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 , 2022
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(301 ) 897-6000
(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 | ||||||
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 ☐
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.
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 24, 2022, was approximately $110.7 billion.
There were 255,297,298 shares of our common stock, $1 par value per share, outstanding as of January 20, 2023.
DOCUMENTS INCORPORATED BY REFERENCE
Lockheed Martin Corporation
Form 10-K
For the Year Ended December 31, 2022
Table of Contents
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| PART II | ||||||||
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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.
We operate in a complex and evolving global security environment. Our strategy consists of the design and development of platforms and systems that meet the future requirements of 21st Century Security. Our vision for 21st Century Security is to accelerate the adoption of advanced networking and leading-edge technologies into our national defense enterprise, while enhancing the performance and value of our platforms and products for our customers. The aim of 21st Century Security is to integrate new and existing systems across all domains with advanced, open-architecture networking and operational technologies to make forces more agile, adaptive and unpredictable.
21st Century Security is an overarching vision that will guide our investment and strategy and we are also focused on four elements for potential growth in the near to mid-term: current programs of record, classified programs, hypersonics and new awards. We have multiple programs of record from each business segment that are entering growth stages, including the F-35 sustainment activity (Aeronautics), increased PAC-3 production rates (Missiles and Fire Control), CH-53K heavy lift helicopter (Rotary and Mission Systems), and the modernization and enhancements to the Trident II D5 Fleet Ballistic Missile (Space). We are engaged in significant classified development programs and pending successful achievement of the objectives within those programs, we expect to begin the transition from development to production over the next few years. We are currently performing on multiple hypersonic programs and following the successful completion of ongoing testing and evaluation activity, multiple programs are expected to enter early production phases between 2023 and 2026. 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 is developing differentiating technologies, forging strategic partnerships, including with commercial companies, executing on our multi-year business transformation initiative to enhance our digital infrastructure and increase efficiencies and collaboration throughout our business and maintaining fiscal discipline. Underpinning our ability to execute our strategy is our talent and culture. We invest substantially in our people to ensure that our workforce has the technical skills necessary to 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.
Business Segments
Aeronautics
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 - international multi-role, multi-variant, fifth generation stealth fighter;
•C-130 Hercules - international tactical airlifter;
•F-16 Fighting Falcon - combat-proven, international multi-role fighter; and
•F-22 Raptor - air dominance and multi-role fifth generation stealth fighter.
The F-35 program is our largest program, generating 27% of our total consolidated net sales, as well as 66% of Aeronautics’ net sales in 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. For additional information on the F-35 program, see “Status of
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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 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®, is focused on future systems, including unmanned and manned aerial systems and next generation capabilities for 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), Joint Air-to-Surface Standoff Missile (JASSM), and Hellfire 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.
•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 a targeting system for several fixed-wing aircraft and is produced for the U.S. Air Force and international customers. IRST21 provides long-range infrared detection and tracking of airborne threats and is used on several fixed-wing aircraft. IRST21 is produced for the U.S. Air 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
RMS designs, manufactures, services and supports various military and commercial helicopters, surface ships, sea and land-based missile defense systems, radar systems, sea and air-based mission and combat systems, command and control mission solutions, cyber solutions, and simulation and training solutions. RMS also has contracts with the U.S. Government for various classified programs. RMS’ major programs include:
•Sikorsky helicopter programs such as those related to the BLACK HAWK®, Seahawk® and CH-53K King Stallion heavy lift helicopters which are in service with U.S. and foreign governments, the Combat Rescue Helicopter (CRH) utilized by the U.S. Air Force, and the VH-92A helicopter for the U.S. Marine One transport mission.
•Integrated warfare systems and sensors (IWSS) programs such as Aegis Combat System (Aegis) programs 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, and the Littoral Combat Ship (LCS) and Multi-Mission Surface Combatant (MMSC) programs to provide surface combatant ships for the U.S. Navy and international customers that are designed to operate in shallow waters and the open ocean.
•Command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance (C6ISR) programs such as the Command, Control, Battle Management and Communications (C2BMC) program to provide
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an air operations center for the Ballistic Missile Defense System for the U.S. Government, and undersea combat systems programs largely serving the U.S. Navy.
•Training and logistics 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.
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 Space Based Infrared System (SBIRS) and Next Generation Overhead Persistent Infrared (Next Gen OPIR) system programs, which provide the 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 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. Space Force.
•Hypersonics programs, which include several programs with the U.S. Army and U.S. Navy to design, develop and build hypersonic strike weapons.
As previously announced, 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, including the entity that manages the program, was no longer included in our financial results as of that date.
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. We also develop and own other intellectual property, including copyrights, trade secrets and research, development and engineering know-how, that contributes significantly to our business. In addition, we license intellectual property to and from third parties. The Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS) provide the U.S. Government 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 in Item 1A - Risk Factors. Non-U.S. governments also may have certain rights in patents and other intellectual property developed in performance of our contracts 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. For example, aluminum and titanium are important raw materials used in certain of our Aeronautics and Space programs. Long-term agreements have helped enable a continued supply of these materials. In addition, carbon fiber is an important ingredient in composite materials used in our Aeronautics programs,
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such as the F-35 aircraft. We rely on other companies to provide materials, 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. During 2022, the COVID-19 pandemic, supply chain challenges, and increased demand caused global semiconductor chip shortages, extended lead times and pricing escalations and these are expected to continue in 2023. These supplier disruptions have resulted in delays and increased costs and have adversely affected our program performance and operating results. For more information on the risks related to our suppliers and raw materials, see Item 1A - Risk Factors.
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 international 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, including accounting systems, estimating systems, earned value management systems for managing cost and schedule performance on certain complex programs, purchasing systems, material management and accounting systems for planning, controlling and accounting for the acquisition, use, issuing and disposition of material, and 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 their 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 our recovery or recoup 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.
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 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 in Item 1A - Risk Factors.
