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 quarter ended March 27, 2022, 72% of our $15.0 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 Annual Report on Form 10-K for the year ended December 31, 2021 (2021 Form 10-K).

COVID-19

The COVID-19 pandemic continued to cause business impacts in the first quarter of 2022 primarily driven by the emergence of the Omicron variant in late 2021 with a resulting increase in COVID cases in early 2022. During the first quarter of 2022, our performance was adversely affected by supply chain disruptions and delays, as well as labor challenges associated with employee absences, travel restrictions, site access, quarantine restrictions, remote work, and adjusted work schedules. Attendance for employees required to be onsite has fluctuated based on pandemic developments. We are actively engaging with our customers and are continuing to take measures to protect the health and safety of our employees by encouraging them to get vaccinated, including booster shots. In our on-going effort to mitigate supply chain risks, we accelerated payments of $1.0 billion to our suppliers as of March 27, 2022, that are due according to contractual terms in future periods, while consistently prioritizing small businesses, which make up over half of our active supply base, as well as at-risk businesses.

The ultimate impact of COVID-19 on our operations and financial performance in future periods, including our ability to execute our programs in the expected timeframe, remains uncertain and will depend on future pandemic-related developments, including the duration of the pandemic, potential subsequent waves of COVID-19 infection or potential new variants (e.g. Ba.2), the effectiveness and adoption of COVID-19 vaccines and therapeutics, supplier impacts and related government actions to prevent and manage disease spread, including the implementation of any federal, state, local or foreign vaccine mandates, all of which are uncertain and cannot be predicted. The long-term impacts of COVID-19 on government budgets and other funding priorities, including international priorities, that impact demand for our products and services are also difficult to predict but could negatively affect our future results and performance.

For additional risks to the corporation related to the COVID-19 pandemic, see Item 1A, Risk Factors of our 2021 Form 10-K.

Termination of Agreement to Acquire Aerojet Rocketdyne Holdings, Inc.

On February 13, 2022, we announced that we had terminated our agreement to acquire Aerojet Rocketdyne Holdings, Inc. following the filing by the Federal Trade Commission on January 25, 2022, of complaints to block the closing of the transaction. No termination penalties were incurred by either party in connection with the termination of the transaction. The termination did not have an impact to our operating results, financial position or cash flows.

INDUSTRY CONSIDERATIONS

U.S. Government Funding

On March 15, 2022, the President signed the Consolidated Appropriations Act, 2022, providing annual funding for the DoD and other government departments and agencies. The appropriation provided $781 billion for national defense, which includes the DoD, Department of Energy (DoE) nuclear weapons-related activities, and the national security activities of the Coast Guard, Federal Bureau of Investigation, and others. The DoD portion was $742.3 billion, $25 billion more than the President’s Fiscal Year (FY) 2022 request. Additionally, the legislation included $13.6 billion in supplemental funding to support Ukraine, including $3.5 billion for defense articles and $650 million in Foreign Military Financing (FMF) for Ukraine and other Eastern European allies. Our programs continued to be well supported and funded through the FY 2022 budget process. It is also anticipated that future FY 2022 Ukraine supplemental requests will be submitted to Congress.

On March 28, 2022, the Administration submitted to Congress the President’s FY 2023 budget request, which proposes $813 billion for national defense. The DoD portion of this request is $773 billion, a 4% increase above the FY 2022 enacted amount.

See also the discussion of U.S. Government funding risks within “Item 1A, Risk Factors” included in our 2021 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
																		March 27, 2022									March 28, 2021
Net sales																								$	14,964								$	16,258
Cost of sales																								(13,055)									(14,072)
Gross profit																								1,909									2,186
Other income (expense), net																								24									(4)
Operating profit																								1,933									2,182
Interest expense																								(135)									(140)
Non-service FAS pension income																								140									93
Other non-operating income, net																								123									76
Earnings before income taxes																								2,061									2,211
Income tax expense																								(328)									(374)
Net earnings																								$	1,733								$	1,837
Diluted earnings per common share																								$	6.44								$	6.56

Certain amounts reported in other income (expense), net, including our share of earnings or losses from equity method investees, are included in the operating profit of our business segments. Accordingly, such amounts are included in the discussion of our business segment results of operations.

