Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OVERVIEW

We are a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We also provide a broad range of management, engineering, technical, scientific, logistics, system integration and cybersecurity services. We serve both U.S. and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S. Government. During the nine months ended September 26, 2021, 72% of our $49.3 billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 63% from the Department of Defense (DoD)), 27% were from international customers (including foreign military sales (FMS) contracted through the U.S. Government) and 1% were from U.S. commercial and other customers. Our main areas of focus are in defense, space, intelligence, homeland security and information technology, including cybersecurity.

The following discussion is a supplement to and should be read in conjunction with the accompanying consolidated financial statements and notes thereto and with our 2020 Form 10-K.

Renationalization of the Atomic Weapons Establishment Program

As previously announced, on June 30, 2021 the UK Ministry of Defence terminated the contract to operate the UK’s nuclear deterrent program and assumed control of the entity that manages the program (referred to as the renationalization of the Atomic Weapons Establishment (AWE program). Accordingly, the AWE program, including the entity that manages the program, is no longer included in our financial results beginning in the third quarter of 2021. Because of the renationalization, no sales or operating profit for the AWE program are included in the company’s financial results for the quarter ended September 26, 2021. However, during the first six months of 2021, AWE generated sales of $865 million and operating profit of $15 million, which are included in the company’s financial results for the nine months ended September 26, 2021. During the quarter and nine months ended September 26, 2020, AWE generated sales of $350 million and $1.0 billion and operating profit of $10 million and $30 million which are included in the company’s financial results for 2020.

Pending Acquisition Of Aerojet Rocketdyne

On December 20, 2020, we entered into an agreement to acquire Aerojet Rocketdyne Holdings, Inc. (“Aerojet Rocketdyne”) for $51.00 per share, which is net of a $5.00 per share special cash dividend Aerojet Rocketdyne paid to its stockholders on March 24, 2021. At the time of announcement, this represented a post-dividend equity value of approximately $4.6 billion, on a fully diluted as-converted basis, and a transaction value of approximately $4.4 billion after the assumption of Aerojet Rocketdyne’s then-projected net cash. We expect to finance the acquisition primarily through new debt issuances. The transaction was approved by Aerojet Rocketdyne’s stockholders on March 9, 2021, which was a closing condition. As part of the regulatory review process of the transaction, on September 24, 2021, we and Aerojet Rocketdyne each certified substantial compliance with the Federal Trade Commission’s (FTC) requests for additional information, known as a “second request”, and the parties continue to engage with the FTC. Subject to satisfactory completion of the regulatory review process and satisfaction of the other closing conditions specified in the acquisition agreement, we anticipate closing the transaction in the first quarter of 2022. As previously disclosed, under the acquisition agreement, the “outside” date that gives rise to certain termination rights will automatically be extended from December 21, 2021 to March 21, 2022 in circumstances where all conditions have been satisfied but for the receipt of regulatory approvals. Our financial results will not include Aerojet Rocketdyne’s results until the acquisition is closed.

COVID-19

The COVID-19 pandemic continues to present business challenges in 2021. During the first nine months of 2021, we continued to experience 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, and the remote work and adjusted work schedules. In the second quarter 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 third quarter of 2021. Although we have not yet returned to pre-pandemic operations, we are experiencing stabilization of our employee attendance. We continued to take measures to protect the health and safety of our employees, including measures to facilitate the provision of vaccines to our employees in line with state and local guidelines. We also continued to work with our customers and suppliers to minimize disruptions, including using

accelerated progress payments from the U.S. Government and cash on hand to accelerate $1.5 billion of payments to our suppliers as of September 26, 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 to our current acceleration approach, we will prioritize small and COVID-19 impacted businesses.

We are closely tracking developments regarding the Administration’s Path Out Of The Pandemic: COVID-19 Action Plan, announced by President Biden on September 9, 2021, including Executive Order 14042, the Safer Federal Workforce Task Force guidance issued September 24, 2021, and the DoD’s Force Health Protection Guidance. As of September 13, 2021, all personnel working at DoD facilities, including Lockheed Martin employees, must comply with DoD’s process to attest to vaccination status. Pursuant to the DoD mandate, this is required for physical access to DoD buildings and leased spaces in non-DoD buildings where official agency business is performed. Additionally, pursuant to Executive Order 14042, all U.S. based employees of Lockheed Martin and most of its suppliers, industry partners and contractors working directly or indirectly on covered government contracts, or working at a facility where those contracts are performed, administered, or otherwise supported, must be fully vaccinated, or have an approved medical or religious accommodation. This includes employees who telework. Contractors that are not working directly or indirectly on covered government contracts but who work at a facility where covered contracts are performed, administered, or otherwise supported are strongly encouraged to be fully vaccinated. We have determined the December 8, 2021 deadline for vaccination will apply to all U.S. sites. We are in the process of executing this executive order across our workforce. It is uncertain to what extent compliance with the vaccine mandate may result in workforce attrition for us or our suppliers. If attrition is significant, 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 COVID-19 related developments, including the duration of the pandemic, any potential subsequent waves of COVID-19 infection or potential new variants, the effectiveness of COVID-19 vaccines and the impacts of implementation of the vaccine mandates, and related government actions to prevent and manage disease spread, 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 business operations.

For additional risks to the corporation related to the COVID-19 pandemic, see Item 1A, Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2020 (2020 Form 10-K).

2021 Financial Outlook

We now expect our 2021 net sales to increase from 2020 to approximately $67 billion. The projected growth is driven by F-16 and classified programs at Aeronautics, increased volume within integrated air and missile defense programs at MFC, increased volume on Sikorsky helicopter programs and training and logistics solutions programs at RMS, and hypersonics development volume at Space. We continue to expect total business segment operating profit margin in 2021 to be approximately 11.0%. Cash from operations in 2021 is now expected to be greater than or equal to $8.3 billion, with no pension contributions.

It is our practice not to incorporate adjustments into our financial outlook for proposed acquisitions, divestitures, ventures, pension risk transfer transactions, changes in law, or new accounting standards until such items have been consummated, enacted or adopted. The outlook for 2021 assumes continued support and funding of our programs, known impacts of COVID-19, no additional impact to Lockheed Martin operations or the supply chain due to continued COVID-19 disruption or implementation of the vaccine executive order, continued accelerated payments to suppliers at current levels, and a statutory tax rate of 21%. Our 2021 outlook also reflects the supply chain impacts experienced in the third quarter of 2021 and the impact of net gains from investments held by the Lockheed Martin Ventures Fund recognized in the first nine months of 2021, but does not include any future gains or losses related to market volatility and changes in valuations of our investment holdings. Additionally, it assumes that there will not be significant reductions in customer budgets, changes in funding priorities and that the U.S. Government will not operate under a continuing resolution for an extended period in which new contract and program starts are restricted.

Changes in circumstances may require us to revise our assumptions, which could materially change our current estimate of 2021 net sales, segment operating margin and cash from operations.

2022 Financial Trends

We expect 2022 net sales to decline from expected 2021 levels to approximately $66 billion and 2022 total business segment operating margin to be approximately 11.0%. Cash from operations in 2022 is expected to be greater than or equal to $8.4 billion, which excludes a potential decrease in 2022 cash from operations of up to $2 billion if the provisions in the Tax Cuts and Jobs Act of 2017 that eliminate the option to immediately deduct research and development expenditures in the period incurred and requires companies to amortize such expenditures over five years is not modified or repealed by Congress before it takes effect on January 1, 2022. Although we continue to have ongoing discussions with members of Congress, both on our own and with other industries through coalitions, we have no assurance that these provisions will be modified or repealed. See “Income Tax Expense” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding potential impacts of changes in tax laws and regulations, including the treatment of research and development costs.

