LOCKHEED MARTIN CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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 2021 and 2020 items and year-to-year comparisons
between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons
between 2020 and 2019 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, 2020 filed with the SEC on January 28, 2021.
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. 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 2021, 71% of our $67.0 billion in net sales were from the U.S.
Government, either as a prime contractor or as a subcontractor (including 62%
from the Department of Defense (DoD)), 28% were from international customers
(including foreign military sales (FMS) contracted through the U.S. Government)
and 1% were from U.S. commercial and other customers. Our main areas of focus
are in defense, space, intelligence, homeland security and information
technology, including cybersecurity.
We operate in four business segments: Aeronautics, Missiles and Fire Control
(MFC), Rotary and Mission Systems (RMS) and Space. We organize our business
segments based on the nature of the products and services offered.
We operate in an environment characterized by both complexity in global security
and continuing economic pressures in the U.S. and globally. A significant
component of our strategy in this environment is to focus on program execution,
improving the quality and predictability of the delivery of our products and
services, and placing security capability quickly into the hands of our U.S. and
international customers at affordable prices. Recognizing that our customers are
resource constrained, we place considerable focus on affordability initiatives
while endeavoring to develop and extend our portfolio domestically in a
disciplined manner, with a focus on adjacent markets close to our core
capabilities as well as growing our international sales. We invest substantially
in our people to ensure we have the technical skills necessary to succeed, and
we expect to continue to invest internally on innovative technologies that
address rapidly evolving mission requirements for our customers. We will
continue to invest in acquisitions, as appropriate, while deepening our
connection to commercial industry through cooperative partnerships, joint
ventures, and equity investments.
COVID-19
The COVID-19 pandemic continued to present business challenges in 2021. We
experienced impacts in each of our business areas related to COVID-19, primarily
in continued increased coronavirus-related costs, delays in supplier deliveries,
travel restrictions, site access and quarantine restrictions, employee absences,
remote work and adjusted work schedules. During the first half of 2021, we had
initiated a plan to reintroduce employees that had been working remotely to the
workplace, however, we paused the reintroduction as COVID-19 cases rose in the
second half of 2021. Attendance for employees required to be onsite has
fluctuated based on pandemic developments. We continued to take measures to
protect the health and safety of our employees, including encouraging employees
to be vaccinated. We also continued to work with our customers and suppliers to
minimize disruptions, including using accelerated progress payments from the
U.S. Government and cash on hand to accelerate $2.2 billion of payments to our
suppliers as of December 31, 2021 that are due by their terms in future periods.
We will continue to monitor risk driven by the pandemic and, based on our
current assessment, we expect to continue to accelerate payments to our
suppliers based on risk assessed need through the end of 2022. Consistent with
our current acceleration approach, we will prioritize small and COVID-19
impacted businesses.
We are closely tracking developments regarding vaccine mandates. Currently, all
personnel working at DoD facilities, including Lockheed Martin employees, must
comply with DoD's process to attest to vaccination status. Pursuant to the DoD
mandate, this is required for physical access to DoD buildings and leased spaces
in non-DoD buildings where official agency business is performed. Additionally,
until it was enjoined by a federal court in December 2021, pursuant to Executive
Order 14042, referred to as the federal contractor vaccine mandate, all U.S.
based employees of Lockheed Martin and most of its suppliers, industry partners
and contractors working directly or indirectly on covered government contracts,
or working at a facility where those contracts are performed, administered, or
otherwise supported, were to be fully vaccinated, or have an
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approved medical or religious accommodation by January 18, 2022. This included
employees who telework. Although the federal contractor vaccine mandate has been
enjoined, we continue to encourage all employees to be vaccinated, including
booster shots. We had taken steps to comply with the federal contractor vaccine
mandate across our workforce until it was enjoined. As of December 31, 2021,
more than 96% of our U.S. employee population had been vaccinated or received an
approved exception. If the mandate is reinstated, or new mandates implemented,
it is uncertain to what extent compliance with any such vaccine mandates may
result in adverse impacts such as workforce attrition for us or our suppliers or
reduce morale or efficiency. If the adverse impact is significant for us or our
suppliers, our operations and ability to execute on our contracts could be
adversely affected.
The ultimate 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 future pandemic-related
developments, including the duration of the pandemic, potential subsequent waves
of COVID-19 infection or potential new variants, 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 vaccine mandates, all of which are
uncertain and cannot be predicted. 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 are also difficult
to predict but could negatively affect our future results and performance.
2022 Financial Trends

We expect 2022 net sales to decrease by approximately 2% from 2021 levels. The
projected decline is driven by declines at three of the four business areas
(MFC, RMS, and Space). Specifically, these decreases are driven by the
renationalization of the Atomic Weapons Establishment (AWE) at Space, the 2021
delivery of a training system on an international pilot training program at RMS
not projected to repeat in 2022, as well as a decrease in Special Operations
Forces Global Logistics Support Services (SOF GLSS) volume at MFC due to
withdrawal of U.S. forces from Afghanistan. Total business segment operating
margin in 2022 is expected to be approximately 10.9% and cash from operations in
2022 is expected to be greater than or equal to $7.9 billion. Cash from
operations assumes no pension contributions; and includes an estimated potential
impact in 2022 of approximately $500 million from the provisions in the Tax Cuts
and Jobs Act of 2017 that went into effect on January 1, 2022 eliminating the
option to immediately deduct research and development expenditures in the period
incurred and requiring companies to amortize such expenditures over five years.
The actual impact on 2022 cash from operations will depend on if and when these
provisions are deferred, modified, or repealed by Congress, including if
retroactively, and the amount of research and development expenses paid or
incurred in 2022 among other factors. See "Income Tax Expense" below and Item
1A. Risk Factors for additional information regarding potential impacts of
changes in tax laws and regulations, including the treatment of research and
development costs.
The outlook for 2022 also assumes continued support and funding of our programs,
a U.S. federal statutory tax rate of 21%, known impacts of COVID-19, and the
continued acceleration of supplier payments, with a focus on small and at-risk
businesses. No additional impacts to the company's operations, supply chain, or
financial results as a result of continued COVID-19 disruption have been
incorporated into our outlook for 2022 as the company cannot predict how the
pandemic will evolve or what impact it will continue to have. The ultimate
impacts of COVID-19 on our financial results remain uncertain and there can be
no assurance that our underlying assumptions are correct. Additionally, the
company's outlook for 2022 assumes that there will not be significant reductions
in customer budgets, changes in funding priorities and that the U.S. Government
will not operate under a continuing resolution for an extended period in which
new contract and program starts are restricted. It also does not incorporate the
pending acquisition of Aerojet Rocketdyne Holdings, Inc. Changes in
circumstances may require us to revise our assumptions, which could materially
change our current estimate of 2022 net sales, business segment operating
margin, and cash flows.
We expect a total net FAS/CAS pension benefit of approximately $2.3 billion in
2022 based on a 2.875% discount rate (a 37.5 basis point increase from the end
of 2020), an approximate 10.5% return on plan assets in 2021, and a 6.50%
expected long-term rate of return on plan assets in future years, among other
assumptions. We do not expect to make required contributions to our qualified
defined benefit pension plans in 2022.
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 and investments at
attractive valuations that will expand or complement our current portfolio and
allow access to new customers or technologies. We also may explore the
divestiture of businesses that
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no longer meet our needs or strategy or that could perform better outside of our
organization. In pursuing our business strategy, we routinely conduct
discussions, evaluate targets and enter into agreements regarding possible
acquisitions, divestitures, joint ventures and equity investments.
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, however, during 2021, AWE generated sales of
$885 million and operating profit of $18 million, which are included in Space's
financial results for the year ended December 31, 2021. During the year ended
December 31, 2020, AWE generated sales of $1.4 billion and operating profit of
$35 million, which are included in Space's financial results for 2020.
Pending Acquisition of Aerojet Rocketdyne Holdings, Inc.
On December 20, 2020, we entered into an agreement to acquire Aerojet Rocketdyne
Holdings, Inc. (Aerojet Rocketdyne) for $51.00 per share, which is net of a
$5.00 per share special cash dividend Aerojet Rocketdyne paid to its
stockholders on March 24, 2021. At the time of announcement, this represented a
post-dividend equity value of approximately $4.6 billion, on a fully diluted
as-converted basis, and a transaction value of approximately $4.4 billion after
the assumption of Aerojet Rocketdyne's then-projected net cash. If the
transaction is completed, we expect to finance the acquisition primarily through
new debt issuances. The transaction was approved by Aerojet Rocketdyne's
stockholders on March 9, 2021. As part of the regulatory review process of the
transaction, on September 24, 2021, we and Aerojet Rocketdyne each certified
substantial compliance with the Federal Trade Commission's (FTC) requests for
additional information, known as a "second request." On January 11, 2022, the
parties provided an updated notice of their intended closing date under their
timing agreement with the FTC, whereby the parties agreed that they would not
close the transaction before January 27, 2022, to enable the parties to discuss
the scope and nature of the merchant supply and firewall commitments previously
offered to the FTC by Lockheed Martin. We have been advised by the FTC that its
concerns regarding the transaction cannot be addressed adequately by the terms
of a consent order. We believe it is highly likely that the FTC will vote to sue
to block the transaction and expect they will make a decision before January 27,
2022. If the FTC sues to block the transaction, we could elect to defend the
lawsuit within 30 days or terminate the merger agreement. If the FTC does not
file a lawsuit to block the transaction before January 27, 2022, the parties
could proceed to close the transaction, but there is no assurance that the FTC
would not file a lawsuit challenging the transaction after the closing since the
parties have not reached agreement on the terms of a consent order. Under the
terms of the merger agreement, either party may terminate the transaction if it
has not closed on or before March 21, 2022. A copy of the merger agreement
between the companies can be found in Lockheed Martin's Form 8-K filing with the
Securities and Exchange Commission on December 21, 2020. See Item 1A - Risk
Factors for a discussion of the risks related to the proposed transaction.
U.S. Government Funding
On May 28, 2021, the Administration submitted to Congress the President's fiscal
year (FY) 2022 budget request, which proposes $753 billion for total national
defense spending including $715 billion for the DoD, a 1.6% increase above the
FY 2021 enacted amounts for both total national defense and the DoD (a U.S.
Government fiscal year starts on October 1 and ends on September 30). This is
the first budget over the past decade that is not restricted by the
discretionary spending caps under the Budget Control Act of 2011. The budget
also proposes to end the use of Overseas Contingency Operations (OCO) as a
separate fund to finance overseas operations.
On December 27, 2021, the President signed the FY 2022 National Defense
Authorization Act (NDAA), the annual policy bill that establishes, continues, or
modifies federal programs, and provides the prerequisite for the Congress to
appropriate budget authority for defense programs. The FY 2022 NDAA authorizes
approximately $25 billion more than the President requested in the FY 2022
budget request.
However, the U.S. Government has not yet enacted an annual budget for FY 2022.
To avert a government shutdown, a series of continuing resolution funding
measures have been enacted to finance all U.S. Government activities through
February 18, 2022. Under the continuing resolution, partial-year funding at
amounts consistent with appropriated levels for FY 2021 are available, subject
to certain restrictions, but new spending initiatives are not authorized.
Importantly, our key programs continue to be supported and funded despite the
continuing resolution financing mechanism. However, during periods covered by
continuing resolutions or in the event of a government shutdown, we may
experience delays in procurement of products and services due to lack of
funding, and those delays may affect our results of operations. In the coming
months, Congress will need to approve or revise the President's FY 2022 budget
proposal through enactment of appropriations bills and other policy
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legislation, which would then require final approval from the President in order
for the FY 2022 budget to become law and complete the budget process.
Additionally, on December 16, 2021, the President signed legislation increasing
the federal debt limit by $2.5 trillion. The measure increases the debt limit to
$31.4 trillion from the previous level of $28.9 trillion and is estimated to
provide sufficient government borrowing capacity to last until early 2023.
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 2021, approximately 69% of our sales to
international customers were FMS and about 31% were DCS. See Item 1A - Risk
Factors for a discussion of risks related to international sales.
In 2021, international customers accounted for 35% 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 six international 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 2021, international customers accounted for 29% 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. The PAC-3 family of missiles are the only combat proven Hit-to-Kill
interceptors that defend against incoming threats, including tactical ballistic
missiles, cruise missiles and aircraft. Fourteen nations have chosen PAC-3 Cost
Reduction Initiative (CRI) and PAC-3 Missile Segment Enhancement (MSE) to
provide missile defense capabilities. THAAD is an integrated system designed to
protect against high altitude ballistic missile threats. 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 2021, 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.
Commercial aircraft are sold to international customers to support search and
rescue missions as well as VIP and offshore oil and gas transportation.
In 2021, international customers accounted for 8% of Space's net sales. The
majority of our Space business segment international sales in 2021 were from our
majority share of AWE Management Limited (AWE), which operated the United
Kingdom's nuclear deterrent program until June 30, 2021. As previously
announced, on June 30, 2021 the UK Ministry of Defence renationalized AWE and,
accordingly, the AWE program's ongoing operations are no longer included in our
financial results beginning as of that date.
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 six
international customers; as well as expressions of interest from other
countries.
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During 2021, the F-35 program completed several milestones both domestically and
internationally. The U.S. Government continued testing the aircraft, including
ship trials, mission and weapons systems evaluations, and the F-35 fleet
recently surpassed 470,000 flight hours. During the second half of 2021, the
U.S. Government awarded the production of 16 F-35 Lot 15 aircraft in addition to
the 967 aircraft previously awarded. Since program inception, we have delivered
753 production F-35 aircraft to U.S. and international customers, including 549
F-35A variants, 150 F-35B variants, and 54 F-35C variants, demonstrating the
F-35 program's continued progress and longevity.
In response to COVID-19 F-35 delays and in conjunction with the F-35 Joint
Program Office (JPO), we tapered our production rate in 2020. In 2021, we
continued to be impacted by COVID-19 but the production rate improved from its
2020 levels. In September 2021, the F-35 JPO and the Lockheed Martin industry
team agreed on an F-35 production rebaseline that ensures predictability and
stability in the production process while recovering the aircraft shortfall
realized over the last year during the COVID-19 pandemic. With this agreement,
we were scheduled to deliver 133-139 aircraft in 2021. However, we delivered 142
aircraft in 2021, exceeding our contractual obligation by three aircraft. We
anticipate delivering 148-153 aircraft in 2022. In 2023 and beyond, we
anticipate delivering 156 aircraft for the foreseeable future. We have 230
aircraft in backlog as of December 31, 2021 extending into 2023, including
orders from our international partner countries.
Given the size and complexity of the F-35 program, we anticipate that there will
be continual reviews related to aircraft performance, program schedule, cost,
and requirements as part of the DoD, Congressional, and international countries'
oversight and budgeting processes. Current program challenges include supplier,
Lockheed Martin and partner performance (including COVID-19 performance-related
challenges), software development, the receipt of 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, sustainment and potential contractual obligations, and the ability
to continue to reduce the unit production costs and improve affordability.
Backlog
At December 31, 2021, our backlog was $135.4 billion compared with
$147.1 billion at December 31, 2020. Backlog is converted into sales in future
periods as work is performed or deliveries are made. We expect to recognize
approximately 38% of our backlog over the next 12 months and approximately 60%
over the next 24 months as revenue, with the remainder recognized thereafter.
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 $88.5 billion at December 31, 2021, as compared to
$102.3 billion at December 31, 2020. For backlog related to each of our business
segments, see "Business Segment Results of Operations" in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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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):
                                                                        2021              2020              2019
Net sales                                                        $ 67,044          $ 65,398          $ 59,812
Cost of sales                                                     (57,983)          (56,744)          (51,445)
Gross profit                                                        9,061             8,654             8,367
Other income (expense), net                                            62               (10)              178
Operating profit                                                    9,123             8,644             8,545
Interest expense                                                     (569)             (591)             (653)
Non-service FAS pension (expense) income                           (1,292)              219              (577)
Other non-operating income (expense), net                             288               (37)              (74)
Earnings from continuing operations before income taxes             7,550             8,235             7,241
Income tax expense                                                 (1,235)           (1,347)           (1,011)
Net earnings from continuing operations                             6,315             6,888             6,230
Net loss from discontinued operations                                   -               (55)                -
Net earnings                                                     $  6,315          $  6,833          $  6,230
Diluted earnings (loss) per common share
Continuing operations                                            $  22.76          $  24.50          $  21.95
Discontinued operations                                                 -             (0.20)                -
Total diluted earnings per common share                          $  22.76   