There is an increasing global regulatory focus on greenhouse gas (GHG) emissions and their potential impacts relating to climate change. Future laws, regulations or policies in response to concerns over GHG emissions such as carbon taxes, mandatory reporting and disclosure obligations, including environmental requirements for certain federal contractors and subcontractors and the SEC’s proposed climate-related disclosure rule, and changes in procurement policies, including the use of environmental goals in proposal evaluation, could significantly increase our operational and compliance burdens and costs. We monitor developments in climate-change related regulation for their potential effect on us and also have a comprehensive sustainability program that seeks to mitigate our impact on the environment, including targets to reduce our GHG emissions. For more information on the risk of climate-change related regulation, see 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 “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “scheduled,” “forecast” and similar
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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 any 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 trade 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 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 73% of our total consolidated net sales from the U.S. Government in 2022, including 64% from the DoD. We expect to continue to derive most of our sales from work performed under U.S. Government contracts. Budget 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 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 are at risk of not being reimbursed for 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 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 and represented 27% of our total consolidated net sales in 2022. A decision by the U.S. Government or international 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 countries’ oversight and budgeting processes. Current program challenges include our and our suppliers’ performance (including COVID-19 performance-related challenges), software development, definitizing and receiving funding for 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 cycle operations and sustainment, inflation-related cost pressures and the ability to continue to improve affordability. Our planned production rates and deliveries have been adversely affected and could continue to be adversely affected by COVID-19 or supplier performance challenges, which affect our results of operations. For example, during 2022, we experienced a temporary halt of F-35 deliveries due to non-compliant materials in a component provided by a supplier, which affected timing of deliveries. Additionally, as described in the “Status of the F-35 Program” in Management Discussion and Analysis of Financial Condition and Results of Operations, we are experiencing a pause in aircraft deliveries due to the suspension of Government Furnished Equipment (GFE) engine deliveries and corresponding flight restrictions that were issued by the U.S. Government. If not resolved in a timely manner, this could impact our results of operations and cash flows. See also the Risk Factor below captioned “We are heavily dependent on suppliers and if our subcontractors or other suppliers or teaming agreement or joint venture partners fail to perform their obligations, our performance and ability to win future business could be adversely affected” for a discussion of the risk of non-compliant parts and the supply chain.
We also may not be successful in making hardware upgrades and other modernization capabilities in a timely manner, including as a result of dependencies on suppliers, which could increase costs and create schedule delays. Our ability to capture and retain future F-35 growth in development, production and sustainment is dependent on the success of our efforts to achieve F-35 sustainment performance, customer affordability, supply chain improvements, continued reliability improvements and other efficiencies, some of which are outside our control.
We are subject to extensive procurement laws and regulations, including those that enable the U.S. Government 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 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 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.
Government contract laws and regulations can impose terms or obligations that are different than those typically found in commercial transactions. One of the significant differences is that the U.S. Government may terminate any of our government contracts, not only for default based on our performance, but also at its convenience. Generally, prime contractors have a similar right under subcontracts related to government contracts. If a contract is terminated for convenience, we typically would be entitled to receive payments for our allowable costs incurred and the proportionate share of fees or earnings for the work performed. However, to the extent insufficient funds have been appropriated by the U.S. Government to the program to cover our costs upon a termination for convenience, the U.S. Government may assert that it is not required to appropriate additional funding. If a contract is terminated for default, the U.S. Government could make claims to reduce the contract value or recover its procurement costs and could assess other special penalties, exposing us to liability and adversely affecting our ability to compete for future contracts and orders. In addition, the U.S. Government could terminate a prime contract under which we are a subcontractor, notwithstanding the fact that our performance and the quality of the products or services we delivered were consistent with our contractual obligations as a subcontractor. Similarly, the U.S. Government could indirectly terminate a program or contract by not appropriating funding. The decision to terminate programs or contracts for convenience or default could adversely affect our business and future financial performance.
Another significant difference from commercial contracting is the existence in government contracting of the concept of an undefinitized contract action (UCA), which is when we begin performing our obligations before the terms, specifications or
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price are finally agreed to between the parties. When 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. This can affect our ability to negotiate mutually agreeable contract terms. 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 utilizes procurement policies that could negatively impact our profitability or the ability to win new business. For example, the U.S. Government has procurement policies that shift risk to contractors, such as using fixed-price contracts for development programs as described in the following risk factor. Other changes in procurement policy that could affect the predictability of our profit rates or make it more difficult to compete on certain types of programs include favoring more incentive-based fee arrangements, using different award fee criteria than historically used (such as the evaluation of environmental factors) or making government contract negotiation offers based upon their view of what our costs should be (as compared to our actual costs). In addition, changes in contract financing policy for fixed-price contracts, such as changes in performance and progress payments policies, could significantly affect the timing of our cash flows. From time to time, the U.S. Government has proposed contract terms, imposed internal policies, or taken positions that represent fundamental changes from historical practices or that we believe are inconsistent with the FAR or other laws and regulations and that could adversely affect our business. Also, a portion of our contracts are classified by the U.S. Government, which imposes security requirements that limit our ability to discuss our performance on these contracts, including any specific risks, disputes and claims.
Additionally, the DoD is increasingly pursuing rapid acquisition pathways and procedures for new technologies, including through so called “other transaction authority” agreements (OTAs). OTAs are exempt from many traditional procurement laws, including the FAR, and an OTA award may be subject, in certain cases, to the condition that a significant portion of the work under the OTA is performed by a non-traditional defense contractor or that a portion of the cost of the protype project is funded by non-governmental sources. If we cannot successfully adapt to the DoD’s rapid acquisition processes, then we may lose strategic new business opportunities in high-growth areas and our future performance and results could be adversely affected.
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.
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. Costs to complete a contract may increase for a variety of reasons, including technical and manufacturing challenges, schedule delays, workforce-related issues, or inaccurate initial contract cost estimates. These could be caused by a variety of reasons, including labor shortages, the nature and complexity of the work performed, the timeliness and availability of materials from suppliers, internal and subcontractor performance or product quality issues, inability to meet cost reduction initiatives or achieve efficiencies from digital transformation, changing laws or regulations, inflation and natural disasters. Certain contracts may impose other risks, such as forfeiting fees, paying penalties, or providing replacement systems in the event of performance failure.
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. 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 receive a fixed price irrespective of the actual costs we incur and we therefore carry the burden of any cost overruns. Under FPI contracts, we generally share with the U.S. Government savings for cost underruns less than target costs and expenses for cost overruns exceeding target costs up to a negotiated ceiling price. We carry the entire burden of cost overruns exceeding the ceiling price amount under FPI contracts. Due to the fixed-price nature of the contracts, if our actual costs exceed our estimates, our margins and profits are reduced and we could incur a reach-forward loss. A reach-forward loss is when estimates of total costs to be incurred on a contract exceed total estimates of the transaction price. When this occurs, a provision for the entire loss is determined at the contract level and is recorded in the period in which the loss is evident.
Contracts for development programs include complex design and technical requirements and are often 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 addition, we have certain contracts where we bid upfront on cost-reimbursable development work and the follow-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 adversely affect our future growth prospects and financial performance. See Note 1 – Organization and Significant Accounting Policies included in our Notes 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., low rate initial production (LRIP) contracts), where 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 create performance and financial risks to our business.