The preliminary outlook for 2022 also assumes continued support and funding of our programs, a statutory tax rate of 21%, known impacts of COVID-19, and the continued acceleration of supplier payments at current levels. No additional impacts to the company’s operations, supply chain, or financial results as a result of continued COVID-19 disruption or implementation of the vaccine executive order have been incorporated into our preliminary 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 remains uncertain and there can be no assurance that our underlying assumptions are correct. Additionally, the company’s preliminary outlook for 2022 assumes that there will not be significant reductions in customer budgets, changes in funding priorities and that the U.S. Government will not operate under a continuing resolution for an extended period in which new contract and program starts are restricted. It also does not incorporate the pending acquisition of Aerojet Rocketdyne Holdings, Inc. Changes in circumstances may require us to revise our assumptions, which could materially change our current estimate of 2022 net sales, business segment operating margin, and cash flows.

We currently expect a total net FAS/CAS pension benefit of approximately $2.2 billion in 2022, which includes total expected U.S. Government cost accounting standards (CAS) pension cost of approximately $1.8 billion and total expected financial accounting standards (FAS) pension income of approximately $400 million. The estimated FAS pension income amount assumes a 2.75% discount rate (the same rate used for the remeasurement of the defined benefit pension plans impacted by the pension risk transfer transaction in the third quarter of 2021), a 10.0% return on plan assets in 2021, and a 6.5% expected long-term rate of return on plan assets in future years, among other assumptions. A change of plus or minus 25 basis points to the assumed discount rate, with all other assumptions held constant, would result in an incremental increase or decrease of approximately $10 million to the estimated net 2022 FAS/CAS pension benefit. A change of plus or minus 100 basis points to the return on plan assets in 2021 only, with all other assumptions held constant, would result in an incremental increase or decrease of approximately $15 million to the estimated net 2022 FAS/CAS pension benefit. We do not expect to make required contributions to our qualified defined benefit pension plans in 2022. We will complete the annual remeasurement of our postretirement benefit plans and update our estimated 2022 net FAS/CAS pension adjustment on December 31, 2021. The final assumptions, including the actual investment return for 2021 may differ materially from those discussed above.

INDUSTRY CONSIDERATIONS

U.S. Government Funding

On May 28, 2021, the Administration submitted to Congress the President’s fiscal year (FY) 2022 budget request, which proposes $753 billion for total national defense spending including $715 billion for the DoD, a 1.6% increase above the FY 2021 enacted amounts for both total national defense and the DoD (a U.S. Government fiscal year starts on October 1 and ends on September 30). This is the first budget over the past decade that is not restricted by the discretionary spending caps under the Budget Control Act of 2011. The budget also proposes to end the use of Overseas Contingency Operations (OCO) as a separate fund to finance overseas operations.

However, the U.S. Government has not yet enacted an annual budget for FY 2022. To avert a government shutdown, on September 30, 2021, a continuing resolution funding measure was enacted to finance all U.S. Government activities through December 3, 2021. 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 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.

In addition to finalizing the FY 2022 budget, the U.S. Government continues to face a variety of fiscal and monetary policy issues, including rising debt levels. The legal limit on U.S. debt, commonly known as the debt ceiling, was reinstated on August 1, 2021 at the amount of U.S. Government debt outstanding on that date, after a two-year suspension in accordance with the Bipartisan Budget Act of 2019 (BBA-19). To avoid exceeding the new debt limit, the U.S. Department of the Treasury began to employ extraordinary measures to continue financing the U.S. Government. On October 15, 2021, the President signed legislation raising the debt limit by $480 billion to $28.9 trillion, which is estimated to provide federal borrowing authority until early December 2021. It is uncertain exactly when the debt ceiling will again become critical, and whether the Department of Treasury will again be able to use “extraordinary measures” to delay the point at which the limit would be exceeded beyond year-end to early 2022. If the debt ceiling is not raised, the U.S. Government may not be able to pay for expenditures or fulfill its funding obligations and there could be significant disruption to discretionary programs and wider financial and economic repercussions. Although we believe that key defense, intelligence and homeland security programs would receive priority in these circumstances, the effect on individual programs or Lockheed Martin cannot be predicted at this time.

See also the discussion of U.S. Government funding risks within “Item 1A, Risk Factors” included in our 2020 Form 10-K.

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 period, or period-to-period comparisons of sales and profits, may not be indicative of future operating results. The following discussions of comparative results among periods 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):

						Quarters Ended																		Nine Months Ended
						September 26, 2021									September 27, 2020									September 26, 2021									September 27, 2020
Net sales						$	16,028								$	16,495								$	49,315								$	48,366
Cost of sales						(13,726)									(14,359)									(42,676)									(41,926)
Gross profit						2,302									2,136									6,639									6,440
Other (expense) income, net						(8)									11									29									(85)
Operating profit						2,294									2,147									6,668									6,355
Interest expense						(141)									(145)									(423)									(442)
Non-service FAS pension (expense) income						(1,572)									54									(1,385)									164
Other non-operating income (expense), net						98									—									200									(29)
Earnings from continuing operations before income taxes						679									2,056									5,060									6,048
Income tax expense						(65)									(303)									(794)									(952)
Net earnings from continuing operations						614									1,753									4,266									5,096
Net loss from discontinued operations						—									(55)									—									(55)
Net earnings						$	614								$	1,698								$	4,266								$	5,041
Diluted earnings per common share
Continuing operations						$	2.21								$	6.25								$	15.32								$	18.12
Discontinued operations						—									(0.20)									—									(0.20)
Total diluted earnings per common share						$	2.21								$	6.05								$	15.32								$	17.92

Certain amounts reported in other (expense) income, 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.

Net Sales

We generate sales from the delivery of products and services to our customers. Our consolidated net sales were as follows (in millions):

						Quarters Ended												Nine Months Ended
						September 26, 2021						September 27, 2020						September 26, 2021						September 27, 2020
Products						$	13,475					$	13,869					$	41,486					$	40,607
% of total net sales						84.1		%				84.1		%				84.1		%				84.0		%
Services						2,553						2,626						7,829						7,759
% of total net sales						15.9		%				15.9		%				15.9		%				16.0		%
Total net sales						$	16,028					$	16,495					$	49,315					$	48,366

Substantially all of our contracts are accounted for using the percentage-of-completion cost-to-cost method. Under the percentage-of-completion cost-to-cost method, we record net sales on contracts over time based upon our progress towards completion on a particular contract, as well as our estimate of the profit to be earned at completion. The following discussion of material changes in our consolidated net sales should be read in tandem with the subsequent discussion of

changes in our consolidated cost of sales and our business segment results of operations because changes in our sales are typically accompanied by a corresponding change in our cost of sales due to the nature of the percentage-of-completion cost-to-cost method. Overall, our sales were negatively affected in the third quarter of 2021 because of supply chain impacts at Aeronautics, MFC and Space.

Product Sales

Product sales decreased $394 million, or 3%, during the quarter ended September 26, 2021 compared to the same period in 2020. The decrease was primarily attributable to lower product sales of approximately $185 million at MFC due to lower volume on tactical and strike missile programs (Guided Multiple Launch Rocket Systems (GMLRS) and Hellfire); $170 million at Aeronautics due to lower volume on F-35 development contracts and lower volume and risk retirements on F-35 production contracts; and $120 million at Space due to the renationalization of AWE program which is no longer included in our financial results beginning in the third quarter of 2021. These decreases were partially offset by higher product sales of approximately $80 million at RMS due to higher production volume and risk retirements on various Sikorsky helicopter programs.

