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, 2022 (2022 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. Our main areas of focus are in defense, space, intelligence, homeland security and information technology, including cybersecurity. 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 26, 2023, 73% of our $15.1 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)), 26% 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.

U.S. Budget Environment

With nearly three quarters of our sales from the U.S. government, U.S. government spending levels, particularly defense spending, and timely funding thereof can affect our financial performance over the short and long term.

On December 29, 2022, the President signed the FY 2023 Omnibus Appropriations Act into law, which provides $858 billion in total national defense funding, of which $816.7 billion is for the DoD base budget. This reflects a $44.6 billion increase over the FY 2023 request for national defense spending, and a $43.7 billion increase for the DoD. The President’s Fiscal Year (FY) 2024 budget request was submitted to Congress on March 9, 2023 initiating the FY 2024 defense authorization and appropriations legislative process. The request includes $866 billion for National Defense, of which $842 billion is for the DoD base budget.

In addition to the FY 2024 budget process, Congress will have to contend with the legal limit on U.S. debt, commonly known as the debt ceiling. The current statutory limit of $31.4 trillion was reached in January, requiring the Treasury Department to take accounting measures to continue normally financing U.S. government obligations while avoiding exceeding the debt ceiling. It is expected, however, the U.S. government will exhaust these measures by June 2023. If the debt ceiling is not raised, the U.S. government may not be able to fulfill its funding obligations and there could be significant disruption to all discretionary programs and wider financial and economic repercussions. The federal budget and debt ceiling are expected to continue to be the subject of considerable congressional debate. Although we believe DoD, intelligence and homeland security programs will continue to receive consensus support for increased funding and would likely receive priority if this scenario came to fruition, the effect on individual programs or Lockheed Martin cannot be predicted at this time.

See also the discussion of U.S. Government funding risks within “Item 1A, Risk Factors” included in our 2022 Form 10-K.

Geopolitical and Economic Environment

We operate in a complex and evolving global security environment and our business is affected by geopolitical issues. Russia’s invasion of Ukraine has significantly elevated global geopolitical tensions and security concerns. As a result, we have received increased interest for certain of our products and services as countries seek to improve their security posture. 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 have seen 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 continue to evaluate capacity at our operations and the supply chain to anticipate potential demand and enable us to deliver critical capabilities.

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COVID-19 has previously impacted our operational and financial performance and its impact in future periods, including our ability to execute our programs in the expected timeframe, remains uncertain and will depend on future COVID-19 related developments, including the impact of COVID-19 infection or potential new variants or subvariants, and supplier impacts and related government actions to prevent and manage disease spread. 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 also are difficult to predict, but could negatively affect our future results and performance.

Our business and financial performance may also be affected by general economic conditions. Heightened levels of inflation and the potential worsening of macro-economic conditions present risks for Lockheed Martin, our suppliers and the stability of the broader defense industrial base. We have been experiencing impacts to our labor rates and suppliers have signaled inflation related cost pressures, which will continue to flow through to our costs and pricing. Although inflation did not significantly impact our financial results in the first quarter of 2023, 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. Inflation can also constrain the overall purchasing power of our customers for our products and services potentially impacting future orders. 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.

For additional risks to the company related to the geopolitical and economic environment, see Item 1A, Risk Factors of our 2022 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 year, or year-to-year comparisons of sales and profits, may not be indicative of future operating results. The following discussions of comparative results 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 26, 2023									March 27, 2022
Net sales																								$	15,126								$	14,964
Cost of sales																								(13,080)									(13,055)
Gross profit																								2,046									1,909
Other (expense) income, net																								(9)									24
Operating profit																								2,037									1,933
Interest expense																								(202)									(135)
Non-service FAS pension income																								110									140
Other non-operating income, net																								49									123
Earnings before income taxes																								1,994									2,061
Income tax expense																								(305)									(328)
Net earnings																								$	1,689								$	1,733
Diluted earnings per common share																								$	6.61								$	6.44

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

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Net Sales

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

												Quarters Ended
																		March 26, 2023						March 27, 2022
Products																		$	12,526					$	12,494
% of total net sales																		82.8		%				83.5		%
Services																		2,600						2,470
% of total net sales																		17.2		%				16.5		%
Total net sales																		$	15,126					$	14,964

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

Product Sales

Product sales during the quarter ended March 26, 2023 were comparable to the same period in 2022 as higher product sales of $375 million at Space were mostly offset by lower product sales of $260 million at Aeronautics and $85 million at MFC. Higher product sales at Space was due to higher development volume for classified programs and higher development volume for Next Generation Interceptor (NGI). Lower product sales at Aeronautics were due to lower volume on F-35 production contracts, partially offset by higher volume on classified contracts. Lower product sales at MFC were due to lower volume for Guided Multiple Launch Rocket Systems (GMLRS).

