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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and notes to consolidated financial statements and with our Annual Report on Form 10-K for the year ended December 31, 2021 (2021 Form 10-K).

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 25, 2022, 74% of our $47.0 billion in net sales were from the U.S. Government, either as a prime contractor or as a subcontractor (including 64% from the Department of Defense (DoD)), 25% 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.

COVID-19

The coronavirus disease 2019 (COVID-19) pandemic continued to cause business impacts in the first nine months of 2022. The emergence of the Omicron variant in late 2021 and resulting increase in COVID cases in early 2022 adversely impacted our operations and our supply chain. Specifically, during the first nine months of 2022, our performance was affected by supply chain disruptions and delays, as well as labor challenges associated with employee absences, travel restrictions, site access, quarantine restrictions, remote work, and adjusted work schedules. The recovery from that disruption has been slower than originally anticipated, in particular within our supply chain, and some of those supply chain impacts are expected to continue into 2023. Attendance for employees required to be onsite 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. In our on-going effort to mitigate supply chain risks, we accelerated payments of $1.1 billion to our suppliers as of September 25, 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, 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.

Inflation

Heightened levels of inflation and the potential worsening of macro-economic conditions present a risk for Lockheed Martin, our suppliers and the stability of the broader defense industrial base. During the first nine months of 2022, we have experienced impacts to our labor rates and suppliers have signaled inflation related cost pressures, which will flow through to our costs and pricing. Although we have not seen a significant impact from inflation to our financial results in the first nine months of 2022, if inflation remains at current levels for an extended period, or increases, and we are unable to successfully mitigate the impact, our costs are likely to increase, resulting in pressure on our profits, margins and cash flows, particularly for existing fixed-price contracts. For new contract proposals, we are factoring into our pricing heightened levels of inflation based on accepted DoD escalation indices and other assumptions, and in some cases seeking the inclusion of economic price adjustment (EPA) clauses, which would permit, subject to the particular contractual terms, cost adjustments in fixed-price contracts for unexpected inflation. In addition, inflation and the increases in the cost of borrowing from rising interest rates could constrain the overall purchasing power of our customers for our

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products and services, in particular in the near term to the extent inflation assumptions are less than current inflationary pressures. Rising interest rates will also increase our borrowing costs on new debt and could affect the fair value of our investments. While rising interest rates reduce the measure of our gross pension obligations, they can also lead to decline in pension plan assets with offsetting impacts on our net pension liability. We remain committed to our ongoing efforts to increase the efficiency of our operations and improve the cost competitiveness and affordability of our products and services, which may, in part, offset cost increases from inflation.

Conflict in Ukraine

Russia’s invasion of Ukraine has elevated global geopolitical tensions and security concerns. As a result, we have received increased interest for our products and services as countries seek to improve their security posture, particularly in Europe. In addition, security assistance provided by the U.S. government to Ukraine has created U.S. government demand to replenish U.S. stockpiles, resulting in additional and potential future orders for our products. We are beginning to see this interest result in initiation of new contract discussions, however, given the long-cycle nature of our business and current industry capacity, we do not expect a significant increase in near term sales from new contracts in response to the conflict. We are evaluating capacity at our operations and the supply chain to anticipate potential demand and enable us to deliver critical capabilities. In addition, the U.S. Government and other nations have implemented broad economic sanctions and export controls targeting Russia, which combined with the conflict, have the potential to indirectly disrupt our supply chain and access to certain resources. We have not, however, experienced significant adverse impacts to date and will continue to monitor for any impacts and seek to mitigate disruption that may arise. The conflict also has increased the threat of malicious cyber activity from nation states and other actors. We have taken steps designed to enhance our defensive posture against tactics and techniques associated with this increased threat.

INDUSTRY CONSIDERATIONS

U.S. Government Funding

On March 28, 2022, the Administration submitted to Congress the President’s Fiscal Year (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.

However, Congress has not yet enacted an annual budget for FY 2023. To avert a government shutdown, on September 30, 2022, a continuing resolution funding measure was enacted to finance all U.S. government activities through December 16, 2022. Under the continuing resolution, partial-year funding at amounts consistent with appropriated levels for FY 2022 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, we may experience delays in procurement of products and services due to lack of funding, and those delays may affect our results of operations.

The continuing resolution also included an additional $12.3 billion in supplemental funding for Ukraine.

Congress continues to work toward the enactment of a FY 2023 Department of Defense Appropriations Act and a FY 2023 National Defense Authorization Act (NDAA). Our expectation is that final FY 2023 DoD funding will be higher than requested in the President’s budget. Final legislation is not expected to be enacted until late in calendar year 2022 or, possibly, in early calendar year 2023.

See also the discussion of U.S. Government funding risks within “Item 1A, Risk Factors” included in our 2021 Form 10-K.