Product sales increased $879 million, or 2%, during the nine months ended September 26, 2021 compared to the same period in 2020. The increase is primarily attributable to higher product sales of approximately $505 million at RMS due to higher production volume and risk retirements on various Sikorsky helicopter programs; and $310 million at Space due to higher volume on Next Generation Overhead Persistent Infrared (Next Gen OPIR) and hypersonic development programs, partially offset by the renationalization of AWE.

Service Sales

Service sales decreased $73 million, or 3%, during the quarter ended September 26, 2021 compared to the same period in 2020. The decrease was primarily attributable to lower sales of approximately $100 million at RMS due to lower sustainment volume for various Sikorsky helicopter programs.

Service sales increased $70 million, or 1%, during the nine months ended September 26, 2021 compared to the same period in 2020. The increase was primarily attributable to higher sales of approximately $105 million at Aeronautics due to higher sustainment volume for the F-35 and C-130 programs, partially offset by lower sales of $60 million at Space due to various national security space programs.

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):

						Quarters Ended																		Nine Months Ended
						September 26, 2021									September 27, 2020									September 26, 2021									September 27, 2020
Cost of sales – products						$	(11,838)								$	(12,370)								$	(36,985)								$	(36,204)
% of product sales						87.9		%							89.2		%							89.2		%							89.2		%
Cost of sales – services						(2,332)									(2,363)									(7,000)									(6,915)
% of service sales						91.3		%							90.0		%							89.4		%							89.1		%
Severance and restructuring charges						—									—									(36)									—
Other unallocated, net						444									374									1,345									1,193
Total cost of sales						$	(13,726)								$	(14,359)								$	(42,676)								$	(41,926)

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. Overall, our cost of sales in the third quarter of 2021 were reduced by the supply chain impacts discussed above that negatively affected sales. 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.

Product Costs

Product costs decreased $532 million, or 4%, during the quarter ended September 26, 2021 compared to the same period in 2020. The decrease was primarily attributable to lower product costs of approximately $205 million at MFC due to lower volume on tactical and strike missile programs (GMLRS and Hellfire); approximately $185 million at Space due to the renationalization of AWE program; and approximately $170 million at Aeronautics due to lower volume on F-35 development and production contracts.

Product costs increased $781 million, or 2%, during the nine months ended September 26, 2021 compared to the same period in 2020. The decrease was primarily attributable to higher product costs of approximately $360 million at RMS due to higher production volume for various Sikorsky helicopter programs and higher net sales for training and logistics solutions programs; about $220 million at Space due to higher volume for hypersonic development and Next Gen OPIR programs, partially offset by a lower product costs due to the renationalization of the AWE program; and approximately $165 million at Aeronautics due to higher volume on classified contracts, higher production volume on the F-16, partially offset by lower development volume on the F-35 program.

Service Costs

Service costs decreased $31 million, or 1%, during the quarter ended September 26, 2021 compared to the same period in 2020. The decrease was primarily attributable to lower sustainment volume for Sikorsky helicopter programs at RMS.

Service costs increased $85 million, or 1%, during the nine months ended September 26, 2021 compared to the same period in 2020. The increase was primarily attributable to higher service costs of approximately $60 million at RMS due to higher volume for various integrated warfare systems and sensors (IWSS) programs; and about $45 million at Aeronautics due to higher sustainment volume for the F-35 and C-130 programs.

Severance and Restructuring Charges

During the first quarter of 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. See “Note 11 - Other” included in our Notes to Consolidated Financial Statements for additional information.

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 segment’s 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 $444 million and $1.3 billion during the quarter and nine months ended September 26, 2021, compared to $374 million and $1.2 billion during the quarter and nine months ended September 27, 2020. Other unallocated, net during the quarter and nine months ended September 26, 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.

Other (Expense) Income, Net

Other (expense) income, net generally includes earnings generated by equity method investees. Other expense, net was $8 million during the quarter ended September 26, 2021, compared to other income, net of $11 million during the quarter ended September 27, 2020. Other income, net was $29 million during the nine months ended September 26, 2021, compared to other expense, net of $85 million during the nine months ended September 27, 2020. Other (expense) income, net during the quarter and nine months ended September 26, 2021 included lower earnings generated by equity method investments. Additionally, other expense, net during the nine months ended September 27, 2020 included a noncash impairment charge of $128 million ($96 million, or $0.34 per share, after-tax) related to our previous investment

in AMMROC, which was sold in 2020. See “Note 11 - Other” included in our Notes to Consolidated Financial Statements for additional information.

Non-Service FAS Pension (Expense) Income

Non-service FAS pension (expense) income for the quarter and nine months ended September 26, 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 7 -Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements for additional information.

Other Non-operating Income (Expense), Net

Other non-operating income (expense), net primarily includes gains or losses related to changes in the fair value of strategic investments in early stage companies made by our Lockheed Martin Ventures Fund. See “Note 11 - Other” included in our Notes to Consolidated Financial Statements for additional information. During the quarter and nine months ended September 26, 2021, other non-operating income, net was $98 million and $200 million. Other non-operating expense was not significant during the quarter ended September 27, 2020 and $29 million during nine months ended September 27, 2020. The increase during the quarter and nine months ended September 26, 2021 was primarily due to increases in the fair value of investments held in our Lockheed Martin Ventures Fund.

Income Tax Expense

Our effective income tax rate was 9.6% and 15.7% for the quarter and nine months ended September 26, 2021 and 14.7% and 15.7% for the quarter and nine months ended September 27, 2020. The rate for the third quarter of 2021 is lower than the third quarter of 2020 primarily due to lower pretax earnings resulting from a noncash pension settlement charge of $1.7 billion, which reduced the tax expense by approximately $355 million. The rates for both periods benefited from tax deductions for foreign derived intangible income, the research and development tax credit, and dividends paid to the corporation's defined contribution plans with an employee stock ownership plan feature.

Changes in U.S. (federal or state) or foreign tax laws and regulations, or their interpretation and application, including those with retroactive effect, including the amortization for research or experimental expenditures, could significantly impact our provision for income taxes, the amount of taxes payable, our deferred tax asset and liability balances, and stockholders’ equity. Recent proposals to increase the U.S. corporate income tax rate would require us to increase our net deferred tax assets upon enactment of new tax legislation, with a corresponding material, one-time, noncash decrease in income tax expense, but our income tax expense and payments would likely be materially increased in subsequent years. Our net deferred tax assets were $2.7 billion and $3.5 billion at September 26, 2021 and December 31, 2020, based on a 21% federal statutory income tax rate, and primarily relate to our postretirement benefit plans. If legislation increasing the federal statutory income tax rate to 26.5% or 28% had been enacted at September 26, 2021, our net deferred tax assets would have been increased by approximately $700 million or $900 million and we would have recorded a corresponding one-time, noncash increase in income tax benefit of approximately $700 million or $900 million. In addition to future changes in tax laws, the amount of net deferred tax assets will change periodically based on several factors, including the measurement of our postretirement benefit plan obligations and actual cash contributions to our postretirement benefit plans.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. While it is possible that Congress may modify or repeal this provision before it takes effect and we continue to have ongoing discussions with members of Congress, both on our own and with other industries through coalitions, we have no assurance that these provisions will be modified or repealed. Furthermore, we are continuing to work with our advisors to refine our legal interpretation of this provision prior to implementation in 2022. If these provisions are not repealed, they would materially decrease our expected cash from operations in 2022 by up to $2.0 billion and increase our net deferred tax assets by a similar amount. The largest impact would be to 2022 cash from operations, which would depend on the amount of research and development expenses paid or incurred in 2022 among other factors. The impact, however, would continue over the five year amortization period but would decrease over the period and be immaterial in year six.