$24.30 $21.95


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):
                                 2021              2020              2019
Products                   $ 56,435          $ 54,928          $ 50,053
% of total net sales           84.2   %          84.0   %          83.7   %
Services                     10,609            10,470             9,759
% of total net sales           15.8   %          16.0   %          16.3   %
Total net sales            $ 67,044          $ 65,398          $ 59,812


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.
Product Sales
Product sales increased $1.5 billion, or 3%, in 2021 as compared to 2020. The
increase was primarily attributable to higher product sales of approximately
$735 million at RMS due to higher production volume on various Sikorsky
helicopter programs and for training and logistics solutions (TLS) programs due
to the delivery of an international pilot training system; $465 million at MFC
due to higher volume on PAC-3, Long Range Anti-Ship Missile (LRASM) and Joint
Air-to-Surface Standoff Missile (JASSM) programs; and $305 million at
Aeronautics due to higher volume on classified contracts and F-16 production
contracts, partially offset by lower volume on F-35 development contracts.
Service Sales
Service sales increased $139 million, or 1%, in 2021 as compared to 2020. The
increase in service sales was primarily attributable to higher sales of
approximately $180 million at Aeronautics due to higher sustainment volume on
F-35, partially offset by lower sustainment volume on F-22.
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):
                                                 2021               2020               2019
Cost of sales - products                  $ (50,273)         $ (48,996)         $ (44,589)
% of product sales                             89.1   %           89.2   %           89.1   %
Cost of sales - services                     (9,463)            (9,371)            (8,731)
% of service sales                             89.2   %           89.5   %           89.5   %
Severance and restructuring charges             (36)               (27)                 -
Other unallocated, net                        1,789              1,650              1,875
Total cost of sales                       $ (57,983)         $ (56,744)         $ (51,445)


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, we have not identified any additional developing trends in cost of
sales for products and services that would have a material impact on our future
operations.
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Product Costs
Product costs increased approximately $1.3 billion, or 3%, in 2021 as compared
to 2020. The increase was primarily attributable to higher product costs of
approximately $560 million at RMS due to higher production volume on various
Sikorsky helicopter programs and for TLS programs due to the delivery of an
international pilot training system; $435 million at Aeronautics due to higher
volume on classified contracts and F-16 production contracts, partially offset
by lower volume on F-35 development contracts; $345 million at MFC due to higher
volume on PAC-3, LRASM and JASSM programs; partially offset by lower product
costs of approximately $65 million at Space due to the renationalization of AWE,
partially offset by higher volume on hypersonic development, Next Generation
Interceptor (NGI) and Next Generation Overhead Persistent Infrared (Next Gen
OPIR) programs.
Service Costs
Service costs increased approximately $92 million, or 1%, in 2021 compared to
2020. The increase in service costs was primarily due to higher service costs of
approximately $85 million at Aeronautics due to higher sustainment volume on
F-35, partially offset by lower sustainment volume on F-22.
Severance and Restructuring Charges
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 total workforce within our RMS
business segment. During 2020, we recorded severance charges totaling
$27 million ($21 million, or $0.08 per share, after-tax) related to the planned
elimination of certain positions primarily at our corporate functions.
Other Unallocated, Net
Other unallocated, net primarily includes the FAS/CAS operating adjustment
(which represents the difference between CAS pension cost recorded in our
business segments' results of operations and the service cost component of FAS
pension (expense) income), stock-based compensation expense and other corporate
costs. These items are not allocated to the business segments and, therefore,
are not allocated to cost of sales for products or services. Other unallocated,
net reduced cost of sales by $1.8 billion in 2021, compared to $1.7 billion in
2020. Other unallocated, net during 2021 was higher primarily due to an increase
in our FAS/CAS operating adjustment 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 generally includes earnings generated by equity
method investees. Other income, net in 2021 was $62 million, compared to other
expense, net of $10 million in 2020. Other income, net in 2021 included lower
earnings generated by equity method investments; however, other expense, net in
2020 included a noncash impairment charge of $128 million ($96 million, or $0.34
per share, after-tax) related to our previous investment in Advanced Military
Maintenance, Repair and Overhaul Center (AMMROC), which was sold in 2020. See
"Note 1 - Organization and Significant Accounting Policies" included in our
Notes to Consolidated Financial Statements for additional information.
Interest Expense
Interest expense in 2021 was $569 million, compared to $591 million in 2020. The
decrease in interest expense in 2021 resulted primarily from our scheduled
repayment of debt in October 2020 and September 2021 of $500 million each. See
"Capital Structure, Resources and Other" included within "Liquidity and Cash
Flows" discussion below and "Note 11 - 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 $1.3 billion in 2021, compared to income of
$219 million in 2020. Non-service FAS pension expense in 2021 includes a noncash
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 gross defined benefit
pension obligations and related plan assets to an insurance company. See
"Note 12 - Postretirement Benefit Plans" included in our Notes to Consolidated
Financial Statements for additional information.
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Other Non-operating Income (Expense), Net

Other non-operating income (expense), net primarily includes gains or losses
related to changes in the fair value of strategic investments in early stage
companies made by our Lockheed Martin Ventures Fund. See "Note 1 - Organization
and Significant Accounting Policies" included in our Notes to Consolidated
Financial Statements for additional information. Other non-operating income, net
in 2021 was $288 million, compared to other non-operating expense, net of
$37 million in 2020. The increase in 2021 was primarily due to increases in the
fair value of investments held in our Lockheed Martin Ventures Fund.

