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 endedDecember 31, 2020 filed with theSEC onJanuary 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 bothU.S. and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of theU.S. Government . In 2021, 71% of our$67.0 billion in net sales were from theU.S. Government , either as a prime contractor or as a subcontractor (including 62% from theDepartment of Defense (DoD )), 28% were from international customers (including foreign military sales (FMS) contracted through theU.S. Government ) and 1% were fromU.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 theU.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 ourU.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 theU.S. Government and cash on hand to accelerate$2.2 billion of payments to our suppliers as ofDecember 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 atDoD facilities, includingLockheed Martin employees, must comply withDoD's process to attest to vaccination status. Pursuant to theDoD mandate, this is required for physical access toDoD buildings and leased spaces in non-DoD buildings where official agency business is performed. Additionally, until it was enjoined by a federal court inDecember 2021 , pursuant to Executive Order 14042, referred to as the federal contractor vaccine mandate, allU.S. based employees ofLockheed 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 32 -------------------------------------------------------------------------------- Table of Contents approved medical or religious accommodation byJanuary 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 ofDecember 31, 2021 , more than 96% of ourU.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 inSpecial Operations Forces Global Logistics Support Services (SOF GLSS) volume at MFC due to withdrawal ofU.S. forces fromAfghanistan . 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 onJanuary 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 byCongress , 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, aU.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 theU.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 33 -------------------------------------------------------------------------------- Table of Contents 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 OnJune 30, 2021 , theUK Ministry of Defence terminated the contract to operate theUK'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 endedDecember 31, 2021 . During the year endedDecember 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. OnDecember 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 onMarch 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 onMarch 9, 2021 . As part of the regulatory review process of the transaction, onSeptember 24, 2021 , we and Aerojet Rocketdyne each certified substantial compliance with theFederal Trade Commission's (FTC) requests for additional information, known as a "second request." OnJanuary 11, 2022 , the parties provided an updated notice of their intended closing date under their timing agreement with theFTC , whereby the parties agreed that they would not close the transaction beforeJanuary 27, 2022 , to enable the parties to discuss the scope and nature of the merchant supply and firewall commitments previously offered to theFTC byLockheed Martin . We have been advised by theFTC that its concerns regarding the transaction cannot be addressed adequately by the terms of a consent order. We believe it is highly likely that theFTC will vote to sue to block the transaction and expect they will make a decision beforeJanuary 27, 2022 . If theFTC sues to block the transaction, we could elect to defend the lawsuit within 30 days or terminate the merger agreement. If theFTC does not file a lawsuit to block the transaction beforeJanuary 27, 2022 , the parties could proceed to close the transaction, but there is no assurance that theFTC 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 beforeMarch 21, 2022 . A copy of the merger agreement between the companies can be found inLockheed Martin 's Form 8-K filing with theSecurities and Exchange Commission onDecember 21, 2020 . See Item 1A - Risk Factors for a discussion of the risks related to the proposed transaction.U.S. Government Funding OnMay 28, 2021 , the Administration submitted toCongress the President's fiscal year (FY) 2022 budget request, which proposes$753 billion for total national defense spending including$715 billion for theDoD , a 1.6% increase above the FY 2021 enacted amounts for both total national defense and theDoD (aU.S. Government fiscal year starts onOctober 1 and ends onSeptember 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. OnDecember 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 theCongress 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, theU.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 allU.S. Government activities throughFebruary 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 34 -------------------------------------------------------------------------------- Table of Contents 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, onDecember 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 theU.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 theU.S. Government and seven international partner countries and six international customers, as well as expressions of interest from other countries. TheU.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 fromGermany andTaiwan and for Long Range Anti-Ship Missiles (LRASM) fromAustralia . 