LOCKHEED MARTIN CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) is intended to help the reader understand our
results of operations and financial condition. The MD&A is provided as a
supplement to, and should be read in conjunction with, our consolidated
financial statements and notes thereto included in Item 8 - Financial Statements
and Supplementary Data.

The MD&A generally discusses 2022 and 2021 items and year-to-year comparisons
between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons
between 2021 and 2020 that are not included in this Form 10-K can be found in
"Management's Discussion and Analysis of Financial Condition and Results or
Operations" in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2021 filed with the SEC on January 25, 2022.

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. In 2022, 73% of our
$66.0 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)), 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.

We operate in four business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space. We organize our business segments based on the nature of the products and services offered.

We operate in a complex and evolving global security environment. Our strategy
consists of the design and development of platforms and systems that meet the
future requirements of 21st Century Security. Our vision for 21st Century
Security is to accelerate the adoption of advanced networking and leading-edge
technologies into our national defense enterprise, while enhancing the
performance and value of our platforms and products for our customers. The aim
of 21st Century Security is to integrate new and existing systems across all
domains with advanced, open-architecture networking and operational technologies
to make forces more agile, adaptive and unpredictable.

21st Century Security is an overarching vision that will guide our investment
and strategy and we are also focused on four elements for potential growth in
the near to mid-term: current programs of record, classified programs,
hypersonics and new awards. We have multiple programs of record from each
business segment that are entering growth stages, including the F-35 sustainment
activity (Aeronautics), increased PAC-3 production rates (Missiles and Fire
Control), CH-53K heavy lift helicopter (Rotary and Mission Systems), and the
modernization and enhancements to the Trident II D5 Fleet Ballistic Missile
(Space). We are engaged in significant classified development programs and
pending successful achievement of the objectives within those programs, we
expect to begin the transition from development to production over the next few
years. We are currently performing on multiple hypersonic programs and following
the successful completion of ongoing testing and evaluation activity, multiple
programs are expected to enter early production phases between 2023 and 2026.
Finally, we are always in pursuit of new program awards to develop future
platforms that enable us to continue to place security capability into the
market and expand our global reach.

Key to enabling success of our strategy is developing differentiating
technologies, forging strategic partnerships, including with commercial
companies, executing on our multi-year business transformation initiative to
enhance our digital infrastructure and increase efficiencies and collaboration
throughout our business and maintaining fiscal discipline. Underpinning our
ability to execute our strategy is our talent and culture. We invest
substantially in our people to ensure that our workforce has the technical
skills necessary to succeed, and we expect to continue to invest internally in
innovative technologies that address rapidly evolving mission requirements for
our customers. We also will continue to evaluate our portfolio and will make
strategic acquisitions or divestitures, as appropriate, while deepening our
connection to commercial industry through cooperative partnerships, joint
ventures, and equity investments.

COVID-19

COVID-19 continued to cause business impacts in 2022. The emergence of the
Omicron variant in late 2021 and resulting increase in COVID-19 cases in early
2022 adversely impacted our operations and our supply chain. Our performance was
affected during 2022 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

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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 fluctuated
during 2022 based on COVID-19 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 $1.5 billion to our suppliers as of December 31, 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. Additionally, we have
deployed resources at supplier sites to improve oversight and performance. We
will continue to monitor supply chain risks, especially at small and at-risk
related suppliers, and may continue to utilize accelerated payments in 2023 on
an as needed basis.

The 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 a number of factors, including
the impact of potential new COVID-19 variants or subvariants, the effectiveness
and adoption of COVID-19 vaccines and therapeutics, 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.

Inflation

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. During 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 inflation did not
significantly impact our financial results in 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 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 significantly elevated global geopolitical
tensions and security concerns. As a result, we have received increased interest
for some of 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 we 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.

Portfolio Shaping Activities

We continuously strive to strengthen our portfolio of products and services to
meet the current and future needs of our customers. We accomplish this in part
by our independent research and development activities and through acquisition,
divestiture and internal realignment activities.

We selectively pursue the acquisition of businesses, investments and ventures at
attractive valuations that will expand or complement our current portfolio and
allow access to new customers or technologies. We also may explore the
divestiture of

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businesses, investments or ventures that no longer meet our needs or strategy or
that could perform better outside of our organization or with a different owner.
In pursuing our business strategy, we routinely conduct discussions, evaluate
targets and enter into agreements regarding possible acquisitions, divestitures,
joint ventures and equity investments.

Renationalization of the Atomic Weapons Establishment Program

On June 30, 2021, the UK Ministry of Defence terminated the contract to operate
the UK's nuclear deterrent program and assumed control of the entity that
manages the program (referred to as the renationalization of the Atomic Weapons
Establishment (AWE program)). Accordingly, the AWE program's ongoing operations,
including the entity that manages the program, are no longer included in our
financial results as of that date. Therefore, during 2021, AWE only generated
sales of $885 million and operating profit of $18 million, which are included in
Space's financial results for the year ended December 31, 2021. During the year
ended December 31, 2020, AWE generated sales of $1.4 billion and operating
profit of $35 million, which are included in Space's financial results for 2020.

U.S. Government Funding

On March 28, 2022 the Administration submitted to Congress the President's
Fiscal Year (FY) 2023 budget request, which proposed $813.4 billion in total
national defense spending, of which $773 billion was for the base budget of the
Department of Defense (DoD).

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 FY 2023 Omnibus Appropriations Act also provided separate and additional
funding of $47 billion for Ukraine, the fourth supplemental since March of 2022,
bringing the total amount of supplemental funding authority provided to $113
billion.

The President's FY 2024 budget request is anticipated to be submitted to
Congress in March 2023, initiating the FY 2024 defense authorization and
appropriations legislative process. 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.

International Business

A key component of our strategic plan is to grow our international sales. To
accomplish this growth, we continue to focus on strengthening our relationships
internationally through partnerships and joint technology efforts. Our
international business is conducted either by foreign military sales (FMS)
contracted through the U.S. Government or by direct commercial sales (DCS) to
international customers. In 2022, approximately 74% of our sales to
international customers were FMS and about 26% were DCS. Additionally, in 2022,
substantially all of our sales from international customers were in our
Aeronautics, MFC and RMS business segments. Space's sales from international
customers were not material in 2022. See Item 1A - Risk Factors for a discussion
of risks related to international sales.

In 2022, international customers accounted for 33% of Aeronautics' net sales.
There continues to be strong international interest in the F-35 program, which
includes commitments from the U.S. Government and seven international partner
countries and nine FMS customers, as well as expressions of interest from other
countries. The U.S. Government and the partner countries continue to work
together on the design, testing, production, and sustainment of the F-35
program. Other areas of international expansion at our Aeronautics business
segment include the F-16 and C-130J programs, which continue to draw interest
from international customers for new aircraft.

In 2022, international customers accounted for 31% of MFC's net sales. Our MFC
business segment continues to generate significant international interest, most
notably in the air and missile defense product line, which produces the Patriot
Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD)
systems. Fourteen nations have chosen PAC-3 Cost Reduction Initiative (CRI) and
PAC-3 Missile Segment Enhancement (MSE) to provide missile defense capabilities.

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Additionally, we continue to see international demand for our tactical and strike missile products, where we received orders for precision fires systems from Germany and Taiwan and for Long Range Anti-Ship Missiles (LRASM) from Australia.

In 2022, international customers accounted for 28% of RMS' net sales. Our RMS
business segment continues to experience international interest in the Aegis
Ballistic Missile Defense System (Aegis) for which we perform activities in the
development, production, modernization, ship integration, test and lifetime
support for ships of international customers such as Japan, Spain, Republic of
Korea, and Australia. We have ongoing combat systems programs associated with
different classes of surface combatant ships for customers in Canada, Chile, and
New Zealand. Our Multi-Mission Surface Combatant (MMSC) program will provide
surface combatant ships for international customers, such as the Kingdom of
Saudi Arabia, designed to operate in shallow waters and the open ocean. In our
training and logistics solutions portfolio, we have active programs and pursuits
in the United Kingdom, the Kingdom of Saudi Arabia, Canada, Singapore,
Australia, Germany and France. We have active development, production, and
sustainment support of the S-70 Black Hawk and MH-60 Seahawk helicopters to
international customers, including India, Philippines, Australia, Republic of
Korea, Thailand, the Kingdom of Saudi Arabia, and Greece. Additionally, in
December 2021, the Israeli Ministry of Defense signed a Letter of Offer and
Acceptance (LOA) to procure 12 CH-53K King Stallion heavy lift helicopters, of
which the first four were awarded in 2022. Commercial aircraft are sold to
international customers to support search and rescue missions as well as VIP and
offshore oil and gas transportation.