Many of our U.S. Government contracts include multiple option years and our expected sales or 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 price 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 based upon our final allowable 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 be subject to civil or criminal penalties and administrative sanctions, including reductions of the value 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 U.S. Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Similar government oversight and risks to our business and reputation exist in most other countries where we conduct business.
Increased competition and bid protests in a budget-constrained environment may make it more difficult to maintain our financial performance and customer relationships.
We are facing increased competition from startups and non-traditional defense contractors, while, at the same time, many of our customers are facing significant budget pressures and are trying to do more with less by cutting costs, using fixed price contracts, deferring large procurements, identifying more affordable solutions, performing certain work internally rather than hiring contractors, and reducing product development cycles. If competitors can offer lower cost services and products, or provide services or products more quickly, at equivalent or in some cases even reduced capabilities, we may lose new business opportunities or contract recompetes, which could adversely affect our future results. Furthermore, acquisitions in our industry, including vertical integration, also could result in increased competition or limit our access to certain suppliers without appropriate remedies to protect our interests. To remain competitive, we must maintain consistently strong customer relationships, seek to understand customer priorities and provide superior performance, advanced technology solutions and services at an affordable cost with the agility that our customers require to satisfy their mission objectives in an increasingly price competitive environment. Our success in achieving these goals may depend, among other things, on accurately assessing our customers’ needs and our competitors’ capabilities, containing our total costs relative to competitors, successfully and efficiently investing in emerging technologies, adopting innovative business models and adaptive pricing methods, effectively
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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, procurements that do not evaluate whether the cost assumptions in the bids are realistic can lead to bidders taking aggressive pricing 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 U.S. Government also may not 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 seeking to overturn the award. Unsuccessful bidders also may protest with the goal of being awarded a subcontract for a portion of the work in return for withdrawing the protest. Bid protests can result in significant expenses to us, contract modifications or even loss of the contract award and the resolution can extend the time until contract activity can begin and delay the recognition of sales 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 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 heavily dependent on suppliers and if our subcontractors or other suppliers or teaming agreement or joint venture partners fail to perform their obligations, our performance and ability to win future business could be adversely affected.
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) and, in many cases, our contracting parties 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, workshares, customer concerns about the other party’s performance, issues related to lower-tier subcontractor performance, our failure to issue or extend task orders, or our hiring the personnel of a subcontractor, teammate or joint venture partner or vice versa. We also could 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. The failure of our supply chain to comply with regulatory requirements that we flow down from our U.S. government prime contracts also could adversely affect our operating results, financial condition, or cash flows. Furthermore, changes in the political or economic environment, may adversely affect the financial stability and viability of our contracting parties or lower-tier subcontractors or their ability to meet their performance obligations.
A failure by one or more of our contracting parties to provide the agreed-upon materials, 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 suppliers and impose stringent cybersecurity regulations also may create challenges for our supply chain and increase costs.
We remain heavily dependent on our supply chain for sourcing contractually compliant components, which is outside of our direct control and is multi-tiered. The future occurrence of non-compliant components in the F-35 or other programs could cause suspensions in product deliveries, remediation work on installed components, contract price adjustments and alternate supply sourcing, all of which could adversely affect our results of operations, financial condition and cash flows.
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 systems 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 Note 1 – Organization and Significant Accounting 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 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 execute 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 variants 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 significant 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 seek 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 products, 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 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. 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. Non-U.S. governments also may have certain rights in patents and other intellectual property developed in performance of our contracts with these entities. The U.S. Government is pursuing 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 implementing 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, third parties may assert that our products or services infringe their intellectual property rights, 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 financial performance depends on us identifying, attracting and retaining a highly skilled workforce.
Our performance is dependent upon us identifying, attracting, developing, motivating and retaining a highly skilled workforce with the requisite skills in multiple areas including: engineering, science, manufacturing, information technology, cybersecurity, business development and strategy and management. Due to the national security nature of our work, our performance is also dependent upon personnel who hold security clearances and receive substantial training to work on certain programs or tasks and can be difficult to replace on a timely basis if we experience unplanned attrition. The market for highly skilled workers and leaders in our industry as well as the market for individuals holding high-level security clearances is extremely competitive and not confined to our industry. For example, we compete with commercial technology companies outside of the aerospace and defense industry for qualified technical, cyber and scientific positions, which may not face the same type of cost pressures as a government contractor and which may be able to offer more flexible work arrangements given that certain of our employees must perform the majority of their work in a secure facility because of the need to access classified information. If we cannot adequately attract and retain personnel with the requisite skills or clearances in this competitive market, our performance and future prospects may be adversely affected.
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 working remotely greater than 50% of the time under our hybrid workforce model. If we are unable to effectively adapt to this hybrid work environment long term, then we may experience a less cohesive workforce, increased attrition, reduced program performance and less innovation.
It is also critical that we develop and train employees, hire new qualified personnel, and successfully manage the short and long-term transfer of critical knowledge and skills, including leadership development and succession planning throughout our business. While we have processes in place for management transition and the transfer of knowledge and skills, the loss of key personnel, coupled with an inability to adequately train other personnel, hire new personnel or transfer knowledge and skills, could significantly impact our ability to perform under our contracts and execute on new or growing programs.
Additionally, approximately 19% of our workforce is comprised of employees that are 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 incur additional costs and experience work stoppages. Union actions at suppliers also can affect us. Any delays or work stoppages could adversely affect our ability to perform under our contracts, which could negatively impact our results of operations, cash flows, and financial condition.
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.
Given the nature of our business, we routinely experience various cybersecurity threats to our information technology infrastructure, unauthorized attempts to gain access to our company, employee- and customer-sensitive information, insider threats and denial-of-service attacks. Our customers, including sites that we operate and manage for our customers, suppliers, subcontractors and joint venture partners, experience similar security threats.
In addition to cyber threats, we face threats to the security of our facilities and 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 state actors, which target us and other defense contractors and 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 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 and financial results.
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We have 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 conduct annual training of our employees on protection of sensitive 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. 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, who or which are subject to similar threats, to seek to minimize the impact of cyber threats, other security threats or business disruptions. These entities, which are typically outside our control and may have access to our information, 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 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 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 reasonable valuations. To be successful, we must conduct due diligence to identify valuation issues and potential loss contingencies or underlying risks, some of which are difficult to discover or assess prior to consummation of an acquisition or investment; negotiate transaction terms; complete and close complex transactions; integrate acquired companies and employees; and realize anticipated operating synergies efficiently and effectively. U.S. regulators have increased their scrutiny of mergers and acquisitions in recent years, which could continue to limit our ability to execute certain transactions that we might otherwise pursue, such as the termination of our proposed acquisition of Aerojet Rocketdyne in 2022.