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CONSOLIDATED RESULTS OF OPERATIONS

Our operating cycle is primarily long-term and involves many types of contracts for the design, development and manufacture of products and related activities with varying delivery schedules. Consequently, the results of operations of a particular 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 25, 2022									September 26, 2021									September 25, 2022									September 26, 2021
Net sales						$	16,583								$	16,028								$	46,993								$	49,315
Cost of sales						(14,463)									(13,726)									(41,008)									(42,676)
Gross profit						2,120									2,302									5,985									6,639
Other income (expense), net						39									(8)									70									29
Operating profit						2,159									2,294									6,055									6,668
Interest expense						(145)									(141)									(421)									(423)
Non-service FAS pension income (expense)						111									(1,572)									(1,080)									(1,385)
Other non-operating (expense) income, net						(26)									98									(64)									200
Earnings before income taxes						2,099									679									4,490									5,060
Income tax expense						(321)									(65)									(670)									(794)
Net earnings						$	1,778								$	614								$	3,820								$	4,266
Diluted earnings per common share						$	6.71								$	2.21								$	14.31								$	15.32

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												Nine Months Ended
						September 25, 2022						September 26, 2021						September 25, 2022						September 26, 2021
Products						$	14,011					$	13,475					$	39,266					$	41,486
% of total net sales						84.5		%				84.1		%				83.6		%				84.1		%
Services						2,572						2,553						7,727						7,829
% of total net sales						15.5		%				15.9		%				16.4		%				15.9		%
Total net sales						$	16,583					$	16,028					$	46,993					$	49,315

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 nine months of 2022 because of supply chain impacts.

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Product Sales

Product sales increased $536 million, or 4%, during the quarter ended September 25, 2022 compared to the same period in 2021. The increase was primarily attributable to higher product sales of approximately $500 million at Aeronautics mostly due to higher volume on F-35 contracts; about $170 million at Space due to higher development volume on strategic and missile defense programs (Next Generation Interceptor (NGI)); and approximately $100 million at MFC primarily due to higher volume on integrated air and missile defense programs (Patriot Advanced Capability-3 (PAC-3)). These increases were partially offset by lower product sales of about $235 million at RMS mostly due to lower production volume on Black Hawk.

Product sales decreased $2.2 billion, or 5%, during the nine months ended September 25, 2022 compared to the same period in 2021. The decrease is primarily attributable to lower product sales of approximately $965 million at RMS mostly due to lower production volume on Black Hawk and lower net sales for training and logistics solutions (TLS) programs due to the delivery of an international pilot training system in the first quarter of 2021; about $650 million at Space primarily due to the renationalization of AWE on June 30, 2021; approximately $340 million at Aeronautics mostly due to lower volume on F-35 contracts partially offset by higher volume on classified contracts; and about $265 million at MFC primarily due to lower volume on air dominance weapon systems and Terminal High Altitude Area Defense (THAAD).

Service Sales

Service sales increased $19 million, or 1%, during the quarter ended September 25, 2022 compared to the same period in 2021.

Service sales decreased $102 million, or 1%, during the nine months ended September 25, 2022 compared to the same period in 2021. The decrease in service sales was primarily due to lower sales of approximately $180 million at MFC primarily due to lower volume on the Special Operations Forces Global Logistics Support Services (SOF GLSS).

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 25, 2022									September 26, 2021									September 25, 2022									September 26, 2021
Cost of sales – products						$	(12,547)								$	(11,838)								$	(35,103)								$	(36,985)
% of product sales						89.6		%							87.9		%							89.4		%							89.2		%
Cost of sales – services						(2,243)									(2,332)									(6,780)									(7,000)
% of service sales						87.2		%							91.3		%							87.7		%							89.4		%
Severance and restructuring charges						—									—									—									(36)
Other unallocated, net						327									444									875									1,345
Total cost of sales						$	(14,463)								$	(13,726)								$	(41,008)								$	(42,676)

The following discussion of material changes in our consolidated cost of sales for products and services should be read in tandem with the preceding discussion of changes in our consolidated net sales and our business segment results of operations. Except for potential impacts to our programs resulting from COVID-19, supply chain disruptions and inflation, we have not 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 increased $709 million, or 6%, during the quarter ended September 25, 2022 compared to the same period in 2021. The increase was primarily attributable to higher product costs of approximately $495 million at

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Aeronautics primarily due to higher volume on F-35 contracts; about $220 million at Space mostly due to higher development volume on strategic and missile defense programs (NGI); and approximately $135 million at MFC mostly due to higher volume on integrated air and missile defense programs (PAC-3). These increases were partially offset by lower product costs of about $140 million at RMS primarily due to lower production volume on Black Hawk.

Product costs decreased $1.9 billion, or 5%, during the nine months ended September 25, 2022 compared to the same period in 2021. The decrease was primarily attributable to lower product costs of approximately $765 million at RMS mostly due to the delivery of an international pilot training system in the first quarter of 2021 and lower production volume on Black Hawk; about $530 million at Space primarily due to the renationalization of AWE; approximately $365 million at Aeronautics mostly due to lower volume on F-35 contracts; and about $220 million at MFC primarily due to lower volume on air dominance weapon systems and THAAD.

Service Costs

Service costs decreased $89 million, or 4%, during the quarter ended September 25, 2022 compared to the same period in 2021.

Service costs decreased $220 million, or 3%, during the nine months ended September 25, 2022 compared to the same period in 2021. The decrease was primarily attributable to lower service costs of approximately $180 million at MFC primarily due to lower volume on SOF GLSS.

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 10 - Other” included in our Notes to Consolidated Financial Statements for additional information.

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 income (expense)), stock-based compensation expense, changes in the fair value of investments held in a trust for deferred compensation plans and other corporate costs. These items are not allocated to the business segments and, therefore, are not allocated to cost of sales for products or services. Other unallocated, net reduced cost of sales by $327 million and $875 million during the quarter and nine months ended September 25, 2022, compared to $444 million and $1.3 billion during the quarter and nine months ended September 26, 2021. Other unallocated, net during the quarter and nine months ended September 25, 2022 was lower primarily due to declines in the fair value of investments held in a trust for deferred compensation plans during the quarter and nine months ended September 25, 2022 compared to the same periods in 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 $39 million during the quarter ended September 25, 2022, compared to other expense, net of $8 million during the quarter ended September 26, 2021. Other income, net was $70 million during the nine months ended September 25, 2022, compared to $29 million during the nine months ended September 26, 2021. Other income, net during the quarter ended September 25, 2022 included higher earnings generated by our equity method investment in ULA due to higher launch volume and launch vehicle mix.