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 asJapan ,Spain ,Republic of Korea , andAustralia . We have ongoing combat systems programs associated with different classes of surface combatant ships for customers inCanada ,Chile , andNew Zealand . Our Multi-Mission Surface Combatant (MMSC) program will provide surface combatant ships for international customers, such as theKingdom 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 theUnited Kingdom , theKingdom of Saudi Arabia ,Canada ,Singapore ,Australia ,Germany andFrance . We have active development, production, and sustainment support of the S-70 Black Hawk® and MH-60 Seahawk® helicopters to international customers, includingIndia ,Philippines ,Australia ,Republic of Korea ,Thailand , theKingdom of Saudi Arabia , andGreece . Additionally, inDecember 2021 , theIsraeli Ministry of Defense signed a Letter of Offer and Acceptance (LOA) to procure 12 CH-53KKing 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 ofAWE Management Limited (AWE), which operated theUnited Kingdom's nuclear deterrent program untilJune 30, 2021 . As previously announced, onJune 30, 2021 theUK 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 theU.S. Government's current inventory objective of 2,456 aircraft for theU.S. Air Force ,U.S. Marine Corps , andU.S. Navy ; commitments from our seven international partner countries and six international customers; as well as expressions of interest from other countries. 35 -------------------------------------------------------------------------------- Table of Contents During 2021, the F-35 program completed several milestones both domestically and internationally. TheU.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, theU.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 toU.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. InSeptember 2021 , the F-35 JPO and theLockheed 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 ofDecember 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 theDoD , 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 AtDecember 31, 2021 , our backlog was$135.4 billion compared with$147.1 billion atDecember 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 atDecember 31, 2021 , as compared to$102.3 billion atDecember 31, 2020 . For backlog related to each of our business segments, see "Business Segment Results of Operations" in Management's Discussion and Analysis of Financial Condition and Results of Operations. 36 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations Our operating cycle is primarily long term and involves many types of contracts for the design, development and manufacture of products and related activities with varying delivery schedules. Consequently, the results of operations of a particular year, or year-to-year comparisons of sales and profits, may not be indicative of future operating results. The following discussions of comparative results among years should be reviewed in this context. All per share amounts cited in these discussions are presented on a "per diluted share" basis, unless otherwise noted. Our consolidated results of operations were as follows (in millions, except per share data): 2021 2020 2019 Net sales$ 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
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. 37 -------------------------------------------------------------------------------- Table of Contents 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) andJoint 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. 38 -------------------------------------------------------------------------------- Table of Contents 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 inOctober 2020 andSeptember 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. 39 -------------------------------------------------------------------------------- Table of Contents 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 ourLockheed 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 ourLockheed 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 inU.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 theU.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 atDecember 31, 2021 andDecember 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 thatCongress may defer, modify, or repeal this provision, potentially with retroactive effect, and we continue to have ongoing discussions with members ofCongress , 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 toJanuary 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 byCongress , 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 theUnited 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. 40 -------------------------------------------------------------------------------- Table of Contents 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 theU.S. Government under the applicableU.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. 41 -------------------------------------------------------------------------------- Table of Contents 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
(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$34 million for the sale of our Distributed Energy Solutions business. (See "Note 1 - Organization and Significant Accounting Policies" included in our Notes to Consolidated Financial Statements for more information). Our business segments' results of operations include pension expense only as calculated underU.S. Government Cost Accounting Standards (CAS), which we refer to as CAS pension cost. We recover CAS pension and other postretirement benefit plan cost through the pricing of our products and services onU.S. Government contracts and, therefore, recognize CAS pension cost in each of our business segment's net sales and cost of sales. Our consolidated financial statements must present FAS pension and other postretirement benefit plan income calculated in accordance with FAS requirements underU.S. GAAP. The operating portion of the net FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension (expense) income and total CAS pension cost. The non-service FAS pension (expense) income components are included in non-service FAS pension (expense) income in our consolidated statements of earnings. As a result, to the extent that CAS pension cost exceeds the service cost component of FAS pension (expense) income, we have a favorable FAS/CAS operating adjustment. 42
-------------------------------------------------------------------------------- Table of Contents Our total net FAS/CAS pension adjustments, including the service and non-service cost components of FAS pension (expense) income for our qualified defined benefit pension plans, were as follows (in millions): 2021 2020
2019
Total FAS (expense) income and CAS costs FAS pension (expense) income$ (1,398) $ 118 $ (1,093) Less: CAS pension cost 2,066 1,977
2,565
Net FAS/CAS pension adjustment$ 668 $ 2,095
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