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 uncertain liabilities that are not covered by indemnification or other coverage could adversely affect our future financial results. This is particularly the 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), 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 are affected by the conduct and performance of businesses over which we do not exercise control and, as a result, we may not be successful in achieving the growth or other intended benefits of strategic investments.
We make investments in certain companies that we believe are advancing or developing new technologies applicable to our core businesses and new initiatives important to us. These investments may be in the forms of common or preferred stock, warrants, convertible debt securities or investments in funds and are generally illiquid at the time of investment, which limits our ability to exit an investment or realize an investment return absent a liquidity event. We generally seek to exit these investments following a liquidity event, such as a public offering and expiration of any applicable lock up or other restrictions, subject to market conditions, although we may not be successful in exiting in a timely manner. Typically, we hold a non-controlling interest and, therefore, are unable to influence strategic decisions by these companies and may have limited visibility into their activities, which may result in our not realizing the intended benefits of the investments. For fund investments, we have even less influence and visibility as a non-controlling investor in a fund that invests in other companies. We may recognize significant gains or losses attributable to adjustments of the investments’ fair value, including impairments up to and including the full value of the investment, which can be affected by the success of the companies, market volatility and changes in valuations of our investment holdings. This is particularly the case for investments that involve companies that have become publicly traded since changes in the trading price of securities we hold for investment must be marked to market in each financial reporting period.
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 evaluate 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 covered retirees and beneficiaries and are subject to the risk that the insurance company will default on its obligations to reimburse the pension trusts. While we believe pension risk transfer transactions are beneficial; future transactions, depending on their size, could result in us making additional contributions to the pension trust and/or require us to recognize noncash settlement charges in earnings in the applicable reporting period.
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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 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. 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 postretirement benefit plan obligations, actual cash contributions to our postretirement benefit plans, change in the amount or reevaluation of uncertain tax positions, and future changes in tax laws. In addition, we are regularly under audit or examination by tax authorities, including foreign tax authorities. 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.
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 seek to obtain insurance coverage from established and reputable insurance carriers to the extent available in order to cover these risks and liabilities. However, 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, 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 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.
Environmental costs and regulation, including in relation to climate change, could adversely affect our future earnings as well as the affordability of our products and services.
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. These types of matters could result in fines, penalties, cost reimbursements or contributions, compensatory or treble damages or non-monetary sanctions or relief. We have incurred and will continue to incur liabilities for 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 historical activities and those of our predecessor companies. Environmental remediation activities usually span many years, and the extent of financial exposure can be difficult to estimate. Among the variables management must assess in evaluating costs associated with these cases and remediation sites are the status of site assessment, extent of the contamination, impacts on natural resources, changing cost estimates, evolution of technologies used to remediate the site, continually evolving environmental standards, availability of insurance coverage and indemnification under existing agreements and cost allowability issues, including varying efforts by the U.S. Government to limit allowability of our costs in resolving liability at third-party-owned sites. Our environmental remediation related liabilities also could increase significantly because of acquisitions, the regulation of new substances, stricter remediation standards for existing regulated substances, changes in the interpretation or enforcement of existing laws and regulations, or the discovery of previously unknown or more extensive contamination or new contaminants. For information regarding these matters, including current estimates of the amounts that we believe are required for environmental remediation to the extent probable and estimable, see “Critical Accounting Policies - Environmental Matters” in the MD&A and “Note 14 – Legal Proceedings, Commitments and Contingencies” included in our Notes to Consolidated Financial Statements.
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.
The increasing global regulatory focus on greenhouse gas (GHG) emissions and their potential impacts relating to climate change could result in laws, regulations or policies that significantly increase our direct and indirect operational and compliance burdens, which could adversely affect our financial condition and results of operations. These laws, regulations or policies could take many forms, including carbon taxes, cap and trade regimes, increased efficiency standards, GHG reduction commitments, incentives or mandates for particular types of energy or changes in procurement laws. Changes in government procurement laws that mandate or take into account climate change considerations, such as the contractor’s GHG emissions,
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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 recoverable through pricing, to the extent that the increase in our 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 such developments. In addition, climate change-related litigation and investigations have increased in recent years and any claims or investigations against us could be costly to defend and our business could be adversely affected by the outcome.
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, “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 payment of dividends and share repurchases could vary from historical practices or our stated expectations. Decreases in asset 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 pay dividends and make share repurchases under Maryland state law in the future. In addition, the timing and amount of share repurchases under Board of Directors approved share repurchase plans may differ from stated expectations and is within the discretion of management and will depend on many factors, including our ability to generate sufficient cash flows from operations in the future or to borrow money from available financing sources, our results of operations, capital requirements and applicable law.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
At December 31, 2022, we owned or leased building space (including offices, manufacturing plants, warehouses, service centers, laboratories and other facilities) at 339 locations primarily in the U.S. Additionally, we manage or occupy 10 government-owned facilities under lease and other arrangements. At December 31, 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, 2022 (in millions):
| 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 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 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.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 4(a). Information about our Executive Officers
Our executive officers as of January 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 are no family relationships among any of our executive officers and directors. All executive officers serve at the discretion of the Board of Directors.
Timothy S. Cahill (age 57), Executive Vice President – Missiles and Fire Control
Mr. Cahill 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 Rotary and Mission Systems (RMS) since June 2020. She previously served as Senior Vice President, Enterprise Business Transformation from June 2019 to June 2020. Prior to that, she was Deputy Executive Vice President of RMS from October 2018 to June 2019; and Senior Vice President for Corporate Strategy and Business Development from September 2017 to October 2018.
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Maryanne R. Lavan (age 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.
Robert M. Lightfoot, Jr. (age 59), Executive Vice President – Space
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. Scott has served as Vice President and Treasurer since June 2022. Previously, Mr. Scott served as Vice President and Assistant Treasurer from 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 56), Chief Operating Officer
Mr. St. John has served as Chief Operating Officer since June 2020. He previously served as Executive Vice President of RMS from August 2019 to 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 for MFC from June 2017 to January 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 – Aeronautics
Mr. Ulmer has served as Executive Vice President, Aeronautics since February 2021. He served as Vice President and General Manager, F-35 Lightning II Program from March 2018 to January 2021. Prior to that, he served as Vice President, F-35 Aircraft Production business unit from March 2016 to March 2018.