income tax expense

Our effective income tax rate from continuing operations was 16.4% for both 2021
and 2020. The rates for both 2021 and 2020 benefited from tax deductions for
foreign derived intangible income, the research and development tax credit,
dividends paid to the company's defined contribution plans with an employee
stock ownership plan feature and tax deductions for 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,
including 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. Recent proposals to increase the U.S. corporate income tax rate would
require us to increase our net deferred tax assets upon enactment of new tax
legislation, with a corresponding material, one-time, noncash decrease in income
tax expense, but our income tax expense and payments would likely be materially
increased in subsequent years. Our net deferred tax assets were $2.3 billion and
$3.5 billion at December 31, 2021 and December 31, 2020, based on a 21% federal
statutory income tax rate, and primarily relate to our postretirement benefit
plans. 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 and actual cash
contributions to our postretirement benefit plans.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to
deduct research and development expenditures immediately in the year incurred
and requires taxpayers to amortize such expenditures over five years. While it
is possible that Congress may defer, modify, or repeal this provision,
potentially with retroactive effect, and we continue to have ongoing discussions
with members of Congress, both on our own and with other industries through
coalitions, we have no assurance that this provision will be deferred, modified,
or repealed. Furthermore, in anticipation of the new provision taking effect, we
have analyzed the provision and worked with our advisors to evaluate its
application to our business. If this provision is not deferred, modified, or
repealed with retroactive effect to January 1, 2022, we estimate it will
decrease our expected cash from operations in 2022 by approximately $500 million
and increase our net deferred tax assets by a similar amount. The actual impact
on 2022 cash from operations will depend on if and when this provision is
deferred, modified, or repealed by Congress, including if retroactively, and the
amount of research and development expenses paid or incurred in 2022 among other
factors. While the largest impact will be to 2022 cash from operations, the
impact would continue over the five year amortization period, but would decrease
over the period and be immaterial in year six.
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.
Net Earnings from Continuing Operations
We reported net earnings from continuing operations of $6.3 billion ($22.76 per
share) in 2021 and $6.9 billion ($24.50 per share) in 2020. Both net earnings
and earnings per share in 2021 were affected by the factors mentioned above,
including the noncash 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 gross
defined benefit pension obligations and related plan assets to an insurance
company. Additionally, both net earnings and earnings per share in 2021 were
affected by the $225 million ($169 million, or $0.61 per share, after-tax) loss
for performance issues experienced on a classified program at our Aeronautics
business segment. Earnings per share also benefited from a net decrease of
approximately 3.8 million weighted average common shares outstanding in 2021,
compared to 2020. Weighted average common shares include share repurchases,
partially offset by share issuance under our stock-based awards and certain
defined contribution plans.
Net Loss from Discontinued Operations
In 2020, we recognized a $55 million ($0.20 per share) noncash charge resulting
from the resolution of certain tax matters related to the former Information
Systems & Global Solutions business divested in 2016.
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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. 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, a portion of corporate costs not considered allowable or allocable
to contracts with the U.S. Government under the applicable U.S. Government cost
accounting standards (CAS) or federal acquisition regulations (FAR), and other
items not considered part of management's evaluation of segment operating
performance such as a portion of management and administration costs, legal fees
and settlements, environmental costs, stock-based compensation expense, retiree
benefits, significant severance actions, significant asset impairments, gains or
losses from divestitures, and other miscellaneous corporate activities.
Excluded items are included in the reconciling item "Unallocated items" between
operating profit from our business segments and our consolidated operating
profit. 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):
                                                      2021          2020          2019
Net sales
Aeronautics                                     $ 26,748      $ 26,266      $ 23,693
Missiles and Fire Control                         11,693        11,257        10,131
Rotary and Mission Systems                        16,789        15,995        15,128
Space                                             11,814        11,880        10,860
Total net sales                                 $ 67,044      $ 65,398      $ 59,812
Operating profit
Aeronautics                                     $  2,799      $  2,843      $  2,521
Missiles and Fire Control                          1,648         1,545         1,441
Rotary and Mission Systems                         1,798         1,615         1,421
Space                                              1,134         1,149         1,191
Total business segment operating profit            7,379         7,152      

6,574

Unallocated Items

   FAS/CAS operating adjustment                    1,960         1,876      

2,049

Stock-based compensation                            (227)         (221)     

(189)

   Severance and restructuring charges (a)           (36)          (27)            -
Other, net (b)                                        47          (136)          111
Total unallocated, net                             1,744         1,492         1,971
Total consolidated operating profit             $  9,123      $  8,644      

$8,545


(a)See "Consolidated Results of Operations - Severance and Restructuring
Charges" discussion above for information on charges related to certain
severance and restructuring actions across our organization.
(b)Other, net in 2020 includes a noncash impairment charge of $128 million
recognized on our investment in the international equity method investee,
AMMROC. Other, net in 2019 includes a previously deferred noncash gain of
$51 million related to properties sold in 2015 as a result of completing our
remaining obligations and a gain of $34 million for the sale of our Distributed
Energy Solutions business. (See "Note 1 - Organization and Significant
Accounting Policies" included in our Notes to Consolidated Financial Statements
for more information).
Our business segments' results of operations include pension expense only as
calculated under U.S. Government Cost Accounting Standards (CAS), which we refer
to as CAS pension cost. We recover CAS pension and other postretirement benefit
plan cost through the pricing of our products and services on U.S. Government
contracts and, therefore, recognize CAS pension cost in each of our business
segment's net sales and cost of sales. Our consolidated financial statements
must present FAS pension and other postretirement benefit plan income calculated
in accordance with FAS requirements under U.S. GAAP. The operating portion of
the net FAS/CAS pension adjustment represents the difference between the service
cost component of FAS pension (expense) income and total CAS pension cost. The
non-service FAS pension (expense) income components are included in non-service
FAS pension (expense) income in our consolidated statements of earnings. As a
result, to the extent that CAS pension cost exceeds the service cost component
of FAS pension (expense) income, we have a favorable FAS/CAS operating
adjustment.









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Our total net FAS/CAS pension adjustments, including the service and non-service
cost components of FAS pension (expense) income for our qualified defined
benefit pension plans, were as follows (in millions):
                                                       2021         2020    

2019

Total FAS (expense) income and CAS costs
FAS pension (expense) income                     $ (1,398)     $   118      $ (1,093)
Less: CAS pension cost                              2,066        1,977      

2,565

Net FAS/CAS pension adjustment                   $    668      $ 2,095      

$1,472

Service and non-service cost reconciliation
FAS pension service cost                             (106)        (101)         (516)
Less: CAS pension cost                              2,066        1,977         2,565
FAS/CAS operating adjustment                        1,960        1,876         2,049
Non-service FAS pension (expense) income           (1,292)         219      

(577)

Net FAS/CAS pension adjustment                   $    668      $ 2,095      

$1,472


The decrease in the net FAS/CAS pension adjustment in 2021 was principally
driven by a noncash, non-operating pension settlement charge of $1.7 billion
($1.3 billion, or $4.72 per share, after-tax) in connection with the transfer of
$4.9 billion of our gross defined benefit pension obligations and related plan
assets to an insurance company on August 3, 2021. See "Note 12 - Postretirement
Benefit Plans" included in our Notes to Consolidated Financial Statements.
The following segment discussions also include information relating to backlog
for each segment. Backlog was approximately $135.4 billion and $147.1 billion at
December 31, 2021 and 2020. These amounts included both funded backlog (firm
orders for which funding has been both authorized and appropriated by the
customer) and unfunded backlog (firm orders for which funding has not yet been
appropriated). Backlog does not include unexercised options or task orders to be
issued under indefinite-delivery, indefinite-quantity contracts. Funded backlog
was approximately $88.5 billion at December 31, 2021, as compared to
$102.3 billion at December 31, 2020. If any of our contracts with firm orders
were to be terminated, our backlog would be reduced by the expected value of the
unfilled orders of such contracts.
Management evaluates performance on our contracts by focusing on net sales and
operating profit and not by type or amount of operating expense. Consequently,
our discussion of business segment performance focuses on net sales and
operating profit, consistent with our approach for managing the business. This
approach is consistent throughout the life cycle of our contracts, as management
assesses the bidding of each contract by focusing on net sales and operating
profit and monitors performance on our contracts in a similar manner through
their completion.
We regularly provide customers with reports of our costs as the contract
progresses. The cost information in the reports is accumulated in a manner
specified by the requirements of each contract. For example, cost data provided
to a customer for a product would typically align to the subcomponents of that
product (such as a wing-box on an aircraft) and for services would align to the
type of work being performed (such as aircraft sustainment). Our contracts
generally allow for the recovery of costs in the pricing of our products and
services. Most of our contracts are bid and negotiated with our customers under
circumstances in which we are required to disclose our estimated total costs to
provide the product or service. This approach for negotiating contracts with our
U.S. Government customers generally allows for 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. Profit booking rates may increase during the
performance of the contract if we successfully retire risks related to the
technical, schedule and cost aspects of the contract, which decreases the
estimated total costs to complete the contract. 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.
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We have a number of programs that are designated as classified by the U.S.
Government which cannot be specifically described. The operating results of
these classified programs are included in our consolidated and business segment
results and are subjected to the same oversight and internal controls as our
other programs.
Our net sales are primarily derived from long-term contracts for products and
services provided to the U.S. Government as well as FMS contracted through the
U.S. Government. We recognize revenue as performance obligations are satisfied
and the customer obtains control of the products and services. For performance
obligations to deliver products with continuous transfer of control to the
customer, revenue is recognized based on the extent of progress towards
completion of the performance obligation, generally using the
percentage-of-completion cost-to-cost measure of progress for our contracts
because it best depicts the transfer of control to the customer as we incur
costs on our contracts. For performance obligations in which control does not
continuously transfer to the customer, we recognize revenue at the point in time
in which each performance obligation is fully satisfied. Lower than expected
supply chain activity negatively affected our net sales during 2021.
Changes in net sales and operating profit generally are expressed in terms of
volume. Changes in volume refer to increases or decreases in sales or operating
profit resulting from varying production activity levels, deliveries or service
levels on individual contracts. Volume changes in segment operating profit are
typically based on the current profit booking rate for a particular contract.
In addition, comparability of our segment sales, operating profit and operating
margin may be impacted favorably or unfavorably by changes in profit booking
rates on our contracts for which we recognize revenue over time using the
percentage-of-completion cost-to-cost method to measure progress towards
completion. Increases in the profit booking rates, typically referred to as risk
retirements, usually relate to revisions in the estimated total costs to fulfill
the performance obligations that reflect improved conditions on a particular
contract. Conversely, conditions on a particular contract may deteriorate,
resulting in an increase in the estimated total costs to fulfill the performance
obligations and a reduction in the profit booking rate. Increases or decreases
in profit booking rates are recognized in the period they are determined and
reflect the inception-to-date effect of such changes. Segment operating profit
and margin may also be impacted favorably or unfavorably by other items, which
may or may not impact sales. Favorable items may include the positive resolution
of contractual matters, cost recoveries on severance and restructuring charges,
insurance recoveries and gains on sales of assets. Unfavorable items may include
the adverse resolution of contractual matters; restructuring charges, except for
significant severance actions, which are excluded from segment operating
results; reserves for disputes; certain asset impairments; and losses on sales
of certain assets.
Our consolidated net adjustments not related to volume, including net profit
booking rate adjustments and other matters, increased segment operating profit
by approximately $2.0 billion in 2021 and $1.8 billion in 2020. The consolidated
net adjustments in 2021 compared to 2020 increased primarily due to increases in
profit booking rate adjustments at Space, MFC and RMS offset by a decrease in
Aeronautics. The consolidated net adjustments for 2021 are inclusive of
approximately $900 million in unfavorable items, which include reserves for a
classified program at Aeronautics, various programs at RMS and a commercial
ground solutions program at Space. The consolidated net adjustments for 2020 are
inclusive of approximately $745 million in unfavorable items, which include
reserves for various programs at RMS, government satellite programs at Space and
performance matters on a sensors and global sustainment international military
program at MFC.
We periodically experience performance issues and record losses for certain
programs. For further discussion on certain programs at Aeronautics and RMS, see
"Note 1 - Organization and Significant Accounting Policies" included in our
Notes to Consolidated Financial Statements for more information.
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Aeronautics
Our Aeronautics business segment is engaged in the research, design,
development, manufacture, integration, sustainment, support and upgrade of
advanced military aircraft, including combat and air mobility aircraft, unmanned
air vehicles and related technologies. Aeronautics' major programs include the
F-35 Lightning II Joint Strike Fighter, C­130 Hercules, F-16 Fighting Falcon and
F-22 Raptor. Aeronautics' operating results included the following (in
millions):
                               2021              2020              2019
Net sales                $ 26,748          $ 26,266          $ 23,693
Operating profit            2,799             2,843             2,521
Operating margin             10.5   %          10.8   %          10.6   %
Backlog at year-end      $ 49,118          $ 56,551          $ 55,636