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 onAugust 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 atDecember 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 atDecember 31, 2021 , as compared to$102.3 billion atDecember 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 ourU.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. 43 -------------------------------------------------------------------------------- Table of Contents We have a number of programs that are designated as classified by theU.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 theU.S. Government as well as FMS contracted through theU.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$745 million in unfavorable items, which include reserves for various programs at RMS, government satellite programs at Space and performance matters on a sensors and global sustainment international military program at MFC. We periodically experience performance issues and record losses for certain programs. For further discussion on certain programs at Aeronautics and RMS, see "Note 1 - Organization and Significant Accounting Policies" included in our Notes to Consolidated Financial Statements for more information. 44 -------------------------------------------------------------------------------- Table of Contents Aeronautics Our Aeronautics business segment is engaged in the research, design, development, manufacture, integration, sustainment, support and upgrade of advanced military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies. Aeronautics' major programs include the F-35 Lightning II Joint Strike Fighter, C130 Hercules, F-16 Fighting Falcon and F-22 Raptor. Aeronautics' operating results included the following (in millions): 2021 2020 2019 Net sales$ 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$60 million lower in 2021 compared to 2020. Backlog Backlog decreased in 2021 compared to 2020 primarily due to prolonged negotiations for F-35 production contracts resulting in lower orders in 2021. Trends We expect Aeronautics' 2022 net sales to increase in the low-single digit range from 2021 driven by growth in F-16, F-22 and classified volume. Operating profit is expected to increase in the low-single digit range above 2021 levels. Operating profit margin for 2022 is expected to be in line with 2021 levels. Missiles and Fire Control Our MFC business segment provides air and missile defense systems; tactical missiles and air-to-ground precision strike weapon systems; logistics; fire control systems; mission operations support, readiness, engineering support and integration services; manned and unmanned ground vehicles; and energy management solutions. MFC's major programs include PAC3, THAAD, Multiple Launch Rocket System (MLRS), Hellfire,Joint Air -to-Surface Standoff Missile (JASSM), Apache fire control system, Sniper Advanced Targeting Pod (SNIPER®), Infrared Search and Track (IRST21®) andSpecial Operations Forces Global Logistics Support Services (SOF GLSS). MFC's operating results included the following (in millions): 2021 2020 2019 Net sales$ 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 45
-------------------------------------------------------------------------------- Table of Contents 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 inMarch 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$85 million higher in 2021 compared to 2020. Backlog Backlog decreased in 2021 compared to 2020 primarily due to lower orders on PAC-3 and air dominance programs. Trends We expect MFC's 2022 net sales to decrease in the low-single digit range from 2021 driven by volume on SOF GLSS and funding on a classified program. Operating profit is expected to decrease in the low-single digit range below 2021 levels. Operating profit margin for 2022 is expected to increase slightly from 2021 levels.Rotary and Mission Systems RMS designs, manufactures, services and supports various military and commercial helicopters, surface ships, sea and land-based missile defense systems, radar systems, sea and air-based mission and combat systems, command and control mission solutions, cyber solutions, and simulation and training solutions. RMS' major programs include Aegis Combat System, Littoral Combat Ship (LCS), Multi-Mission Surface Combatant (MMSC), Black Hawk® and Seahawk® helicopters, CH-53KKing Stallion heavy lift helicopter, Combat Rescue Helicopter (CRH), VH-92A helicopter, and the C2BMC program. RMS' operating results included the following (in millions): 2021 2020 2019 Net sales$ 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$80 million higher in 2021 compared 2020. 46 -------------------------------------------------------------------------------- Table of Contents Backlog Backlog decreased in 2021 compared to 2020 primarily due to lower orders on Sikorsky programs. Trends We expect RMS' 2022 net sales to decrease in the low-single digit range from 2021 driven by the delivery of a training system on an international pilot training program at RMS in 2021, as well as from lower volume on Black Hawk. Operating profit is expected to decline in the high-single digit range below 2021. Operating profit margin for 2022 is expected to be lower than 2021 levels. Space Our Space business segment is engaged in the research and development, design, engineering and production of satellites, space transportation systems, and strategic, advanced strike and defensive systems. Space provides network-enabled situational awareness and integrates complex space and ground global systems to help our customers gather, analyze, and securely distribute critical intelligence data. Space is also responsible for various classified systems and services in support of vital national security systems. Space's major programs include the Trident II D5 Fleet Ballistic Missile (FBM), Orion Multi-Purpose Crew Vehicle (Orion), Space Based Infrared System (SBIRS) and Next Generation Overhead Persistent Infrared (Next Gen OPIR) system, Global Positioning System (GPS) III, hypersonics programs and Next Generation Interceptor (NGI). Operating profit for our Space business segment includes our share of earnings for our investment in ULA, which provides expendable launch services to theU.S. Government and commercial customers. Space's operating results included the following (in millions): 2021 2020 2019 Net sales$ 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. 