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 saw strong international demand for the F-35 in 2022. During the
first quarter of 2022, Finland became the seventh FMS customer to join the
program. During the second quarter of 2022, the Government of Canada selected
Lockheed Martin and the F-35 as the preferred bidder to move into the
Finalization Phase of the competitive process to replace its fighter fleet. As a
result of the Finalization Phase, the Government of Canada recently announced in
January 2023 their commitment to purchase 88 F-35 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 fourth quarter of 2022, the German government
signed a Letter of Offer and Acceptance for the procurement of 35 F-35 aircraft
and became the ninth FMS customer to join the program.

During the fourth quarter of 2022, we finalized the F-35 Low Rate Initial
Production (LRIP) Lots 15-17 production contract with the U.S. Government for up
to 398 aircraft. The agreement includes 145 aircraft for Lot 15, 127 for Lot 16
and up to 126 for a Lot 17 contract option. In 2022 we delivered 141 aircraft
and had a backlog of 345 production aircraft, including orders from our
international partner countries and FMS customers. Since program inception we
have delivered 894 production F-35 aircraft to U.S. and international customers,
including 648 F-35A variants, 178 F-35B variants, and 68 F-35C variants,
demonstrating the F-35 program's continued progress and longevity.

COVID-19 and other impacts experienced by the F-35 enterprise have continued to
impact our near-term production plans. At the end of 2022, there was an issue
with the Government Furnished Equipment (GFE) engine that resulted in a pause in
flight operations and 2022 aircraft deliveries were impacted. The delivery pause
continues as flight operations remain on hold and concurrently, GFE engine
deliveries have been suspended. We will have greater clarity if changes to our
2023 aircraft delivery expectation are required once the pause in flight
operations and the GFE engine delivery suspension have been resolved. As of
January 2023, we plan on producing 147-153 aircraft in 2023 and 2024, and 2023
deliveries will be determined pending the resumption of engine deliveries and
other factors. We anticipate annual deliveries of 156 aircraft in 2025 and for
the foreseeable future.

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.

Backlog

At December 31, 2022, our backlog was $150.0 billion compared with $135.4 billion at December 31, 2021. Backlog is converted into sales in future periods as work is performed or deliveries are made. We expect to recognize approximately 37%

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of our backlog over the next 12 months and approximately 61% over the next 24 months as revenue, with the remainder recognized thereafter.

Our backlog includes both funded (firm orders for our products and services for
which funding has been both authorized and appropriated by the customer) and
unfunded (firm orders for which funding has not been appropriated) amounts. We
do not include unexercised options or potential orders under
indefinite-delivery, indefinite-quantity (IDIQ) agreements in our backlog. If
any of our contracts with firm orders were to be terminated, our backlog would
be reduced by the expected value of the unfilled orders of such contracts.
Funded backlog was $95.5 billion at December 31, 2022, as compared to
$88.5 billion at December 31, 2021. For backlog related to each of our business
segments, see below.

Consolidated Results of Operations

Our operating cycle is primarily long term and involves many types of contracts
for the design, development and manufacture of products and related activities
with varying delivery schedules. Consequently, the results of operations of a
particular year, or year-to-year comparisons of sales and profits, may not be
indicative of future operating results. The following discussions of comparative
results among years should be reviewed in this context. All per share amounts
cited in these discussions are presented on a "per diluted share" basis, unless
otherwise noted. Our consolidated results of operations were as follows (in
millions, except per share data):
                                                                        2022              2021              2020
Net sales                                                        $ 65,984          $ 67,044          $ 65,398
Cost of sales                                                     (57,697)          (57,983)          (56,744)
Gross profit                                                        8,287             9,061             8,654
Other income (expense), net                                            61                62               (10)
Operating profit                                                    8,348             9,123             8,644
Interest expense                                                     (623)             (569)             (591)
Non-service FAS pension (expense) income                             (971)           (1,292)              219
Other non-operating (expense) income, net                             (74)              288               (37)
Earnings from continuing operations before income taxes             6,680             7,550             8,235
Income tax expense                                                   (948)           (1,235)           (1,347)
Net earnings from continuing operations                             5,732             6,315             6,888
Net loss from discontinued operations                                   -                 -               (55)
Net earnings                                                     $  5,732          $  6,315          $  6,833
Diluted earnings (loss) per common share
Continuing operations                                            $  21.66          $  22.76          $  24.50
Discontinued operations                                                 -                 -             (0.20)
Total diluted earnings per common share                          $  21.66

$ 22.76 $ 24.30

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.

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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):

                                 2022              2021              2020
Products                   $ 55,466          $ 56,435          $ 54,928
% of total net sales           84.1   %          84.2   %          84.0   %
Services                     10,518            10,609            10,470
% of total net sales           15.9   %          15.8   %          16.0   %
Total net sales            $ 65,984          $ 67,044          $ 65,398


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 2022 because of supply chain impacts.

Product Sales

Product sales decreased $1.0 billion, or 2%, in 2022 as compared to 2021. The
decrease is primarily attributable to lower product sales of approximately
$670 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 $315 million at Space primarily due to the renationalization of AWE on
June 30, 2021, partially offset by higher development volume (Next Generation
Interceptor (NGI)); and approximately $220 million at MFC primarily due to lower
volume on Terminal High Altitude Area Defense (THAAD) and air dominance weapon
systems. These decreases were partially offset by higher product sales of about
$240 million at Aeronautics mostly due to higher volume on classified contracts
that were partially offset by lower volume on F-35 contracts.

Service Sales

Service sales decreased $91 million, or 1%, in 2022 as compared to 2021. The decrease in service sales was primarily due to lower sales of approximately $155 million at MFC primarily due to lower volume on the Special Operations Forces Global Logistics Support Services (SOF GLSS) program.

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):

                                        2022               2021               2020
Cost of sales - products         $ (49,577)         $ (50,273)         $ (48,996)
% of product sales                    89.4   %           89.1   %           89.2   %
Cost of sales - services            (9,280)            (9,463)            (9,371)
% of service sales                    88.2   %           89.2   %           89.5   %
Severance and other charges           (100)               (36)               (27)
Other unallocated, net               1,260              1,789              1,650
Total cost of sales              $ (57,697)         $ (57,983)         $ (56,744)


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

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identified any additional developing trends in cost of sales for products and services that would have a material impact on our future operations.

Product Costs

Product costs decreased approximately $696 million, or 1%, in 2022 as compared
to 2021. The decrease was primarily attributable to lower product costs of
approximately $525 million at RMS mostly due to lower production volume on Black
Hawk and the delivery of an international pilot training system in the first
quarter of 2021; about $195 million at MFC primarily due to lower volume on air
dominance weapon systems and THAAD; and approximately $165 million at Space
primarily due to the renationalization of AWE, partially offset by higher
development volume (NGI). These decreases were partially offset by higher
product costs of about $185 million at Aeronautics mostly due to higher volume
on classified contracts that were partially offset by lower volume on F-35
contracts.

Service Costs

Service costs decreased approximately $183 million, or 2%, in 2022 compared to
2021. The decrease was primarily attributable to lower service costs of
approximately $160 million at MFC primarily due to lower volume on the SOF GLSS
program.

Severance and other charges

During the fourth quarter of 2022, we recorded charges totaling $100 million
($79 million, or $0.31 per share, after-tax) that relate to actions at our RMS
business segment, which include severance costs for reduction of positions and
asset impairment charges. After a strategic review of RMS, these actions will
improve the efficiency of our operations, better align the organization and cost
structure with changing economic conditions, and changes in program lifecycles.
During 2021, we recorded severance and restructuring charges of $36 million ($28
million, or $0.10 per share, after-tax) associated with plans to close and
consolidate certain facilities and reduce the total workforce within our RMS
business segment.

Other Unallocated, Net

Other unallocated, net primarily includes the FAS/CAS pension operating
adjustment (which represents the difference between CAS pension cost recorded in
our business 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 investments and liabilities 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
$1.3 billion in 2022, compared to $1.8 billion in 2021. Other unallocated, net
during 2022 was lower primarily due to a decrease in our FAS/CAS pension
operating adjustment due to lower CAS cost from the American Rescue Plan Act of
2021 (ARPA) legislation, declines in the fair value of investments and
liabilities for deferred compensation plans, and fluctuations in costs
associated with various corporate items, none of which were individually
significant. See "Business Segment Results of Operations" and "Critical
Accounting Policies - Postretirement Benefit Plans" discussion below for more
information on our pension cost.

Other Income (Expense), Net

Other income (expense), net primarily includes earnings generated by equity method investees. Other income, net in 2022 was $61 million, compared to $62 million in 2021.

Interest Expense

Interest expense in 2022 was $623 million, compared to $569 million in 2021. The
increase in interest expense in 2022 resulted primarily from the issuance of
notes in October of 2022 to fund share repurchases. See "Capital Structure,
Resources and Other" included within "Liquidity and Cash Flows" discussion below
and "Note 10 - Debt" included in our Notes to Consolidated Financial Statements
for a discussion of our debt.