Interest Expense

Interest expense during the quarter and nine months ended September 25, 2022 was $145 million and $421 million, compared to $141 million and $423 million during the quarter and nine months ended September 26, 2021. See “Capital Resources” included within “Liquidity and Cash Flows” discussion below and “Note 10 - Other” included in our Notes to Consolidated Financial Statements for additional information.

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Non-Service FAS Pension Income (Expense)

Non-service FAS pension income was $111 million during the quarter ended September 25, 2022, compared to Non-service FAS pension expense of $1.1 billion for the nine months ended September 25, 2022. Non-Service FAS pension expense was $1.6 billion and $1.4 billion during the quarter and nine months ended September 26, 2021. Non-service FAS pension expense for the nine months ended September 25, 2022 includes a noncash, non-operating pension settlement charge of $1.5 billion ($1.2 billion, or $4.33 per share, after-tax), related to the transfer of $4.3 billion of our gross defined benefit pension obligations and related plan assets to an insurance company on June 24, 2022. Non-service FAS pension expense 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 on August 3, 2021. See “Note 6 - Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements for additional information.

Other Non-operating (Expense) Income, Net

Other non-operating (expense) income, net primarily includes gains or losses related to changes in the fair value of strategic investments in companies made by our Lockheed Martin Ventures Fund. During the quarter ended September 25, 2022, other non-operating expense, net was $26 million compared to other non-operating income, net of $98 million during the quarter ended September 26, 2021. During the nine months ended September 25, 2022, other non-operating expense, net was $64 million compared to other non-operating income, net of $200 million during the nine months ended September 26, 2021. The decrease during the quarter and nine months ended September 25, 2022 was primarily due to decreases in the fair value of investments held in this fund. Other non-operating expense, net for the nine months ended September 25, 2022 also included losses related to early extinguishments of debt. See “Note 10 - Other” included in our Notes to Consolidated Financial Statements for additional information.

Income Tax Expense

Our effective income tax rate was 15.3% and 14.9% for the quarter and nine months ended September 25, 2022 and 9.6% and 15.7% for the quarter and nine months ended September 26, 2021. The rate for the third quarter of 2021 was lower than the third quarter of 2022 primarily due to lower earnings before income taxes resulting from a noncash, non-operating pension settlement charge of $1.7 billion, which reduced the tax expense by approximately $355 million. See “Note 6 - Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements for additional information. The rates for all periods benefited from the research and development tax credit, tax deductions for foreign derived intangible income 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), such as the amortization for research or experimental expenditures, could significantly impact our provision for income taxes, the amount of taxes payable, our deferred tax asset and liability balances, and stockholders’ equity. In addition to future changes in tax laws, the amount of net deferred tax assets will change periodically based on several factors, including the measurement of our postretirement benefit plan obligations, actual cash contributions to our postretirement benefit plans and the change in the amount or reevaluation of uncertain tax positions.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for tax purposes. Furthermore, in anticipation of the new provision taking effect, we analyzed the provision and worked with our advisors to evaluate its application to our business. We estimate our cash from operations in 2022 will be negatively impacted by approximately $600 million and our net deferred tax assets will increase by a similar amount provided this provision is not deferred, modified, or repealed. While it is possible that Congress may defer, modify, or repeal this provision, potentially with retroactive effect, we have no assurance that this provision will be deferred, modified, or repealed and we have made federal tax payments of approximately $450 million related to this provision during the nine months ended September 25, 2022. The actual impact on 2022 cash from operations will depend on the amount of research and development expenses paid or incurred in 2022 among other factors. While the largest impact of this provision 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.

As of December 31, 2021, our liabilities associated with uncertain tax positions were not material. For the quarter ended September 25, 2022, our liabilities associated with uncertain tax positions increased to $1.2 billion with a

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corresponding increase to net deferred tax assets as a result of the provision described above from the Tax Cuts and Jobs Act of 2017.

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

On August 16, 2022, the President signed into law the Inflation Reduction Act of 2022 which contained provisions effective January 1, 2023, including a 15% corporate minimum tax and a 1% excise tax on stock buybacks, both of which we expect to be immaterial to our financial results, financial position and cash flows.

Net Earnings

We reported net earnings of $1.8 billion ($6.71 per share) and $3.8 billion ($14.31 per share) during the quarter and nine months ended September 25, 2022, compared to $614 million ($2.21 per share) and $4.3 billion ($15.32 per share) during the quarter and nine months ended September 26, 2021. Net earnings and earnings per share for the nine months ended September 25, 2022 were affected by factors mentioned above. Earnings per share also benefited from a net decrease of approximately 12.2 million and 11.6 million weighted average common shares outstanding during the quarter and nine months ended September 25, 2022, compared to the same periods 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.

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BUSINESS SEGMENT RESULTS OF OPERATIONS

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

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

Business segment operating profit excludes the FAS/CAS pension operating adjustment described below, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. Government under the applicable U.S. Government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance such as a portion of management and administration costs, legal fees and settlements, environmental costs, changes in the fair value of strategic investments in companies made by our Lockheed Martin Ventures Fund, stock-based compensation expense, changes in the fair value of investments held in a trust for deferred compensation plans, retiree benefits, significant severance actions, significant asset impairments, gains or losses from divestitures, and other miscellaneous corporate activities. Excluded items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit.