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
																		March 27, 2022						March 28, 2021
Products																		$	12,494					$	13,753
% of total net sales																		83.5		%				84.6		%
Services																		2,470						2,505
% of total net sales																		16.5		%				15.4		%
Total net sales																		$	14,964					$	16,258

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 first quarter of 2022 because of supply

chain impacts.

Product Sales

Product sales decreased $1.3 billion, or 9%, during the quarter ended March 27, 2022 compared to the same period in 2021. The decrease is primarily attributable to lower product sales of approximately $510 million at RMS due to lower net sales for training and logistics solutions (TLS) programs due to the delivery of an international pilot training system in the first quarter of 2021 and lower production volume on Black Hawk; about $450 million mostly at Space due to the previously announced renationalization of the Atomic Weapons Establishment (AWE) program on June 30, 2021, which was no longer included in the company's financial results beginning in the third quarter of 2021; and approximately $235 million at MFC due to lower volume on Terminal High Altitude Area Defense (THAAD), Patriot Advanced Capability-3 (PAC-3) and air dominance weapon systems.

Service Sales

Service sales decreased $35 million, or 1%, during the quarter ended March 27, 2022 compared to the same period in 2021. The decrease in service sales was primarily due to lower sales of approximately $60 million at MFC and $45 million at RMS, partially offset by higher sales of about $75 million at Aeronautics.

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
																		March 27, 2022									March 28, 2021
Cost of sales – products																								$	(11,161)								$	(12,281)
% of product sales																								89.3		%							89.3		%
Cost of sales – services																								(2,175)									(2,230)
% of service sales																								88.1		%							89.0		%
Severance and restructuring charges																								—									(36)
Other unallocated, net																								281									475
Total cost of sales																								$	(13,055)								$	(14,072)

The following discussion of material changes in our consolidated cost of sales for products and services should be read in tandem with the preceding discussion of changes in our consolidated net sales and our business segment results of operations. Except for potential impacts to our programs resulting from COVID-19, including related supply chain impacts, 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 $1.1 billion, or 9%, during the quarter ended March 27, 2022 compared to the same period in 2021. The decrease was primarily attributable to lower product costs of approximately $450 million at RMS due to the delivery of an international pilot training system in the first quarter of 2021 and lower production volume on Black Hawk; about $420 million at Space primarily due to the renationalization of AWE; and approximately $225 million at MFC due to lower volume on THAAD, PAC-3 and air dominance weapon systems.

Service Costs

Service costs decreased $55 million, or 2%, during the quarter ended March 27, 2022 compared to the same period in 2021. The decrease was primarily attributable to lower service costs of approximately $60 million at MFC, and about $30 million at RMS, partially offset by higher service costs of approximately $50 million at Aeronautics.

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.

Other Unallocated, Net

Other unallocated, net primarily includes the FAS/CAS pension operating adjustment (which represents the difference between CAS pension cost recorded in our business 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 $281 million during the quarter ended March 27, 2022, compared to $475 million during the quarter ended March 28, 2021. Other unallocated, net during the quarter ended March 27, 2022 was lower primarily due to declines in the fair value of investments held in a trust for deferred compensation plans during the quarter ended March 27, 2022 compared to the quarter ended March 28, 2021, a decrease in our FAS/CAS pension operating adjustment due to lower CAS cost from the American Rescue Plan Act of 2021 (ARPA) legislation, and fluctuations in costs associated with various corporate items, none of which were individually significant.

Other Income (Expense), Net

Other income (expense), net primarily includes earnings generated by equity method investees. Other income, net was $24 million during the quarter ended March 27, 2022, compared to other (expense), net of $4 million during the quarter ended March 28, 2021. Other income (expense), net during the quarter ended March 27, 2022 included $35 million of higher equity earnings from our equity method investment in ULA driven by higher launch volume compared to the quarter ended March 28, 2021.

Non-Service FAS Pension Income

Non-service FAS pension income was $140 million for the quarter ended March 27, 2022, compared to $93 million during the quarter ended March 28, 2021. The increase was primarily due to lower net recognized actuarial losses.

Other Non-operating Income, Net

Other non-operating income, net primarily includes gains or losses related to changes in the fair value of strategic investments in companies made by our Lockheed Martin Ventures Fund. During the quarter ended March 27, 2022, other non-operating income, net was $123 million compared to $76 million during the quarter ended March 28, 2021. The increase during the quarter ended March 27, 2022 was primarily due to higher increases in the fair value of investments held in this fund. See “Note 10 - Other” included in our Notes to Consolidated Financial Statements for additional information.