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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 20, 2023, we had 23,358 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 29, 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 The Boeing Company, General Dynamics Corporation, Howmet Aerospace Inc., Huntington Ingalls Industries, L3Harris Technologies, Inc., Lockheed Martin Corporation, Northrop Grumman Corporation, Raytheon Technologies Corporation, Textron Inc. and Transdigm Group Inc. The stockholder return performance indicated on the graph is not a guarantee of future performance.
This graph is not deemed to be “filed” with the U.S. Securities and Exchange Commission or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934 (the Exchange Act), and should not be deemed to be incorporated by reference into any of our prior or subsequent filings under the Securities Act of 1933 or the Exchange Act.
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Purchases of Equity Securities
There were no sales of unregistered equity securities during the quarter ended December 31, 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, 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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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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(e)We recognized net losses of $176 million ($132 million, or $0.50 per share, after-tax) in 2022 and net gains of $42 million ($32 million, or $0.11 per share, after-tax) in 2021, $98 million ($74 million, or $0.26 per share, after-tax) in 2020, and $20 million ($15 million, or $0.05 per share, after-tax) in 2019, and net losses of $11 million ($8 million, or $0.03 per share, after-tax) in 2018 due to changes in the fair value of investments and liabilities for deferred compensation plans.
(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 $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). See “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for more information.
(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 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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, 2021 filed with the SEC on 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 2022, 73% of our $66.0 billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 64% from the Department of Defense (DoD)), 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.
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 a complex and evolving global security environment. Our strategy consists of the design and development of platforms and systems that meet the future requirements of 21st Century Security. Our vision for 21st Century Security is to accelerate the adoption of advanced networking and leading-edge technologies into our national defense enterprise, while enhancing the performance and value of our platforms and products for our customers. The aim of 21st Century Security is to integrate new and existing systems across all domains with advanced, open-architecture networking and operational technologies to make forces more agile, adaptive and unpredictable.
21st Century Security is an overarching vision that will guide our investment and strategy and we are also focused on four elements for potential growth in the near to mid-term: current programs of record, classified programs, hypersonics and new awards. We have multiple programs of record from each business segment that are entering growth stages, including the F-35 sustainment activity (Aeronautics), increased PAC-3 production rates (Missiles and Fire Control), CH-53K heavy lift helicopter (Rotary and Mission Systems), and the modernization and enhancements to the Trident II D5 Fleet Ballistic Missile (Space). We are engaged in significant classified development programs and pending successful achievement of the objectives within those programs, we expect to begin the transition from development to production over the next few years. We are currently performing on multiple hypersonic programs and following the successful completion of ongoing testing and evaluation activity, multiple programs are expected to enter early production phases between 2023 and 2026. 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 is developing differentiating technologies, forging strategic partnerships, including with commercial companies, executing on our multi-year business transformation initiative to enhance our digital infrastructure and increase efficiencies and collaboration throughout our business and maintaining fiscal discipline. Underpinning our ability to execute our strategy is our talent and culture. We invest substantially in our people to ensure that our workforce has the technical skills necessary to 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.
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 execute our programs in the expected timeframe, remains uncertain and will depend on a number of factors, including the impact of potential new COVID-19 variants or subvariants, the effectiveness and adoption of COVID-19 vaccines and therapeutics, and supplier impacts and related government actions to prevent and manage disease spread,. The long-term impacts of COVID-19 on government budgets and other funding priorities, including international priorities, that impact demand for our products and services also are difficult to predict, but could negatively affect our future results and performance.
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 customers for our products and services, in particular in the near term to the extent inflation assumptions are less than current inflationary pressures. Rising interest rates will also increase our borrowing costs on new debt and could affect the fair value of our investments. While rising interest rates reduce the measure of our gross pension obligations, they can also lead to decline in pension plan assets with offsetting impacts on our net pension liability. We remain committed to our ongoing efforts to increase the efficiency of our operations and improve the cost competitiveness and affordability of our products and services, which may, in part, offset cost increases from inflation.
Conflict in Ukraine
Russia’s invasion of Ukraine has significantly elevated global geopolitical tensions and security concerns. As a result, we have received increased interest for some of our products and services as countries seek to improve their security posture, particularly in Europe. In addition, security assistance provided by the U.S. government to Ukraine has created U.S. government demand to replenish U.S. stockpiles, resulting in additional and potential future orders for our products. We are beginning to see this interest result in initiation of new contract discussions, however, given the long-cycle nature of our business and current industry capacity, we do not expect a significant increase in near term sales from new contracts in response to the conflict. We are evaluating capacity at our operations and the supply chain to anticipate potential demand and enable us to deliver critical capabilities. In addition, the U.S. Government and other nations have implemented broad economic sanctions and export controls targeting Russia, which combined with the conflict have the potential to indirectly disrupt our supply chain and access to certain resources. We have not, however, experienced significant adverse impacts to date and we will continue to monitor for any impacts and seek to mitigate disruption that may arise. The conflict also has increased the threat of malicious cyber activity from nation states and other actors. We have taken steps designed to enhance our defensive posture against tactics and techniques associated with this increased threat.
Portfolio Shaping Activities
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 ventures at attractive valuations that will expand or complement our current portfolio and allow access to new customers or technologies. We also may explore the divestiture of
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businesses, investments or ventures that no longer meet our needs or strategy or that could perform better outside of our organization or with a different owner. In pursuing our business strategy, we routinely conduct discussions, evaluate targets and enter into agreements regarding possible acquisitions, divestitures, joint ventures and equity investments.
Renationalization of the Atomic Weapons Establishment Program
On June 30, 2021, the UK Ministry of Defence terminated the contract to operate the UK’s nuclear deterrent program and assumed control of the entity that manages the program (referred to as the renationalization of the Atomic Weapons Establishment (AWE program)). Accordingly, the AWE program’s ongoing operations, including the entity that manages the program, are no longer included in our financial results as of that date. Therefore, during 2021, AWE only generated sales of $885 million and operating profit of $18 million, which are included in Space’s financial results for the year ended December 31, 2021. During the year ended December 31, 2020, AWE generated sales of $1.4 billion and operating profit of $35 million, which are included in Space’s financial results for 2020.
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 29, 2022, the President signed the FY 2023 Omnibus Appropriations Act into law, which provides $858 billion in total national defense funding, of which $816.7 billion is for the DoD base budget. This reflects a $44.6 billion increase over the FY 2023 request for national defense spending, and a $43.7 billion increase for the DoD.