47 -------------------------------------------------------------------------------- Table of Contents 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 ofDecember 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. TheU.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. InMarch 2020 , theDoD increased the percentage rate for certain progress payments from 80% to 90%. Our cash flows may be affected if theU.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. InSeptember 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 ofDecember 31, 2021 . As disclosed in the "Business Overview" section above, onDecember 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 finalFTC 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. OnAugust 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 18,000U.S. retirees and beneficiaries. The group annuity contracts were purchased using assets fromLockheed Martin 's master retirement trust and no additional funding 48 -------------------------------------------------------------------------------- Table of Contents 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. TheU.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 theDoD's modification of the progress payment rate to our supply chain partners. As ofDecember 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 ofDecember 31, 2021 , we have accelerated$2.2 billion of payments to our suppliers that are due by their terms in future periods. We will continue to monitor risk driven by the pandemic and, based on our current assessment, we will continue to accelerate payments to our suppliers based on risk assessed need through the end of 2022. Consistent with our current acceleration approach, we will prioritize small and COVID-19 impacted businesses. OnMarch 11, 2021 , the President signed the American Rescue Plan Act of 2021 (ARPA) into law. ARPA eased funding rules for single-employer defined benefit pension plans by extending the amortization of funding shortfalls and enhancing interest rate stabilization, which has the effect of reducing the funding requirements for our single-employer defined benefit pension plans beginning in 2021 and reducing the amount of CAS pension costs allocated to ourU.S. Government contracts beginning in 2022. The lower pension contributions will be partially offset by lower tax deductions. The following table provides a summary of our cash flow information followed by a discussion of the key elements (in millions): 2021 2020 2019 Cash and cash equivalents at beginning of year$ 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
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 ofDecember 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 ofDecember 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 49 -------------------------------------------------------------------------------- Table of Contents 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 inJanuary 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. InSeptember 2021 , we repaid$500 million of long-term notes with a fixed interest rate of 3.35% according to their scheduled maturities. InMay 2020 , we received net cash proceeds of$1.1 billion from the issuance of senior unsecured notes. InJune 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. InOctober 2020 , we repaid$500 million of long-term notes with a fixed interest rate of 2.50% due inNovember 2020 . Capital Structure, Resources and Other AtDecember 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 ofDecember 31, 2021 and is in the form of publicly-issued notes that bear interest at fixed rates. As ofDecember 31, 2021 , we had$6 million of short-term borrowings due within one year, which are scheduled to mature in the first quarter of 2022. As ofDecember 31, 2021 , we were in compliance with all covenants contained in our debt and credit agreements. See "Note 11 - Debt" included in our Notes to Consolidated Financial Statements for more information on our long-term debt and revolving credit facilities. We actively seek to finance our business in a manner that preserves financial flexibility while minimizing borrowing costs to the extent practicable. We review changes in financial market and economic conditions to manage the types, amounts and maturities of our indebtedness. We may at times refinance existing indebtedness, vary our mix of variable-rate and fixed-rate debt or seek alternative financing sources for our cash and operational needs. 50 -------------------------------------------------------------------------------- Table of Contents Contractual Commitments AtDecember 31, 2021 , we had contractual commitments to repay debt, make payments under operating leases, settle obligations related to agreements to purchase goods and services and settle tax and other liabilities. Financing lease obligations were not material. Payments due under these obligations and commitments are as follows (in millions): Due Within Total 1 Year Total debt$ 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
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 ofDecember 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 ourU.S. Government customers. TheU.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 aU.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 ofDecember 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 51 -------------------------------------------------------------------------------- Table of Contents ventures that we do not control and may involve products and services that are dissimilar to our business activities. AtDecember 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 atDecember 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$1.7 billion atDecember 31, 2021 , in the event we fail to perform in accordance with offset requirements. While historically we have not been required to pay material penalties, resolution of offset requirements are often the result of negotiations and subjective judgments. We have entered into standby letters of credit and surety bonds issued on our behalf by financial institutions, and we have directly issued guarantees to third parties primarily relating to advances received from customers and the guarantee of future performance on certain contracts. Letters of credit and surety bonds generally are available for draw down in the event we do not perform. In some cases, we may guarantee the contractual performance of third parties such as joint venture partners. AtDecember 31, 2021 , we had the following outstanding letters of credit, surety bonds and third-party guarantees (in millions): Total Less Than Commitment 1 Year Standby letters of credit (a)$ 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. AtDecember 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. AtDecember 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 theU.S. Government and international customers (including FMS contracted through theU.