Non-Service FAS Pension (Expense) Income

Non-service FAS pension expense was $1.0 billion in 2022, compared to
$1.3 billion in 2021. Non-service FAS pension expense in 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 in the second quarter of 2022. Non-service FAS pension expense
in 2021 includes a noncash, non-operating 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

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gross defined benefit pension obligations and related plan assets to an
insurance company in the third quarter of 2021. See "Note 11 - 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 mark-to-market investments. See
"Note 1 - Organization and Significant Accounting Policies" included in our
Notes to Consolidated Financial Statements for additional information. Other
non-operating expense, net in 2022 was $74 million, compared to other
non-operating income, net of $288 million in 2021. The decrease in 2022 was
primarily due to decreases in the fair value of certain mark-to-market
investments.

Income Tax Expense

Our effective income tax rate was 14.2% for 2022 and 16.4% for 2021. The rate
for 2022 was lower than the rate for 2021 primarily due to increased research
and development tax credits. The rates for both 2022 and 2021 benefited from tax
deductions for foreign derived intangible income, dividends paid to the
company's defined contribution plans with an employee stock ownership plan
feature, and employee equity awards.

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 resulted in a cash tax liability for the 2022 tax year
of approximately $660 million. Our net deferred tax assets increased in 2022 by
approximately $660 million as a result as well. This provision is expected to
increase our 2023 cash tax liability by approximately $575 million. 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. While the
largest impact of this provision will be to 2022 cash tax liability, the impact
will continue over the five-year amortization period, but will 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. As of December 31, 2022, our liabilities associated with
uncertain tax positions increased to $1.6 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. See "Note 9 - Income Taxes"
included in our Notes to Consolidated Financial Statements for additional
information.

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 $5.7 billion ($21.66 per share) in 2022 and
$6.3 billion ($22.76 per share) in 2021. Both net earnings and earnings per
share in 2022 were affected by the factors mentioned above. Earnings per share
also benefited from a net decrease of approximately 12.8 million weighted
average common shares outstanding in 2022, compared to 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. United Launch Alliance (ULA), results of which are included in our
Space business segment, is our largest equity method investee.

Business segment operating profit also excludes the FAS/CAS pension operating
adjustment 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 certain mark-to-market investments,
stock-based compensation expense, changes in the fair value of investments and
liabilities 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. See "Note 1 - Organization and Significant Accounting Policies" for a
discussion related to certain factors that may impact the comparability of net
sales and operating profit of our business segments.

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Summary operating results for each of our business segments were as follows (in
millions):
                                                     2022          2021          2020
Net sales
Aeronautics                                    $ 26,987      $ 26,748      $ 26,266
Missiles and Fire Control                        11,317        11,693        11,257
Rotary and Mission Systems                       16,148        16,789        15,995
Space                                            11,532        11,814        11,880
Total net sales                                $ 65,984      $ 67,044      $ 65,398
Operating profit
Aeronautics                                    $  2,866      $  2,799      $  2,843
Missiles and Fire Control                         1,635         1,648         1,545
Rotary and Mission Systems                        1,673         1,798         1,615
Space                                             1,045         1,134         1,149
Total business segment operating profit           7,219         7,379       

7,152

Unallocated items

   FAS/CAS pension operating adjustment           1,709         1,960         1,876

   Severance and other charges (a)                 (100)          (36)          (27)
Other, net (b)                                     (480)         (180)         (357)
Total unallocated, net                            1,129         1,744         1,492
Total consolidated operating profit            $  8,348      $  9,123

$ 8,644

(a)See "Consolidated Results of Operations - Severance and Other Charges"
discussion above for information on charges related to certain severance and
other actions across our organization.
(b)Other, net in 2020 includes a noncash impairment charge of $128 million
recognized on our investment in the international equity method investee,
Advanced Military Maintenance, Repair and Overhaul Center (AMMROC). (See
"Note 1 - Organization and Significant Accounting Policies" included in our
Notes to Consolidated Financial Statements for more information).

Our business segments' results of operations include pension expense only as
calculated 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 (expense) 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
(expense) income and total CAS pension cost. The non-service FAS pension
(expense) income components are included in non-service FAS pension (expense)
income in our consolidated statements of earnings. As a result, to the extent
that CAS pension cost exceeds the service cost component of FAS pension
(expense) income, we have a favorable FAS/CAS pension operating adjustment.





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

                                                       2022          2021   

2020

Total FAS (expense) income and CAS cost
FAS pension (expense) income                     $ (1,058)     $ (1,398)     $   118
Less: CAS pension cost                              1,796         2,066     

1,977

Total FAS/CAS pension adjustment                 $    738      $    668

$ 2,095

Service and non-service cost reconciliation
FAS pension service cost                         $    (87)     $   (106)     $  (101)
Less: CAS pension cost                              1,796         2,066     

1,977

Total FAS/CAS pension operating adjustment 1,709 1,960

1,876

Non-service FAS pension (expense) income             (971)       (1,292)    

219

Total FAS/CAS pension adjustment                 $    738      $    668

$ 2,095

The total FAS/CAS pension adjustment in 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 connection with the transfer of $4.3 billion of our
gross defined benefit pension obligations and related plan assets to an
insurance company in the second quarter of 2022. The total FAS/CAS pension
adjustment in 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 in the third
quarter of 2021. See "Note 11 - Postretirement Benefit Plans" included in our
Notes to Consolidated Financial Statements.

The following segment discussions also include information relating to backlog
for each segment. Backlog was approximately $150.0 billion and $135.4 billion at
December 31, 2022 and 2021. These amounts included both funded backlog (firm
orders for which funding has been both authorized and appropriated by the
customer) and unfunded backlog (firm orders for which funding has not yet been
appropriated). Backlog does not include unexercised options or task orders to be
issued under indefinite-delivery, indefinite-quantity contracts. Funded backlog
was approximately $95.5 billion at December 31, 2022, as compared to
$88.5 billion at December 31, 2021. If any of our contracts with firm orders
were to be terminated, our backlog would be reduced by the expected value of the
unfilled orders of such contracts.

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

We regularly provide customers with reports of our costs as the contract
progresses. The cost information in the reports is accumulated in a manner
specified by the requirements of each contract. For example, cost data provided
to a customer for a product would typically align to the subcomponents of that
product (such as a wing-box on an aircraft) and for services would align to the
type of work being performed (such as aircraft sustainment). Our contracts
generally allow for the recovery of costs in the pricing of our products and
services. Most of our contracts are bid and negotiated with our customers under
circumstances in which we are required to disclose our estimated total costs to
provide the product or service. This approach for negotiating contracts with 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,

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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 1 - Organization and Significant Accounting Policies"
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, 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 $1.8 billion in 2022 and $2.0 billion in 2021. The
consolidated net profit booking rate adjustments in 2022 compared to 2021
decreased primarily due to decreases in profit booking rate adjustments at
Space, RMS and MFC offset by an increase in Aeronautics. The consolidated net
adjustments for 2022 and 2021 are inclusive of approximately $780 million and
$900 million in unfavorable items, which include reserves for a classified
program at Aeronautics, various programs at RMS and a ground solutions program
at Space.

We periodically experience performance issues and record losses for certain programs. For further discussion on programs at Aeronautics and RMS, see "Note 1 - Organization and Significant Accounting Policies" included in our Notes to Consolidated Financial Statements for more information.

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We have contracted with the Canadian Government for the Canadian Maritime
Helicopter Program at our RMS business segment that provide 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 to date 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 could be adversely impacted by 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. The
U.S. Government has imposed certain sanctions on Türkish entities and persons
that has affected our ability to perform under contracts supporting the Türkish
Utility Helicopter Program. As a result of the sanctions, we have provided force
majeure notices under the affected contracts and these 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.

Aeronautics

Our Aeronautics business segment is engaged in the research, design,
development, manufacture, integration, sustainment, support and upgrade of
advanced military aircraft, including combat and air mobility aircraft, unmanned
air vehicles and related technologies. Aeronautics' major programs include the
F-35 Lightning II, C­130 Hercules, F-16 Fighting Falcon and F-22 Raptor.
Aeronautics' operating results included the following (in millions):

                               2022              2021              2020
Net sales                $ 26,987          $ 26,748          $ 26,266
Operating profit            2,866             2,799             2,843
Operating margin             10.6   %          10.5   %          10.8   %
Backlog at year-end      $ 56,630          $ 49,118          $ 56,551


Aeronautics' net sales in 2022 increased $239 million, or 1%, compared to 2021.
Net sales increased by approximately $375 million on classified contracts
primarily due to higher volume; about $80 million for the F-22 program due to
higher net favorable profit adjustments; and approximately $55 million for the
F-16 program due to higher volume on production contracts that was partially
offset by lower volume on sustainment contracts and unfavorable profit
adjustments on a production contract and modernization contracts. These
increases were partially offset by a decrease of about $310 million for the F-35
program due to lower volume and favorable profit adjustments on sustainment and
production contracts that were partially offset by higher volume on development
contracts.