The FY 2023 Omnibus Appropriations Act also provided separate and additional funding of $47 billion for Ukraine, the fourth supplemental since March of 2022, bringing the total amount of supplemental funding authority provided to $113 billion.
The President’s FY 2024 budget request is anticipated to be submitted to Congress in March 2023, initiating the FY 2024 defense authorization and appropriations legislative process. In addition to the FY 2024 budget process, Congress will have to contend with the legal limit on U.S. debt, commonly known as the debt ceiling. The current statutory limit of $31.4 trillion was reached in January, requiring the Treasury Department to take accounting measures to continue normally financing U.S. government obligations while avoiding exceeding the debt ceiling. It is expected, however, the U.S. government will exhaust these measures by June 2023. If the debt ceiling is not raised, the U.S. government may not be able to fulfill its funding obligations and there could be significant disruption to all discretionary programs and wider financial and economic repercussions. The federal budget and debt ceiling are expected to continue to be the subject of considerable congressional debate. Although we believe DoD, intelligence, and homeland security programs will continue to receive consensus support for increased funding and would likely receive priority if this scenario came to fruition, the effect on individual programs or Lockheed Martin cannot be predicted at this time.
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. Our international business is conducted either by foreign military sales (FMS) contracted through the U.S. Government or by direct commercial sales (DCS) to international customers. In 2022, approximately 74% of our sales to international 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 2022, international customers accounted for 33% of Aeronautics’ net sales. There continues to be strong international interest in the F-35 program, which includes commitments from the U.S. Government and seven international partner countries and nine FMS customers, as well as expressions of interest from other countries. The U.S. Government and the partner countries continue to work together on the design, testing, production, and sustainment of the F-35 program. Other areas of international expansion at our Aeronautics business segment include the F-16 and C-130J programs, which continue to draw interest from international customers for new aircraft.
In 2022, international customers accounted for 31% of MFC’s net sales. Our MFC business segment continues to generate significant international interest, most notably in the air and missile defense product line, which produces the Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD) systems. Fourteen nations have chosen PAC-3 Cost Reduction Initiative (CRI) and PAC-3 Missile Segment Enhancement (MSE) to provide missile defense capabilities.
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Additionally, we continue to see international demand for our tactical and strike missile products, where we received orders for precision fires systems from Germany and Taiwan and for Long Range Anti-Ship Missiles (LRASM) from Australia.
In 2022, international customers accounted for 28% of RMS’ net sales. Our RMS business segment continues to experience international interest in the Aegis Ballistic Missile Defense System (Aegis) 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 New Zealand. Our Multi-Mission Surface Combatant (MMSC) program will 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, Singapore, Australia, Germany and France. We have active development, production, and sustainment support of the S-70 Black Hawk and MH-60 Seahawk helicopters to international customers, including India, Philippines, Australia, Republic of Korea, Thailand, the Kingdom of Saudi Arabia, and Greece. Additionally, in December 2021, the Israeli Ministry of Defense signed a Letter of Offer and Acceptance (LOA) to procure 12 CH-53K King Stallion heavy lift helicopters, of which the first four were awarded in 2022. Commercial aircraft are sold to international customers to support search and rescue missions as well as VIP and offshore oil and gas transportation.
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 seven international partner countries and nine Foreign Military Sales (FMS) customers; as well as interest from other countries. We saw strong international demand for the F-35 in 2022. During the first quarter of 2022, Finland became the seventh FMS customer to join the program. During the second quarter of 2022, the Government of Canada selected Lockheed Martin and the F-35 as the preferred bidder to move into the Finalization Phase of the competitive process to replace its fighter fleet. As a result of the Finalization Phase, the Government of Canada recently announced in January 2023 their commitment to purchase 88 F-35 aircraft. During the third quarter of 2022, the Swiss government signed a Letter of Offer and Acceptance for the procurement of 36 F-35 aircraft and became the eighth FMS customer to join the program. During the fourth quarter of 2022, the German government signed a Letter of Offer and Acceptance for the procurement of 35 F-35 aircraft and became the ninth FMS customer to join the program.
During the fourth quarter of 2022, we finalized the F-35 Low Rate Initial Production (LRIP) Lots 15-17 production contract with the U.S. Government for up to 398 aircraft. The agreement includes 145 aircraft for Lot 15, 127 for Lot 16 and up to 126 for a Lot 17 contract option. In 2022 we delivered 141 aircraft and had a backlog of 345 production aircraft, including orders from our international partner countries and FMS customers. Since program inception we have delivered 894 production F-35 aircraft to U.S. 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.
COVID-19 and other impacts experienced by the F-35 enterprise have continued to impact our near-term production plans. At the end of 2022, there was an issue with the Government Furnished Equipment (GFE) engine that resulted in a pause in flight operations and 2022 aircraft deliveries were impacted. The delivery pause continues as flight operations remain on hold and concurrently, GFE engine deliveries have been suspended. We will have greater clarity if changes to our 2023 aircraft delivery expectation are required once the pause in flight operations and the GFE engine delivery suspension have been resolved. As of January 2023, we plan on producing 147-153 aircraft in 2023 and 2024, and 2023 deliveries will be determined pending the resumption of engine deliveries and other factors. We anticipate annual deliveries of 156 aircraft in 2025 and for the foreseeable future.
Given the size and complexity of the F-35 program, we anticipate that there will be continual reviews related to aircraft performance, program, and delivery schedule, cost, and requirements as part of the DoD, Congressional, and international countries’ oversight, and budgeting processes. Current program challenges include our and our suppliers’ performance (including COVID-19 performance-related challenges), software development, execution of future flight tests and findings resulting from testing and operating the aircraft, the level of cost associated with life cycle operations, sustainment and potential contractual obligations, inflation-related cost pressures, and the ability to improve affordability.
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 periods as work is performed or deliveries are made. We expect to recognize approximately 37%
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of our backlog over the next 12 months and approximately 61% over the next 24 months as revenue, with the remainder recognized thereafter.
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 | ||||||||||||||
Certain amounts reported in other income (expense), net, including our share of earnings or losses from equity method investees, are included in the operating profit of our business segments. Accordingly, such amounts are included in the discussion of our business segment results of operations.