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., 52 -------------------------------------------------------------------------------- Table of Contents 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 theU.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 theU.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 theU.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. 53 -------------------------------------------------------------------------------- Table of Contents 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 theU.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 underU.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 theU.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 theU.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 withU.S. Government regulations by our personnel and are subject to audit by theDefense Contract Audit Agency . 54 -------------------------------------------------------------------------------- Table of Contents 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 effectiveJanuary 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. OnAugust 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 18,000U.S. retirees and beneficiaries. The GACs were purchased using assets fromLockheed 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 theAugust 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, sinceDecember 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 requiredPension 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% atDecember 31, 2021 , compared to 2.50% atDecember 31, 2020 . We utilized a single weighted average discount rate of 2.75% when calculating our benefit obligations related to our 55 -------------------------------------------------------------------------------- Table of Contents retiree medical and life insurance plans atDecember 31, 2021 , compared to 2.375% atDecember 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 fromDecember 31, 2020 toDecember 31, 2021 resulted in a decrease in the projected benefit obligations of our qualified defined benefit pension plans of approximately$2.3 billion atDecember 31, 2021 . We utilized an expected long-term rate of return on plan assets of 6.50% atDecember 31, 2021 compared to 7.00% atDecember 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. InOctober 2021 , theSociety of Actuaries published revised longevity assumptions that refined its prior studies. We used the revised assumptions in ourDecember 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 ofDecember 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 atDecember 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 atDecember 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 atDecember 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 56 -------------------------------------------------------------------------------- Table of ContentsDecember 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 onU.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 theU.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 underU.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 atDecember 31, 2021 and 2020, respectively. The prepayment credit balance will increase or decrease based on our actual investment return on plan assets. OnMarch 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). AtDecember 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 atDecember 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 theU.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 underU.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). 57 -------------------------------------------------------------------------------- Table of Contents Under agreements reached with theU.S. Government , most of the amounts we spend for environmental remediation are allocated to our operations as general and administrative costs. Under existingU.S. Government regulations, these and other environmental expenditures relating to ourU.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 toU.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, ourU.S. Government business base and contract mix, our history of receiving reimbursement of such costs, and efforts by someU.S. Government representatives to limit such reimbursement. In addition to the proceedings and potential proceedings discussed above, theCalifornia State Water Resources Control Board , a branch of theCalifornia 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. TheU.S. Environmental Protection Agency decided inJune 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 (inCalifornia ) or for hexavalent chromium (inCalifornia 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 theU.S. Government . The amount that would be allocable to our non-U.S. Government contracts or that is determined not to be recoverable underU.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 theU.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 andU.S. Government regulation. 58 -------------------------------------------------------------------------------- Table of ContentsGoodwill 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 bothDecember 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, includingU.S. Government budgetary constraints, discount rates, long term growth rates, and changes inU.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. 59 -------------------------------------------------------------------------------- Table of Contents 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"). 60
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