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

						Quarters Ended																		Nine Months Ended
						September 25, 2022									September 26, 2021									September 25, 2022									September 26, 2021
Net sales
Aeronautics						$	7,089								$	6,568								$	19,352								$	19,621
Missiles and Fire Control						2,831									2,781									8,030									8,474
Rotary and Mission Systems						3,781									3,980									11,345									12,329
Space						2,882									2,699									8,266									8,891
Total net sales						$	16,583								$	16,028								$	46,993								$	49,315
Operating profit
Aeronautics						$	759								$	714								$	2,050								$	1,979
Missiles and Fire Control						382									413									1,184									1,210
Rotary and Mission Systems						414									459									1,165									1,350
Space						301									264									814									826
Total business segment operating profit						1,856									1,850									5,213									5,365
Unallocated items
FAS/CAS pension operating adjustment						430									491									1,281									1,469
Severance and restructuring charges						—									—									—									(36)
Other, net						(127)									(47)									(439)									(130)
Total unallocated items						303									444									842									1,303
Total consolidated operating profit						$	2,159								$	2,294								$	6,055								$	6,668

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Our business segments’ results of operations include pension expense only as calculated under U.S. Government Cost Accounting Standards (CAS), which we refer to as CAS pension cost. We recover CAS pension and other postretirement benefit plan cost through the pricing of our products and services on U.S. Government contracts and, therefore, recognize CAS pension cost in each of our business segment’s net sales and cost of sales. Our consolidated financial statements must present pension and other postretirement benefit plan income calculated in accordance with FAS requirements under U.S. GAAP. The operating portion of the total FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension income (expense) and total CAS pension cost. The non-service FAS pension income (expense) components are included in non-service FAS pension income (expense) in our consolidated statements of earnings. As a result, to the extent that CAS pension cost exceeds the service cost component of FAS pension income (expense), we have a favorable FAS/CAS pension operating adjustment.

The total FAS/CAS pension adjustment for the quarters and nine months ended September 25, 2022 and September 26, 2021, including the service and non-service cost components of FAS pension income (expense) for our qualified defined benefit pension plans, were as follows (in millions):

						Quarters Ended																		Nine Months Ended
						September 25, 2022									September 26, 2021									September 25, 2022									September 26, 2021
Total FAS income (expense) and CAS cost
FAS pension income (expense)						$	91								$	(1,598)								$	(1,148)								$	(1,465)
Less: CAS pension cost						450									517									1,349									1,549
Total FAS/CAS pension adjustment						$	541								$	(1,081)								$	201								$	84
Service and non-service cost reconciliation
FAS pension service cost						$	(20)								$	(26)								$	(68)								$	(80)
Less: CAS pension cost						450									517									1,349									1,549
Total FAS/CAS pension operating adjustment						430									491									1,281									1,469
Non-service FAS pension income (expense)						111									(1,572)									(1,080)									(1,385)
Total FAS/CAS pension adjustment						$	541								$	(1,081)								$	201								$	84

The total FAS/CAS pension adjustment for the nine months ended September 25, 2022 reflects a noncash, non-operating pension settlement charge of $1.5 billion ($1.2 billion, or $4.33 per share, after-tax) recognized in the second quarter in connection with the transfer of $4.3 billion of our gross defined benefit pension obligations and related plan assets to an insurance company on June 24, 2022. The total FAS/CAS pension adjustment during the quarter and nine months ended September 26, 2021 reflects a noncash, non-operating pension settlement charge of $1.7 billion ($1.3 billion, or $4.72 per share, after-tax) recognized in connection with the transfer of $4.9 billion of our gross defined benefit pension obligations and related plan assets to an insurance company on August 3, 2021. See Note 6 - Postretirement Benefit Plans.

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.

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Many of our contracts span several years and include highly complex technical requirements. At the outset of a contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract and assess the effects of those risks on our estimates of total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset agreements, required under certain contracts with international customers). The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements, schedule and costs in the initial estimated total costs to complete the contract and variable considerations. Profit booking rates may increase during the performance of the contract if we successfully retire risks related to the technical, schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate. For further discussion on fixed-price contracts, see “Note 10 - Other” included in our Notes to Consolidated Financial Statements.

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

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

Changes in net sales and operating profit generally are expressed in terms of volume. Changes in volume refer to increases or decreases in sales or operating profit resulting from varying production activity levels, deliveries or service levels on individual contracts. Volume changes in segment operating profit are typically based on the current profit booking rate for a particular contract.

In addition, comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts for which we recognize revenue over time using the percentage-of-completion cost-to-cost method to measure progress towards completion. Increases in the profit booking rates, typically referred to as favorable profit adjustments, usually relate to revisions in the estimated total costs to fulfill the performance obligations that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate, for example COVID-19 impacts or supply chain disruptions, 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 profit booking rate adjustments increased segment operating profit by approximately $455 million and $1.3 billion during the quarter and nine months ended September 25, 2022 and $580 million and $1.5 billion during the quarter and nine months ended September 26, 2021.

We periodically experience performance issues and record losses for certain programs. For further discussion on programs at Aeronautics and RMS, see “Note 10 - Other” included in our Notes to Consolidated Financial Statements.

