |||||||||||||
| Net sales | $ | 11,635 | $ | 13,398 | $ | 14,318 | $ | 14,411 | ||||||||
| Operating profit | 1,725 | 1,795 | 1,963 | 1,851 | ||||||||||||
| Net earnings | 1,157 | 1,163 | 1,473 | 1,253 | ||||||||||||
Basic earnings per common share (b) | 4.05 | 4.08 | 5.18 | 4.43 | ||||||||||||
Diluted earnings per common share (b) | 4.02 | 4.05 | 5.14 | 4.39 | ||||||||||||
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, 2019.2022. 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 as of December 31, 2019.2022.
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, 2019.2022. 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 concluded that our internal control over financial reporting was effective as of December 31, 2019.2022.
Our independent registered public accounting firm has issued a report on the effectiveness of our internal control over financial reporting, which is below.
Changes in Internal Control Over Financial Reporting
There 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, 20192022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Report of 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, 2019,2022, 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, 2019,2022, 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 the Corporation as of December 31, 20192022 and 2018,2021, the related consolidated statements of earnings, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2019,2022, and the related notes and our report dated February 7, 2020January 26, 2023 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 Over 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
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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 20202023 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 “Delinquent Section 16(a) Reports” in the 2020 Proxy Statement, and that information is incorporated by reference in this Form 10-K. The information required by Items 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 20202023 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 20202023 Proxy Statement and that information is incorporated by reference in this Form 10-K. The information required by Item 407(e)(5) of Regulation S-K is included under the caption “Compensation Committee Report” in the 20202023 Proxy Statement, and that information is incorporated by reference in this Form 10-K.
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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 20202023 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, 2022.
| 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) | 2,297,380 | $ | — | 6,761,032 | |||||||||||||||||||
Equity compensation plans not approved by security holders (2) | 545,753 | — | 2,486,789 | ||||||||||||||||||||
| Total | 2,843,133 | $ | — | 9,247,821 | |||||||||||||||||||
(1)Column (a) includes, as of December 31, 2022: 1,587,329 shares that have been granted as restricted stock units (RSUs) and 624,106 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) under the heading “EquityLockheed Martin Corporation 2020 Incentive Performance Award Plan (2020 IPA Plan) or predecessor plans and 85,945 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, 2022, 6,391,651 shares available for future issuance under the 2020 IPA Plan as options, stock appreciation rights, restricted stock awards, RSUs or PSUs and 369,381 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.
(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. Because the DMICP shares are outstanding, they should be included in the 2020 Proxy Statement, and that information is incorporated by reference in this Form 10-K.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 404 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 20202023 Proxy Statement, and that information is incorporated by reference in this Form 10-K.
ITEM 14. Principal Accounting Fees and Services
The information required by this Item 14 is included under the caption “Proposal 24 - Ratification of Appointment of Independent Auditors” in the 20202023 Proxy Statement, and that information is incorporated by reference in this Form 10-K.
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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:
| Page | |||||
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.
| Page | |||||
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
| 3.1 | |||||||||||
| 3.2 | |||||||||||
| 4.1 | |||||||||||
| 4.2 | |||||||||||
| 4.3 | |||||||||||
| 4.4 | |||||||||||
| 4.5 | |||||||||||
| 4.6 | |||||||||||
| 4.7 | |||||||||||
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| See also Exhibits 3.1 and 3.2. | |||||||||||
| 10.1 | |||||||||||
| 10.2 | |||||||||||
| 10.7 | |||||||||||
| 10.8 | |||||||||||
| 10.9 | |||||||||||
| 10.10 | |||||||||||
| 10.11 | |||||||||||
| 10.12 | |||||||||||
| 10.13 | |||||||||||
| 10.14 | |||||||||||
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| 10.20 | |||||||||||
| 10.21 | |||||||||||
| 10.22 | |||||||||||
| 10.23 | |||||||||||
| 10.24 | |||||||||||
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| 10.27 | |||||||||||
| 10.28 | |||||||||||
| 10.29 | |||||||||||
| 10.30 | |||||||||||
| 10.31 | |||||||||||
| 10.32 | |||||||||||
| 10.33 | |||||||||||
| 10.34 | |||||||||||
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| 10.36 | |||||||||||
| 10.37 | |||||||||||
| 10.38 | |||||||||||
| 10.40 | |||||||||||
| 10.41 | |||||||||||
| 21 | |||||||||||
| 23 | |||||||||||
| 24 | |||||||||||
| 31.1 | |||||||||||
| 31.2 | |||||||||||
| 32 | |||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||
| 104 | 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 10.41 constitute management contracts or compensatory plans or arrangements.
ITEM 16. Form 10-K Summary
None.
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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.
| Lockheed Martin Corporation | ||||||||||||||
| (Registrant) | ||||||||||||||
| Date: | By: | /s/ | ||||||||||||
| 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.
Signatures | Titles | Date | ||||||||||||||||||
| /s/ | Chairman, President and Chief Executive Officer (Principal Executive Officer) | |||||||||||||||||||
| /s/ | ||||||||||||||||||||
| /s/ | Vice President, Controller, and Chief Accounting Officer (Principal Accounting Officer) | |||||||||||||||||||
| * | Director | |||||||||||||||||||
| Daniel F. Akerson | ||||||||||||||||||||
| * | Director | |||||||||||||||||||
| David B. Burritt | ||||||||||||||||||||
| * | Director | |||||||||||||||||||
| Bruce A. Carlson | ||||||||||||||||||||
| * | Director | |||||||||||||||||||
| John M. Donovan | ||||||||||||||||||||
| * | Director | January 26, 2023 | ||||||||||||||||||
| Joseph F. Dunford, Jr. | ||||||||||||||||||||
| * | Director | January 26, 2023 | ||||||||||||||||||
| James O. Ellis, Jr. | ||||||||||||||||||||
| * | Director | |||||||||||||||||||
| Thomas J. Falk | ||||||||||||||||||||
| * | Director | |||||||||||||||||||
| Ilene S. Gordon | ||||||||||||||||||||
| * | Director | |||||||||||||||||||
| Vicki A. Hollub | ||||||||||||||||||||
| * | Director | |||||||||||||||||||
| Jeh C. Johnson | ||||||||||||||||||||
| * | Director | |||||||||||||||||||
| Debra L. Reed-Klages | ||||||||||||||||||||
| * | Director | |||||||||||||||||||
*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.
| Date: | By: | /s/ Maryanne R. Lavan | ||||||||||||
| Maryanne R. Lavan | ||||||||||||||
| Attorney-in-fact | ||||||||||||||
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