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Net Sales
We generate sales from the delivery of products and services to our customers. Our consolidated net sales were as follows (in millions):
| 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 decreased $1.0 billion, or 2%, in 2022 as compared to 2021. The decrease is primarily attributable to lower product sales of approximately $670 million at RMS mostly due to lower production volume on Black Hawk and lower net sales for training and logistics solutions (TLS) programs due to the delivery of an international pilot training system in the first quarter of 2021; about $315 million at Space primarily due to the renationalization of AWE on June 30, 2021, partially offset by higher development volume (Next Generation Interceptor (NGI)); and approximately $220 million at MFC primarily due to lower volume on Terminal High Altitude Area Defense (THAAD) and air dominance weapon systems. These decreases were partially offset by higher product sales of about $240 million at Aeronautics mostly due to higher volume on classified contracts that were partially offset by lower volume on F-35 contracts.
Service Sales
Service sales decreased $91 million, or 1%, in 2022 as compared to 2021. The decrease in service sales was primarily due to lower sales of approximately $155 million at MFC primarily due to lower volume on the Special Operations Forces Global Logistics Support Services (SOF GLSS) program.
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):
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| Cost of sales – products | $ | (49,577) | $ | (50,273) | $ | (48,996) | |||||||||||||||||||||||
| % of product sales | 89.4 | % | 89.1 | % | 89.2 | % | |||||||||||||||||||||||
| Cost of sales – services | (9,280) | (9,463) | (9,371) | ||||||||||||||||||||||||||
| % of service sales | 88.2 | % | 89.2 | % | 89.5 | % | |||||||||||||||||||||||
| 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) | |||||||||||||||||||||||
The following discussion of material changes in our consolidated cost of sales for products and services should be read in tandem with the preceding discussion of changes in our consolidated net sales and our business segment results of operations. Except for potential impacts to our programs resulting from COVID-19, supply chain disruptions and inflation, we have not
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identified any additional developing trends in cost of sales for products and services that would have a material impact on our future operations.
Product Costs
Product costs decreased approximately $696 million, or 1%, in 2022 as compared to 2021. The decrease was primarily attributable to lower product costs of approximately $525 million at RMS mostly due to lower production volume on Black Hawk and the delivery of an international pilot training system in the first quarter of 2021; about $195 million at MFC primarily due to lower volume on air dominance weapon systems and THAAD; and approximately $165 million at Space primarily due to the renationalization of AWE, partially offset by higher development volume (NGI). These decreases were partially offset by higher product costs of about $185 million at Aeronautics mostly due to higher volume on classified contracts that were partially offset by lower volume on F-35 contracts.
Service Costs
Service costs decreased approximately $183 million, or 2%, in 2022 compared to 2021. The decrease was primarily attributable to lower service costs of approximately $160 million at MFC primarily due to lower volume on the SOF GLSS program.
Severance and other charges
During the fourth quarter of 2022, we recorded charges totaling $100 million ($79 million, or $0.31 per share, after-tax) that relate to actions at our RMS business segment, which include severance costs for reduction of positions and asset impairment charges. After a strategic review of RMS, these actions will improve the efficiency of our operations, better align the organization and cost structure with changing economic conditions, and changes in program lifecycles. During 2021, we recorded severance and restructuring charges of $36 million ($28 million, or $0.10 per share, after-tax) associated with plans to close and consolidate certain facilities and reduce the total workforce within our RMS business segment.
Other Unallocated, Net
Other unallocated, net primarily includes the FAS/CAS pension operating adjustment (which represents the difference between CAS pension cost recorded in our business segments’ results of operations and the service cost component of Financial Accounting Standards (FAS) pension expense), stock-based compensation expense, changes in the fair value of investments and liabilities for deferred compensation plans and other corporate costs. These items are not allocated to the business segments and, therefore, are not allocated to cost of sales for products or services. Other unallocated, net reduced cost of sales by $1.3 billion in 2022, compared to $1.8 billion in 2021. Other unallocated, net during 2022 was lower primarily due to a decrease in our FAS/CAS pension operating adjustment due to lower CAS cost from the American Rescue Plan Act of 2021 (ARPA) legislation, declines in the fair value of investments and liabilities for deferred compensation plans, and fluctuations in costs associated with various corporate items, none of which were individually significant. See “Business Segment Results of Operations” and “Critical Accounting Policies - Postretirement Benefit Plans” discussion below for more information on our pension cost.
Other Income (Expense), Net
Other income (expense), net primarily includes earnings generated by equity method investees. Other income, net in 2022 was $61 million, compared to $62 million in 2021.
Interest Expense
Interest expense in 2022 was $623 million, compared to $569 million in 2021. The increase in interest expense in 2022 resulted primarily from the issuance of notes in October of 2022 to fund share repurchases. See “Capital Structure, Resources and Other” included within “Liquidity and Cash Flows” discussion below and “Note 10 – Debt” included in our Notes to Consolidated Financial Statements for a discussion of our debt.
Non-Service FAS Pension (Expense) Income
Non-service FAS pension expense was $1.0 billion in 2022, compared to $1.3 billion in 2021. Non-service FAS pension expense in 2022 includes a noncash, non-operating pension settlement charge of $1.5 billion ($1.2 billion, or $4.33 per share, after-tax), related to the transfer of $4.3 billion of our gross defined benefit pension obligations and related plan assets to an insurance company in the second quarter of 2022. Non-service FAS pension expense in 2021 includes a noncash, non-operating pension settlement charge of $1.7 billion ($1.3 billion, or $4.72 per share, after-tax), related to the transfer of $4.9 billion of our
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gross defined benefit pension obligations and related plan assets to an insurance company in the third quarter of 2021. See “Note 11 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements for additional information.
Other Non-operating (Expense) Income, Net
Other non-operating (expense) income, net primarily includes gains or losses related to changes in the fair value of mark-to-market investments. See “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for additional information. Other non-operating expense, net in 2022 was $74 million, compared to other non-operating income, net of $288 million in 2021. The decrease in 2022 was primarily due to decreases in the fair value of certain mark-to-market investments.
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 tax deductions for foreign derived intangible income, dividends paid to the company's defined contribution plans with an employee stock ownership plan feature, and employee equity awards.
Changes in U.S. (federal or state) or foreign tax laws and regulations, or their interpretation and application (including those with retroactive effect), such as the amortization for research or experimental expenditures, could significantly impact our provision for income taxes, the amount of taxes payable, our deferred tax asset and liability balances, and stockholders’ equity. In addition to future changes in tax laws, the amount of net deferred tax assets will change periodically based on several factors, including the measurement of our postretirement benefit plan obligations, actual cash contributions to our postretirement benefit plans and the change in the amount or reevaluation of uncertain tax positions.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for tax purposes. This provision 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 (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 $5.7 billion ($21.66 per share) in 2022 and $6.3 billion ($22.76 per share) in 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 12.8 million weighted average common shares outstanding in 2022, compared to 2021. The reduction in weighted average common shares was a result of share repurchases, partially offset by share issuance under our stock-based awards and certain defined contribution plans.