Aeronautics' operating profit in 2022 increased $67 million, or 2%, compared to
2021. Operating profit increased approximately $145 million on classified
contracts primarily due to lower unfavorable profit adjustments on a classified
program ($45 million in 2022 compared to $225 million in 2021) that were
partially offset by lower favorable profit adjustments; and about $100 million
for the F-22 program due to higher net favorable profit adjustments. These
increases were partially offset by lower operating profit of approximately $110
million for the F-16 program due to unfavorable profit adjustments in 2022 on a
production contract and modernization contracts; and about $80 million for the
F-35 program due to lower net favorable profit adjustments on production and
sustainment contracts and volume on sustainment contracts. Net favorable profit
booking rate adjustments were $30 million higher in 2022 compared to 2021.

Backlog

Backlog increased in 2022 compared to 2021 primarily due to the delay of F-35 Lot 15 award from 2021 to 2022 and the award of the F-35 Lot 16 contract in December 2022.

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Missiles and Fire Control

Our MFC business segment provides air and missile defense systems; tactical
missiles and air-to-ground precision strike weapon systems; logistics; fire
control systems; mission operations support, readiness, engineering support and
integration services; manned and unmanned ground vehicles; and energy management
solutions. MFC's major programs include PAC­3, THAAD, Multiple Launch Rocket
System (MLRS), Hellfire, Joint Air-to-Surface Standoff Missile (JASSM), Apache
fire control system, Sniper Advanced Targeting Pod (SNIPER®), Infrared Search
and Track (IRST21®) and Special Operations Forces Global Logistics Support
Services (SOF GLSS). MFC's operating results included the following (in
millions):

                               2022              2021              2020
Net sales                $ 11,317          $ 11,693          $ 11,257
Operating profit            1,635             1,648             1,545
Operating margin             14.4   %          14.1   %          13.7   %
Backlog at year-end      $ 28,735          $ 27,021          $ 29,183


MFC's net sales in 2022 decreased $376 million, or 3%, compared to 2021. The
decrease was primarily attributable to lower net sales of approximately $280
million for sensors and global sustainment programs due to lower volume on SOF
GLSS as a result of changes in mission requirements and lower volume on SNIPER®;
and about $60 million for integrated air and missile defense programs due to
lower volume (THAAD) and lower net favorable profit adjustments (PAC-3) that
were partially offset by higher volume (PAC-3). Net sales for tactical and
strike missile programs were comparable as higher volume (PrSM) was offset by
lower volume (air dominance weapon systems).

MFC's operating profit in 2022 decreased $13 million, or 1%, compared to 2021.
The decrease was primarily attributable to lower operating profit of
approximately $85 million for integrated air and missile defense programs due to
lower net favorable profit adjustments for the PAC-3 program and an unfavorable
profit adjustment of about $40 million on an air and missile defense development
program. This decrease was partially offset by an increase of about $50 million
for tactical and strike missile programs due to contract mix and higher net
favorable profit adjustments (an international tactical and strike missile
program and HIMARS) that were partially offset by an unfavorable profit
adjustment of about $25 million on an air-to-ground missile program. There also
were unfavorable profit adjustments of approximately $25 million on an energy
program in 2021 that did not recur in 2022. Operating profit for sensors and
global sustainment programs was comparable as both contract mix and the net
effect of favorable profit adjustments on an international program in 2022 were
offset by the closeout activities related to the Warrior program in 2021 that
did not recur in 2022. Net favorable profit booking rate adjustments were $45
million lower in 2022 compared to 2021.

Backlog

Backlog increased in 2022 compared to 2021 primarily due to higher orders on precision fires (GMLRS) and THAAD programs.

Rotary and Mission Systems

RMS designs, manufactures, services and supports various military and commercial
helicopters, surface ships, sea and land-based missile defense systems, radar
systems, sea and air-based mission and combat systems, command and control
mission solutions, cyber solutions, and simulation and training solutions. RMS'
major programs include Aegis Combat System, Littoral Combat Ship (LCS),
Multi-Mission Surface Combatant (MMSC), Black Hawk and Seahawk helicopters,
CH-53K King Stallion heavy lift helicopter, Combat Rescue Helicopter (CRH),
VH-92A helicopter, and the C2BMC program.

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
challenging the U.S. Army's decision, and a ruling is expected on or before
April 7, 2023 based on the 100-day deadline. Sikorsky remains one of two
competitors for the other component of the Future Vertical Lift initiative, the
Future Attack Reconnaissance Aircraft competition.




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RMS' operating results included the following (in millions):

                               2022              2021              2020
Net sales                $ 16,148          $ 16,789          $ 15,995
Operating profit            1,673             1,798             1,615
Operating margin             10.4   %          10.7   %          10.1   %
Backlog at year-end      $ 34,949          $ 33,700          $ 36,249


RMS' net sales in 2022 decreased $641 million, or 4%, compared to 2021. The
decrease was primarily attributable to lower net sales of approximately $280
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
$205 million for various C6ISR programs due to lower volume; and approximately
$170 million for Sikorsky helicopter programs due to lower production volume
(Black Hawk) that was partially offset by higher production volume (CH-53K).

RMS' operating profit in 2022 decreased $125 million, or 7%, compared to 2021.
The decrease was primarily attributable to approximately $70 million for
Sikorsky helicopter programs due to lower production volume and net favorable
profit adjustments (Black Hawk) that were partially offset by higher net
favorable profit adjustments (CRH); about $50 million for various C6ISR programs
due to lower net favorable profit adjustments; and approximately $15 million for
integrated warfare systems and sensors (IWSS) programs due to lower net
favorable profit adjustments (TPQ-53 and Aegis) that were partially offset by
$30 million of unfavorable profit adjustments on a ground-based radar program in
2021 that did not recur in 2022. These decreases were partially offset by an
increase of approximately $35 million for TLS programs due to higher net
favorable profit adjustments that were partially offset by lower volume due to
the delivery of an international pilot training system in the first quarter of
2021 that did not recur in 2022. Net favorable profit booking rate adjustments
were $65 million lower in 2022 compared to 2021.

Backlog

Backlog increased in 2022 compared to 2021 primarily due to higher orders on Sikorsky programs.

Space

Our Space business segment is engaged in the research and design, development,
engineering and production of satellites, space transportation systems, and
strategic, advanced strike and defensive systems. Space provides network-enabled
situational awareness and integrates complex space and ground global systems to
help our customers gather, analyze, and securely distribute critical
intelligence data. Space is also responsible for various classified systems and
services in support of vital national security systems. Space's major programs
include the Trident II D5 Fleet Ballistic Missile (FBM), Orion Multi-Purpose
Crew Vehicle (Orion), Space Based Infrared System (SBIRS) and Next Generation
Overhead Persistent Infrared (Next Gen OPIR) system, Global Positioning System
(GPS) III, hypersonics programs and Next Generation Interceptor (NGI). Operating
profit for our Space business segment includes our share of earnings for our
investment in ULA, which provides expendable launch services to the U.S.
Government and commercial customers. Space's operating results included the
following (in millions):
                               2022              2021              2020
Net sales                $ 11,532          $ 11,814          $ 11,880
Operating profit            1,045             1,134             1,149
Operating margin              9.1   %           9.6   %           9.7   %
Backlog at year-end      $ 29,684          $ 25,516          $ 25,148


Space's net sales in 2022 decreased $282 million, or 2%, compared to 2021. The
decrease was primarily attributable to lower net sales of approximately $885
million due to the renationalization of the AWE program on June 30, 2021, which
was no longer included in our financial results beginning in the third quarter
of 2021; and about $125 million for commercial civil space programs due to lower
volume (Orion). These decreases were partially offset by higher net sales of
about $495 million for strategic and missile defense programs due to higher
development volume (NGI); and about $245 million for national security space
programs due to higher development volume (classified programs).

Space's operating profit in 2022 decreased $89 million, or 8%, compared to 2021.
The decrease was primarily attributable to approximately $85 million for
national security space programs primarily due to lower net favorable profit
adjustments (classified programs and SBIRS) that were partially offset by lower
net unfavorable profit adjustments of $25 million on a

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ground solutions program; and about $40 million for commercial civil space
programs due to lower net favorable profit adjustments (Human Lander System
(HLS)) and lower volume (Orion). These decreases were partially offset by higher
equity earnings of approximately $35 million from the company's investment in
ULA due to higher launch volume and launch mix; and about $20 million for
strategic and missile defense programs due to higher net favorable profit
adjustments (primarily NGI). Operating profit for the AWE program was comparable
as its operating profit in 2021 was mostly offset by accelerated amortization
expense for intangible assets as a result of the renationalization. Net
favorable profit booking rate adjustments were $150 million lower in 2022
compared to 2021.

Equity earnings

Total equity earnings (primarily ULA) represented approximately $100 million and $65 million, or 10% and 6%, of Space's operating profit during 2022 and 2021.

Backlog

Backlog increased in 2022 compared to 2021 primarily due to the exercise of the
Orion Production Contract option for Artemis VI-VIII in commercial civil space
and contract awards in national security space (Southern Positioning
Augmentation Network (SouthPan) and classified).