Aeronautics' net sales in 2021 increased $482 million, or 2%, compared to 2020.
The increase was primarily attributable to higher net sales of approximately
$290 million on classified contracts due to higher volume; about $180 million
for the F-16 program due to higher volume on production contracts that was
partially offset by lower sustainment volume; approximately $75 million for the
F-35 program primarily due to higher volume on production and sustainment
contracts that was partially offset by lower volume on development contracts;
and about $30 million for the C-130 program primarily due to higher volume on
production contracts and higher risk retirements on sustainment activities.
These increases were partially offset by a decrease of approximately $170
million for lower sustainment volume for the F-22 program.
Aeronautics' operating profit in 2021 decreased $44 million, or 2%, compared to
2020. The decrease was primarily attributable to lower operating profit of
approximately $120 million for classified contracts primarily due to a $225
million loss recognized in the second quarter of 2021 for performance issues
experienced on a classified program that was partially offset by higher risk
retirements on other classified programs recognized in the second half of 2021;
and about $70 million for the F-35 program due to lower risk retirements and
volume on development contracts and lower risk retirements on production
contracts that were partially offset by higher risk retirements and volume on
sustainment contracts. These decreases were partially offset by an increase of
approximately $90 million for the C-130 program due to higher risk retirements
on sustainment contracts; and about $50 million for the F-16 program due to
higher risk retirements on sustainment contracts and higher production volume.
Adjustments not related to volume, including net profit booking rate
adjustments, were $60 million lower in 2021 compared to 2020.
Backlog
Backlog decreased in 2021 compared to 2020 primarily due to prolonged
negotiations for F-35 production contracts resulting in lower orders in 2021.
Trends
We expect Aeronautics' 2022 net sales to increase in the low-single digit range
from 2021 driven by growth in F-16, F-22 and classified volume. Operating profit
is expected to increase in the low-single digit range above 2021 levels.
Operating profit margin for 2022 is expected to be in line with 2021 levels.
Missiles and Fire Control
Our MFC business segment provides air and missile defense systems; tactical
missiles and air-to-ground precision strike weapon systems; logistics; fire
control systems; mission operations support, readiness, engineering support and
integration services; manned and unmanned ground vehicles; and energy management
solutions. MFC's major programs include PAC­3, THAAD, Multiple Launch Rocket
System (MLRS), Hellfire, Joint Air-to-Surface Standoff Missile (JASSM), Apache
fire control system, Sniper Advanced Targeting Pod (SNIPER®), Infrared Search
and Track (IRST21®) and Special Operations Forces Global Logistics Support
Services (SOF GLSS). MFC's operating results included the following (in
millions):
                               2021              2020              2019
Net sales                $ 11,693          $ 11,257          $ 10,131
Operating profit            1,648             1,545             1,441
Operating margin             14.1   %          13.7   %          14.2   %
Backlog at year-end      $ 27,021          $ 29,183          $ 25,796


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MFC's net sales in 2021 increased $436 million, or 4%, compared to 2020. The
increase was primarily attributable to higher net sales of approximately $340
million for integrated air and missile defense programs due to higher volume and
risk retirements (primarily PAC-3); and about $215 million for tactical and
strike missile programs due to higher volume (primarily LRASM and JASSM). These
increases were partially offset by a decrease of approximately $90 million for
sensors and global sustainment programs due to lower volume (primarily SNIPER®
and Apache) that was partially offset by close out activities related to the
Warrior Capability Sustainment Program (Warrior) that was terminated by the
customer in March 2021.
MFC's operating profit in 2021 increased $103 million, or 7%, compared to 2020.
The increase was primarily attributable to higher operating profit of
approximately $65 million for integrated air and missile defense programs due to
higher risk retirements and volume (primarily PAC-3); about $45 million for
tactical and strike missile programs due to higher volume (primarily LRASM and
JASSM) and higher risk retirements (primarily GMLRS); and approximately $20
million for sensors and global sustainment programs due to the reversal of a
portion of previously recorded losses on the Warrior program in the second and
third quarters of 2021 that will not recur as a result of the program being
terminated, which was partially offset by lower volume (primarily SNIPER and
Apache). These increases were partially offset by charges of approximately $25
million due to performance issues on an energy program during the third quarter
of 2021. Adjustments not related to volume, including net profit booking rate
adjustments, were $85 million higher in 2021 compared to 2020.
Backlog
Backlog decreased in 2021 compared to 2020 primarily due to lower orders on
PAC-3 and air dominance programs.
Trends
We expect MFC's 2022 net sales to decrease in the low-single digit range from
2021 driven by volume on SOF GLSS and funding on a classified program. Operating
profit is expected to decrease in the low-single digit range below 2021 levels.
Operating profit margin for 2022 is expected to increase slightly from 2021
levels.
Rotary and Mission Systems
RMS designs, manufactures, services and supports various military and commercial
helicopters, surface ships, sea and land-based missile defense systems, radar
systems, sea and air-based mission and combat systems, command and control
mission solutions, cyber solutions, and simulation and training solutions. RMS'
major programs include Aegis Combat System, Littoral Combat Ship (LCS),
Multi-Mission Surface Combatant (MMSC), Black Hawk® and Seahawk® helicopters,
CH-53K King Stallion heavy lift helicopter, Combat Rescue Helicopter (CRH),
VH-92A helicopter, and the C2BMC program. RMS' operating results included the
following (in millions):
                               2021              2020              2019
Net sales                $ 16,789          $ 15,995          $ 15,128
Operating profit            1,798             1,615             1,421
Operating margin             10.7   %          10.1   %           9.4   %
Backlog at year-end      $ 33,700          $ 36,249          $ 34,296


RMS' net sales in 2021 increased $794 million, or 5%, compared to 2020. The
increase was primarily attributable to higher net sales of $540 million for
Sikorsky helicopter programs due to higher production volume (Black Hawk, CH-53K
and CRH); and about $340 million for TLS programs primarily due to the delivery
of an international pilot training system in the first quarter of 2021. These
increases were partially offset by lower net sales of about $65 million for
integrated warfare systems and sensors (IWSS) programs due to lower volume on
the LCS and TPQ-53 programs that were partially offset by higher volume on the
Canadian Surface Combatant (CSC) and Aegis programs.
RMS' operating profit in 2021 increased $183 million, or 11%, compared to 2020.
The increase was primarily attributable to higher operating profit of
approximately $140 million for Sikorsky helicopter programs due to higher risk
retirements (Black Hawk and CH-53K), higher production volume (Black Hawk and
CRH), and lower charges on the CRH program in the first half of 2021; and about
$10 million for TLS programs due to the delivery of an international pilot
training system in the first quarter of 2021. Operating profit for IWSS programs
was comparable as lower risk retirements on the LCS program and lower volume on
the TPQ-53 program were offset by higher volume on the CSC program and lower
charges on a ground-based radar program. Adjustments not related to volume,
including net profit booking rate adjustments, were $80 million higher in 2021
compared 2020.
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Backlog
Backlog decreased in 2021 compared to 2020 primarily due to lower orders on
Sikorsky programs.
Trends
We expect RMS' 2022 net sales to decrease in the low-single digit range from
2021 driven by the delivery of a training system on an international pilot
training program at RMS in 2021, as well as from lower volume on Black Hawk.
Operating profit is expected to decline in the high-single digit range below
2021. Operating profit margin for 2022 is expected to be lower than 2021 levels.
Space
Our Space business segment is engaged in the research and development, design,
engineering and production of satellites, space transportation systems, and
strategic, advanced strike and defensive systems. Space provides network-enabled
situational awareness and integrates complex space and ground global systems to
help our customers gather, analyze, and securely distribute critical
intelligence data. Space is also responsible for various classified systems and
services in support of vital national security systems. Space's major programs
include the Trident II D5 Fleet Ballistic Missile (FBM), Orion Multi-Purpose
Crew Vehicle (Orion), Space Based Infrared System (SBIRS) and Next Generation
Overhead Persistent Infrared (Next Gen OPIR) system, Global Positioning System
(GPS) III, hypersonics programs and Next Generation Interceptor (NGI). Operating
profit for our Space business segment includes our share of earnings for our
investment in ULA, which provides expendable launch services to the U.S.
Government and commercial customers. Space's operating results included the
following (in millions):
                               2021              2020              2019
Net sales                $ 11,814          $ 11,880          $ 10,860
Operating profit            1,134             1,149             1,191
Operating margin              9.6   %           9.7   %          11.0   %
Backlog at year-end      $ 25,516          $ 25,148          $ 28,253


Space's net sales in 2021 decreased $66 million, or 1%, compared to 2020. The
decrease was primarily attributable to lower net sales of approximately $535
million due to the renationalization of the AWE program; and about $105 million
for commercial civil space programs due to lower volume (primarily Orion). These
decreases were partially offset by higher net sales of approximately $405
million for strategic and missile defense programs due to higher volume
(primarily hypersonic development and NGI programs); and about $140 million for
national security space programs due to higher volume and risk retirements
(primarily Next Gen OPIR and SBIRS).
Space's operating profit in 2021 decreased $15 million, or 1%, compared to 2020.
The decrease was primarily attributable to approximately $70 million of lower
equity earnings from the company's investment in ULA due to lower launch volume
and launch vehicle mix; and about $20 million due to the renationalization of
the AWE program. These decreases were partially offset by an increase of about
$35 million for strategic and missile defense programs due to higher volume
(primarily hypersonic development programs); and approximately $25 million for
national security space programs due to higher risk retirements (primarily SBIRS
and classified programs) and higher volume (primarily Next Gen OPIR) that was
partially offset by charges of about $80 million on a commercial ground
solutions program. Operating profit was comparable for commercial civil space
programs as higher risk retirements (primarily space transportation programs)
were offset by lower volume (primarily Orion). Adjustments not related to
volume, including net profit booking rate adjustments, were $100 million higher
in 2021 compared to 2020.
Equity earnings
Total equity earnings recognized by Space (primarily ULA) represented
approximately $65 million and $135 million, or 6% and 12%, of this business
segment's operating profit during 2021 and 2020.
Backlog
Backlog increased in 2021 compared to 2020 primarily due to multi-year contract
awards in national security space (Next Gen OPIR) and strategic missile defense
(Next Generation Interceptor). These backlog increases were partially offset by
higher sales on hypersonic development programs and the renationalization of the
Atomic Weapons Establishment.
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Trends
We expect Space's 2022 net sales to decrease in the mid-single digit levels from
2021 primarily driven by the renationalization of the AWE and lower volume on
OPIR/SBIRS due to program lifecycles, partially offset by growth on the NGI
program. Operating profit is expected to decrease in the high single-digit level
from 2021. Operating profit margin for 2022 is expected to be lower than 2021
levels.
Liquidity and Cash Flows
As of December 31, 2021, we had cash and cash equivalents of $3.6 billion. Our
principal source of liquidity is our cash from operations. However, we also have
access to credit markets, if needed, for liquidity or general corporate
purposes, including our revolving credit facility or the ability to issue
commercial paper, and letters of credit to support customer advance payments and
for other trade finance purposes such as guaranteeing our performance on
particular contracts. We believe our cash and cash equivalents, our expected
cash flow generated from operations and our access to credit markets will be
sufficient to meet our cash requirements and cash deployment plans over the next
twelve months and beyond based on our current business plans.
Cash received from customers, either from the payment of invoices for work
performed or for advances from non-U.S. Government customers in excess of costs
incurred, is our primary source of cash. We generally do not begin work on
contracts until funding is appropriated by the customer. However, we may
determine to fund customer programs ourselves pending government appropriations.
If we incur costs in excess of funds obligated on the contract, we may be at
risk for reimbursement of the excess costs.
Billing timetables and payment terms on our contracts vary based on a number of
factors, including the contract type. We generally bill and collect cash more
frequently under cost-reimbursable contracts, which represented approximately
38% of the sales we recorded in 2021, as we are authorized to bill as the costs
are incurred. A number of our fixed-price contracts may provide for
performance-based payments, which allow us to bill and collect cash as we
perform on the contract. The amount of performance-based payments and the
related milestones are encompassed in the negotiation of each contract. The
timing of such payments may differ from the timing of the costs incurred related
to our contract performance, thereby affecting our cash flows.
The U.S. Government has indicated that it would consider progress payments as
the baseline for negotiating payment terms on fixed-price contracts, rather than
performance-based payments. In contrast to negotiated performance-based payment
terms, progress payment provisions correspond to a percentage of the amount of
costs incurred during the performance of the contract and are invoiced regularly
as costs are incurred. In March 2020, the DoD increased the percentage rate for
certain progress payments from 80% to 90%. Our cash flows may be affected if the
U.S. Government changes its payment policies or decides to withhold payments on
our billings. While the impact of policy changes or withholding payments may
delay the receipt of cash, the cumulative amount of cash collected during the
life of the contract should not vary.
We have a balanced cash deployment strategy to invest in our business and key
technologies to provide our customers with enhanced capabilities, enhance
stockholder value, and position ourselves to take advantage of new business
opportunities when they arise. Consistent with that strategy, we have continued
to invest in our business and technologies through capital expenditures,
independent research and development, and selective business acquisitions and
investments. We have returned cash to stockholders through dividends and share
repurchases. We also continue to actively manage our debt levels, including
maturities and interest rates, and our pension obligations. We expect to
continue to opportunistically manage our pension liabilities through the
purchase of group annuity contracts for portions of our outstanding defined
benefit pension obligations using assets from the pension trust.
In September 2021, our Board of Directors increased our dividend rate in the
fourth quarter by $0.20 to $2.80 per share and approved a $5.0 billion increase
to our share repurchase program. Inclusive of this increase, the total remaining
authorization for future common share repurchases under our program was
$3.9 billion as of December 31, 2021.
As disclosed in the "Business Overview" section above, on December 20, 2020, we
entered into an agreement to acquire Aerojet Rocketdyne for approximately $4.4
billion after the assumption of Aerojet Rocketdyne's then-projected net cash and
are awaiting a final FTC decision. If the transaction is completed, we expect to
finance the acquisition primarily through new debt issuances. Please see the
"Business Overview" above for the status of the transaction.
On August 3, 2021, we purchased group annuity contracts to transfer $4.9 billion
of gross defined benefit pension obligations and related plan assets to an
insurance company for approximately 18,000 U.S. retirees and beneficiaries. The
group annuity contracts were purchased using assets from Lockheed Martin's
master retirement trust and no additional funding
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contribution was required by us. See "Note 12 - Postretirement Benefit Plans"
included in our Notes to Consolidated Financial Statements for additional
information. We expect to continue to opportunistically manage our pension
liabilities through the purchase of group annuity contracts for portions of our
outstanding defined benefit pension obligations using assets from the pension
trust. Future pension risk transfer transactions could also be significant and
result in us making additional contributions to the pension trust and/or require
us to recognize noncash pension settlement charges in earnings in the applicable
reporting period.
To date, the effects of COVID-19 have resulted in some negative impacts on our
cash flows, partially due to supplier delays. The U.S. Government has taken
certain actions and enacted legislation to mitigate the impacts of COVID-19 on
public health, the economy, state and local governments, individuals, and
businesses. Since the pandemic began, Lockheed Martin has remained committed to
flowing down the benefits received from the DoD's modification of the progress
payment rate to our supply chain partners. As of December 31, 2021, we have
received approximately $1.5 billion of net accelerated progress payments, the
majority of which were in 2020. We continue to use accelerated progress payments
and cash on hand to accelerate payments to our suppliers. As of December 31,
2021, we have accelerated $2.2 billion of payments to our suppliers that are due
by their terms in future periods. We will continue to monitor risk driven by the
pandemic and, based on our current assessment, we will continue to accelerate
payments to our suppliers based on risk assessed need through the end of 2022.
Consistent with our current acceleration approach, we will prioritize small and
COVID-19 impacted businesses.
On March 11, 2021, the President signed the American Rescue Plan Act of 2021
(ARPA) into law. ARPA eased funding rules for single-employer defined benefit
pension plans by extending the amortization of funding shortfalls and enhancing
interest rate stabilization, which has the effect of reducing the funding
requirements for our single-employer defined benefit pension plans beginning in
2021 and reducing the amount of CAS pension costs allocated to our U.S.
Government contracts beginning in 2022. The lower pension contributions will be
partially offset by lower tax deductions.
The following table provides a summary of our cash flow information followed by
a discussion of the key elements (in millions):
                                                           2021         2020         2019
Cash and cash equivalents at beginning of year        $ 3,160      $ 1,514      $   772
Operating activities
Net earnings                                            6,315        6,833        6,230
Noncash adjustments                                     3,109        1,726        1,549
Changes in working capital                                  9          101         (672)
Other, net                                               (212)        (477)         204
Net cash provided by operating activities               9,221        8,183  