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Aeronautics

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

						Quarters Ended																		Nine Months Ended
						September 25, 2022									September 26, 2021									September 25, 2022									September 26, 2021
Net sales						$	7,089								$	6,568								$	19,352								$	19,621
Operating profit						759									714									2,050									1,979
Operating margin						10.7		%							10.9		%							10.6		%							10.1		%

Aeronautics’ net sales during the quarter ended September 25, 2022 increased $521 million, or 8%, compared to the same period in 2021. Net sales increased by approximately $425 million for the F-35 program due to the recognition of $325 million of sales deferred from the second quarter of 2022 to the third quarter of 2022 until additional contractual authorization and funding was received on the Lot 15 contract and higher volume and net favorable profit adjustments on production contracts; and about $100 million on classified contracts primarily due to higher volume that was partially offset by lower net favorable profit adjustments.

Aeronautics’ operating profit during the quarter ended September 25, 2022 increased $45 million, or 6%, compared to the same period in 2021. Operating profit increased approximately $70 million for the F-35 program due to the recognition of sales and associated operating profit on the Lot 15 contract as described above and higher net favorable profit adjustments on production contracts; and about $15 million for the F-22 program due to higher net favorable profit adjustments. These increases were partially offset by lower operating profit of approximately $40 million on classified contracts due to the combination of lower net favorable profit adjustments and $25 million of unfavorable profit adjustments recorded in the third quarter of 2022. Net favorable profit booking rate adjustments were $20 million lower in the third quarter of 2022 compared to the same period in 2021.

Aeronautics’ net sales during the nine months ended September 25, 2022 decreased $269 million, or 1%, compared to the same period in 2021. Net sales decreased by approximately $585 million for the F-35 program due to lower volume on production and sustainment contracts as a result of supply chain performance delays and lower net favorable profit adjustments on production and sustainment contracts, partially offset by higher volume on development contracts. This decrease was partially offset by increases of approximately $310 million on classified contracts primarily due to higher volume.

Aeronautics’ operating profit during the nine months ended September 25, 2022 increased $71 million, or 4%, compared to the same period in 2021. Operating profit increased approximately $200 million on classified contracts due to a net of $200 million of unfavorable profit adjustments recognized on a classified program and about $85 million for the F-22 program due to higher net favorable profit adjustments. These increases were partially offset by lower operating profit of approximately $125 million for the F-35 program due to lower net favorable profit adjustments and lower volume on production and sustainment contracts; and about $95 million for the F-16 program due to unfavorable profit adjustments in second quarter of 2022 on a production contract and modernization contracts. Net favorable profit booking rate adjustments were $75 million higher in the nine months ended September 25, 2022 compared to the same period in 2021.

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Missiles and Fire Control

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

						Quarters Ended																		Nine Months Ended
						September 25, 2022									September 26, 2021									September 25, 2022									September 26, 2021
Net sales						$	2,831								$	2,781								$	8,030								$	8,474
Operating profit						382									413									1,184									1,210
Operating margin						13.5		%							14.9		%							14.7		%							14.3		%

MFC’s net sales during the quarter ended September 25, 2022 increased $50 million, or 2%, compared to the same period in 2021. The increase was primarily attributable to higher net sales of approximately $95 million for integrated air and missile defense programs due to higher volume (PAC-3).This increase was partially offset by a decrease of about $55 million for sensors and global sustainment programs as a result of closeout activities related to the Warrior program in 2021.

MFC’s operating profit during the quarter ended September 25, 2022 decreased $31 million, or 8%, compared to the same period in 2021. The decrease was primarily attributable to lower operating profit for integrated air and missile defense programs due to lower net favorable profit adjustments of approximately $50 million for the PAC-3 program and an unfavorable profit adjustment of about $40 million on the Advanced Radar Threat System Variant 2 (ARTS-V2) program, partially offset by the impact of higher volume on PAC-3; and about $10 million for sensors and global sustainment programs primarily due to favorable profit adjustments on the Warrior program in the third quarter of 2021 as a result of the program being terminated in March 2021. These net decreases were partially offset by unfavorable profit adjustments of approximately $25 million on an energy program in the third quarter of 2021 that did not recur in 2022. Net favorable profit booking rate adjustments were $75 million lower in the third quarter of 2022 compared to the same period in 2021.

MFC’s net sales during the nine months ended September 25, 2022 decreased $444 million, or 5%, compared to the same period in 2021. The decrease was primarily attributable to lower net sales of approximately $285 million for sensors and global sustainment programs due to lower volume on SOF GLSS as a result of troop withdrawals from Afghanistan and lower volume and net favorable profit adjustments on Sniper Advanced Targeting Pod (SNIPER®); and about $110 million for tactical and strike missile programs due to lower volume (air dominance weapon systems). Net sales for integrated air and missile defense programs were comparable as lower volume (THAAD) and lower net favorable profit adjustments (PAC-3) were mostly offset by higher volume (PAC-3).