Service Sales

Service sales increased $130 million, or 5%, during the quarter ended March 26, 2023 compared to the same period in 2022. The increase is primarily attributable to higher sales of approximately $130 million at Aeronautics due to higher volume on F-35 sustainment contracts.

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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 (a)
																		March 26, 2023									March 27, 2022
Cost of sales – products																								$	(11,151)								$	(11,107)
% of product sales																								89.0		%							88.9		%
Cost of sales – services																								(2,284)									(2,167)
% of service sales																								87.8		%							87.7		%
Other unallocated, net																								355									219
Total cost of sales																								$	(13,080)								$	(13,055)

(a)Effective January 1, 2023, the company reclassed intangible asset amortization expense out of the business segment operating profit and into the unallocated items line item to better align with how management views and manages the business. See “Note 1 - Basis of Presentation” included in our Notes to Consolidated Financial Statements for further information regarding the impact of this change on our current and prior period segment operating profit.

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 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 during the quarter ended March 26, 2023 were comparable to the same period in 2022 as higher product costs of $305 million at Space were offset by lower product costs of $240 million at Aeronautics and $75 million at MFC. Higher product costs at Space were due to higher development volume for classified programs and higher development volume for NGI. Lower product costs at Aeronautics were due to lower volume on F-35 production contracts, partially offset by higher volume on classified contracts. Lower product costs at MFC were due to lower volume for GMLRS.

Service Costs

Service costs increased $117 million, or 5%, during the quarter ended March 26, 2023 compared to the same period in 2022. The increase was primarily attributable to higher product costs of approximately $115 million at Aeronautics due to higher volume on F-35 sustainment contracts.

Other Unallocated, Net

Other unallocated, net primarily includes the FAS/CAS pension operating adjustment (which represents the difference between total CAS pension cost recorded in our business segments’ results of operations and the service cost component of Financial Accounting Standards (FAS) pension expense), stock-based compensation expense, changes in the fair value of assets and liabilities for deferred compensation plans, intangible asset amortization 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 $355 million during the quarter ended March 26, 2023, compared to $219 million during the quarter ended March 27, 2022. Other unallocated, net was higher primarily due

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to gains during the quarter ended March 26, 2023, compared to losses during the same period in 2022 for the fair value of assets and liabilities related to deferred compensation plans.

Other (Expense) Income, Net

Other (expense) income, net, primarily includes earnings generated by equity method investees. Other expense, net was $9 million during the quarter ended March 26, 2023, compared to other income, net of $24 million during the quarter ended March 27, 2022. Other expense, net during the quarter ended March 26, 2023 included lower earnings generated by our equity method investment in ULA due to lower launch volume and an increase in new product development costs.

Interest Expense

Interest expense during the quarter ended March 26, 2023 was $202 million, compared to $135 million during the quarter ended March 27, 2022. The increase in interest expense in 2023 resulted primarily from the issuance of notes in October of 2022.

Non-Service FAS Pension Income

Non-service FAS pension income was $110 million during the quarter ended March 26, 2023, compared to $140 million during the quarter ended March 27, 2022. The decrease was primarily due to higher interest cost and lower plan assets and associated expected return. See “Note 6 - Postretirement Benefit Plans” included in our Notes to Consolidated Financial Statements for additional information.

Other Non-operating Income, Net

Other non-operating income, net primarily includes gains or losses related to changes in the fair value of investments or gains or losses upon sale of investments. During the quarter ended March 26, 2023, other non-operating income, net was $49 million compared to $123 million during the quarter ended March 27, 2022. The decrease during the quarter ended March 26, 2023 was primarily due to lower gains for the fair value of certain investments. 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% for the quarter ended March 26, 2023 and 15.9% for the quarter ended March 27, 2022.The rates for both periods benefited from research and development tax credits, tax deductions for foreign derived intangible income, dividends paid to our defined contribution plans with an employee stock ownership plan feature, and employee equity awards. The rate for the first quarter of 2023 was lower than the first quarter of 2022 primarily due to increased research and development tax credits.