Liquidity and Cash Flows

As of December 31, 2022, we had cash and cash equivalents of $2.5 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
38% of the sales we recorded in 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 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 December 31, 2022, we have accelerated
$1.5 billion of payments to our suppliers that are due by their terms in future
periods. We will continue to monitor supply chain risks, especially at small and
at-risk related suppliers, and may continue to utilize accelerated payments in
2023 on an as needed basis.

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

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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.
On October 17, 2022, the Board of Directors authorized an additional $14.0
billion to the program. During the fourth quarter of 2022, we entered into an
accelerated share repurchase (ASR) agreement to repurchase $4.0 billion of our
common stock and issued $4.0 billion of senior unsecured notes. As of
December 31, 2022, the total remaining authorization for future common share
repurchases under our program was $10.0 billion, which is expected to be
utilized over a three-year period. 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, as evidenced by the debt transaction in the second quarter of
2022, the proceeds of which were used to refinance certain upcoming debt
maturities between 2023 and 2026. 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 in the second quarter of 2022. See "Note 11 - 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.

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

                                                           2022         2021         2020
Cash and cash equivalents at beginning of year        $ 3,604      $ 3,160      $ 1,514
Operating activities
Net earnings                                            5,732        6,315        6,833
Noncash adjustments                                     2,455        3,109        1,726
Changes in working capital                               (733)           9          101
Other, net                                                348         (212)        (477)
Net cash provided by operating activities               7,802        9,221  

8,183

Net cash used for investing activities                 (1,789)      (1,161) 

(2,010)

Net cash used for financing activities                 (7,070)      (7,616) 

(4,527)

Net change in cash and cash equivalents                (1,057)         444  

1,646

Cash and cash equivalents at end of year              $ 2,547      $ 3,604      $ 3,160


Operating Activities

Net cash provided by operating activities decreased $1.4 billion in 2022
compared to 2021. The decrease was primarily attributable to lower cash at
Aeronautics, MFC and RMS. The decrease at Aeronautics was primarily due to
timing of production and billing cycles impacting contract assets (primarily
F-35). The decrease at MFC was primarily due to timing of accounts receivables
collections. The decrease at RMS was primarily due to liquidation of inventories
(primarily TLS and Sikorsky helicopter programs) in 2021 that did not recur in
2022. As of December 31, 2022, we accelerated $1.5 billion of payments to
suppliers that were due in the first quarter of 2023, compared to $2.2 billion
of payments to suppliers as of December 31, 2021 that were due in the first
quarter of 2022. Our federal and foreign income tax payments, net of refunds,
were $1.6 billion in 2022, compared to $1.4 billion in 2021.

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

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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):

                                2022            2021            2020
Cash from operations       $ 7,802         $ 9,221         $ 8,183
Capital expenditures        (1,670)         (1,522)         (1,766)
Free cash flow             $ 6,132         $ 7,699         $ 6,417


Investing Activities

Cash flows related to investing activities primarily include capital
expenditures and payments for acquisitions and divestitures of businesses and
investments. The majority of our capital expenditures are for equipment and
facilities infrastructure that generally are incurred to support new and
existing programs across all of our business segments. We also incur capital
expenditures for information technology to support programs and general
enterprise information technology infrastructure, inclusive of costs for the
development or purchase of internal-use software.

Net cash used for investing activities increased $628 million in 2022 compared
to 2021. The increase in cash used for investing activities is due to an
increase in capital expenditures and the receipt of $307 million in 2021 from
the sale of our ownership interest in the Advanced Military Maintenance, Repair
and Overhaul Center (AMMROC) joint venture. Capital expenditures totaled $1.7
billion and $1.5 billion in 2022 and 2021.

Financing Activities

Net cash used for financing activities decreased $546 million in 2022 compared to 2021, primarily due to repayment of $500 million of long-term notes in 2021.

We paid dividends totaling $3.0 billion ($11.40 per share) in 2022 and $2.9
billion ($10.60 per share) in 2021. We paid quarterly dividends of $2.80 per
share during each of the first three quarters of 2022 and $3.00 per share during
the fourth quarter of 2022. We paid quarterly dividends of $2.60 per share
during each of the first three quarters of 2021 and $2.80 per share during the
fourth quarter of 2021.

During 2022, we paid $7.9 billion to repurchase 18.3 million shares of our common stock. See "Note 12 - Stockholders' Equity" included in our Notes to Consolidated Financial Statements for additional information. During 2021, we paid $4.1 billion to repurchase 11.7 million shares of our common stock.

In October 2022, we received net proceeds of $3.9 billion from issuance of
senior unsecured notes and used the net proceeds from the offering to enter into
an ASR agreement to repurchase $4.0 billion of our common stock. See
"Note 10 - Debt" included in our Notes to Consolidated Financial Statements for
additional information.

In May 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.

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

Capital Structure, Resources and Other

At December 31, 2022, we held cash and cash equivalents of $2.5 billion that were generally available to fund ordinary business operations without significant legal, regulatory, or other restrictions.

Our outstanding debt, net of unamortized discounts and issuance costs, was
$15.5 billion as of December 31, 2022 and is in the form of publicly-issued
notes that bear interest at fixed rates. As of December 31, 2022, we were in
compliance with all covenants contained in our debt and credit agreements. See
"Note 10 - Debt" included in our Notes to Consolidated Financial Statements for
more information on our long-term debt and revolving credit facilities.

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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.

Long-Term Debt

On October 24, 2022, we issued a total of $4.0 billion of senior unsecured
notes, consisting of $500 million aggregate principal amount of 4.95% Notes due
2025 (the "2025 Notes"), $750 million aggregate principal amount of 5.10% Notes
due 2027 (the "2027 Notes"), $1.0 billion aggregate principal amount of 5.25%
Notes due 2033 (the "2033 Notes"), $1.0 billion aggregate principal amount of
5.70% Notes due 2054 (the "2054 Notes") and $750 million aggregate principal
amount of 5.90% Notes due 2063 (the "2063 Notes" and, together with the 2025
Notes, the 2027 Notes, the 2033 Notes and the 2054 Notes, the "October 2022
Notes"). We will pay interest on the 2025 Notes semi-annually in arrears on
April 15 and October 15 of each year, beginning on April 15, 2023. We will pay
interest on the 2033 Notes semi-annually in arrears on January 15 and July 15 of
each year, beginning on January 15, 2023. We will pay interest on each of 2027
Notes, 2054 Notes and 2063 Notes semi-annually in arrears on May 15 and November
15 of each year, beginning on May 15, 2023. We may, at our option, redeem the
October 2022 Notes of any series, in whole or in part, at any time at the
redemption prices equal to the greater of 100% of the principal amount of the
Notes to be redeemed or an applicable "make-whole" amount, plus accrued and
unpaid interest to the date of redemption.

On May 5, 2022, we issued a total of $2.3 billion of senior unsecured notes,
consisting of $800 million aggregate principal amount of 3.90% Notes due June
15, 2032 (the "2032 Notes"), $850 million aggregate principal amount of 4.15%
Notes due June 15, 2053 (the "2053 Notes") and $650 million aggregate principal
amount of 4.30% Notes due June 15, 2062 (the "2062 Notes" and, together with the
2032 Notes and 2053 Notes, the "May 2022 Notes") in a registered public
offering. Net proceeds received from the offering were, after deducting pricing
discounts and debt issuance costs, which are being amortized and recorded as
interest expense over the term of the May 2022 Notes. We will pay interest on
the May 2022 Notes semi-annually in arrears on June 15 and December 15 of each
year with the first payment made on June 15, 2022. We may, at our option, redeem
the May 2022 Notes of any series, in whole or in part, at any time and from time
to time, at a redemption price equal to the greater of 100% of the principal
amount of the May 2022 Notes to be redeemed or an applicable make-whole amount,
plus accrued and unpaid interest to the date of redemption.

On May 11, 2022, we used the net proceeds from the May 2022 Notes to redeem all
of the outstanding $500 million in aggregate principal amount of our 3.10% Notes
due 2023, $750 million in aggregate principal amount of our 2.90% Notes due
2025, and $1.0 billion of our outstanding $2.0 billion in aggregate principal
amount of our 3.55% Notes due 2026 at their redemption price. We paid make-whole
premiums of $13.9 million in connection with the early extinguishments of debt.
We incurred losses of $34 million ($26 million, or $0.10 per share, after tax)
on these transactions related to early extinguishments of debt, additional
interest expense and other related charges, which was recorded in other
non-operating (expense) income, net in our consolidated statements of earnings.