MFC’s operating profit during the nine months ended September 25, 2022 decreased $26 million, or 2% compared to the same period in 2021. The decrease was primarily attributed to lower operating profit for integrated air and missile defense programs due to lower net favorable profit adjustments of approximately $60 million for the PAC-3 program and an unfavorable profit adjustment of about $40 million on the ARTS-V2 program. This decrease was partially offset by an increase of about $35 million for tactical and strike missile programs due to higher net favorable profit adjustments (HIMARS, GMLRS and JASSM); and higher unfavorable profit adjustments of approximately $25 million on an energy program in 2021. Operating profit for sensors and global sustainment programs was comparable as the net effect of favorable profit adjustments on an international program in the first quarter of 2022 was mostly offset by the closeout activities related to the Warrior program in 2021. In addition, operating margin was positively impacted when compared to the nine months ended September 26, 2021 due to contract mix (lower SOF GLSS volume and lower development volume at tactical and strike missiles). Net favorable profit booking rate adjustments were $55 million lower in the nine months ended September 25, 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																		Nine Months Ended
						September 25, 2022									September 26, 2021									September 25, 2022									September 26, 2021
Net sales						$	3,781								$	3,980								$	11,345								$	12,329
Operating profit						414									459									1,165									1,350
Operating margin						10.9		%							11.5		%							10.3		%							10.9		%

RMS’ net sales during the quarter ended September 25, 2022 decreased $199 million, or 5%, compared to the same

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period in 2021. The decrease was primarily attributable to lower net sales of approximately $160 million for Sikorsky helicopter programs due to lower production volume and net favorable profit adjustments (Black Hawk); and about $35 million for various C6ISR (command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance) programs due to lower volume.

RMS’ operating profit during the quarter ended September 25, 2022 decreased $45 million, or 10%, compared to the same period in 2021.The decrease was primarily attributable to approximately $65 million for Sikorsky helicopter programs due to lower net favorable profit adjustments and volume (Black Hawk). This decrease was partially offset by an increase of about $10 million for IWSS programs due primarily to $45 million of unfavorable profit adjustments on a ground-based radar program in the third quarter of 2021 that did not recur in the third quarter of 2022, partially offset by lower net favorable profit adjustments on certain programs (TPQ-53 and Vertical Launching System (VLS)). Net favorable profit booking rate adjustments were $15 million lower in the third quarter of 2022 compared to the same period in 2021.

RMS’ net sales during the nine months ended September 25, 2022 decreased $984 million, or 8%, compared to the same period in 2021.The decrease was primarily attributable to lower net sales of approximately $305 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 2022; about $300 million for Sikorsky helicopter programs due to lower production volume (Black Hawk); approximately $240 million for IWSS programs due to lower volume (Littoral Combat Ship (LCS)) and Advanced Hawkeye); and about $140 million for various C6ISR programs due to lower volume.

RMS’ operating profit during the nine months ended September 25, 2022 decreased $185 million, or 14%, compared to the same period in 2021. The decrease was primarily attributable to approximately $95 million for Sikorsky helicopter programs due to lower production volume and net favorable profit adjustments (Black Hawk), partially offset by higher net favorable profit adjustments on certain programs (Combat Rescue Helicopter (CRH)); about $40 million for various C6ISR programs due to lower net favorable profit adjustments and volume; and approximately $40 million for IWSS programs due to lower net favorable profit adjustments (TPQ-53 and Aegis), partially offset by $30 million of unfavorable profit adjustments on a ground-based radar program in 2021 that did not recur in 2022. 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 2022, offset by higher net favorable profit adjustments on various other programs. Net favorable profit booking rate adjustments were $95 million lower in the nine months ended September 25, 2022 compared to the same period in 2021.

Space

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

						Quarters Ended																		Nine Months Ended
						September 25, 2022									September 26, 2021									September 25, 2022									September 26, 2021
Net sales						$	2,882								$	2,699								$	8,266								$	8,891
Operating profit						301									264									814									826
Operating margin						10.4		%							9.8		%							9.8		%							9.3		%

Space’s net sales during the quarter ended September 25, 2022 increased $183 million, or 7%, compared to the same period in 2021. The increase was primarily attributable to higher net sales of approximately $155 million for strategic and missile defense programs due to higher development volume (NGI).

Space’s operating profit during the quarter ended September 25, 2022 increased $37 million, or 14%, compared to the same period in 2021. The increase was primarily attributable to approximately $50 million of higher equity earnings from the company's investment in United Launch Alliance (ULA) due to higher launch volume and launch mix. This increase was partially offset by a decrease of about $15 million for commercial civil space programs due to lower net favorable profit adjustments and lower volume (primarily the Orion and Human Lander System (HLS) programs). Operating profit for national security space programs was comparable as an unfavorable profit adjustment of $45 million on a commercial ground solutions program in the third quarter of 2021 that did not recur was offset by lower net favorable profit adjustments (Space-Based Infrared System (SBIRS) and classified programs). Net favorable profit booking rate adjustments were $15 million lower in the third quarter of 2022 compared to the same period in 2021.

Space’s net sales during the nine months ended September 25, 2022 decreased $625 million, or 7%, compared to the same period in 2021. The decrease was primarily attributable to lower net sales of approximately $865 million due to the renationalization of the AWE program on June 30, 2021, which was no longer included in our financial results beginning in

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the third quarter of 2021; and about $165 million for commercial civil space programs due to lower volume (Orion and HLS programs). These decreases were partially offset by higher net sales of about $385 million for strategic and missile defense programs due to higher development volume (NGI).

Space’s operating profit during the nine months ended September 25, 2022 decreased $12 million, or 1%, compared to the same period in 2021. The decrease was primarily attributable to approximately $50 million for commercial civil space programs due to lower net favorable profit adjustments and lower volume (the Orion and HLS programs); and about $40 million for national security space programs primarily due to lower net favorable profit adjustments (SBIRS and classified programs), partially offset by lower net unfavorable profit adjustments of $50 million on a commercial ground solutions program. These decreases were partially offset by higher equity earnings of approximately $50 million from the company's investment in ULA due to higher launch volume and launch mix; and about $30 million for strategic and missile defense programs due to higher net favorable profit adjustments and volume (primarily NGI and other missile defense programs). Operating profit for the AWE program was comparable as its operating profit in the first nine months of 2021 was mostly offset by accelerated amortization expense for intangible assets as a result of the renationalization. Net favorable profit booking rate adjustments were $70 million lower in the nine months ended September 25, 2022 compared to the same period in 2021.