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 eliminated 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. This provision is expected to increase our 2023 cash tax liability by approximately $575 million and our net deferred tax assets will increase by a similar amount. The actual impact on 2023 cash tax liability will depend on the amount of research and development expenses paid or incurred in 2023 among other factors. The cash tax impact will continue over the five-year amortization period but will decrease over the period and be immaterial by 2027.

As of December 31, 2022, our liabilities associated with uncertain tax positions were $1.6 billion. For the quarter ended March 26, 2023, our liabilities associated with uncertain tax positions increased to $1.9 billion with a corresponding increase to net deferred tax assets primarily as a result of the provision described above from the Tax Cuts and Jobs Act of 2017.

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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 were immaterial to our financial results, financial position and cash flows.

Net Earnings

We reported net earnings of $1.7 billion ($6.61 per share) during the quarter ended March 26, 2023, compared to $1.7 billion ($6.44 per share) during the quarter ended March 27, 2022. Net earnings and earnings per share for the quarter ended March 26, 2023 were affected by the factors mentioned above. Earnings per share also benefited from a net decrease of approximately 13.5 million weighted average common shares outstanding during the quarter ended March 26, 2023, compared to the same periods in 2022. 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 are 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, stock-based compensation expense, changes in the fair value of assets and liabilities for deferred compensation plans, retiree benefits, significant severance charges, significant asset impairments, gains or losses from divestitures, intangible asset amortization expense, 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.

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Sales and operating profit for each of our business segments were as follows (in millions):

												Quarters Ended
																		March 26, 2023									March 27, 2022
Net sales
Aeronautics																								$	6,269								$	6,401
Missiles and Fire Control																								2,388									2,452
Rotary and Mission Systems																								3,510									3,552
Space																								2,959									2,559
Total net sales																								$	15,126								$	14,964
Operating profit
Aeronautics																								$	675								$	679
Missiles and Fire Control																								377									385
Rotary and Mission Systems																								350									406
Space																								280									248
Total business segment operating profit																								1,682									1,718
Unallocated items
FAS/CAS pension operating adjustment																								415									426
Intangible asset amortization expense																								(62)									(62)
Other, net																								2									(149)
Total unallocated items																								355									215
Total consolidated operating profit																								$	2,037								$	1,933

Effective January 1, 2023, we no longer consider amortization expense related to purchased intangible assets when evaluating the operating performance of our business segments. As a result, intangible asset amortization expense, which was previously included in segment operating profit, is now reported in unallocated items within total consolidated operating profit. This change has been applied to the accompanying amounts above, including the amounts for 2022. See “Note 1 - Basis of Presentation” included in our Notes to Consolidated Financial Statements for further information regarding the impact of this change on our current and prior period segment operating profit. We also included supplemental tables under the caption Pro Forma Business Segment Summary Operating Results in our earnings release included as exhibit 99.1 to our Current Report on Form 8-K filed January 24, 2023, which provide unaudited pro forma financial information reflecting the impact of the change in presentation as-if it had been applicable for the quarters and year to date periods in 2022 and 2021. The supplemental tables, the earnings release and the Current Report on Form 8-K are not, and shall not be deemed to be, incorporated by reference herein.

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 Financial Accounting Standards (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 and total CAS pension cost. The non-service FAS pension income components are included in non-service FAS pension 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 income, we have a favorable FAS/CAS pension operating adjustment.

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

												Quarters Ended
																		March 26, 2023									March 27, 2022
Total FAS income and CAS cost
FAS pension income																								$	94								$	116
Less: CAS pension cost																								431									450
Total FAS/CAS pension adjustment																								$	525								$	566
Service and non-service cost reconciliation
FAS pension service cost																								$	(16)								$	(24)
Less: CAS pension cost																								431									450
Total FAS/CAS pension operating adjustment																								415									426
Non-service FAS pension income																								110									140
Total FAS/CAS pension adjustment																								$	525								$	566

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 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

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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.

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. 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 they are determined and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other items, which may or may not impact sales. Favorable items may include the positive resolution of contractual matters, cost recoveries on severance and restructuring, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; COVID-19 impacts or supply chain disruptions; 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 $415 million during the quarter ended March 26, 2023 and $405 million during the quarter ended March 27, 2022.

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.