We are regularly under audit or examination by tax authorities, including foreign tax authorities (including in, amongst others, Australia, Canada, India, Italy, Japan, Poland, and the United Kingdom). The final determination of tax audits and any related litigation could similarly result in unanticipated increases in our tax expense and affect profitability and cash flows.

Net Earnings from Continuing Operations

We reported net earnings from continuing operations of $614 million ($2.21 per share) and $4.3 billion ($15.32 per share) during the quarter and nine months ended September 26, 2021, compared to $1.8 billion ($6.25 per share) and $5.1 billion ($18.12 per share) during the quarter and nine months ended September 27, 2020. Net earnings from continuing operations and earnings per share for both quarter and nine months ended September 26, 2021 were affected by 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 for the nine months ended September 26, 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 3.3 million and 2.8 million weighted average common shares outstanding during the quarter and nine months ended September 26, 2021, compared to the same periods in 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 on Discontinued Operations

During the third quarter of 2020, we recognized a $55 million ($0.20 per share) non-cash charge resulting from the resolution of certain tax matters related to the former IS&GS business divested in 2016.

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.

Business segment operating profit also excludes the FAS/CAS pension operating adjustment, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. Government under the applicable U.S. Government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance such as a portion of management and administration costs, legal fees and settlements, environmental costs, stock-based compensation expense, retiree benefits, significant severance actions, significant asset impairments, gains or losses from divestitures, and other miscellaneous corporate activities.

Excluded items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See “Note 11 - Other” (under the caption “Changes in Estimates”) included in our Notes to Consolidated Financial Statements for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.

Summary operating results for each of our business segments were as follows (in millions):

						Quarters Ended																		Nine Months Ended
						September 26, 2021									September 27, 2020									September 26, 2021									September 27, 2020
Net sales
Aeronautics						$	6,568								$	6,680								$	19,621								$	19,552
Missiles and Fire Control						2,781									2,971									8,474									8,391
Rotary and Mission Systems						3,980									3,998									12,329									11,783
Space						2,699									2,846									8,891									8,640
Total net sales						$	16,028								$	16,495								$	49,315								$	48,366
Operating profit
Aeronautics						$	714								$	705								$	1,979								$	2,116
Missiles and Fire Control						413									405									1,210									1,171
Rotary and Mission Systems						459									404									1,350									1,209
Space						264									248									826									781
Total business segment operating profit						1,850									1,762									5,365									5,277
Unallocated items
FAS/CAS operating adjustment						491									469									1,469									1,407
Stock-based compensation						(62)									(67)									(189)									(182)
Severance and restructuring charges						—									—									(36)									—
Other, net						15									(17)									59									(147)
Total unallocated items						444									385									1,303									1,078
Total consolidated operating profit						$	2,294								$	2,147								$	6,668								$	6,355

We recover CAS pension and other postretirement benefit plan cost through the pricing of our products and services on U.S. Government contracts and, therefore, recognize CAS pension cost in each of our business segment’s net sales and cost of sales. Our consolidated financial statements must present FAS pension and other postretirement benefit plan income calculated in accordance with FAS requirements under U.S. GAAP. The operating portion of the net FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension (expense) income and total CAS pension cost. The non-service FAS pension (expense) income components are included in non-

service FAS pension (expense) income in our consolidated statements of earnings. As a result, to the extent that CAS pension cost exceeds the service cost component of FAS pension (expense) income, we have a favorable FAS/CAS operating adjustment.

Our total net FAS/CAS pension adjustment for the quarters and nine months ended September 26, 2021 and September 27, 2020, 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):

						Quarters Ended																		Nine Months Ended
						September 26, 2021									September 27, 2020									September 26, 2021									September 27, 2020
Total FAS (expense) income and CAS costs
FAS pension (expense) income						$	(1,598)								$	29								$	(1,465)								$	88
Less: CAS pension cost						517									494									1,549									1,483
Net FAS/CAS pension adjustment						$	(1,081)								$	523								$	84								$	1,571
Service and non-service cost reconciliation
FAS pension service cost						$	(26)								$	(25)								$	(80)								$	(76)
Less: CAS pension cost						517									494									1,549									1,483
FAS/CAS operating adjustment						491									469									1,469									1,407
Non-service FAS pension (expense) income						(1,572)									54									(1,385)									164
Net FAS/CAS pension adjustment						$	(1,081)								$	523								$	84								$	1,571

The decrease in the net FAS/CAS pension adjustment during the quarter and nine months ended September 26, 2021, was principally driven by a noncash, non-operating pension settlement charge of $1.7 billion ($1.3 billion, or $4.72 per share, after-tax) in connection with the transfer of $4.9 billion of our gross defined benefit pension obligations and related plan assets to an insurance company on August 3, 2021. See “Note 7 - Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements.

Management evaluates performance on our contracts by focusing on net sales and operating profit and not by type or amount of operating expense. Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing the business. This approach is consistent throughout the life cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance on our contracts in a similar manner through their completion.

We regularly provide customers with reports of our costs as the contract progresses. The cost information in the reports is accumulated in a manner specified by the requirements of each contract. For example, cost data provided to a customer for a product would typically align to the subcomponents of that product (such as a wing-box on an aircraft) and for services would align to the type of work being performed (such as aircraft sustainment). Our contracts generally allow for the recovery of costs in the pricing of our products and services. Most of our contracts are bid and negotiated with our customers under circumstances in which we are required to disclose our estimated total costs to provide the product or service. This approach for negotiating contracts with our U.S. Government customers generally allows for recovery of our actual costs plus a reasonable profit margin. We also may enter into long-term supply contracts for certain materials or components to coincide with the production schedule of certain products and to ensure their availability at known unit prices.

Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract and assess the effects of those risks on our estimates of total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks related to the technical, schedule and cost aspects of the contract, which decreases the estimated total costs to

complete the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate.

We have a number of programs that are designated as classified by the U.S. Government which cannot be specifically described. The operating results of these classified programs are included in our consolidated and business segment results and are subjected to the same oversight and internal controls as our other programs.

Our net sales are primarily derived from long-term contracts for products and services provided to the U.S. Government as well as FMS contracted through the U.S. Government. We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the percentage-of-completion cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. In the third quarter of 2021, lower supply chain activity negatively affected our net sales for the period.

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 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 current period 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 $580 million and $1.5 billion during the quarters and nine months ended September 26, 2021 and $415 million and $1.4 billion during the quarters and nine months ended September 27, 2020.

We periodically experience performance issues and record losses for certain programs. For further discussion on the programs at Aeronautics, RMS and MFC, see “Note 11 - Other” included in our Notes to Consolidated Financial Statements.

Aeronautics

Summary operating results for our Aeronautics business segment were as follows (in millions):

						Quarters Ended																		Nine Months Ended
						September 26, 2021									September 27, 2020									September 26, 2021									September 27, 2020
Net sales						$	6,568								$	6,680								$	19,621								$	19,552
Operating profit						714									705									1,979									2,116
Operating margin						10.9		%							10.6		%							10.1		%							10.8		%

Aeronautics’ net sales during the quarter ended September 26, 2021 decreased $112 million, or 2%, compared to the same period in 2020. The decrease was primarily attributable to lower net sales of approximately $220 million for the F-35 program due to lower volume on development contracts and lower volume and risk retirements on production contracts. This decrease was partially offset by an increase in sales of about $35 million for the F-16 program due to higher production volume that was partially offset by lower sustainment volume; and approximately $30 million for classified development contracts due to higher risk retirements.