Income Tax Expense

Our effective income tax rate was 15.9% for the quarter ended March 27, 2022 and 16.9% for the quarter ended March 28, 2021. The rate for the first quarter of 2022 is lower due to increased tax deductions for employee equity awards and foreign derived intangible income compared to the first quarter of 2021. The rates for both periods benefited from the research and development tax credit and dividends paid to our 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. 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 $2.3 billion at March 27, 2022 and December 31, 2021, based on a 21% federal statutory income tax rate, and primarily relate to our postretirement benefit plans. In addition to future changes in tax laws, the amount of net deferred tax assets will change periodically based on several factors, including the measurement of our postretirement benefit plan obligations, actual cash contributions to our postretirement benefit plans and the reevaluation of uncertain tax positions.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, and we continue to have ongoing discussions with members of Congress, both on our own and with other industries through coalitions, we have no assurance that this provision will be deferred, modified, or repealed. Furthermore, in anticipation of the new provision taking effect, we have analyzed the provision and worked with our advisors to evaluate its application to our business. If this provision is not deferred, modified, or repealed with retroactive effect to January 1, 2022, we estimate it will decrease our cash from operations in 2022 by approximately $500 million. The actual impact on 2022 cash from operations will depend on if and when this provision is deferred, modified, or repealed by Congress, including if retroactively, and the amount of research and development expenses paid or incurred in 2022 among other factors. While the largest impact will be to 2022 cash from operations, the impact would continue over the five year amortization period, but would decrease over the period and be immaterial in year six.

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

Net Earnings

We reported net earnings from continuing operations of $1.7 billion ($6.44 per share) during the quarter ended March 27, 2022, compared to $1.8 billion ($6.56 per share) during the quarter ended March 28, 2021. Net earnings and earnings per share for the quarter ended March 27, 2022 were affected by the factors mentioned above. Earnings per share also benefited from a net decrease of approximately 10.8 million weighted average common shares outstanding during the quarter ended March 27, 2022, compared to the same period in 2021. The reduction in weighted average common shares was a result of share repurchases, partially offset by share issuance under our stock-based awards and certain defined contribution plans.

BUSINESS SEGMENT RESULTS OF OPERATIONS

We operate in four business segments: Aeronautics, MFC, RMS and Space. We organize our business segments based on the nature of products and services offered.

Net sales and operating profit of our business segments exclude intersegment sales, cost of sales, and profit as these activities are eliminated in consolidation and thus not included in management’s evaluation of performance of each segment. Business segment operating profit includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments.

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 10 - 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
																		March 27, 2022									March 28, 2021
Net sales
Aeronautics																								$	6,401								$	6,387
Missiles and Fire Control																								2,452									2,749
Rotary and Mission Systems																								3,552									4,107
Space																								2,559									3,015
Total net sales																								$	14,964								$	16,258
Operating profit
Aeronautics																								$	679								$	693
Missiles and Fire Control																								384									396
Rotary and Mission Systems																								348									433
Space																								245									227
Total business segment operating profit																								1,656									1,749
Unallocated items
FAS/CAS pension operating adjustment																								426									489
Severance and restructuring charges																								—									(36)
Other, net																								(149)									(20)
Total unallocated items																								277									433
Total consolidated operating profit																								$	1,933								$	2,182

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 pension operating adjustment.

Total FAS/CAS pension adjustment for the quarters ended March 27, 2022 and March 28, 2021, 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
																		March 27, 2022									March 28, 2021
Total FAS income and CAS cost
Total FAS pension income																								$	116								$	66
Less: CAS pension cost																								450									516
Total FAS/CAS pension adjustment																								$	566								$	582
Service and non-service cost reconciliation
FAS pension service cost																								$	(24)								$	(27)
Less: CAS pension cost																								450									516
Total FAS/CAS pension operating adjustment																								426									489
Non-service FAS pension income																								140									93
Total FAS/CAS pension adjustment																								$	566								$	582

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 first quarter of 2022, 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 the profit booking rates, typically referred to as favorable profit adjustments, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate, resulting in an increase in the estimated total costs to fulfill the performance obligations and a reduction in the profit booking rate and are typically referred to as unfavorable profit adjustments. Increases or decreases in profit booking rates are recognized in the current period 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 $405 million during the quarter ended March 27, 2022 and $495 million during the quarter ended March 28, 2021.