We have contracted with the Canadian Government for the Canadian Maritime Helicopter Program at our RMS business segment that provides for design, development, and production of CH-148 aircraft (the Original Equipment contract), which is a military variant of the S-92 helicopter, and for logistical support to the fleet (the In Service Support contract) over an extended time period. The program has experienced performance issues, including delays in the final aircraft deliveries from the original contract requirement, and the Royal Canadian Air Force’s flight hours have been less than originally anticipated, which has impacted program revenues and the recovery of our costs under this program. Future sales and recovery of existing and future costs under the program are highly dependent upon achieving a certain number of flight hours, which are uncertain and dependent on aircraft availability and performance, and the availability of Canadian government resources. We are currently in discussions with the Canadian Government to potentially restructure certain contractual terms and conditions that may be beneficial to both parties. Future performance issues or changes in our estimates due to revised contract scope or customer requirements may affect our ability to recover our costs and may result in a loss that could be material to our operating results.

We also have a number of contracts with Türkish industry for the Türkish Utility Helicopter Program (TUHP), which anticipates co-production with Türkish industry for production of T70 helicopters for use in Türkiye, as well as the related provision of Türkish goods and services under buy-back or offset obligations, to include the future sales of helicopters built in Türkiye for sale globally. In 2020, the U.S. Government imposed certain sanctions on Türkish entities and persons that have affected our ability to perform under the TUHP contracts and we have provided force majeure notices under the affected contracts. The TUHP contracts may be restructured or terminated, either in whole or in part, which could result in a further reduction in sales, the imposition of penalties or assessment of damages, and increased unrecoverable costs, which could have an adverse effect on our financial results.

Our MFC business segment was previously awarded a competitively bid classified contract, which includes multiple phases of the program. We are currently performing on a phase which is primarily structured as cost-type. Additional phases are primarily fixed price and are not currently able to be awarded. If the additional phases are awarded at a later date, we expect that those phases would be performed at a loss. We will continue to monitor the circumstances on the program and may be required to recognize a reach-forward loss if circumstances change. Any such losses could be material to our financial results.

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Aeronautics

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

												Quarters Ended
																		March 26, 2023									March 27, 2022
Net sales																								$	6,269								$	6,401
Operating profit																								675									679
Operating margin																								10.8		%							10.6		%

Aeronautics’ net sales in the quarter ended March 26, 2023 decreased $132 million, or 2%, compared to the same period in 2022. The decrease was primarily attributable to lower net sales of $335 million for the F-35 program due to lower volume on production contracts. This decrease was partially offset by higher sales of $135 million on classified programs due to higher volume and $70 million for the F-16 program due to higher production and sustainment volume.

Aeronautics’ operating profit in the quarter ended March 26, 2023 was comparable to the same period in 2022. Operating profit for the F-35 program was comparable as lower volume on production contracts was mostly offset by contract mix. Operating profit for the F-16 program was comparable as higher volume on production and sustainment contracts was offset by higher unfavorable profit adjustments on a production contract and sustainment contracts. Total net profit booking rate adjustments were approximately $15 million lower in the first quarter of 2023 compared to the same period in 2022.

Missiles and Fire Control

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

												Quarters Ended
																		March 26, 2023									March 27, 2022
Net sales																								$	2,388								$	2,452
Operating profit																								377									385
Operating margin																								15.8		%							15.7		%

MFC’s net sales in the quarter ended March 26, 2023 decreased $64 million, or 3%, compared to the same period in 2022. The decrease was primarily attributable to lower net sales of $85 million for sensors and global sustainment programs as net sales for the first quarter of 2022 reflect the impact of a favorable profit adjustment on an international program as a result of a requirements modification that did not recur in the first quarter of 2023; and lower net sales of $60 million for tactical and strike missile programs due to lower volume (Guided Multiple Launch Rocket Systems (GMLRS)). These decreases were partially offset by higher net sales of $70 million for integrated air and missile defense programs due to the impact of higher net favorable profit adjustments (Patriot Advanced Capability-3 (PAC-3)).

MFC’s operating profit in the quarter ended March 26, 2023 decreased $8 million, or 2%, compared to the same period in 2022. The decrease was primarily attributable to lower operating profit of $85 million for sensors and global sustainment programs due to the favorable profit adjustment on an international program in the first quarter of 2022 as described above. This decrease was partially offset by higher operating profit of $60 million for integrated air and missile defense programs due to the impact of higher net favorable profit adjustments (PAC-3). In addition, operating margin was positively impacted when compared to the first quarter of 2022 due to contract mix at tactical and strike missiles. Total net profit booking rate adjustments were approximately $25 million lower in the first quarter of 2023 compared to the same period in 2022.