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Contractual Commitments

At December 31, 2022, we had contractual commitments to repay debt, make
payments under operating leases, settle obligations related to agreements to
purchase goods and services and settle tax and other liabilities. Financing
lease obligations were not material. Payments due under these obligations and
commitments are as follows (in millions):

                                                         Due Within
                                            Total           1 Year
Total debt                                $ 16,842      $       118
Interest payments                           15,028              768
Other liabilities                            3,520              222
Operating lease obligations                  1,342              327
Purchase obligations:
Operating activities                        59,101           27,925
Capital expenditures                           671              472

Total contractual cash obligations $ 96,504 $ 29,832

The table above includes debt presented gross of any unamortized discounts and
issuance costs, but excludes the net unfunded obligation and estimated minimum
funding requirements related to our qualified defined benefit pension plans. For
additional information about obligations and our future minimum contribution
requirements for these plans, see "Note 11 - Postretirement Benefit Plans"
included in our Notes to Consolidated Financial Statements. Amounts related to
other liabilities represent the contractual obligations for certain long-term
liabilities recorded as of December 31, 2022. Such amounts mainly include
expected payments under non-qualified pension plans, environmental liabilities
and deferred compensation plans.

Purchase obligations related to operating activities include agreements and
contracts that give the supplier recourse to us for cancellation or
nonperformance under the contract or contain terms that would subject us to
liquidated damages. Such agreements and contracts may, for example, be related
to direct materials, obligations to subcontractors and outsourcing arrangements.
Total purchase obligations for operating activities in the preceding table
include approximately $53.7 billion related to contractual commitments entered
into as a result of contracts we have with our U.S. Government customers. The
U.S. Government generally would be required to pay us for any costs we incur
relative to these commitments if they were to terminate the related contracts
"for convenience" under the FAR, subject to available funding. This also would
be true in cases where we perform subcontract work for a prime contractor under
a U.S. Government contract. The termination for convenience language also may be
included in contracts with foreign, state and local governments. We also have
contracts with customers that do not include termination for convenience
provisions, including contracts with commercial customers.

The majority of our capital expenditures for 2022 and those planned for 2023 are
for equipment, facilities infrastructure and information technology. The amounts
above in the table represent the portion of expected capital expenditures to be
incurred in 2023 and beyond that have been obligated under contracts as of
December 31, 2022 and not necessarily total capital expenditures for future
periods. Expenditures for equipment and facilities infrastructure are generally
incurred to support new and existing programs across all of our business
segments. For example, we have projects underway at Aeronautics to support
classified development programs and at RMS to support our Sikorsky helicopter
programs; and we have projects underway to modernize certain of our facilities.
We also incur capital expenditures for information technology to support
programs and general enterprise information technology infrastructure, inclusive
of costs for the development or purchase of internal-use software.

We also may enter into industrial cooperation agreements, sometimes referred to
as offset agreements, as a condition to obtaining orders for our products and
services from certain customers in foreign countries. These agreements are
designed to enhance the social and economic environment of the foreign country
by requiring the contractor to promote investment in the country. Offset
agreements may be satisfied through activities that do not require us to use
cash, including transferring technology, providing manufacturing and other
consulting support to in-country projects and the purchase by third parties
(e.g., our vendors) of supplies from in-country vendors. These agreements also
may be satisfied through our use of cash for such activities as purchasing
supplies from in-country vendors, providing financial support for in-country
projects, establishment of joint ventures with local companies and building or
leasing facilities for in-country operations. We typically do not commit to
offset agreements until orders for our products or services are definitive. The
amounts ultimately applied against our offset agreements are based on
negotiations with the customer and typically require cash outlays that represent
only a fraction of the original amount in the offset agreement. Satisfaction of
our offset obligations are included in the estimates of our total costs to
complete the contract and may impact our sales, profitability and cash flows.
Our ability to recover investments on our consolidated balance sheet that we
make to satisfy offset obligations is generally dependent upon the successful
operation of

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ventures that we do not control and may involve products and services that are
dissimilar to our business activities. At December 31, 2022, the notional value
of remaining obligations under our outstanding offset agreements totaled
approximately $16.1 billion, which primarily relate to our Aeronautics, MFC and
RMS business segments, most of which extend through 2044. To the extent we have
entered into purchase or other obligations at December 31, 2022 that also
satisfy offset agreements, those amounts are included in the contractual
commitments table above. Offset programs usually extend over several years and
may provide for penalties, estimated at approximately $1.8 billion at
December 31, 2022, in the event we fail to perform in accordance with offset
requirements. While historically we have not been required to pay material
penalties, resolution of offset requirements are often the result of
negotiations and subjective judgments.

We have entered into standby letters of credit and surety bonds issued on our
behalf by financial institutions, and we have directly issued guarantees to
third parties primarily relating to advances received from customers and the
guarantee of future performance on certain contracts. Letters of credit and
surety bonds generally are available for draw down in the event we do not
perform. In some cases, we may guarantee the contractual performance of third
parties such as joint venture partners. At December 31, 2022, we had the
following outstanding letters of credit, surety bonds and third-party guarantees
(in millions):
                                      Total           Less Than
                                     Commitment        1 Year
Standby letters of credit (a)       $     2,504      $      966
Surety bonds                                342             342
Third-party Guarantees                      904             230
Total commitments                   $     3,750      $    1,538


(a)Approximately $704 million of standby letters of credit in the "Less Than 1
Year" category are expected to renew for additional periods until completion of
the contractual obligation.

At December 31, 2022, third-party guarantees totaled $904 million, of which
approximately 71% related to guarantees of contractual performance of joint
ventures to which we currently are or previously were a party. These amounts
represent our estimate of the maximum amounts we would expect to incur upon the
contractual non-performance of the joint venture, joint venture partners or
divested businesses. Generally, we also have cross-indemnities in place that may
enable us to recover amounts that may be paid on behalf of a joint venture
partner.

In determining our exposures, we evaluate the reputation, performance on contractual obligations, technical capabilities and credit quality of our current and former joint venture partners and the transferee under novation agreements, all of which include a guarantee as required by the FAR. At December 31, 2022 and 2021, there were no material amounts recorded in our financial statements related to third-party guarantees or novation agreements.

Critical Accounting Policies

Contract Accounting / Sales Recognition

The majority of our net sales are generated from long-term contracts with the
U.S. Government and international customers (including FMS contracted through
the U.S. Government) for the research, design, development, manufacture,
integration and sustainment of advanced technology systems, products and
services. We account for a contract when it has approval and commitment from
both parties, the rights of the parties are identified, payment terms are
identified, the contract has commercial substance and collectability of
consideration is probable. For certain contracts that meet the foregoing
requirements, primarily international direct commercial sale contracts, we are
required to obtain certain regulatory approvals. In these cases, we recognize
revenue when it is probable that we will receive regulatory approvals based upon
all known facts and circumstances. We provide our products and services under
fixed-price and cost-reimbursable contracts.

Under fixed-price contracts, we agree to perform the specified work for a
pre-determined price. To the extent our actual costs vary from the estimates
upon which the price was negotiated, we will generate more or less profit or
could incur a loss. Some fixed-price contracts have a performance-based
component under which we may earn incentive payments or incur financial
penalties based on our performance.

Cost-reimbursable contracts provide for the payment of allowable costs incurred
during performance of the contract plus a fee up to a ceiling based on the
amount that has been funded. Typically, we enter into three types of
cost-reimbursable contracts: cost-plus-award-fee, cost-plus-incentive-fee, and
cost-plus-fixed-fee. Cost-plus-award-fee contracts provide for an award fee that
varies within specified limits based on the customer's assessment of our
performance against a predetermined set of criteria, such as targets based on
cost, quality, technical and schedule criteria. Cost-plus-incentive-fee
contracts provide for reimbursement of costs plus a fee, which is adjusted by a
formula based on the relationship of total allowable costs to total target costs
(i.e., incentive based on cost) or reimbursement of costs plus an incentive to
exceed stated performance targets (i.e.,
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incentive based on performance). Cost-plus-fixed-fee contracts provide a fixed
fee that is negotiated at the inception of the contract and does not vary with
actual costs.

We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.

We evaluate the products or services promised in each contract at inception to
determine whether the contract should be accounted for as having one or more
performance obligations. The products and services in our contracts are
typically not distinct from one another due to their complex relationships and
the significant contract management functions required to perform under the
contract. Accordingly, our contracts are typically accounted for as one
performance obligation. In limited cases, our contracts have more than one
distinct performance obligation, which occurs when we perform activities that
are not highly complex or interrelated or involve different product lifecycles.
Significant judgment is required in determining performance obligations, and
these decisions could change the amount of revenue and profit recorded in a
given period. We classify net sales as products or services on our consolidated
statements of earnings based on the predominant attributes of the performance
obligations.

We determine the transaction price for each contract based on the consideration
we expect to receive for the products or services being provided under the
contract. For contracts where a portion of the price may vary (e.g. awards,
incentive fees and claims), we estimate variable consideration at the most
likely amount, which is included in the transaction price to the extent it is
probable that a significant reversal of cumulative revenue recognized will not
occur. We analyze the risk of a significant revenue reversal and if necessary
constrain the amount of variable consideration recognized in order to mitigate
this risk.