Aeronautics’ operating profit during the quarter ended September 26, 2021 increased $9 million, or 1%, compared to the same period in 2020. The increase was primarily attributable to higher operating profit of approximately $45 million for classified development contracts due to higher risk retirements; about $25 million for the C-130 program primarily due to higher risk retirements on sustainment activities; and about $15 million for the F-16 program due to higher risk retirements on sustainment contracts and higher production volume. These increases were partially offset by lower operating profit of approximately $75 million for the F-35 program due to lower risk retirements and volume on production and development contracts that were partially offset by higher risk retirements on sustainment contracts. Adjustments not related to volume, including net profit booking rate adjustments, were $15 million higher in the third quarter of 2021 compared to the same period in 2020.

Aeronautics’ net sales during the nine months ended September 26, 2021 were comparable to the same period in 2020. Net sales increased approximately $180 million on classified development contracts due to higher volume; and about $155 million for the F-16 program due to higher volume and risk retirements on production contracts that was partially offset by lower sustainment volume. These increases were offset by a decrease of approximately $195 million for the F-35 program primarily due to lower volume and risk retirements on development contracts that was partially offset by higher risk retirements and volume on sustainment contracts and higher volume on production contracts; and about $135 million for lower sustainment volume for the F-22 program.

Aeronautics’ operating profit during the nine months ended September 26, 2021 decreased $137 million, or 6%, compared with the same period in 2020. Operating profit decreased approximately $175 million for classified contracts primarily due to a $225 million loss in the second quarter of 2021 for performance issues experienced on a classified program partially offset by higher risk retirements in the third quarter of 2021; and about $75 million for the F-35 program due to lower risk retirements and volume on development and production contracts that was offset by higher risk retirements and volume on sustainment contracts. These decreases were partially offset by an increase of approximately $55 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 $140 million lower during the nine months ended September 26, 2021 compared to the same period in 2020.

We currently expect Aeronautics’ 2021 net sales to increase in the low-single digit percentage range from 2020 levels driven by increased volume on F-16 and classified programs. Operating profit is expected to be slightly lower than 2020 levels. Operating profit margin for 2021 is expected to be lower than 2020 levels.

Missiles and Fire Control

Summary operating results for our MFC business segment were as follows (in millions):

						Quarters Ended																		Nine Months Ended
						September 26, 2021									September 27, 2020									September 26, 2021									September 27, 2020
Net sales						$	2,781								$	2,971								$	8,474								$	8,391
Operating profit						413									405									1,210									1,171
Operating margin						14.9		%							13.6		%							14.3		%							14.0		%

MFC’s net sales during the quarter ended September 26, 2021 decreased $190 million, or 6%, compared to the same period in 2020. The decrease was primarily attributable to lower net sales of approximately $130 million for tactical and strike missile programs due to lower volume (GMLRS and Hellfire); and a net decrease of about $50 million for sensors and global sustainment programs due to lower volume (primarily Sniper Advanced Targeting Pod (SNIPER®) and Infrared Search and Track (IRST)) that was partially offset by higher risk retirements due to close out activities related to the Warrior Capability Sustainment Program (Warrior) that was terminated by the customer in March 2021.

MFC’s operating profit during the quarter ended September 26, 2021 increased $8 million, or 2% compared to the same period in 2020. Operating profit increased approximately $20 million on integrated air and missile defense programs due to higher risk retirements (primarily PAC-3), and about $15 million for sensors and global sustainment programs primarily due to the reversal of a portion of previously recorded losses on the Warrior program in the third quarter of 2021 that are no longer expected to be incurred as a result of the program being terminated that was partially offset by lower volume (primarily IRST and SNIPER). These increases were offset by charges of approximately $25 million for performance issues on an energy program. Operating profit for tactical and strike missile programs was comparable as lower volume (primarily GMLRS and Hellfire) was offset by higher risk retirements (primarily Hellfire). Adjustments not related to volume, including net profit booking rate adjustments, were approximately $70 million higher in the third quarter of 2021 compared to the same period in 2020.

MFC’s net sales during the nine months ended September 26, 2021 increased $83 million, or 1%, compared to the same period in 2020. The increase was primarily attributable to higher net sales of approximately $140 million for integrated air and missile defense programs due to higher volume and risk retirements (primarily PAC-3). This increase in net sales was partially offset by approximately $50 million for sensors and global sustainment programs due to lower volume (primarily SNIPER, IRST and Apache) that was partially offset by higher risk retirements due to close out activities related to Warrior and higher volume (primarily SOF GLSS).

MFC’s operating profit during the nine months ended September 26, 2021 increased $39 million, or 3%, compared to the same period in 2020. Operating profit increased approximately $40 million for integrated air and missile defense programs due to higher risk retirements and volume (primarily PAC-3) that was offset by lower risk retirements (primarily THAAD); and about $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 are no longer expected to be incurred as a result of the program being terminated that was partially offset by lower volume and risk retirements (SNIPER and Apache). These increases were partially offset by approximately $25 million of charges due to performance issues on an energy program. Adjustments not related to volume, including net profit booking rate adjustments, were approximately $80 million higher during the nine months ended September 26, 2021 compared to the same period in 2020.

We expect MFC’s 2021 net sales to increase in the low-single digit percentage range from 2020 levels driven by higher volume in the integrated air and missile defense business, primarily PAC-3. Operating profit is expected to increase in the low-to-mid-single digit percentage range above 2020 levels. Operating profit margin for 2021 is expected to be higher than 2020 levels.

Rotary and Mission Systems

Summary operating results for our RMS business segment were as follows (in millions):

						Quarters Ended																		Nine Months Ended
						September 26, 2021									September 27, 2020									September 26, 2021									September 27, 2020
Net sales						$	3,980								$	3,998								$	12,329								$	11,783
Operating profit						459									404									1,350									1,209
Operating margin						11.5		%							10.1		%							10.9		%							10.3		%

RMS’ net sales during the quarter ended September 26, 2021 were comparable with the same period in 2020. Net sales decreased by approximately $50 million for IWSS programs due to lower volume on radar surveillance systems (primarily TPQ-53) and the Littoral Combat Ship (LCS) program; about $45 million for various C6ISR (command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance) programs due to lower volume; and about $30 million for various training and logistics solutions programs primarily due to lower risk retirements and volume. These decreases were offset by higher net sales of approximately $120 million for Sikorsky helicopter programs due to higher risk retirements (Black Hawk, Seahawk and CH-53-K) and higher production volume (Combat Rescue Helicopter (CRH) and Seahawk).

RMS’ operating profit during the quarter ended September 26, 2021 increased $55 million, or 14%, compared to the same period in 2020. The increase was primarily attributable to higher operating profit of approximately $75 million for Sikorsky helicopter programs due to higher risk retirements (Black Hawk, Seahawk and CH-53K) and higher production volume (CRH). This increase was partially offset by a decrease of approximately $20 million for training and logistics solutions programs primarily due to lower risk retirements and volume; and about $15 million for IWSS programs due to charges that were $30 million higher on a ground-based radar program partially offset by higher risk retirements on Vertical Launching System (VLS) programs. Operating profit for C6ISR programs was comparable as lower volume was offset by lower charges on certain programs (primarily undersea combat systems programs). Adjustments not related to volume, including net profit booking rate adjustments, were $50 million higher in the third quarter of 2021 compared to the same period in 2020.