We periodically experience performance issues and record losses for certain programs. For further discussion on the programs at Aeronautics and RMS, see “Note 10 - 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
																		March 27, 2022									March 28, 2021
Net sales																								$	6,401								$	6,387
Operating profit																								679									693
Operating margin																								10.6		%							10.9		%

Aeronautics’ net sales during the quarter ended March 27, 2022 were comparable to the same period in 2021. Net sales increased by approximately $80 million for the F-16 program due to higher volume on production contracts that was partially offset by an unfavorable profit adjustment on a modernization contract. This increase was offset by lower net sales of approximately $65 million for the F-35 program due to lower net favorable profit adjustments and volume on production contracts that were partially offset by an unfavorable profit adjustment on a development contract in the first quarter of 2021 that did not recur in the first quarter of 2022.

Aeronautics’ operating profit during the quarter ended March 27, 2022 decreased $14 million, or 2%, compared to the same period in 2021. The decrease was primarily attributable to lower operating profit of approximately $50 million for the F-35 program due to lower net favorable profit adjustments and volume on production contracts that were partially

offset by an unfavorable profit adjustment on a development contract in the first quarter of 2021 that did not recur in the first quarter of 2022; and about $25 million for the F-16 program due to an unfavorable profit adjustment on a modernization contract. These decreases were partially offset by an increase of approximately $30 million for the F-22 program due to higher net favorable profit adjustments; and about $20 million for classified contracts due to higher net favorable profit adjustments. Adjustments not related to volume, including net profit booking rate adjustments, were $25 million lower in the first quarter of 2022 compared to the same period in 2021.

Missiles and Fire Control

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

												Quarters Ended
																		March 27, 2022									March 28, 2021
Net sales																								$	2,452								$	2,749
Operating profit																								384									396
Operating margin																								15.7		%							14.4		%

MFC’s net sales during the quarter ended March 27, 2022 decreased $297 million, or 11%, compared to the same period in 2021. The decrease was primarily attributable to lower net sales of approximately $115 million for

integrated air and missile defense programs due to lower volume and net favorable profit adjustments (THAAD and PAC-3); about $80 million for tactical and strike missile programs due to lower volume (air dominance weapon systems, Army Tactical Missile System (ATACMS) and hypersonics); and approximately $75 million for sensors and global sustainment programs due to lower volume (Special Operations Forces Global Logistics Support Services (SOF GLSS) and lower volume and net favorable profit adjustments on Sniper Advanced Targeting Pod (SNIPER®)), partially offset by the effect of a favorable profit adjustment on an international program as a result of a requirements modification in the first quarter of 2022.

MFC’s operating profit during the quarter ended March 27, 2022 decreased $12 million, or 3%, compared to the same period in 2021. The decrease was primarily attributable to lower operating profit of approximately $45 million for integrated air and missile defense programs due to lower net favorable profit adjustments and volume (THAAD and PAC-3), and about $10 million for tactical and strike missile programs due to lower volume (ATACMS and hypersonics). These decreases were partially offset by an increase of about $50 million for sensors and global sustainment programs primarily due to the effect of a favorable profit adjustment on an international program described above, partially offset by lower net favorable profit adjustments (SNIPER). Adjustments not related to volume, including net profit booking rate adjustments, were $15 million higher in the first quarter of 2022 compared to the same period in 2021.

Rotary and Mission Systems

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

												Quarters Ended
																		March 27, 2022									March 28, 2021
Net sales																								$	3,552								$	4,107
Operating profit																								348									433
Operating margin																								9.8		%							10.5		%

RMS’ net sales during the quarter ended March 27, 2022 decreased $555 million, or 14%, compared to the same period in 2021. The decrease was primarily attributable to lower net sales of approximately $315 million for TLS programs primarily due to the delivery of an international pilot training system in the first quarter of 2021 that did not recur in the first quarter of 2022; about $150 million for integrated warfare systems and sensors (IWSS) programs due to lower volume (Littoral Combat Ship (LCS), TPQ-53, and Aegis); approximately $50 million for various C6ISR (command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance) programs due to lower volume; and approximately $40 million for Sikorsky helicopter programs due to lower production volume on the Black Hawk and VH-92A programs that was partially offset by higher production volume on the Combat Rescue Helicopter (CRH), Seahawk and CH-53K programs.