Total equity earnings (primarily ULA) represented approximately $50 million, or 17%, and $85 million, or 10%, of Space's operating profit during the quarter and nine months ended September 25, 2022. Total equity earnings were not significant during the quarter ended September 26, 2021 and $35 million, or 4% during the nine months ended September 26, 2021.

FINANCIAL CONDITION

Liquidity and Cash Flows

At September 25, 2022, we had cash and cash equivalents of $2.4 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 also have access to credit markets to fund share repurchases. 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 from operations. We generally do not begin work on contracts until funding is appropriated by the customer. However, from time to time, we 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, this negatively affects our cash flows and 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 39% of the sales we recorded during the nine months ended September 25, 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 disruptions and delays. The U.S. Government has taken certain actions and enacted legislation to mitigate the impacts of

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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 supply chain with a focus on small and at risk businesses. As of September 25, 2022, we have accelerated $1.1 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. Subsequent to the third quarter of 2022, on September 30, 2022, the company authorized a fourth quarter dividend payment of $3.00 per share, representing an increase of $0.20 per share. On October 17, 2022, the Board of Directors authorized an additional $14 billion to the program from the $117 million that remained at September 25, 2022. This multi-year share repurchase program follows the substantial completion of purchases of common stock under the prior repurchase authorization. We anticipate executing a $4.0 billion accelerated share repurchase program in the fourth quarter of 2022 bringing our total share repurchases for the year to approximately $8.0 billion. The remainder of the repurchase program authorization is expected to be utilized over a three-year period. We expect to fund the repurchases through a combination of cash on hand and the issuance of debt. The stock repurchase program does not have an expiration date and may be amended or terminated by the board of directors at any time. The amount of shares ultimately purchased and the timing of purchases are at the discretion of management and subject to compliance with applicable law and regulation.

We continue to actively manage our debt levels, including maturities and interest rates, as evidenced by the debt transaction in the second quarter of 2022. We also actively manage our pension obligations and 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 as we did on June 24, 2022. See “Note 6 - Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements for additional information. 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, non-operating pension settlement charges in earnings in the applicable reporting period.

There were no material changes during the quarter or nine months ended September 25, 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.

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 25, 2022									September 26, 2021
Cash and cash equivalents at beginning of year						$	3,604								$	3,160
Operating activities
Net earnings						3,820									4,266
Noncash adjustments						2,090									2,654
Changes in working capital						(621)									(2,176)
Other, net						585									209
Net cash provided by operating activities						5,874									4,953
Net cash used for investing activities						(981)									(619)
Net cash used for financing activities						(6,067)									(4,767)
Net change in cash and cash equivalents						(1,174)									(433)
Cash and cash equivalents at end of period						$	2,430								$	2,727

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Operating Activities

Net cash provided by operating activities during the nine months ended September 25, 2022 increased $921 million compared to the same period in 2021. The increase was primarily driven by $1.6 billion of lower working capital (defined as receivables, contract assets, and inventories less accounts payable and contract liabilities) which was primarily attributable to timing of production and billing cycles affecting contract assets (primarily the F-35 program in our Aeronautics business segment) and timing of cash payments for accounts payable, partially offset by liquidation of inventories (primarily TLS and Sikorsky helicopter programs in our RMS business segment).

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 that are capitalized). We use free cash flow to evaluate our business performance and overall liquidity, as well as 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 repurchases 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 and pension contributions. While management believes that free cash flow as a non-GAAP financial measure may be useful in evaluating our financial performance, 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):

						Nine Months Ended
						September 25, 2022									September 26, 2021
Cash from operations						$	5,874								$	4,953
Capital expenditures						(977)									(915)
Free cash flow						$	4,897								$	4,038

Investing Activities

Net cash used for investing activities during the nine months ended September 25, 2022 increased $362 million compared to the same period in 2021. The increase in cash used for investing activities is due to the receipt of $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 $977 million and $915 million during the nine months ended September 25, 2022 and September 26, 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 $6.1 billion during the nine months ended September 25, 2022, compared to $4.8 billion during the same period in 2021.

During the nine months ended September 25, 2022 and September 26, 2021, we paid dividends totaling $2.3 billion ($8.40 per share) and $2.2 billion ($7.80 per share).

During the nine months ended September 25, 2022, we paid $3.7 billion to repurchase 11.1 million shares of our common stock, some of which were settled subsequent to the end of the third quarter. See “Note 9 - Stockholders’ Equity” included in our Notes to Consolidated Financial Statements for additional information. During the nine months ended September 26, 2021, we paid $2.0 billion to repurchase 5.6 million shares of our common stock.

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During the nine months ended September 25, 2022, we received net proceeds of $2.3 billion from issuance of senior unsecured notes and used the net proceeds from the offering to redeem all of the outstanding $500 million Notes due 2023, $750 million Notes due 2025 and used the remaining balance of the net proceeds to redeem $1.0 billion of our outstanding $2.0 billion Notes due 2026. See “Note 10 - Other” included in our Notes to Consolidated Financial Statements for additional information.

Capital Resources

At September 25, 2022, we held cash and cash equivalents of $2.4 billion that was generally available to fund ordinary business operations without significant legal, regulatory, or other restrictions.