RMS’ net sales during the nine months ended September 26, 2021 increased $546 million, or 5%, compared to the same period in 2020. The increase was attributable to higher net sales of $520 million for Sikorsky helicopter programs due to higher production volume (CH-53K, Black Hawk, CRH, and VH-92A) and higher risk retirements (Black Hawk and CRH); and about $270 million for training and logistics solutions 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 $135 million for various C6ISR programs due to lower volume; and about $110 million for 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 during the nine months ended September 26, 2021 increased $141 million, or 12%, compared to the same period in 2020. Operating profit increased approximately $110 million for Sikorsky helicopter programs due to higher production volume and risk retirements (Black Hawk), and higher production volume (CH-53K and CRH); and about $10 million for IWSS programs due to charges that were lower on a ground-based radar program and higher volume on the CSC program, partially offset by lower volume and risk retirements on the LCS program. Operating profit for C6ISR programs was comparable due to lower volume was offset by lower charges on certain programs (primarily undersea combat systems programs). Operating profit for training and logistics solutions programs was comparable due to higher volume being offset by lower risk retirements. Adjustments not related to volume, including net profit booking rate adjustments, were $70 million higher during the nine months ended September 26, 2021 compared to the same period in 2020.

We currently expect RMS’ 2021 net sales to increase in the mid-single digit percentage range from 2020 levels driven by higher volume on Sikorsky helicopter programs and TLS programs. Operating profit is expected to increase in the low-double digit percentage range above 2020 levels. Operating profit margin for 2021 is expected to be higher than 2020 levels.

Space

Summary operating results for our Space business segment were as follows (in millions):

						Quarters Ended																		Nine Months Ended
						September 26, 2021									September 27, 2020									September 26, 2021									September 27, 2020
Net sales						$	2,699								$	2,846								$	8,891								$	8,640
Operating profit						264									248									826									781
Operating margin						9.8		%							8.7		%							9.3		%							9.0		%

Space’s net sales during the quarter ended September 26, 2021 decreased $147 million, or 5%, compared to the same period in 2020. The decrease was primarily attributable to lower net sales of approximately $340 million due to the renationalization of the Atomic Weapons Establishment (AWE) program, which is no longer included in the company's financial results beginning in the third quarter of 2021. This decrease was partially offset by higher sales of about $140 million for strategic and missile defense programs due to higher volume (hypersonic development, Fleet Ballistic Missile (FBM) and Next Generation Interceptor (NGI) programs); and about $70 million for national security space programs due to higher risk retirements and volume (primarily Next Gen OPIR).

Space’s operating profit during the quarter ended September 26, 2021 increased $16 million, or 6%, compared to the same period in 2020. The increase was primarily attributable to higher operating profit of approximately $30 million for strategic and missile defense programs due to higher risk retirements (primarily FBM programs) and higher volume (primarily hypersonic development). This increase was partially offset by a decrease of approximately $10 million due to the renationalization of the AWE program. Operating profit for national security space programs was comparable as higher volume and risk retirements (primarily Next Gen OPIR) were offset by a charge of $45 million on a commercial ground solutions program. Adjustments not related to volume, including net profit booking rate adjustments, were $30 million higher in the third quarter of 2021 compared to the same period in 2020.

Space’s net sales during the nine months ended September 26, 2021 increased $251 million, or 3%, compared to the same period in 2020. The increase was primarily attributable to higher net sales of approximately $235 million for strategic and missile defense programs due to higher volume (primarily hypersonic development and NGI programs); and about $170 million for national security space programs due to higher volume and risk retirements (primarily Next Gen OPIR). These increases were partially offset by a decrease of approximately $155 million as a result of the renationalization of the AWE program.

Space’s operating profit during the nine months ended September 26, 2021 increased $45 million, or 6%, compared to the same period in 2020. Operating profit increased approximately $25 million for commercial civil space programs due to higher risk retirements (primarily space transportation programs); about $25 million for strategic and missile defense programs due to higher volume (primarily hypersonic development programs); and about $15 million for national security space programs to higher risk retirements (primarily SBIRS) and higher volume (primarily Next Gen OPIR), offset by charges of $70 million on a commercial ground solutions program and lower risk retirements (primarily Advanced Extremely High Frequency (AEHF). These increases were partially offset by a decrease of approximately $15 million due to the renationalization of the AWE program. Adjustments not related to volume, including net profit booking rate adjustments, were $90 million higher during the nine months ended September 26, 2021 compared to the same period in 2020.

Total equity earnings (primarily United Launch Alliance (ULA)) recognized in Space's operating profit were not significant during the quarter ended September 26, 2021 and 2020; and represented $35 million, or 4%, of Space’s operating profit during the nine months ended September 26, 2021, compared to approximately $45 million, or 6%, during the nine months ended September 26, 2020.

We currently expect Space’s 2021 net sales to be comparable to 2020 levels driven by higher volume on strategic and missile defense programs (primarily hypersonics development and NGI programs) and on national security space programs (primarily Next Gen OPIR), offset by lower volume at AWE due to the UK Ministry of Defence’s renationalization of the program on June 30, 2021. Operating profit is expected to be slightly lower than 2020 levels driven by lower equity earnings from the company’s investment in ULA. Operating profit margin for 2021 is also expected to be slightly lower than 2020 levels.

FINANCIAL CONDITION

Liquidity and Cash Flows

At September 26, 2021, we had cash and cash equivalents of $2.7 billion. Our principal source of liquidity is our cash from operations. However, we also have access to additional financial resources as described in the “Capital Resources” section below.

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.

On August 3, 2021, we purchased group annuity contracts to transfer $4.9 billion of gross defined benefit pension obligations and related plan assets to an insurance company for approximately 18,000 U.S. retirees and beneficiaries. The group annuity contracts were purchased using assets from Lockheed Martin’s master retirement trust and no additional funding contribution was required by us. See “Note 7 - Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements. 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 impact on our cash flows, partially due to supplier delays. The U.S. Government has taken certain actions and enacted legislation to mitigate the impacts of COVID-19 on public health, the economy, state and local governments, individuals, and businesses. In March 2020, the U.S. Department of Defense (DoD) increased the rate for certain progress payments from 80% to 90% for costs incurred and work performed on relevant contracts. Since the pandemic began, Lockheed Martin has remained committed to flowing down the benefits received from the DoD’s modification of the progress payment rate to our supply chain partners. As of September 26, 2021, we have received approximately $1.5 billion of net accelerated progress payments, the majority of which were in 2020. We continue to use accelerated progress payments and cash on hand to accelerate payments to our suppliers. As of September 26, 2021, we have accelerated $1.5 billion of payments to our suppliers that are due by their terms in future periods. We will continue to monitor 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 to our current acceleration approach, we will prioritize small and COVID-19 impacted businesses.

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. Pursuant to the CARES Act, U.S. companies could defer the employer’s portion of social security taxes between March 27, 2020 and December 31, 2020, which allowed us to defer cash outlays of $460 million in 2020, of which approximately half will be paid in the fourth quarter of 2021 and approximately half will be paid in the fourth quarter of 2022. Section 3610 of the CARES Act also authorized the U.S. Government to reimburse qualifying contractors for any paid leave, including sick leave, provided to employees during the pandemic to keep its workforce in a ready state. Section 3610 of the CARES Act expired on September 30, 2021 and has not been extended. While that option is currently unavailable, we continue to monitor other legislation that may reinstate Section 3610 and work with our government customers to seek recovery of COVID-19-related costs through other contract provisions.

On March 11, 2021, the President signed the American Rescue Plan Act of 2021 (ARPA) into law. ARPA eased funding rules for single-employer defined benefit pension plans by extending the amortization of funding shortfalls and enhancing interest rate stabilization, which has the effect of reducing the funding requirements for our single-employer defined benefit pension plans beginning in 2021 and reducing the amount of CAS pension costs allocated to our U.S. Government contracts beginning in 2022. The lower pension contributions will be partially offset by lower tax deductions.