RMS’ operating profit during the quarter ended March 27, 2022 decreased $85 million, or 20%, compared to the same period in 2021. The decrease was primarily attributable to approximately $35 million for various C6ISR programs due to lower net favorable profit adjustments, about $30 million for IWSS programs due to lower net favorable profit adjustments (Aegis); and approximately $15 million for Sikorsky helicopter programs due to lower net favorable profit adjustments (Black Hawk). Operating profit for TLS programs was comparable due to the delivery of an international pilot training system in the first quarter of 2021 that did not recur in the first quarter of 2022, offset by higher net favorable profit adjustments on various other programs. Adjustments not related to volume, including net profit booking rate adjustments, were $55 million lower in the first quarter of 2022 compared to the same period in 2021.

Space

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

												Quarters Ended
																		March 27, 2022									March 28, 2021
Net sales																								$	2,559								$	3,015
Operating profit																								245									227
Operating margin																								9.6		%							7.5		%

Space’s net sales during the quarter ended March 27, 2022 decreased $456 million, or 15%, compared to the same period in 2021. The decrease was primarily attributable to lower net sales of approximately $440 million due to the previously announced renationalization of the AWE program on June 30, 2021, which was no longer included in the company's financial results beginning in the third quarter of 2021; and about $95 million for commercial civil space programs due to lower volume (Orion and human lander system (HLS) programs). These decreases were partially offset by higher net sales of about $100 million for strategic and missile defense programs due to higher development volume (Next Generation Interceptor (NGI)).

Space’s operating profit during the quarter ended March 27, 2022 increased $18 million, or 8%, compared to the same period in 2021. The increase was primarily attributable to approximately $35 million of higher equity earnings from the company's investment in United Launch Alliance (ULA) driven by higher launch volume. This increase was partially offset by a decrease of approximately $30 million for commercial civil space programs due to lower net favorable profit adjustments and volume (the HLS program). Operating profit for the AWE program was comparable as its operating profit in the first quarter of 2021 was mostly offset by accelerated amortization expense for intangible assets as a result of the renationalization. Adjustments not related to volume, including net profit booking rate adjustments, were $25 million lower in the first quarter of 2022 compared to the same period in 2021.

Total equity earnings/(losses) (primarily ULA) represented approximately $30 million, or 12%, of Space's operating profit in the first quarter of 2022, compared to approximately $(5) million, or (2)%, in the first quarter of 2021.

FINANCIAL CONDITION

Liquidity and Cash Flows

At March 27, 2022, we had cash and cash equivalents of $1.9 billion. Our principal source of liquidity is our cash from operations. However, we also have access to credit markets, if needed, for liquidity or general corporate purposes, including our revolving credit facility or the ability to issue commercial paper, and letters of credit to support customer advance payments and for other trade finance purposes such as guaranteeing our performance on particular contracts. We believe our cash and cash equivalents, our expected cash flow generated from operations and our access to credit markets will be sufficient to meet our cash requirements and cash deployment plans over the next twelve months and beyond based on our current business plans.

Cash received from customers, either from the payment of invoices for work performed or for advances from non-U.S. Government customers in excess of costs incurred, is our primary source of cash. We generally do not begin work on contracts until funding is appropriated by the customer. However, we may determine to fund customer programs ourselves

pending government appropriations. If we incur costs in excess of funds obligated on the contract or in advance of a contract award, we may be at risk for reimbursement of the excess costs.

Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type. We generally bill and collect cash more frequently under cost-reimbursable contracts, which represented approximately 38% of the sales we recorded during the quarter ended March 27, 2022, as we are authorized to bill as the costs are incurred. A number of our fixed-price contracts may provide for performance-based payments, which allow us to bill and collect cash as we perform on the contract. The amount of performance-based payments and the related milestones are encompassed in the negotiation of each contract. The timing of such payments may differ from the timing of the costs incurred related to our contract performance, thereby affecting our cash flows.

The U.S. Government has indicated that it would consider progress payments as the baseline for negotiating payment terms on fixed-price contracts, rather than performance-based payments. In contrast to negotiated performance-based payment terms, progress payment provisions correspond to a percentage of the amount of costs incurred during the performance of the contract and are invoiced regularly as costs are incurred. Our cash flows may be affected if the U.S. Government changes its payment policies or decides to withhold payments on our billings. While the impact of policy changes or withholding payments may delay the receipt of cash, the cumulative amount of cash collected during the life of the contract should not vary.