7,311

Net cash used for investing activities                 (1,161)      (2,010) 

(1,241)

Net cash used for financing activities                 (7,616)      (4,527) 

(5,328)

Net change in cash and cash equivalents                   444        1,646  

742

Cash and cash equivalents at end of year              $ 3,604      $ 3,160  

$1,514


Operating Activities
Net cash provided by operating activities increased $1.0 billion in 2021
compared to 2020. The increase in cash from operating activities was primarily
attributable to lower pension contributions, as we made no contributions in 2021
compared to a pension contribution of $1.0 billion in 2020, and an increase of
approximately $865 million in cash from our net earnings adjusted for noncash
items. These increases in cash from operations were partially offset by an
increase of approximately $720 million in payroll taxes and an increase of about
$100 million in accelerated payments to our supply chain. During 2021, we paid
employer payroll taxes of $942 million, compared to $222 million during 2020.
The increase in employer payroll taxes was due to the deferral of $460 million
of payments in 2020, half of which were paid in the fourth quarter of 2021 and
half of which will be paid in the fourth quarter of 2022, pursuant to the CARES
Act. As of December 31, 2021, we accelerated $2.2 billion of payments to
suppliers that were due in the first quarter of 2022, compared to $2.1 billion
of payments to suppliers as of December 31, 2020 that were due in the first
quarter of 2021. Our federal and foreign income tax payments, net of refunds,
were $1.4 billion in both 2021 and 2020.
Investing Activities
Cash flows related to investing activities primarily include capital
expenditures and payments for acquisitions and divestitures of businesses and
investments. The majority of our capital expenditures are for equipment and
facilities
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infrastructure that generally are incurred to support new and existing programs
across all of our business segments. We also incur capital expenditures for
information technology to support programs and general enterprise information
technology infrastructure, inclusive of costs for the development or purchase of
internal-use software.
Net cash used for investing activities decreased $849 million in 2021 compared
to 2020. The decrease in net cash used for investing activities is primarily
attributable to proceeds of $307 million received in 2021 from the sale of our
ownership interest in the AMMROC joint venture, cash payments of $282 million
for various business acquisitions in 2020, and a decrease of $244 million in
capital expenditures. Capital expenditures totaled $1.5 billion in 2021,
compared to $1.8 billion in 2020.
Financing Activities
Net cash used for financing activities increased $3.1 billion in 2021 compared
to 2020, primarily due to increased repurchases of common stock and higher
dividend payments.
During 2021, we paid $4.1 billion to repurchase 11.7 million shares of our
common stock, of which 2.2 million shares were received upon settlement in
January 2022. During 2020, we paid $1.1 billion to repurchase 3.0 million shares
of our common stock.
We paid dividends totaling $2.9 billion ($10.60 per share) in 2021 and $2.8
billion ($9.80 per share) in 2020. We paid quarterly dividends of $2.60 per
share during each of the first three quarters of 2021 and $2.80 per share during
the fourth quarter of 2021. We paid quarterly dividends of $2.40 per share
during each of the first three quarters of 2020 and $2.60 per share during the
fourth quarter of 2020.
In September 2021, we repaid $500 million of long-term notes with a fixed
interest rate of 3.35% according to their scheduled maturities.
In May 2020, we received net cash proceeds of $1.1 billion from the issuance of
senior unsecured notes. In June 2020, we used the net proceeds from the offering
plus cash on hand to redeem $750 million of notes due in 2020 and $400 million
of notes due in 2021, each at their redemption price.
In October 2020, we repaid $500 million of long-term notes with a fixed interest
rate of 2.50% due in November 2020.

Capital Structure, Resources and Other
At December 31, 2021, we held cash and cash equivalents of $3.6 billion that was
generally available to fund ordinary business operations without significant
legal, regulatory, or other restrictions.
Our outstanding debt, net of unamortized discounts and issuance costs was
$11.7 billion as of December 31, 2021 and is in the form of publicly-issued
notes that bear interest at fixed rates. As of December 31, 2021, we had $6
million of short-term borrowings due within one year, which are scheduled to
mature in the first quarter of 2022. As of December 31, 2021, we were in
compliance with all covenants contained in our debt and credit agreements. See
"Note 11 - Debt" included in our Notes to Consolidated Financial Statements for
more information on our long-term debt and revolving credit facilities.
We actively seek to finance our business in a manner that preserves financial
flexibility while minimizing borrowing costs to the extent practicable. We
review changes in financial market and economic conditions to manage the types,
amounts and maturities of our indebtedness. We may at times refinance existing
indebtedness, vary our mix of variable-rate and fixed-rate debt or seek
alternative financing sources for our cash and operational needs.
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Contractual Commitments
At December 31, 2021, we had contractual commitments to repay debt, make
payments under operating leases, settle obligations related to agreements to
purchase goods and services and settle tax and other liabilities. Financing
lease obligations were not material. Payments due under these obligations and
commitments are as follows (in millions):
                                                         Due Within
                                            Total           1 Year
Total debt                                $ 12,799      $         6
Interest payments                            8,827              537
Other liabilities                            2,503              242
Operating lease obligations                  1,566              325
Purchase obligations:
Operating activities                        56,923           25,139
Capital expenditures                           737              582

Total cash contractual obligations $83,355 $26,831


The table above includes debt presented gross of any unamortized discounts and
issuance costs, but excludes the net unfunded obligation and estimated minimum
funding requirements related to our qualified defined benefit pension plans. For
additional information about obligations and our future minimum contribution
requirements for these plans, see "Note 12 - Postretirement Benefit Plans"
included in our Notes to Consolidated Financial Statements. Amounts related to
other liabilities represent the contractual obligations for certain long-term
liabilities recorded as of December 31, 2021. Such amounts mainly include
expected payments under non-qualified pension plans, environmental liabilities
and deferred compensation plans.
Purchase obligations related to operating activities include agreements and
contracts that give the supplier recourse to us for cancellation or
nonperformance under the contract or contain terms that would subject us to
liquidated damages. Such agreements and contracts may, for example, be related
to direct materials, obligations to subcontractors and outsourcing arrangements.
Total purchase obligations for operating activities in the preceding table
include approximately $52.8 billion related to contractual commitments entered
into as a result of contracts we have with our U.S. Government customers. The
U.S. Government generally would be required to pay us for any costs we incur
relative to these commitments if they were to terminate the related contracts
"for convenience" under the FAR, subject to available funding. This also would
be true in cases where we perform subcontract work for a prime contractor under
a U.S. Government contract. The termination for convenience language also may be
included in contracts with foreign, state and local governments. We also have
contracts with customers that do not include termination for convenience
provisions, including contracts with commercial customers.
The majority of our capital expenditures for 2021 and those planned for 2022 are
for equipment, facilities infrastructure and information technology. The amounts
above in the table represent the portion of expected capital expenditures to be
incurred in 2022 and beyond that have been obligated under contracts as of
December 31, 2021 and not necessarily total capital expenditures for future
periods. Expenditures for equipment and facilities infrastructure are generally
incurred to support new and existing programs across all of our business
segments. For example, we have projects underway at Aeronautics to support
classified development programs and at RMS to support our Sikorsky helicopter
programs; and we have projects underway to modernize certain of our facilities.
We also incur capital expenditures for information technology to support
programs and general enterprise information technology infrastructure, inclusive
of costs for the development or purchase of internal-use software.
We also may enter into industrial cooperation agreements, sometimes referred to
as offset agreements, as a condition to obtaining orders for our products and
services from certain customers in foreign countries. These agreements are
designed to enhance the social and economic environment of the foreign country
by requiring the contractor to promote investment in the country. Offset
agreements may be satisfied through activities that do not require us to use
cash, including transferring technology, providing manufacturing and other
consulting support to in-country projects and the purchase by third parties
(e.g., our vendors) of supplies from in-country vendors. These agreements also
may be satisfied through our use of cash for such activities as purchasing
supplies from in-country vendors, providing financial support for in-country
projects, establishment of joint ventures with local companies and building or
leasing facilities for in-country operations. We typically do not commit to
offset agreements until orders for our products or services are definitive. The
amounts ultimately applied against our offset agreements are based on
negotiations with the customer and typically require cash outlays that represent
only a fraction of the original amount in the offset agreement. Satisfaction of
our offset obligations are included in the estimates of our total costs to
complete the contract and may impact our sales, profitability and cash flows.
Our ability to recover investments on our consolidated balance sheet that we
make to satisfy offset obligations is generally dependent upon the successful
operation of
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ventures that we do not control and may involve products and services that are
dissimilar to our business activities. At December 31, 2021, the notional value
of remaining obligations under our outstanding offset agreements totaled
approximately $17.0 billion, which primarily relate to our Aeronautics, MFC and
RMS business segments, most of which extend through 2044. To the extent we have
entered into purchase or other obligations at December 31, 2021 that also
satisfy offset agreements, those amounts are included in the contractual
commitments table above. Offset programs usually extend over several years and
may provide for penalties, estimated at approximately $1.7 billion at
December 31, 2021, in the event we fail to perform in accordance with offset
requirements. While historically we have not been required to pay material
penalties, resolution of offset requirements are often the result of
negotiations and subjective judgments.
We have entered into standby letters of credit and surety bonds issued on our
behalf by financial institutions, and we have directly issued guarantees to
third parties primarily relating to advances received from customers and the
guarantee of future performance on certain contracts. Letters of credit and
surety bonds generally are available for draw down in the event we do not
perform. In some cases, we may guarantee the contractual performance of third
parties such as joint venture partners. At December 31, 2021, we had the
following outstanding letters of credit, surety bonds and third-party guarantees
(in millions):
                                      Total           Less Than
                                     Commitment        1 Year
Standby letters of credit (a)       $     2,439      $    1,035
Surety bonds                                342             319
Third-party Guarantees                      838             428
Total commitments                   $     3,619      $    1,782