As disclosed in the “Business Overview” section above, on December 20, 2020, we entered into an agreement to acquire Aerojet Rocketdyne for approximately $4.4 billion after the assumption of Aerojet Rocketdyne’s then-projected net cash. Subject to satisfactory completion of the regulatory review process and satisfaction of the other closing conditions specified in the acquisition agreement, we anticipate closing the transaction in the first quarter of 2022. We expect to finance the acquisition primarily through new debt issuances.

Currently, we expect our cash from operations will continue to be sufficient to support our operations and anticipated capital expenditures and independent research and development for the foreseeable future. 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.

The following table provides a summary of our cash flow information followed by a discussion of the key elements (in millions):

						Nine Months Ended
						September 26, 2021									September 27, 2020
Cash and cash equivalents at beginning of year						$	3,160								$	1,514
Operating activities
Net earnings						4,266									5,041
Noncash adjustments						2,889									1,292
Changes in working capital						(2,176)									(564)
Other, net						(26)									607
Net cash provided by operating activities						4,953									6,376
Net cash used for investing activities						(619)									(1,017)
Net cash used for financing activities						(4,767)									(3,288)
Net change in cash and cash equivalents						(433)									2,071
Cash and cash equivalents at end of period						$	2,727								$	3,585

Operating Activities

Net cash provided by operating activities during the nine months ended September 26, 2021 decreased $1.4 billion compared to the same period in 2020. The decrease was primarily due to lower working capital, higher tax payments and a decrease in net earnings. The $1.6 billion decrease in cash flows related to working capital (defined as receivables, contract assets, and inventories less accounts payable and contract liabilities) was primarily attributable to timing of production and billing cycles affecting contract assets and contract liabilities (primarily the F-35 and F-16 programs in our Aeronautics business segment and Sikorsky helicopter programs in our RMS business segment), partially offset by timing of cash payments for accounts payable and liquidation of inventories (primarily the delivery of an international pilot training system in our RMS business segment). During the nine months ended September 26, 2021, we paid federal and foreign income taxes and employer portion of payroll taxes of $974 million and $578 million, compared to $865 million and $236 million during the nine months ended September 27, 2020. The increase in the employer portion of payroll taxes was due to the deferral of $315 million of payments to the fourth quarters of 2021 and 2022 pursuant to the CARES Act during the nine months ended September 27, 2020. In addition, we accelerated $1.5 billion of payments to suppliers as of September 26, 2021 that were due in the fourth quarter of 2021, compared to $1.8 billion of payments to suppliers as of September 27, 2020 that were due in the fourth quarter of 2020.

Investing Activities

Net cash used for investing activities during the nine months ended September 26, 2021 decreased $398 million compared to the same period in 2020. The decrease in cash used for investing activities is due to the receipt of the first two installment payments totaling $231 million in the first nine months of 2021 from the sale of our ownership interest in the Advanced Military Maintenance, Repair and Overhaul Center (AMMROC) joint venture. Capital expenditures totaled $915 million and $1.0 billion during the nine months ended September 26, 2021 and September 27, 2020. The majority of our capital expenditures were for equipment and facilities infrastructure that generally are incurred to support new and existing programs across all of our business segments. We also incur capital expenditures for information technology to support programs and general enterprise information technology infrastructure, inclusive of costs for the development or purchase of internal-use software.

Financing Activities

Net cash used for financing activities was $4.8 billion during the nine months ended September 26, 2021, compared to $3.3 billion during the same period in 2020.

During the nine months ended September 26, 2021 and September 27, 2020, we paid dividends totaling $2.2 billion ($7.80 per share) and $2.0 billion ($7.20 per share).

We repurchased 5.6 million shares of our common stock for $2.0 billion during the nine months ended September 26, 2021, compared to 3.0 million shares of our common stock for $1.1 billion during the nine months ended September 27, 2020.

In September 2021, we repaid $500 million of long-term notes with a fixed interest rate of 3.35% according to their scheduled maturities.

In May 2020, we received net cash proceeds of $1.1 billion from issuance of senior unsecured notes. In June 2020, we used the net proceeds from the offering plus cash on hand to redeem $750 million of notes due in 2020 and $400 million of notes due in 2021, each at their redemption price.

Capital Resources

At September 26, 2021, we held cash and cash equivalents of $2.7 billion that was generally available to fund ordinary business operations without significant legal, regulatory, or other restrictions.

At September 26, 2021, we had a $3.0 billion revolving credit facility (the Revolving Credit Facility) with various banks with an expiration date of August 24, 2026 that is available for general corporate purposes including supporting commercial paper borrowings. We entered into this Revolving Credit Facility effective August 24, 2021 and concurrently terminated our existing $2.5 billion revolving credit facility. We may request and the banks may grant, at their discretion, an increase in the borrowing capacity under the Revolving Credit Facility of up to an additional $500 million. There were no borrowings outstanding under the Revolving Credit Facility at September 26, 2021.

We have agreements in place with financial institutions to provide for the issuance of commercial paper. The outstanding balance of commercial paper can fluctuate daily and the amount outstanding during the period may be greater than or less than the amount reported at the end of the period. There were no commercial paper borrowings outstanding as of September 26, 2021 and December 31, 2020. We may, as conditions warrant, from time to time issue commercial paper backed by our Revolving Credit Facility to manage the timing of cash flows. However, as described under Item 1A, Risk Factors of our 2020 Form 10-K, depending on market conditions, commercial paper may not be available on favorable terms or at all.

Our outstanding debt, net of unamortized discounts and issuance costs was $11.7 billion as of September 26, 2021 and is in the form of publicly-issued notes that bear interest at fixed rates. In September 2021, we repaid $500 million of long-term notes with a fixed interest rate of 3.35% according to their scheduled maturities. As of September 26, 2021, we were in compliance with all covenants contained in our debt and credit agreements. Other than the $500 million debt redemption in September 2021 and the new Revolving Credit Facility in August 2021, there were no material changes during the quarter or nine months ended September 26, 2021 to our contractual commitments as presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Form 10-K that were outside the ordinary course of our business.

OTHER MATTERS

Status of the F-35 Program

The F-35 program primarily consists of production contracts, sustainment activities, and new development efforts. Production of the aircraft is expected to continue for many years given the U.S. Government’s current inventory objective of 2,456 aircraft for the U.S. Air Force, U.S. Marine Corps, and U.S. Navy; commitments from our seven international partner countries and six international customers; as well as expressions of interest from other countries. During the second quarter of 2021, Switzerland's Federal Council announced its decision to purchase the F-35A Conventional Takeoff and Landing (CTOL) aircraft along with sustainment and training services, as part of their Air 2030 modernization program.

During the quarter ended September 26, 2021, we delivered 36 production aircraft to our U.S. and international partner countries, and international customers, resulting in total deliveries of 701 production aircraft. We have 282 production aircraft in backlog, including orders from our international partner customers and countries.

In response to COVID-19 F-35 supplier delays and in conjunction with the F-35 Joint Program Office, we tapered our production rate in 2020. In 2021, we continue to be impacted by COVID-19 but expect the production rate to improve from its 2020 levels and deliver 133-139 aircraft in 2021. As agreed with the F-35 Joint Program Office in September 2021, we anticipate delivering 151-153 aircraft in 2022 and 156 aircraft in 2023 and stabilizing at that rate for future years of the program. See the discussion in Business Overview - COVID-19.

Given the size and complexity of the F-35 program, we anticipate that there will be continual reviews related to aircraft performance, program schedule, cost, and requirements as part of the DoD, Congressional, and international partner countries’ oversight and budgeting processes. Current program challenges include, but are not limited to supplier and partner performance, software development, receiving funding for contracts on a timely basis, the level of cost associated with life cycle operations, sustainment and warranties, and executing future flight tests and supporting the resulting findings from testing and operating the aircraft.