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Rotary and Mission Systems

On December 5, 2022, the U.S. Army selected Sikorsky’s competitor in the Future Long Range Assault Aircraft Competition, a component of its Future Vertical Lift initiative to replace a portion of its assault and utility helicopter fleet. On December 28, 2022, Sikorsky, on behalf of Team DEFIANT, filed a protest with the U.S. Government Accountability Office (GAO) challenging the U.S. Army’s decision, and on April 6, 2023 the GAO issued a decision denying the protest. We are not pursuing further litigation in this matter. Sikorsky remains one of two competitors for the other component of the Future Vertical Lift initiative, the Future Attack Reconnaissance Aircraft competition.

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

												Quarters Ended
																		March 26, 2023									March 27, 2022
Net sales																								$	3,510								$	3,552
Operating profit																								350									406
Operating margin																								10.0		%							11.4		%

RMS’ net sales in the quarter ended March 26, 2023 decreased $42 million, or 1%, compared to the same period in 2022. The decrease was primarily attributable to lower net sales of $75 million for Sikorsky helicopter programs due to lower production volume (Black Hawk); and lower net sales of $60 million for various C6ISR (command, control, communications, computers, cyber, combat systems, intelligence, surveillance, and reconnaissance) programs due to lower volume. These decreases were partially offset by higher net sales of $85 million for integrated warfare systems and sensors (IWSS) programs due to higher volume (Aegis and TPY-4 programs).

RMS’ operating profit in the quarter ended March 26, 2023 decreased $56 million, or 14%, compared to the same period in 2022. The decrease was primarily attributable to lower operating profit of $65 million for Sikorsky helicopter programs due to lower production volume, net favorable profit adjustments, and contract mix on the Black Hawk program and unfavorable profit adjustments (CH-53K). Total net profit booking rate adjustments were $35 million lower in the first quarter of 2023 compared to the same period in 2022.

Space

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

												Quarters Ended
																		March 26, 2023									March 27, 2022
Net sales																								$	2,959								$	2,559
Operating profit																								280									248
Operating margin																								9.5		%							9.7		%

Space’s net sales in the quarter ended March 26, 2023 increased $400 million, or 16%, compared to the same period in 2022. The increase was primarily attributable to higher net sales of $185 million for strategic and missile defense programs due to higher development volume (Next Generation Interceptor (NGI)); higher net sales of $170 million for national security space programs due to higher development volume (classified programs) and the impact of higher net favorable profit adjustments (Next Generation Overhead Persistent Infrared geosynchronous satellites (Next Gen OPIR) and classified programs); and higher net sales of $55 million for commercial civil space programs due to higher volume (Orion).

Space’s operating profit in the quarter ended March 26, 2023 increased $32 million, or 13%, compared to the same period in 2022. The increase was primarily attributable to higher operating profit of $70 million for national security space programs due to the impact of higher net favorable profit adjustments (Next Gen OPIR and classified programs). This increase was partially offset by $45 million of lower equity earnings from the company's investment in United Launch Alliance (ULA) due to lower launch volume and an increase in new product development costs. Total net profit booking rate adjustments were $85 million higher in the first quarter of 2023 compared to the same period in 2022.

Total equity (losses)/earnings (primarily ULA) represented approximately $(15) million, or (5)%, of Space's operating profit in the first quarter of 2023, compared to approximately $30 million, or 12% in the first quarter of 2022.

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FINANCIAL CONDITION

Liquidity and Cash Flows

At March 26, 2023, 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 share repurchases. This access includes our $3.0 billion 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 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 41% of the sales we recorded during the quarter ended March 26, 2023, 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. For example, the U.S. Government increased the progress payment rate applicable to us from 80% to 90% at the beginning of the COVID-19 pandemic and a reversal or modification of this policy could affect the timing of our cash flows. 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.

Since the COVID-19 pandemic began, we have remained committed to accelerating payments to the supply chain with a focus on small and at-risk businesses. We will continue to utilize accelerated payments throughout 2023 on an as needed basis.

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. During the quarter ended March 26, 2023, we entered into an accelerated share repurchase (ASR) agreement to repurchase $500 million of our common stock. As of March 26, 2023, the total remaining authorization for future common share repurchases under our program was $9.5 billion, which is expected to be utilized over a three-year period through 2025. We expect to fund the repurchases through a combination of cash from operations and the issuance of additional 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. We also actively manage our pension obligations and expect to continue to opportunistically manage our pension liabilities through the purchase of group annuity contracts or other actions for portions of our outstanding defined benefit pension obligations using assets

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from the pension trust. 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.