To date, the effects of COVID-19 have resulted in some negative impacts on our cash flows, partially due to supplier delays. The U.S. Government has taken certain actions and enacted legislation to mitigate the impacts of COVID-19 on public health, the economy, state and local governments, individuals, and businesses. Since the pandemic began, Lockheed Martin has remained committed to accelerating payments to the supplier chain with a focus on small and at risk businesses. As of March 27, 2022, we have accelerated $1.0 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.

In addition, we have a balanced cash deployment strategy to invest in our business and key technologies to provide our customers with enhanced capabilities, enhance stockholder value, and position ourselves to take advantage of new business 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. Our total remaining authorization for future common share repurchases under our program was $1.9 billion as of March 27, 2022.

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. 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.

Also as previously disclosed, the President signed the American Rescue Plan Act of 2021 (ARPA) into law on March 11, 2021. ARPA reduced the amount of CAS pension costs allocated to our U.S. Government contracts beginning in 2022 due to the enhanced interest rate stabilization. This also has the effect, along with extending the amortization period of funding shortfalls, of reducing the minimum funding requirements for our single-employer defined benefit pension plans. The lower pension contributions will be partially offset by lower tax deductions.

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

						Quarters Ended
						March 27, 2022									March 28, 2021
Cash and cash equivalents at beginning of year						$	3,604								$	3,160
Operating activities
Net earnings						1,733									1,837
Noncash adjustments						(28)									482
Changes in working capital						(654)									(577)
Other, net						359									6
Net cash provided by operating activities						1,410									1,748
Net cash used for investing activities						(251)									(169)
Net cash used for financing activities						(2,880)									(1,806)
Net change in cash and cash equivalents						(1,721)									(227)
Cash and cash equivalents at end of period						$	1,883								$	2,933

Operating Activities

Net cash provided by operating activities during the quarter ended March 27, 2022 decreased $338 million compared to the same period in 2021. The decrease was primarily due to lower cash at Aeronautics and MFC partially offset by higher cash at RMS. The decrease at Aeronautics was primarily due to the timing of performance based payments on the F-35 program partially offset by lower accounts payable accelerations across the segment. The decrease at MFC was primarily due to higher receipts of international advances on the PAC-3 program in 2021. The increase at RMS was primarily due to the timing of international advances on radar programs.

Non-GAAP Financial Measure - Free Cash Flow

Free cash flow is a non-GAAP financial measure that we define as cash from operations less capital expenditures. Our capital expenditures are comprised of equipment and facilities infrastructure and information technology (inclusive of costs for the development or purchase of internal-use software). We use free cash flow to evaluate our business performance and overall liquidity and is a performance goal in our annual and long-term incentive plans. We believe free cash flow is a useful measure for investors because it represents the amount of cash generated from operations after reinvesting in the business and that may be available to return to stockholders and creditors (through dividends, stock repurchase and debt repayments) or available to fund acquisitions. The entire amount of free cash flow is not necessarily available for discretionary expenditures, however, because it does not account for certain mandatory expenditures, such as the repayment of maturing debt. While management believes that free cash flow as a non-GAAP financial measure may be useful in evaluating the financial performance of the company, it should be considered supplemental to, and not a substitute for, financial information prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies.

The following table reconciles net cash provided by operating activities to free cash flow (in millions):

						Quarters Ended
						March 27, 2022									March 28, 2021
Cash from operations						$	1,410								$	1,748
Capital expenditures						(268)									(281)
Free cash flow						$	1,142								$	1,467

Investing Activities

Net cash used for investing activities during the quarter ended March 27, 2022 increased $82 million compared to the same period in 2021. The increase in cash used for investing activities is due to cash proceeds in the first quarter of

2021 from the sale of our ownership interest in Advanced Military Maintenance, Repair and Overhaul Center (AMMROC) which was completed in the fourth quarter of 2020. Capital expenditures totaled $268 million and $281 million during the quarters ended March 27, 2022 and March 28, 2021. 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 $2.9 billion during the quarter ended March 27, 2022, compared to $1.8 billion during the same period in 2021.