At September 25, 2022, we had a $3.0 billion revolving credit facility (the Revolving Credit Facility) with various banks with an expiration date of August 24, 2027 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 September 25, 2022. See “Note 10 - Other” included in our Notes to Consolidated Financial Statements for additional information.

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 25, 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 $11.5 billion as of September 25, 2022 and is in the form of publicly-issued notes that bear interest at fixed rates. As of September 25, 2022, we were in compliance with all covenants contained in our debt and credit agreements.

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 eight Foreign Military Sales (FMS) customers; as well as interest from other countries. We have seen strong international demand for the F-35 in the first three quarters of 2022. During the first quarter of 2022, Finland became the seventh FMS customer to join the 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 the U.S. Government for the procurement of 88 aircraft. During the third quarter of 2022, the Swiss government signed a Letter of Offer and Acceptance for the procurement of 36 F-35 aircraft and became the eighth FMS customer to join the program.

During the third quarter of 2022, we announced an agreement in principle with the U.S. Government on the F-35 Low Rate Initial Production (LRIP) Lots 15-17 production contract for approximately 375 aircraft and we continue to engage with the U.S. Government to definitize the contract. We have been performing work on the Lots 15-17 production under customer authorization and initial funding under an advance acquisition contract received in December 2019. During the second quarter of 2022, our costs began to exceed the contract value and available funding on the Lots 15-17 advance acquisition contract, which prevented the recognition of approximately $325 million of sales and associated operating profit in the second quarter. This also prevented us from invoicing and receiving cash of approximately $465 million in the second quarter of 2022 for costs incurred.

In the third quarter of 2022, we received an undefinitized contract action for Lot 15 aircraft and funding from the U.S. Government that allowed us to resume invoicing, collect the cash deferred from the second quarter, and recognize the sales and associated operating profit deferred from the second quarter. This undefinitized contract action added 129 Lot 15 aircraft to our backlog while we continue working to definitize the Lots 15-17 production contract.

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As part of the Lots 15-17 agreement in principle referenced above, the U.S. Government reduced the acquisition quantities based on budget availability. COVID-19 and other impacts experienced by the F-35 enterprise have continued to impact our near-term production plans. While we expect the LRIP Lots 15-17 production contract to support our long-term objective to produce 156 aircraft a year, deliveries are expected to be in the range of 148-153 aircraft for 2022 and in the range of 147-153 aircraft per year in 2023 and 2024, before we achieve our 156 aircraft delivery target in 2025. We anticipate annual deliveries of 156 aircraft beyond 2025 for the foreseeable future.

During the third quarter of 2022, F-35 deliveries were temporarily paused because specialty metals sourced from the People’s Republic of China were discovered in one component provided by a supplier. The material in question poses no performance, quality, safety, or security risks and the F-35 remains safe for flight. The U.S. Government has processed a National Security Waiver that permits the Department of Defense to accept delivery of aircraft that contain the component, and we are in discussions with the U.S. Government to incorporate the waiver into the underlying production contracts, which will permit deliveries to formally resume. We currently expect deliveries to resume in the fourth quarter of 2022.

During the third quarter of 2022, we delivered 27 production aircraft to our U.S. and international partner countries, and FMS customers, resulting in total deliveries of 841 production aircraft. We have 271 production aircraft in backlog, including orders from our international partner customers and countries.

Given the size and complexity of the F-35 program, we anticipate that there will be continual reviews related to aircraft performance, program schedule, delivery schedule, cost, and requirements as part of the DoD, Congressional, and international countries’ oversight, and budgeting processes. In addition to the contract negotiation and funding and supplier performance challenges described above, current program challenges include Lockheed Martin and partner performance (including COVID-19 performance-related challenges), software development, execution of future flight tests and findings resulting from testing and operating the aircraft, the level of cost associated with life cycle operations, sustainment and potential contractual obligations, inflation-related cost pressures, and the ability to 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, except for, as set forth below.

Postretirement Benefit Plans

As previously disclosed, on June 24, 2022, we purchased group annuity contracts to transfer $4.3 billion of gross defined benefit pension obligations and related plan assets to an insurance company for approximately 13,600 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. In connection with this transaction, we recognized a noncash, non-operating pension settlement charge of $1.5 billion ($1.2 billion, or $4.33 per share, after-tax) for the affected defined benefit pension plans in the second quarter ended June 26, 2022, which represents the accelerated recognition of actuarial losses that were included in the accumulated other comprehensive loss account within stockholders’ equity. For more information on the transaction and remeasurement, see “Note 6 - Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements.

Goodwill and Intangible Assets

The carrying value of our goodwill balance was $10.8 billion at September 25, 2022, including $2.7 billion of goodwill at our Sikorsky reporting unit. The carrying value of our Sikorsky reporting unit also included an indefinite-lived trademark intangible asset of $887 million as of September 25, 2022. In the fourth quarter of 2021, we performed our annual impairment test for goodwill and indefinite-lived trademark intangible asset, 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% and the fair value of the intangible asset exceeded its carrying value by a margin of approximately 15%. We will perform our next annual goodwill and intangible asset impairment test during the fourth quarter of 2022 and will perform a quantitative assessment of the

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fair value of our Sikorsky reporting unit.

The fair values of both our Sikorsky reporting unit and the indefinite-lived trademark intangible asset at our Sikorsky reporting unit can be significantly impacted by the reporting unit’s 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 and the indefinite-lived trademark intangible asset at our Sikorsky reporting unit are 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 or inflation. 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.