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Business Segment Results of Operations
We operate in four business segments: Aeronautics, MFC, RMS and Space. We organize our business segments based on the nature of products and services offered.
Net sales and operating profit of our business segments exclude intersegment sales, cost of sales, and profit as these activities are eliminated in consolidation and not included in management’s evaluation of performance of each segment. Business segment operating profit includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments. United Launch Alliance (ULA), results of which are included in our Space business segment, is our largest equity method investee.
Business segment operating profit also excludes the FAS/CAS pension operating adjustment described below, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. Government under the applicable U.S. Government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance such as a portion of management and administration costs, legal fees and settlements, environmental costs, changes in the fair value of certain mark-to-market investments, stock-based compensation expense, changes in the fair value of investments and liabilities for deferred compensation plans, retiree benefits, significant severance actions, significant asset impairments, gains or losses from divestitures, and other miscellaneous corporate activities.
Excluded items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See “Note 1 – Organization and Significant Accounting Policies” for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.
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Summary operating results for each of our business segments were as follows (in millions):
| 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 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 result, to the extent that CAS pension cost exceeds the service cost component of FAS pension (expense) income, we have a favorable FAS/CAS pension operating adjustment.
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The total FAS/CAS pension adjustments, including the service and non-service cost components of FAS pension (expense) income for our qualified defined benefit pension plans, were as follows (in millions):
| 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) recognized in connection with the transfer of $4.9 billion of our gross defined benefit pension obligations and related plan assets to an insurance company in the third quarter of 2021. See “Note 11 – Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements.
The following segment discussions also include information relating to backlog for each segment. Backlog was approximately $150.0 billion and $135.4 billion at December 31, 2022 and 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 $95.5 billion at December 31, 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 and variable considerations. Profit booking rates may increase during the performance of the contract if we successfully retire risks related to the technical,
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schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract. 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 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 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, 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 for significant severance actions, which are excluded from segment operating results); reserves for disputes; certain asset impairments; and losses on sales of certain assets.
Our consolidated net profit booking rate adjustments increased segment operating profit by approximately $1.8 billion in 2022 and $2.0 billion in 2021. The consolidated net profit booking rate adjustments in 2022 compared to 2021 decreased primarily due to decreases in profit booking rate adjustments at Space, RMS and MFC offset by an increase in Aeronautics. The consolidated net adjustments for 2022 and 2021 are inclusive of approximately $780 million and $900 million in unfavorable items, which include reserves for a classified program at Aeronautics, various programs at RMS and a ground solutions program at Space.
We periodically experience performance issues and record losses for certain programs. For further discussion on programs at Aeronautics and RMS, see “Note 1 – Organization and Significant Accounting Policies” included in our Notes to Consolidated Financial Statements for more information.
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We have contracted with the Canadian Government for the Canadian Maritime Helicopter Program at our RMS business segment that provide for design, development, and production of CH-148 aircraft (the Original Equipment contract), which is a military variant of the S-92 helicopter, and for logistical support to the fleet (the In Service Support contract) over an extended time period. The program has experienced performance issues, including delays in the final aircraft deliveries from the original contract requirement, and to date the Royal Canadian Air Force’s flight hours have been less than originally anticipated, which has impacted program revenues and the recovery of our costs under this program. Future sales and recovery of existing and future costs under the program are highly dependent upon achieving a certain number of flight hours, which could be adversely impacted by aircraft availability and performance, and the availability of Canadian government resources. We are currently in discussions with the Canadian Government to potentially restructure certain contractual terms and conditions that may be beneficial to both parties. Future performance issues or changes in our estimates due to revised contract scope or customer requirements may affect our ability to recover our costs and may result in a loss that could be material to our operating results.
We also have a number of contracts with Türkish industry for the Türkish Utility Helicopter Program (TUHP), which anticipates co-production with Türkish industry for production of T70 helicopters for use in Türkiye, as well as the related provision of Türkish goods and services under buy-back or offset obligations, to include the future sales of helicopters built in Türkiye for sale globally. 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, 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 | |||||||||||||||||||||||
Aeronautics’ net sales in 2022 increased $239 million, or 1%, compared to 2021. Net sales increased by approximately $375 million on classified contracts primarily due to higher volume; about $80 million for the F-22 program due to higher net favorable profit adjustments; and approximately $55 million for the F-16 program due to higher volume on production contracts that was partially offset by lower volume on sustainment contracts and unfavorable profit adjustments on a production contract and modernization contracts. These increases were partially offset by a decrease of about $310 million for the F-35 program due to lower volume and favorable profit adjustments on sustainment and production contracts that were partially offset by higher volume on development contracts.
Aeronautics’ operating profit in 2022 increased $67 million, or 2%, compared to 2021. Operating profit increased approximately $145 million on classified contracts primarily due to lower unfavorable profit adjustments on a classified program ($45 million in 2022 compared to $225 million in 2021) that were partially offset by lower favorable profit adjustments; and about $100 million for the F-22 program due to higher net favorable profit adjustments. These increases were partially offset by lower operating profit of approximately $110 million for the F-16 program due to unfavorable profit adjustments in 2022 on a production contract and modernization contracts; and about $80 million for the F-35 program due to lower net favorable profit adjustments on production and sustainment contracts and volume on sustainment contracts. Net favorable profit booking rate adjustments were $30 million higher in 2022 compared to 2021.
Backlog
Backlog increased in 2022 compared to 2021 primarily due to the delay of F-35 Lot 15 award from 2021 to 2022 and the award of the F-35 Lot 16 contract in December 2022.
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Missiles and Fire Control
Our MFC business segment provides air and missile defense systems; tactical missiles and air-to-ground precision strike weapon systems; logistics; fire control systems; mission operations support, readiness, engineering support and integration services; manned and unmanned ground vehicles; and energy management solutions. MFC’s major programs include PAC‑3, THAAD, Multiple Launch Rocket System (MLRS), Hellfire, Joint Air-to-Surface Standoff Missile (JASSM), Apache fire control system, Sniper Advanced Targeting Pod (SNIPER®), Infrared Search and Track (IRST21®) and Special Operations Forces Global Logistics Support Services (SOF GLSS). MFC’s operating results included the following (in millions):
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||
| Net sales | $ | 11,317 | $ | 11,693 | |||||||||||||||||||||||||