At the inception of a contract we estimate the transaction price based on our
current rights and do not contemplate future modifications (including
unexercised options) or follow-on contracts until they become legally
enforceable. Contracts are often subsequently modified to include changes in
specifications, requirements or price, which may create new or change existing
enforceable rights and obligations. Depending on the nature of the modification,
we consider whether to account for the modification as an adjustment to the
existing contract or as a separate contract. Generally, modifications to our
contracts are not distinct from the existing contract due to the significant
integration and interrelated tasks provided in the context of the contract.
Therefore, such modifications are accounted for as if they were part of the
existing contract and recognized as a cumulative adjustment to revenue.

For contracts with multiple performance obligations, we allocate the transaction
price to each performance obligation based on the estimated standalone selling
price of the product or service underlying each performance obligation. The
standalone selling price represents the amount we would sell the product or
service to a customer on a standalone basis (i.e., not bundled with any other
products or services). Our contracts with the U.S. Government, including FMS
contracts, are subject to FAR and the price is typically based on estimated or
actual costs plus a reasonable profit margin. As a result of these regulations,
the standalone selling price of products or services in our contracts with the
U.S. Government and FMS contracts are typically equal to the selling price
stated in the contract.

For non-U.S. Government contracts with multiple performance obligations, we
evaluate whether the stated selling prices for the products or services
represent their standalone selling prices. We primarily sell customized
solutions unique to a customer's specifications. When it is necessary to
allocate the transaction price to multiple performance obligations, we typically
use the expected cost plus a reasonable profit margin to estimate the standalone
selling price of each product or service. We occasionally sell standard products
or services with observable standalone sales transactions. In these situations,
the observable standalone sales transactions are used to determine the
standalone selling price.

We recognize revenue as performance obligations are satisfied and the customer
obtains control of the products and services. In determining when performance
obligations are satisfied, we consider factors such as contract terms, payment
terms and whether there is an alternative future use of the product or service.
Substantially all of our revenue is recognized over time as we perform under the
contract because control of the work in process transfers continuously to the
customer. For most contracts with the U.S. Government and FMS contracts, this
continuous transfer of control of the work in process to the customer is
supported by clauses in the contract that give the customer ownership of work in
process and allow the customer to unilaterally terminate the contract for
convenience and pay us for costs incurred plus a reasonable profit. For most
non-U.S. Government contracts, primarily international direct commercial
contracts, continuous transfer of control to our customer is supported because
we deliver products that do not have an alternative use to us and if our
customer were to terminate the contract for reasons other than our
non-performance we would have the right to recover damages which would include,
among other potential damages, the right to payment for our work performed to
date plus a reasonable profit.
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For performance obligations to deliver products with continuous transfer of
control to the customer, revenue is recognized based on the extent of progress
towards completion of the performance obligation, generally using the
percentage-of-completion cost-to-cost measure of progress for our contracts
because it best depicts the transfer of control to the customer as we incur
costs on our contracts. Under the percentage-of-completion cost-to-cost measure
of progress, the extent of progress towards completion is measured based on the
ratio of costs incurred to date to the total estimated costs to complete the
performance obligation(s). For performance obligations to provide services to
the customer, revenue is recognized over time based on costs incurred or the
right to invoice method (in situations where the value transferred matches our
billing rights) as our customer receives and consumes the benefits.

For performance obligations in which control does not continuously transfer to
the customer, we recognize revenue at the point in time in which each
performance obligation is fully satisfied. This coincides with the point in time
the customer obtains control of the product or service, which typically occurs
upon customer acceptance or receipt of the product or service, given that we
maintain control of the product or service until that point.

Significant estimates and assumptions are made in estimating contract sales,
costs, and profit. We estimate profit as the difference between estimated
revenues and total estimated costs to complete the contract. At the outset of a
long-term contract, we identify and monitor risks to the achievement of the
technical, schedule and cost aspects of the contract, as well as our ability to
earn variable consideration, and assess the effects of those risks on our
estimates of sales and total costs to complete the contract. The estimates
consider the technical requirements (e.g., a newly-developed product versus a
mature product), the schedule and associated tasks (e.g., the number and type of
milestone events) and costs (e.g., material, labor, subcontractor, overhead,
general and administrative and the estimated costs to fulfill our industrial
cooperation agreements, sometimes referred to as offset or localization
agreements, required under certain contracts with international customers). The
initial profit booking rate of each contract considers risks surrounding the
ability to achieve the technical requirements, schedule and costs in the initial
estimated total costs to complete the contract. Profit booking rates may
increase during the performance of the contract if we successfully retire risks
related to technical, schedule and cost aspects of the contract, which decreases
the estimated total costs to complete the contract or may increase the variable
consideration we expect to receive on the contract. Conversely, our profit
booking rates may decrease if the estimated total costs to complete the contract
increase or our estimates of variable consideration we expect to receive
decrease. All of the estimates are subject to change during the performance of
the contract and may affect the profit booking rate. When estimates of total
costs to be incurred on a contract exceed total estimates of the transaction
price, a provision for the entire loss is determined at the contract level and
is recorded in the period in which the loss is evident, which we refer to as a
reach-forward loss.

Comparability of our segment sales, operating profit and operating margin may be
impacted favorably or unfavorably by changes in profit booking rates on our
contracts for which we recognize revenue over time using the
percentage-of-completion cost-to-cost method to measure progress towards
completion. Increases in the profit booking rates, typically referred to as
favorable profit adjustments, usually relate to revisions in the estimated total
costs to fulfill the performance obligations that reflect improved conditions on
a particular contract. Conversely, conditions on a particular contract may
deteriorate, resulting in an increase in the estimated total costs to fulfill
the performance obligations and a reduction in the profit booking rate and are
typically referred to as unfavorable profit adjustments. Increases or decreases
in profit booking rates are recognized in the current period 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.

Other Contract Accounting Considerations

The majority of our sales are driven by pricing based on costs incurred to
produce products or perform services under contracts with the U.S. Government.
Cost-based pricing is determined under the FAR. The FAR provides guidance on the
types of costs that are allowable in establishing prices for goods and services
under U.S. Government contracts. For example, costs such as those related to
charitable contributions, interest expense and certain advertising and public
relations activities are unallowable and, therefore, not recoverable through
sales. In addition, we may enter into advance agreements with the U.S.
Government that address the subjects of allowability and allocability of costs
to contracts for specific matters. For example, most of the environmental costs
we incur for environmental remediation related to sites operated in prior years
are allocated to our current operations as general and administrative costs
under FAR provisions and supporting advance agreements reached with the U.S.
Government.

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We closely monitor compliance with and the consistent application of our
critical accounting policies related to contract accounting. Costs incurred and
allocated to contracts are reviewed for compliance with U.S. Government
regulations by our personnel and are subject to audit by the Defense Contract
Audit Agency.

Postretirement Benefit Plans

Overview

Many of our employees and retirees participate in qualified and nonqualified
defined benefit pension plans, retiree medical and life insurance plans and
other postemployment plans (collectively, postretirement benefit plans - see
"Note 11 - Postretirement Benefit Plans" included in our Notes to Consolidated
Financial Statements). The majority of our accrued benefit obligations relate to
our qualified defined benefit pension and retiree medical and life insurance
plans. We recognize on a plan-by-plan basis the net funded status of these
postretirement benefit plans under GAAP as either an asset or a liability on our
consolidated balance sheets. The GAAP funded status represents the difference
between the fair value of each plan's assets and the benefit obligation of the
plan. The GAAP benefit obligation represents the present value of the estimated
future benefits we currently expect to pay to plan participants based on past
service. The qualified defined benefit pension plans for salaried employees are
fully frozen effective January 1, 2020 and our salaried employees participate in
an enhanced defined contribution retirement savings plan.

Similar to recent years, we continue to take actions to mitigate the effect of
our defined benefit pension plans on our financial results by reducing the
volatility of our pension obligations, including entering into pension risk
transfer transactions involving the purchase of group annuity contracts (GACs)
for portions of our outstanding defined benefit pension obligations using assets
from the pension trust. During the second quarter of 2022, we purchased GACs 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 GACs 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 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. Similarly, in the third quarter of 2021, we purchased GACs
to transfer $4.9 billion of gross defined benefit pension obligations and
related plan assets to an insurance company for approximately 18,000 U.S.
retirees and beneficiaries. In connection with this transaction, we recognized a
noncash pension settlement charge of $1.7 billion ($1.3 billion, or $4.72 per
share, after tax) during the third quarter of 2021.

Inclusive of the transactions described above, since December 2018, Lockheed
Martin, through its master retirement trust, has purchased total contracts for
approximately $15.9 billion related to our outstanding defined benefit pension
obligations eliminating pension plan volatility for approximately 109,000
retirees and beneficiaries and annually required Pension Benefit Guarantee
Corporation (PBGC) premiums of approximately $79 million per year.

We expect to continue to look for opportunities to manage our pension liabilities through additional pension risk transfer transactions in future years. Future transactions could result in a noncash settlement charge to earnings, which could be material to a reporting period.