(a)Approximately $781 million of standby letters of credit in the "Less Than 1
Year" category are expected to renew for additional periods until completion of
the contractual obligation.
At December 31, 2021, third-party guarantees totaled $838 million, of which
approximately 69% related to guarantees of contractual performance of joint
ventures to which we currently are or previously were a party. These amounts
represent our estimate of the maximum amounts we would expect to incur upon the
contractual non-performance of the joint venture, joint venture partners or
divested businesses. Generally, we also have cross-indemnities in place that may
enable us to recover amounts that may be paid on behalf of a joint venture
partner.
In determining our exposures, we evaluate the reputation, performance on
contractual obligations, technical capabilities and credit quality of our
current and former joint venture partners and the transferee under novation
agreements all of which include a guarantee as required by the FAR. At
December 31, 2021 and 2020, there were no material amounts recorded in our
financial statements related to third-party guarantees or novation agreements.
Critical Accounting Policies
Contract Accounting / Sales Recognition
The majority of our net sales are generated from long-term contracts with the
U.S. Government and international customers (including FMS contracted through
the U.S. Government) for the research, design, development, manufacture,
integration and sustainment of advanced technology systems, products and
services. We account for a contract when it has approval and commitment from
both parties, the rights of the parties are identified, payment terms are
identified, the contract has commercial substance and collectability of
consideration is probable. For certain contracts that meet the foregoing
requirements, primarily international direct commercial sale contracts, we are
required to obtain certain regulatory approvals. In these cases, we recognize
revenue when it is probable that we will receive regulatory approvals based upon
all known facts and circumstances. We provide our products and services under
fixed-price and cost-reimbursable contracts.
Under fixed-price contracts, we agree to perform the specified work for a
pre-determined price. To the extent our actual costs vary from the estimates
upon which the price was negotiated, we will generate more or less profit or
could incur a loss. Some fixed-price contracts have a performance-based
component under which we may earn incentive payments or incur financial
penalties based on our performance.
Cost-reimbursable contracts provide for the payment of allowable costs incurred
during performance of the contract plus a fee up to a ceiling based on the
amount that has been funded. Typically, we enter into three types of
cost-reimbursable contracts: cost-plus-award-fee, cost-plus-incentive-fee, and
cost-plus-fixed-fee. Cost-plus-award-fee contracts provide for an award fee that
varies within specified limits based on the customer's assessment of our
performance against a predetermined set of criteria, such as targets based on
cost, quality, technical and schedule criteria. Cost-plus-incentive-fee
contracts provide for reimbursement of costs plus a fee, which is adjusted by a
formula based on the relationship of total allowable costs to total target costs
(i.e., incentive based on cost) or reimbursement of costs plus an incentive to
exceed stated performance targets (i.e.,
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incentive based on performance). Cost-plus-fixed-fee contracts provide a fixed
fee that is negotiated at the inception of the contract and does not vary with
actual costs.
We assess each contract at its inception to determine whether it should be
combined with other contracts. When making this determination, we consider
factors such as whether two or more contracts were negotiated and executed at or
near the same time or were negotiated with an overall profit objective. If
combined, we treat the combined contracts as a single contract for revenue
recognition purposes.
We evaluate the products or services promised in each contract at inception to
determine whether the contract should be accounted for as having one or more
performance obligations. The products and services in our contracts are
typically not distinct from one another due to their complex relationships and
the significant contract management functions required to perform under the
contract. Accordingly, our contracts are typically accounted for as one
performance obligation. In limited cases, our contracts have more than one
distinct performance obligation, which occurs when we perform activities that
are not highly complex or interrelated or involve different product lifecycles.
Significant judgment is required in determining performance obligations, and
these decisions could change the amount of revenue and profit recorded in a
given period. We classify net sales as products or services on our consolidated
statements of earnings based on the predominant attributes of the performance
obligations.
We determine the transaction price for each contract based on the consideration
we expect to receive for the products or services being provided under the
contract. For contracts where a portion of the price may vary, we estimate
variable consideration at the most likely amount, which is included in the
transaction price to the extent it is probable that a significant reversal of
cumulative revenue recognized will not occur. We analyze the risk of a
significant revenue reversal and if necessary constrain the amount of variable
consideration recognized in order to mitigate this risk.
At the inception of a contract we estimate the transaction price based on our
current rights and do not contemplate future modifications (including
unexercised options) or follow-on contracts until they become legally
enforceable. Contracts are often subsequently modified to include changes in
specifications, requirements or price, which may create new or change existing
enforceable rights and obligations. Depending on the nature of the modification,
we consider whether to account for the modification as an adjustment to the
existing contract or as a separate contract. Generally, modifications to our
contracts are not distinct from the existing contract due to the significant
integration and interrelated tasks provided in the context of the contract.
Therefore, such modifications are accounted for as if they were part of the
existing contract and recognized as a cumulative adjustment to revenue.
For contracts with multiple performance obligations, we allocate the transaction
price to each performance obligation based on the estimated standalone selling
price of the product or service underlying each performance obligation. The
standalone selling price represents the amount we would sell the product or
service to a customer on a standalone basis (i.e., not bundled with any other
products or services). Our contracts with the U.S. Government, including FMS
contracts, are subject to FAR and the price is typically based on estimated or
actual costs plus a reasonable profit margin. As a result of these regulations,
the standalone selling price of products or services in our contracts with the
U.S. Government and FMS contracts are typically equal to the selling price
stated in the contract.
For non-U.S. Government contracts with multiple performance obligations, we
evaluate whether the stated selling prices for the products or services
represent their standalone selling prices. We primarily sell customized
solutions unique to a customer's specifications. When it is necessary to
allocate the transaction price to multiple performance obligations, we typically
use the expected cost plus a reasonable profit margin to estimate the standalone
selling price of each product or service. We occasionally sell standard products
or services with observable standalone sales transactions. In these situations,
the observable standalone sales transactions are used to determine the
standalone selling price.
We recognize revenue as performance obligations are satisfied and the customer
obtains control of the products and services. In determining when performance
obligations are satisfied, we consider factors such as contract terms, payment
terms and whether there is an alternative future use of the product or service.
Substantially all of our revenue is recognized over time as we perform under the
contract because control of the work in process transfers continuously to the
customer. For most contracts with the U.S. Government and FMS contracts, this
continuous transfer of control of the work in process to the customer is
supported by clauses in the contract that give the customer ownership of work in
process and allow the customer to unilaterally terminate the contract for
convenience and pay us for costs incurred plus a reasonable profit. For most
non-U.S. Government contracts, primarily international direct commercial
contracts, continuous transfer of control to our customer is supported because
we deliver products that do not have an alternative use to us and if our
customer were to terminate the contract for reasons other than our
non-performance we would have the right to recover damages which would include,
among other potential damages, the right to payment for our work performed to
date plus a reasonable profit.
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For performance obligations to deliver products with continuous transfer of
control to the customer, revenue is recognized based on the extent of progress
towards completion of the performance obligation, generally using the
percentage-of-completion cost-to-cost measure of progress for our contracts
because it best depicts the transfer of control to the customer as we incur
costs on our contracts. Under the percentage-of-completion cost-to-cost measure
of progress, the extent of progress towards completion is measured based on the
ratio of costs incurred to date to the total estimated costs to complete the
performance obligation(s). For performance obligations to provide services to
the customer, revenue is recognized over time based on costs incurred or the
right to invoice method (in situations where the value transferred matches our
billing rights) as our customer receives and consumes the benefits.
For performance obligations in which control does not continuously transfer to
the customer, we recognize revenue at the point in time in which each
performance obligation is fully satisfied. This coincides with the point in time
the customer obtains control of the product or service, which typically occurs
upon customer acceptance or receipt of the product or service, given that we
maintain control of the product or service until that point.
Significant estimates and assumptions are made in estimating contract sales and
costs, including the profit booking rate. At the outset of a long-term contract,
we identify and monitor risks to the achievement of the technical, schedule and
cost aspects of the contract, as well as variable consideration, and assess the
effects of those risks on our estimates of sales and total costs to complete the
contract. The estimates consider the technical requirements (e.g., a
newly-developed product versus a mature product), the schedule and associated
tasks (e.g., the number and type of milestone events) and costs (e.g., material,
labor, subcontractor, overhead, general and administrative and the estimated
costs to fulfill our industrial cooperation agreements, sometimes referred to as
offset or localization agreements, required under certain contracts with
international customers). The initial profit booking rate of each contract
considers risks surrounding the ability to achieve the technical requirements,
schedule and costs in the initial estimated total costs to complete the
contract. Profit booking rates may increase during the performance of the
contract if we successfully retire risks surrounding the technical, schedule and
cost aspects of the contract, which decreases the estimated total costs to
complete the contract or may increase the variable consideration we expect to
receive on the contract. Conversely, our profit booking rates may decrease if
the estimated total costs to complete the contract increase or our estimates of
variable consideration we expect to receive decrease. All of the estimates are
subject to change during the performance of the contract and may affect the
profit booking rate. When estimates of total costs to be incurred on a contract
exceed total estimates of the transaction price, a provision for the entire loss
is determined at the contract level and is recorded in the period in which the
loss is determined.
Comparability of our segment sales, operating profit and operating margin may be
impacted favorably or unfavorably by changes in profit booking rates on our
contracts for which we recognize revenue over time using the
percentage-of-completion cost-to-cost method to measure progress towards
completion. Increases in the profit booking rates, typically referred to as risk
retirements, usually relate to revisions in the estimated total costs to fulfill
the performance obligations that reflect improved conditions on a particular
contract. Conversely, conditions on a particular contract may deteriorate,
resulting in an increase in the estimated total costs to fulfill the performance
obligations and a reduction in the profit booking rate. Increases or decreases
in profit booking rates are recognized in the period they are determined and
reflect the inception-to-date effect of such changes. Segment operating profit
and margin may also be impacted favorably or unfavorably by other items, which
may or may not impact sales. Favorable items may include the positive resolution
of contractual matters, cost recoveries on severance and restructuring charges,
insurance recoveries and gains on sales of assets. Unfavorable items may include
the adverse resolution of contractual matters; restructuring charges, except for
significant severance actions, which are excluded from segment operating
results; reserves for disputes; certain asset impairments; and losses on sales
of certain assets.
Other Contract Accounting Considerations
The majority of our sales are driven by pricing based on costs incurred to
produce products or perform services under contracts with the U.S. Government.
Cost-based pricing is determined under the FAR. The FAR provides guidance on the
types of costs that are allowable in establishing prices for goods and services
under U.S. Government contracts. For example, costs such as those related to
charitable contributions, interest expense and certain advertising and public
relations activities are unallowable and, therefore, not recoverable through
sales. In addition, we may enter into advance agreements with the U.S.
Government that address the subjects of allowability and allocability of costs
to contracts for specific matters. For example, most of the environmental costs
we incur for environmental remediation related to sites operated in prior years
are allocated to our current operations as general and administrative costs
under FAR provisions and supporting advance agreements reached with the U.S.
Government.
We closely monitor compliance with and the consistent application of our
critical accounting policies related to contract accounting. Costs incurred and
allocated to contracts are reviewed for compliance with U.S. Government
regulations by our personnel and are subject to audit by the Defense Contract
Audit Agency.
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Postretirement Benefit Plans
Overview
Many of our employees and retirees participate in qualified and nonqualified
defined benefit pension plans, retiree medical and life insurance plans and
other postemployment plans (collectively, postretirement benefit plans - see
"Note 12 - Postretirement Benefit Plans" included in our Notes to Consolidated
Financial Statements). The majority of our accrued benefit obligations relate to
our qualified defined benefit pension plans and retiree medical and life
insurance plans. We recognize on a plan-by-plan basis the net funded status of
these postretirement benefit plans under GAAP as either an asset or a liability
on our consolidated balance sheets. The GAAP funded status represents the
difference between the fair value of each plan's assets and the benefit
obligation of the plan. The GAAP benefit obligation represents the present value
of the estimated future benefits we currently expect to pay to plan participants
based on past service. The qualified defined benefit pension plans for salaried
employees are fully frozen effective January 1, 2020 and our salaried employees
participate in an enhanced defined contribution retirement savings plan.
Similar to recent years, we continue to take actions to mitigate the effect of
our defined benefit pension plans on our financial results by reducing the
volatility of our pension obligations, including entering into pension risk
transfer transactions involving the purchase of group annuity contracts (GACs)
for portions of our outstanding defined benefit pension obligations using assets
from the pension trust. On August 3, 2021, we purchased GACs to transfer $4.9
billion of gross defined benefit pension obligations and related plan assets to
an insurance company for approximately 18,000 U.S. retirees and beneficiaries.
The GACs were purchased using assets from Lockheed Martin's master retirement
trust and no additional funding contribution was required by us. This
transaction had no impact on the amount, timing, or form of the monthly
retirement benefit payments to the affected retirees and beneficiaries. In
connection with this transaction, we recognized a noncash pension settlement
charge of $1.7 billion ($1.3 billion, or $4.72 per share, after tax) for the
affected defined benefit pension plans during the third quarter of 2021, which
represents the accelerated recognition of actuarial losses that were included in
the accumulated other comprehensive loss account within stockholders' equity. As
a result of this transaction, we were required to remeasure the benefit
obligations and plan assets for the affected defined benefit pension plans as of
the August 3, 2021 close date. The purchase of the GACs and the pension
remeasurement did not have an impact on our CAS pension cost and did not
significantly impact our total FAS pension expense or net FAS/CAS pension
adjustment in 2021, except for the noncash pension settlement charge.
Inclusive of the transaction described above, since December 2018, Lockheed
Martin, through its master retirement trust, has purchased total contracts for
approximately $11.6 billion related to our outstanding defined benefit pension
obligations eliminating pension plan volatility for approximately 95,000
retirees and beneficiaries and annually required Pension Benefit Guarantee
Corporation (PBGC) premiums of approximately $69 million per year.
We expect to continue to look for opportunities to manage our pension
liabilities through additional pension risk transfer transactions in future
years. Future transactions could result in a noncash settlement charge to
earnings, which could be material to a reporting period.
Notwithstanding these actions, the impact of our postretirement benefit plans on
our earnings may be volatile in that the amount of expense we record and the
funded status for our postretirement benefit plans may materially change from
year to year because the calculations are sensitive to funding levels as well as
changes in several key economic assumptions, including interest rates, actual
rates of return on plan assets and other actuarial assumptions including
participant longevity and employee turnover, as well as the timing of cash
funding.