There were no material changes during the quarter ended March 26, 2023 to our contractual commitments as presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2022 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):

						Quarters Ended
						March 26, 2023									March 27, 2022
Cash and cash equivalents at beginning of year						$	2,547								$	3,604
Operating activities
Net earnings						1,689									1,733
Noncash adjustments						265									352
Changes in working capital						(267)									(654)
Other, net						(123)									(21)
Net cash provided by operating activities						1,564									1,410
Net cash used for investing activities						(259)									(251)
Net cash used for financing activities						(1,412)									(2,880)
Net change in cash and cash equivalents						(107)									(1,721)
Cash and cash equivalents at end of period						$	2,440								$	1,883

Operating Activities

Net cash provided by operating activities during the quarter ended March 26, 2023 increased $154 million compared to the same period in 2022. The increase was primarily due to various changes in working capital, primarily production and billing cycles impacting contract assets and receivables (primarily F-35 program at Aeronautics and missile programs at MFC), partially offset by the timing of cash payments for accounts payable (primarily Aeronautics).

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 and other investments. 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):

						Quarters Ended
						March 26, 2023									March 27, 2022
Cash from operations						$	1,564								$	1,410
Capital expenditures						(294)									(268)
Free cash flow						$	1,270								$	1,142

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Investing Activities

Net cash used for investing activities during the quarter ended March 26, 2023 increased $8 million compared to the same period in 2022. Capital expenditures totaled $294 million and $268 million during the quarters ended March 26, 2023 and March 27, 2022. The majority of our capital expenditures are 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 $1.4 billion during the quarter ended March 26, 2023, compared to $2.9 billion during the same period in 2022.

During the quarters ended March 26, 2023 and March 27, 2022, we paid dividends totaling $784 million ($3.00 per share) and $767 million ($2.80 per share).

During the quarter ended March 26, 2023, we paid $500 million to repurchase 1.1 million shares of our common stock, of which 0.2 million shares were received upon settlement in April 2023. See “Note 9 - Stockholders’ Equity” included in our Notes to Consolidated Financial Statements for additional information. 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.

Capital Resources

At March 26, 2023, 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 March 26, 2023, 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 March 26, 2023.

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 26, 2023 and December 31, 2022. 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 total outstanding short-term and long-term debt, net of unamortized discounts and issuance costs was $15.6 billion as of March 26, 2023 and is in the form of publicly-issued notes that bear interest at fixed rates. As of March 26, 2023, we were in compliance with all covenants contained in our debt and credit agreements.

We actively seek to finance our business in a manner that preserves financial flexibility while minimizing borrowing costs to the extent practicable. We review changes in financial market and economic conditions to manage the types, amounts and maturities of our indebtedness. We may at times refinance existing indebtedness, vary our mix of variable-rate and fixed-rate debt or seek alternative financing sources for our cash and operational needs.

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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 nine Foreign Military Sales (FMS) customers; as well as interest from other countries. We continue to see strong international demand for the F-35. The Government of Canada announced in January 2023 their commitment to purchase 88 F-35 aircraft. In February 2023, the government of Singapore announced its intent to exercise an option to purchase an additional eight F-35 aircraft, increasing its total quantity to 12. In March of 2023, the government of South Korea announced approval to purchase an additional 20 F-35 aircraft, increasing its total quantity to 60.

During the first quarter of 2023, we delivered five aircraft and had a backlog of 340 aircraft. Deliveries in the quarter were impacted by an issue with the Government Furnished Equipment (GFE) engine that occurred at the end of 2022 and resulted in a pause in flight operations, which prevented aircraft deliveries until flight operations and deliveries resumed in March 2023. We currently expect that we will deliver fewer than the prior plan of 147-153 aircraft in 2023 due to both software maturation related to the Technology Refresh 3 (TR-3) configuration and hardware delivery timing; we will provide an updated range pending the results of future flight tests. Despite the change in the delivery range, currently we do not expect a material impact to our 2023 financial outlook. Since program inception through the first quarter of 2023, we have delivered 899 production F-35 aircraft to U.S. and international customers, including 652 F-35A variants, 178 F-35B variants, and 69 F-35C variants, demonstrating the F-35 program’s continued progress and longevity.

Given the size and complexity of the F-35 program, we anticipate that there will be continual reviews related to aircraft performance, program, and delivery schedule, cost, and requirements as part of the DoD, Congressional, and international countries’ oversight, and budgeting processes. Current program challenges include our and our suppliers’ 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 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 2022 Form 10-K.