During the quarters ended March 27, 2022 and March 28, 2021, we paid dividends totaling $767 million ($2.80 per share) and $739 million ($2.60 per share).

During the quarter ended March 27, 2022, we paid $2.0 billion to repurchase 4.7 million shares of our common stock, of which 0.6 million shares were received upon settlement in April 2022. During the quarter ended March 28, 2021, we paid $1.0 billion to repurchase 2.9 million shares of our common stock, of which 1.0 million shares were received upon settlement in April 2021.

Capital Resources

At March 27, 2022, we held cash and cash equivalents of $1.9 billion that was generally available to fund ordinary business operations without significant legal, regulatory, or other restrictions.

At March 27, 2022, 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 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 March 27, 2022.

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 March 27, 2022 and December 31, 2021. 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, 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 $11.6 billion as of March 27, 2022 and is in the form of publicly-issued notes that bear interest at fixed rates. As of March 27, 2022, we were in compliance with all covenants contained in our debt and credit agreements. There were no material changes during the quarter ended March 27, 2022 to our contractual commitments as presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 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 seven international customers; as well as expressions of interest from other countries. During the first quarter of 2022, Finland became the seventh international customer to join the F-35 program, and Germany announced its intention to purchase 35 F-35 aircraft. On March 28, 2022, the Government of Canada selected the F-35 as the preferred bidder to move into the Finalization Phase of the competitive process to replace their fighter fleet. In the Finalization Phase, they will collaborate with the F-35 team to deliver unique requirements and a delivery profile before moving forward with contracting with the U.S. Government for the procurement of 88 aircraft.

We remain in negotiations with the U.S. Government on the Lot 15-17 production contracts. Without additional contractual direction from the U.S. Government, we will exceed the current contractual authorization and funding on the Lot 15-17 advance acquisition contract during the second quarter of 2022. If this occurs, it could negatively impact our results of operations, cash flows, and financial condition. We continue to engage with the U.S. Government to reach a mutually agreeable solution.

On April 24, 2022, our five-year contract with the International Association of Machinists and Aerospace Workers (IAM) covering approximately 5,000 represented employees that primarily work on F-35 production in Fort Worth, Texas, concludes. We are currently negotiating the next contract period with the goal of reaching an agreement before the existing agreement concludes, however, if there are work stoppages or other disruptions related to the contract negotiations, our ability to perform under certain contracts could be adversely affected which could negatively impact our results of operations, cash flows, and financial condition.

During the quarter ended March 27, 2022, we delivered 26 production aircraft to our U.S. and international partner countries, and international customers, resulting in total deliveries of 779 production aircraft. We have 204 production aircraft in backlog, including orders from our international partner customers and countries.

In response to F-35 delays caused by COVID-19 and in conjunction with the F-35 JPO, we tapered our production rate in 2020. In 2021, the F-35 JPO and the Lockheed Martin industry team agreed on an F-35 production re-baseline that improves predictability and stability in the production process while recovering the aircraft shortfall resulting from the COVID-19 pandemic. With this agreement, we anticipate delivering 148-153 aircraft in 2022. In 2023 and 2024, we anticipate delivering 156 aircraft each year. This delivery profile requires adequate funding from not only the U.S. Government's, but also the international partner countries' and international customers' budgeting process.

Given the size and complexity of the F-35 program, we anticipate that there will be continual reviews related to aircraft performance, program schedule, cost, and requirements as part of the DoD, Congressional, and international countries’ oversight and budgeting processes. Current program challenges include supplier, Lockheed Martin and partner performance (including COVID-19 performance-related challenges), software development, the receipt of funding for contracts on a timely basis, execution of future flight tests and findings resulting from testing and operating the aircraft, the level of cost associated with life cycle operations, sustainment and potential contractual obligations, and the ability to continue to reduce the unit production costs and improve affordability.

Contingencies

See “Note 7 - 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 2021 Form 10-K.

Goodwill and Intangible Assets

The carrying value of our goodwill balance was $10.8 billion at March 27, 2022, including $2.7 billion of goodwill at our Sikorsky reporting unit. In the fourth quarter of 2021, we performed our annual impairment test for goodwill, and the results of that test indicated no impairment existed. As of the date of our 2021 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 2022 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 2021 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 11 - Recent Accounting Pronouncements” included in our Notes to Consolidated Financial Statements for information related to new accounting standards.