Actuarial Assumptions
The benefit obligations and assets of our postretirement benefit plans are
measured at the end of each year, or more frequently, upon the occurrence of
certain events such as a significant plan amendment (including in connection
with a pension risk transfer transaction), settlement or curtailment. The
amounts we record are measured using actuarial valuations, which are dependent
upon key assumptions such as discount rates, the expected long-term rate of
return on plan assets, participant longevity, and employee turnover. The
assumptions we make affect both the calculation of the benefit obligations as of
the measurement date and the calculation of FAS expense in subsequent periods.
When reassessing these assumptions, we consider past and current market
conditions and make judgments about future market trends. We also consider
factors such as the timing and amounts of expected contributions to the plans
and benefit payments to plan participants.
We continue to use a single weighted average discount rate approach when
calculating our consolidated benefit obligations related to our defined benefit
pension plans resulting in 2.875% at December 31, 2021, compared to 2.50% at
December 31, 2020. We utilized a single weighted average discount rate of 2.75%
when calculating our benefit obligations related to our
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retiree medical and life insurance plans at December 31, 2021, compared to
2.375% at December 31, 2020. We evaluate several data points in order to arrive
at an appropriate single weighted average discount rate, including results from
cash flow models, quoted rates from long-term bond indices and changes in
long-term bond rates over the past year. As part of our evaluation, we calculate
the approximate average yields on corporate bonds rated AA or better selected to
match our projected postretirement benefit plan cash flows. The increase in the
discount rate from December 31, 2020 to December 31, 2021 resulted in a decrease
in the projected benefit obligations of our qualified defined benefit pension
plans of approximately $2.3 billion at December 31, 2021.
We utilized an expected long-term rate of return on plan assets of 6.50% at
December 31, 2021 compared to 7.00% at December 31, 2020. We lowered our
expected long-term rate of return on plan assets due to changes in our asset
allocation targets. The long-term rate of return assumption represents the
expected long-term rate of return on the funds invested or to be invested, to
provide for the benefits included in the benefit obligations. This assumption is
based on several factors including historical market index returns, the
anticipated long-term allocation of plan assets, the historical return data for
the trust funds, plan expenses and the potential to outperform market index
returns. The difference between the long-term rate of return on plan assets
assumption we select and the actual return on plan assets in any given year
affects both the funded status of our benefit plans and the calculation of FAS
pension expense in subsequent periods. Although the actual return in any
specific year likely will differ from the assumption, the average expected
return over a long-term future horizon should be approximately equal to the
assumption. Any variance each year should not, by itself, suggest that the
assumption should be changed. Patterns of variances are reviewed over time, and
then combined with expectations for the future. As a result, changes in this
assumption are less frequent than changes in the discount rate. The actual
investment return for our qualified defined benefit plans during 2021 of $3.9
billion, based on an actual rate of approximately 10.5%, improved plan assets
more than the $2.1 billion expected return based on our long-term rate of return
assumption.
In October 2021, the Society of Actuaries published revised longevity
assumptions that refined its prior studies. We used the revised assumptions in
our December 31, 2021 re-measurement of benefit obligation resulting in an
approximate $109 million increase in the projected benefit obligations of our
qualified defined benefit pension plans.
Our stockholders' equity has been reduced cumulatively by $11.0 billion from the
annual year-end measurements of the funded status of postretirement benefit
plans. The cumulative noncash, after-tax reduction primarily represents net
actuarial losses resulting from declines in discount rates, investment losses
and updated longevity. A market-related value of our plan assets, determined
using actual asset gains or losses over the prior three-year period, is used to
calculate the amount of deferred asset gains or losses to be amortized. These
cumulative actuarial losses will be amortized to expense using the corridor
method, where gains and losses are recognized to the extent they exceed 10% of
the greater of plan assets or benefit obligations, over an average period of
approximately twenty years as of December 31, 2021. During 2021, $1.8 billion of
these amounts were recognized as a component of postretirement benefit plans
expense inclusive of the noncash pension settlement charge of $1.3 billion.
The discount rate and long-term rate of return on plan assets assumptions we
select at the end of each year are based on our best estimates and judgment. A
change of plus or minus 25 basis points in the 2.875% discount rate assumption
at December 31, 2021, with all other assumptions held constant, would have
decreased or increased the amount of the qualified pension benefit obligation we
recorded at the end of 2021 by approximately $1.5 billion, which would result in
an after-tax increase or decrease in stockholders' equity at the end of the year
of approximately $1.2 billion. If the 2.875% discount rate at December 31, 2021
that was used to compute the expected 2022 FAS pension expense for our qualified
defined benefit pension plans had been 25 basis points higher or lower, with all
other assumptions held constant, the amount of FAS pension expense projected for
2022 would be lower or higher by approximately $10 million. If the 6.50%
expected long-term rate of return on plan assets assumption at December 31, 2021
that was used to compute the expected 2022 FAS pension expense for our qualified
defined benefit pension plans had been 25 basis points higher or lower, with all
other assumptions held constant, the amount of FAS pension expense projected for
2022 would be lower or higher by approximately $75 million. Each year,
differences between the actual and expected long-term rate of return on plan
assets impacts the measurement of the following year's FAS expense. Every 100
basis points increase (decrease) in return during 2021 between our actual rate
of return of approximately 10.5% and our expected long-term rate of return
decreased (increased) 2022 expected FAS pension expense by approximately $15
million.
Funding Considerations
We made no contributions in 2021, compared to $1.0 billion in 2020, to our
qualified defined benefit pension plans. Funding of our qualified defined
benefit pension plans is determined in a manner consistent with CAS and in
accordance with the Employee Retirement Income Security Act of 1974 (ERISA), as
amended, along with consideration of CAS and Internal Revenue Code rules. Our
goal has been to fund the pension plans to a level of at least 80%, as
determined in accordance with ERISA. The ERISA funded status of our qualified
defined benefit pension plans was approximately 92% and 82% as of
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December 31, 2021 and 2020; which is calculated on a different basis than under
GAAP and reflects the impact of the American Rescue Plan Act of 2021 discussed
below.
Contributions to our defined benefit pension plans are recovered over time
through the pricing of our products and services on U.S. Government contracts,
including FMS, and are recognized in our cost of sales and net sales. CAS govern
the extent to which our pension costs are allocable to and recoverable under
contracts with the U.S. Government, including FMS. Pension cost recoveries under
CAS occur in different periods from when pension contributions are made in
accordance with ERISA.
We recovered $2.1 billion in 2021 and $2.0 billion in 2020 as CAS pension costs.
Amounts contributed in excess of the CAS pension costs recovered under U.S.
Government contracts are considered to be prepayment credits under the CAS
rules. Our prepayment credits were approximately $7.0 billion and $8.3 billion
at December 31, 2021 and 2020, respectively. The prepayment credit balance will
increase or decrease based on our actual investment return on plan assets.
On March 11, 2021, the President signed the American Rescue Plan Act of 2021
into law, which eased funding requirements for single-employer defined benefit
pension plans under ERISA, as amended, by restarting and extending the
amortization of funding shortfalls and extending and enhancing interest rate
stabilization percentages, among many other stimulus measures. These changes
have the effect of lowering our minimum funding requirements and CAS pension
costs from what they otherwise would have been had the measures not been
enacted.
Trends
We do not plan to make contributions to our qualified defined benefit pension
plans in 2022. We anticipate recovering approximately $1.8 billion of CAS
pension cost in 2022 allowing us to recoup a portion of our CAS prepayment
credits.
We project FAS pension income of $460 million in 2022 compared to FAS pension
income of $265 million in 2021 and a net 2022 FAS/CAS pension benefit of $2.3
billion, which is comparable to the $2.3 billion in 2021. This excludes the
noncash pension settlement charge of $1.7 billion (pretax) recognized in the
third quarter of 2021 described above for comparison year over year.
Environmental Matters
We are a party to various agreements, proceedings and potential proceedings for
environmental remediation issues, including matters at various sites where we
have been designated a potentially responsible party (PRP). At December 31, 2021
and 2020, the total amount of liabilities recorded on our consolidated balance
sheet for environmental matters was $742 million and $789 million. We have
recorded assets totaling $645 million and $685 million at December 31, 2021 and
2020 for the portion of environmental costs that are probable of future recovery
in pricing of our products and services for agencies of the U.S. Government, as
discussed below. The amount that is expected to be allocated to our non-U.S.
Government contracts or that is determined to not be recoverable under U.S.
Government contracts is expensed through cost of sales. We project costs and
recovery of costs over approximately 20 years.