Contingencies

See “Note 8 - Legal Proceedings and Contingencies” included in our Notes to Consolidated Financial Statements for information regarding our contingent obligations, including off-balance sheet arrangements.

Critical Accounting Policies

There have been no significant changes to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Form 10-K, except for an update related to our postretirement benefit plans to describe changes to our funding requirements and the amount of pension costs recoverable under contracts with the U.S. Government as a result of the American Rescue Plan Act of 2021 in our Form 10-Q for the quarter ended March 28, 2021. Additionally, as set forth below, we have updated our defined benefit plan disclosures to reflect the impact of the purchase of group annuity contracts on August 3, 2021.

Postretirement Benefit Plans

Overview

On August 3, 2021, we purchased group annuity contracts to transfer $4.9 billion of gross defined benefit pension obligations and related plan assets to an insurance company for approximately 18,000 U.S. retirees and beneficiaries. The group annuity contracts were purchased using assets from Lockheed Martin’s master retirement trust and no additional funding contribution was required by us. This transaction has 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 (the Affected Plans) in the quarter ended September 26, 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 assets related to the Affected Plans as of the August 3, 2021 close date (the Remeasurement Date). The remeasurement reflects the use of updated actuarial assumptions, primarily the discount rate, and actual return on plan assets described in further detail below.

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, 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 pension expense in subsequent periods.

As described above, we remeasured the benefit obligations and assets related to the Affected Plans as of the August 3, 2021 close date. When calculating the benefit obligations related to the Affected Plans, we utilized a discount rate of 2.75% as of the Remeasurement Date, compared to 2.50% as of December 31, 2020. The increase in the discount resulted in a decrease of approximately $1.3 billion in the projected benefit obligations.

The actual return on plan assets for the period January 1, 2021 through August 3, 2021 for the Affected Plans was approximately 8.00%, or $3.2 billion, which was approximately $1.6 billion higher (the incremental return) than our expected return on plan assets of approximately 4.00%, or $1.6 billion (the proportional effect, or approximately seven twelfths, of our previously expected 7.00% annual long-term rate of return on plan assets assumption), for the period January 1, 2021 through August 3, 2021. The incremental return of $1.6 billion on plan assets was recognized in the remeasurement of the assets related to the Affected Plans.

When calculating FAS pension expense for periods subsequent to the Remeasurement Date, we lowered our expected long-term rate of return on plan assets from 7.00% utilized as of December 31, 2020 to 6.50% as of the Remeasurement Date, which reflects recent changes in our asset allocation targets.

Longevity assumptions are used to estimate the life expectancy of plan participants during which they are expected to receive benefit payments. The longevity assumptions utilized to calculate the benefit obligations at the Remeasurement Date were unchanged from December 31, 2020.

The plan remeasurements resulted in a decrease of $2.9 billion to our net unfunded pension obligations (which includes the change in benefit obligation primarily related to the higher discount rate utilized in the remeasurement of $1.3 billion and the incremental return on plan assets recognized in remeasurement of $1.6 billion) with a corresponding increase of $2.3 billion after taxes in stockholders’ equity. The change in stockholders’ equity reflects the decrease in deferred actuarial losses, which will be recognized as an increase in net FAS pension income (or a decrease in net FAS pension expense) over the estimated remaining life expectancy of the covered employees beginning in the third quarter of 2021. However, deferred net actuarial gains or losses in stockholders’ equity are adjusted annually when the funded status of our postretirement benefit plans are measured, which will result in additional changes to our FAS pension income or expense in future periods.

The purchase of the group annuity contracts and the 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 for the quarter ended September 26, 2021 or expected full year 2021, except for the noncash pension settlement charge. The increase in the discount rate, incremental return on plan assets, and settlement charge reduced FAS pension expense in future periods, which was offset by the impact of the lower expected long-term rate of return on plan assets.

Funding Considerations

The required funding of our qualified defined benefit pension plans is determined in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), as amended, along with consideration of CAS and Internal Revenue Code rules.

Contributions to our defined benefit pension plans are recovered over time through the pricing of our products and services on U.S. Government contracts, including FMS, and are recognized in our cost of sales and net sales. CAS govern the extent to which our pension costs are allocable to and recoverable under contracts with the U.S. Government, including FMS. Pension cost recoveries under CAS occur in different periods from when pension contributions are made under the Pension Protection Act of 2006.

As previously disclosed, on March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law, which eased funding requirements for single-employer defined benefit pension plans under the 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. As permitted under the law, we will adopt the funding amortization change by 2020 and the interest rate stabilization in 2022.

We made no contributions to our qualified defined benefit pension plans during the quarters and nine months ended September 26, 2021.

Trends

We now expect FAS pension expense of approximately $1.4 billion in 2021, inclusive of the noncash pension settlement charge of $1.7 billion (pretax) described above, compared to our prior estimate of FAS pension income of $265

million in 2021. Excluding the noncash pension settlement charge, our adjusted FAS pension income will be approximately $265 million in 2021, which is consistent with our prior 2021 FAS pension income estimate.

Our CAS cost was not impacted by the purchase of the group annuity contracts or the remeasurement of the benefit pension obligations and related assets related to the Affected Plans described above. Therefore, we continue to expect our CAS pension cost will be approximately $2.1 billion in 2021, which is consistent with our prior 2021 CAS pension cost estimate.

We now expect FAS/CAS pension income of approximately $665 million in 2021, inclusive of the noncash pension settlement charge of $1.7 billion (pretax) described above, compared to our prior estimate of FAS/CAS pension income of $2.3 billion in 2021. Excluding the noncash pension settlement charge, our adjusted FAS/CAS pension income will be approximately $2.3 billion in 2021, which is consistent with our prior 2021 FAS/CAS pension income estimate.

We do not plan to make contributions to our qualified defined benefit pension plans in 2021, consistent with our 2021 financial outlook provided in July 2021.

For 2022 financial trending information related to our qualified defined benefit pension plans, see “2022 Financial Trends” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Goodwill and Intangible Assets

The carrying value of our goodwill balance was $10.8 billion at September 26, 2021, including $2.7 billion of goodwill at our Sikorsky reporting unit. In the fourth quarter of 2020, we performed our annual impairment test for goodwill, and the results of that test indicated no impairment existed. As of the date of our 2020 annual impairment test, we estimated that the fair value of our Sikorsky reporting unit exceeded its carrying value for goodwill by a margin of approximately 30%. We will perform our next annual goodwill impairment test during the fourth quarter of 2021 and will perform a quantitative assessment of the fair value of our Sikorsky reporting unit.

The fair value of our Sikorsky reporting unit can be significantly impacted by its performance, the amount and timing of expected future cash flows, contract terminations, changes in expected future orders, general market pressures, including U.S. Government budgetary constraints, discount rates, long term growth rates, and changes in U.S. (federal or state) or foreign tax laws and regulations, or their interpretation and application, including those with retroactive effect, along with other significant judgments. Based on our assessment of these circumstances, we have determined that goodwill at our Sikorsky reporting unit is at risk for impairment should there be a deterioration of projected cash flows of the reporting unit.

We do not currently anticipate any material impairments on our assets as a result of COVID-19. See Item 1A, Risk Factors of our 2020 Form 10-K for a discussion of the potential impacts of COVID-19 on the fair value of our assets.

Recent Accounting Pronouncements

See “Note 12 - Recent Accounting Pronouncements” included in our Notes to Consolidated Financial Statements for information related to new accounting standards.