We enter into agreements (e.g., administrative consent orders, consent decrees)
that document the extent and timing of some of our environmental remediation
obligations. We also are involved in environmental remediation activities at
sites where formal agreements either do not exist or do not quantify the extent
and timing of our obligations. Environmental remediation activities usually span
many years, which makes estimating the costs more judgmental due to, for
example, changing remediation technologies. To determine the costs related to
clean up sites, we have to assess the extent of contamination, effects on
natural resources, the appropriate technology to be used to accomplish the
remediation, and evolving environmental standards.

We perform quarterly reviews of environmental remediation sites and record
liabilities and receivables in the period it becomes probable that the
liabilities have been incurred and the amounts can be reasonably estimated (see
the discussion under "Environmental Matters" in "Note 1 - Organization and
Significant Accounting Policies" and "Note 15 - Legal Proceedings, Commitments
and Contingencies" included in our Notes to Consolidated Financial Statements).
We consider the above factors in our quarterly estimates of the timing and
amount of any future costs that may be required for environmental remediation
activities, which result in the calculation of a range of estimates for each
particular environmental remediation site. We do not discount the recorded
liabilities, as the amount and timing of future cash payments are not fixed or
cannot be reliably determined. Given the required level of judgment and
estimation, it is likely that materially different amounts could be recorded if
different assumptions were used or if circumstances were to change (e.g., a
change in environmental standards or a change in our estimate of the extent of
contamination).
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Under agreements reached with the U.S. Government, most of the amounts we spend
for environmental remediation are allocated to our operations as general and
administrative costs. Under existing U.S. Government regulations, these and
other environmental expenditures relating to our U.S. Government business, after
deducting any recoveries received from insurance or other PRPs, are allowable in
establishing prices of our products and services. As a result, most of the
expenditures we incur are included in our net sales and cost of sales according
to U.S. Government agreement or regulation, regardless of the contract form
(e.g. cost-reimbursable, fixed-price). We continually evaluate the
recoverability of our assets for the portion of environmental costs that are
probable of future recovery by assessing, among other factors, U.S. Government
regulations, our U.S. Government business base and contract mix, our history of
receiving reimbursement of such costs, and efforts by some U.S. Government
representatives to limit such reimbursement.
In addition to the proceedings and potential proceedings discussed above, the
California State Water Resources Control Board, a branch of the California
Environmental Protection Agency, has indicated it will work to re-establish a
maximum level of the contaminant hexavalent chromium in drinking water after a
prior standard of 10 parts per billion (ppb) was challenged and withdrawn, and
is also reevaluating its existing drinking water standard of 6 ppb for
perchlorate. The U.S. Environmental Protection Agency decided in June 2020 not
to regulate perchlorate in drinking water at the federal level, although this
decision has been challenged, and is considering whether to regulate hexavalent
chromium.
If substantially lower standards are adopted for perchlorate (in California) or
for hexavalent chromium (in California or at the federal level), we expect a
material increase in our estimates for environmental liabilities and the related
assets for the portion of the increased costs that are probable of future
recovery in the pricing of our products and services for the U.S. Government.
The amount that would be allocable to our non-U.S. Government contracts or that
is determined not to be recoverable under U.S. Government contracts would be
expensed, which may have a material effect on our earnings in any particular
interim reporting period.
We also are evaluating the potential impact of existing and contemplated legal
requirements addressing a class of chemicals known generally as per- and
polyfluoroalkyl substances (PFAS). PFAS have been used ubiquitously, such as in
fire-fighting foams, manufacturing processes, and stain- and stick-resistant
products (e.g., Teflon, stain-resistant fabrics). Because we have used products
and processes over the years containing some of those compounds, they likely
exist as contaminants at many of our environmental remediation
sites. Governmental authorities have announced plans, and in some instances have
begun, to regulate certain of these compounds at extremely low concentrations in
drinking water, which could lead to increased cleanup costs at many of our
environmental remediation sites.
As disclosed above, we may record changes in the amount of environmental
remediation liabilities as a result of our quarterly reviews of the status of
our environmental remediation sites, which would result in a change to the
corresponding amount that is probable of future recovery and a charge to
earnings. For example, if we were to determine that the liabilities should be
increased by $100 million, the corresponding amount that is probable of future
recovery would be increased by approximately $87 million, with the remainder
recorded as a charge to earnings. This allocation is determined annually, based
upon our existing and projected business activities with the U.S. Government.
We cannot reasonably determine the extent of our financial exposure at all
environmental remediation sites with which we are involved. There are a number
of former operating facilities we are monitoring or investigating for potential
future environmental remediation. In some cases, although a loss may be
probable, it is not possible at this time to reasonably estimate the amount of
any obligation for remediation activities because of uncertainties (e.g.,
assessing the extent of the contamination). During any particular quarter, such
uncertainties may be resolved, allowing us to estimate and recognize the initial
liability to remediate a particular former operating site. The amount of the
liability could be material. Upon recognition of the liability, a portion will
be recognized as a receivable with the remainder charged to earnings, which may
have a material effect in any particular interim reporting period.
If we are ultimately found to have liability at those sites where we have been
designated a PRP, we expect that the actual costs of environmental remediation
will be shared with other liable PRPs. Generally, PRPs that are ultimately
determined to be responsible parties are strictly liable for site remediation
and usually agree among themselves to share, on an allocated basis, the costs
and expenses for environmental investigation and remediation. Under existing
environmental laws, responsible parties are jointly and severally liable and,
therefore, we are potentially liable for the full cost of funding such
remediation. In the unlikely event that we were required to fund the entire cost
of such remediation, the statutory framework provides that we may pursue rights
of cost recovery or contribution from the other PRPs. The amounts we record do
not reflect the fact that we may recover some of the environmental costs we have
incurred through insurance or from other PRPs, which we are required to pursue
by agreement and U.S. Government regulation.
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Goodwill and Intangible Assets
The assets and liabilities of acquired businesses are recorded under the
acquisition method of accounting at their estimated fair values at the date of
acquisition. Goodwill represents costs in excess of fair values assigned to the
underlying identifiable net assets of acquired businesses. Intangible assets
from acquired businesses are recognized at fair value on the acquisition date
and consist of customer programs, trademarks, customer relationships, technology
and other intangible assets. Customer programs include values assigned to major
programs of acquired businesses and represent the aggregate value associated
with the customer relationships, contracts, technology and trademarks underlying
the associated program. Intangible assets are amortized over a period of
expected cash flows used to measure fair value, which ranges from five to 20
years.
Our goodwill balance was $10.8 billion at both December 31, 2021 and 2020. We
perform an impairment test of our goodwill at least annually in the fourth
quarter or more frequently whenever events or changes in circumstances indicate
the carrying value of goodwill may be impaired. Such events or changes in
circumstances may include a significant deterioration in overall economic
conditions, changes in the business climate of our industry, a decline in our
market capitalization, operating performance indicators, competition,
reorganizations of our business, U.S. Government budget restrictions or the
disposal of all or a portion of a reporting unit. Our goodwill has been
allocated to and is tested for impairment at a level referred to as the
reporting unit, which is our business segment level or a level below the
business segment. The level at which we test goodwill for impairment requires us
to determine whether the operations below the business segment constitute a
self-sustaining business for which discrete financial information is available
and segment management regularly reviews the operating results.

We may use both qualitative and quantitative approaches when testing goodwill
for impairment. For selected reporting units where we use the qualitative
approach, we perform a qualitative evaluation of events and circumstances
impacting the reporting unit to determine the likelihood of goodwill impairment.
Based on that qualitative evaluation, if we determine it is more likely than not
that the fair value of a reporting unit exceeds its carrying amount, no further
evaluation is necessary. Otherwise, we perform a quantitative impairment test.
We perform quantitative tests for most reporting units at least once every three
years. However, for certain reporting units we may perform a quantitative
impairment test every year.
To perform the quantitative impairment test, we compare the fair value of a
reporting unit to its carrying value, including goodwill. If the fair value of a
reporting unit exceeds its carrying value, goodwill of the reporting unit is not
impaired. If the carrying value of the reporting unit, including goodwill,
exceeds its fair value, a goodwill impairment loss is recognized in an amount
equal to that excess. We generally estimate the fair value of each reporting
unit using a combination of a discounted cash flow (DCF) analysis and
market-based valuation methodologies such as comparable public company trading
values and values observed in recent business acquisitions. Determining fair
value requires the exercise of significant judgments, including the amount and
timing of expected future cash flows, long-term growth rates, discount rates and
relevant comparable public company earnings multiples and relevant transaction
multiples. The cash flows employed in the DCF analysis are based on our best
estimate of future sales, earnings and cash flows after considering factors such
as general market conditions, U.S. Government budgets, existing firm orders,
expected future orders, contracts with suppliers, labor agreements, changes in
working capital, long term business plans and recent operating performance. The
discount rates utilized in the DCF analysis are based on the respective
reporting unit's weighted average cost of capital, which takes into account the
relative weights of each component of capital structure (equity and debt) and
represents the expected cost of new capital, adjusted as appropriate to consider
the risk inherent in future cash flows of the respective reporting unit. The
carrying value of each reporting unit includes the assets and liabilities
employed in its operations, goodwill and allocations of amounts held at the
business segment and corporate levels.
In the fourth quarter of 2021, we performed our annual goodwill impairment test
for each of our reporting units. The results of that test indicated that for
each of our reporting units no impairment existed. As of the date of our annual
impairment test, the fair value of our Sikorsky reporting unit exceeded its
carrying value, which included goodwill of $2.7 billion, by a margin of
approximately 30%. The fair value of our Sikorsky reporting unit can be
significantly impacted by its performance, the amount and timing of expected
future cash flows, contract terminations, changes in expected future orders,
general market pressures, including U.S. Government budgetary constraints,
discount rates, long term growth rates, and changes in U.S. (federal or state)
or foreign tax laws and regulations, or their interpretation and application,
including those with retroactive effect, along with other significant judgments.
Based on our assessment of these circumstances, we have determined that goodwill
at our Sikorsky reporting unit remains at risk for impairment should there be a
deterioration of projected cash flows of the reporting unit.

Impairment assessments inherently involve management judgments regarding a
number of assumptions such as those described above. Due to the many variables
inherent in the estimation of a reporting unit's fair value and the relative
size of our recorded goodwill, differences in assumptions could have a material
effect on the estimated fair value of one or more of our reporting units and
could result in a goodwill impairment charge in a future period.

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Acquired intangible assets deemed to have indefinite lives are not amortized,
but are subject to annual impairment testing. This testing compares carrying
value to fair value and, when appropriate, the carrying value of these assets is
reduced to fair value. In the fourth quarter of 2021, we performed our annual
impairment test, and the results of that test indicated no impairment existed.
Intangibles are amortized to expense over their applicable useful lives, ranging
from five to 20 years, based on the nature of the asset and the underlying
pattern of economic benefit as reflected by future net cash inflows. We perform
an impairment test of finite-lived intangibles whenever events or changes in
circumstances indicate their carrying value may be impaired. If events or
changes in circumstances indicate the carrying value of a finite-lived
intangible may be impaired, the sum of the undiscounted future cash flows
expected to result from the use of the asset group would be compared to the
asset group's carrying value. If the asset group's carrying amount exceed the
sum of the undiscounted future cash flows, we would determine the fair value of
the asset group and record an impairment loss in net earnings.
Recent Accounting Pronouncements
See "Note 1 - Organization and Significant Accounting Policies" included in our
Notes to Consolidated Financial Statements (under the caption "Recent Accounting
Pronouncements").
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