Notwithstanding these actions, the impact of our postretirement benefit plans on
our earnings may be volatile in that the amount of expense we record and the
funded status for our postretirement benefit plans may materially change from
year to year because the calculations are sensitive to changes in several key
economic assumptions, including interest rates, actual rates of return on plan
assets and other actuarial assumptions including participant longevity, as well
as the timing of cash funding.

Actuarial Assumptions

The benefit obligations and assets of our postretirement benefit plans are
measured at the end of each year, or more frequently, upon the occurrence of
certain events such as a significant plan amendment (including in connection
with a pension risk transfer transaction), settlement, or curtailment. The
amounts we record are measured using actuarial valuations, which are dependent
upon key assumptions such as discount rates, the expected long-term rate of
return on plan assets and participant longevity. The assumptions we make affect
both the calculation of the benefit obligations as of the measurement date and
the calculation of FAS expense in subsequent periods. When reassessing these
assumptions, we consider past and current market conditions and make judgments
about future market trends. We also consider factors such as the timing and
amounts of expected contributions to the plans and benefit payments to plan
participants.

We continue to use a single weighted average discount rate approach when
calculating our consolidated benefit obligations related to our defined benefit
pension plans resulting in 5.250% at December 31, 2022, compared to 2.875% at
December 31,

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2021. We utilized a single weighted average discount rate of 5.25% when
calculating our benefit obligations related to our retiree medical and life
insurance plans at December 31, 2022, compared to 2.75% at December 31, 2021. We
evaluate several data points in order to arrive at an appropriate single
weighted average discount rate, including results from cash flow models, quoted
rates from long-term bond indices and changes in long-term bond rates over the
past year. As part of our evaluation, we calculate the approximate average
yields on corporate bonds rated AA or better selected to match our projected
postretirement benefit plan cash flows. The increase in the discount rate from
December 31, 2021 to December 31, 2022 resulted in a decrease in the projected
benefit obligations of our qualified defined benefit pension plans of
approximately $10.2 billion at December 31, 2022.

We utilized an expected long-term rate of return on plan assets of 6.50% at both
December 31, 2022 and December 31, 2021. The long-term rate of return assumption
represents the expected long-term rate of return on the funds invested or to be
invested, to provide for the benefits included in the benefit obligations. This
assumption is based on several factors including historical market index
returns, the anticipated long-term allocation of plan assets, the historical
return data for the trust funds, plan expenses and the potential to outperform
market index returns. The difference between the long-term rate of return on
plan assets assumption we select and the actual return on plan assets in any
given year affects both the funded status of our benefit plans and the
calculation of FAS pension expense in subsequent periods. Although the actual
return in any specific year likely will differ from the assumption, the average
expected return over a long-term future horizon should be approximately equal to
the assumption. Any variance each year should not, by itself, suggest that the
assumption should be changed. Patterns of variances are reviewed over time, and
then combined with expectations for the future. As a result, changes in this
assumption are less frequent than changes in the discount rate. The actual
investment return for our qualified defined benefit plans during 2022 of $(5.9)
billion, based on an actual rate of approximately (18)%, reduced plan assets
more than the $1.9 billion expected return based on our long-term rate of return
assumption.

Our stockholders' equity has been reduced cumulatively by $7.9 billion from the
annual year-end measurements of the funded status of postretirement benefit
plans. The cumulative noncash, after-tax reduction primarily represents net
actuarial losses resulting from changes in discount rates, investment
experience, and updated longevity. A market-related value of our plan assets,
determined using actual asset gains or losses over the prior three-year period,
is used to calculate the amount of deferred asset gains or losses to be
amortized. These cumulative actuarial losses will be amortized to expense using
the corridor method, where gains and losses are recognized to the extent they
exceed 10% of the greater of plan assets or benefit obligations, over an average
period of approximately twenty years as of December 31, 2022. During 2022,
$1.2 billion of these amounts, along with amortization of net prior service
credit, were recognized as a component of postretirement benefit plans expense
inclusive of the noncash pension settlement charge of $1.2 billion.

The discount rate and long-term rate of return on plan assets assumptions we
select at the end of each year are based on our best estimates and judgment. A
change of plus or minus 25 basis points in the 5.25% discount rate assumption at
December 31, 2022, with all other assumptions held constant, would have
decreased or increased the amount of the qualified pension benefit obligation we
recorded at the end of 2022 by approximately $800 million, which would result in
an after-tax increase or decrease in stockholders' equity at the end of the year
of approximately $600 million. If the 5.25% discount rate at December 31, 2022
that was used to compute the expected 2023 FAS pension income for our qualified
defined benefit pension plans had been 25 basis points higher or lower, with all
other assumptions held constant, the amount of FAS pension income projected for
2023 would change approximately $5 million. If the 6.50% expected long-term rate
of return on plan assets assumption at December 31, 2022 that was used to
compute the expected 2023 FAS pension income for our qualified defined benefit
pension plans had been 25 basis points higher or lower, with all other
assumptions held constant, the amount of FAS pension income projected for 2023
would be higher or lower by approximately $65 million. Each year, differences
between the actual and expected long-term rate of return on plan assets impacts
the measurement of the following year's FAS pension income. Every 100 basis
points increase (decrease) in return during 2022 between our actual rate of
return of approximately (18)% and our expected long-term rate of return
increased (decreased) 2023 expected FAS pension income by approximately $10
million.

Funding Considerations

We made no contributions in 2022 and 2021 to our qualified defined benefit
pension plans. Funding of our qualified defined benefit pension plans is
determined in a manner consistent with CAS and in accordance with the Employee
Retirement Income Security Act of 1974 (ERISA), as amended, along with
consideration of CAS and Internal Revenue Code rules. Our goal has been to fund
the pension plans to a level of at least 80%, as determined in accordance with
ERISA. The ERISA funded status of our qualified defined benefit pension plans
was approximately 82% and 92% as of December 31, 2022 and 2021; which is
calculated on a different basis than under GAAP and reflects the impact of the
American Rescue Plan Act of 2021.

Contributions to our defined benefit pension plans are recovered over time
through the pricing of our products and services on U.S. Government contracts,
including FMS, and are recognized in our cost of sales and net sales. CAS govern
the extent to

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which our pension costs are allocable to and recoverable under contracts with
the U.S. Government, including FMS. Pension cost recoveries under CAS occur in
different periods from when pension contributions are made in accordance with
ERISA.

We recovered $1.8 billion in 2022 and $2.1 billion in 2021 as CAS pension costs.
Amounts contributed in excess of the CAS pension costs recovered under U.S.
Government contracts are considered to be prepayment credits under the CAS
rules. Our prepayment credits were approximately $4.3 billion and $7.0 billion
at December 31, 2022 and 2021. The prepayment credit balance will increase or
decrease based on our actual investment return on plan assets.

Environmental Matters

We are a party to various agreements, proceedings and potential proceedings for
environmental remediation issues, including matters at various sites where we
have been designated a potentially responsible party (PRP). At December 31, 2022
and 2021, the total amount of liabilities recorded on our consolidated balance
sheet for environmental matters was $696 million and $742 million. We have
recorded assets totaling $618 million and $645 million at December 31, 2022 and
2021 for the portion of environmental costs that are probable of future recovery
in pricing of our products and services for agencies of the U.S. Government, as
discussed below. The amount that is expected to be allocated to our non-U.S.
Government contracts or that is determined to not be recoverable under U.S.
Government contracts is expensed through cost of sales. We project costs and
recovery of costs over approximately 20 years.

We enter into agreements (e.g., administrative consent orders, consent decrees)
that document the extent and timing of some of our environmental remediation
obligations. We also are involved in environmental remediation activities at
sites where formal agreements either do not exist or do not quantify the extent
and timing of our obligations. Environmental remediation activities usually span
many years, which makes estimating the costs more judgmental due to, for
example, changing remediation technologies. To determine the costs related to
clean up sites, we have to assess the extent of contamination, effects on
natural resources, the appropriate technology to be used to accomplish the
remediation, and evolving environmental standards.

We perform quarterly reviews of environmental remediation sites and record
liabilities and receivables in the period it becomes probable that the
liabilities have been incurred and the amounts can be reasonably estimated (see
the discussion under "Environmental Matters" in "Note 1 - Organization and
Significant Accounting Policies" and "Note 14 - Legal Proceedings, Commitments
and Contingencies" included in our Notes to Consolidated Financial Statements).
We consider the above factors in our quarterly estimates of the timing and
amount of any future costs that may be required for environmental remediation
activities, which result in the calculation of a range of estimates for each
particular environmental remediation site. We do not discount the recorded
liabilities, as the amount and timing of future cash payments are not fixed or
cannot be reliably determined. Given the required level of judgment and
estimation, it is likely that materially different amounts could be recorded if
different assumptions were used or if circumstances were to change (e.g., a
change in environmental standards or a change in our estimate of the extent of
contamination).

Under agreements reached with the U.S. Government, most of the amounts we spend
for environmental remediation are allocated to our operations as general and
administrative costs. Under existing U.S. Government regulations, these and
other environmental expenditures relating to our U.S. Government business, after
deducting any recoveries received from insurance or other PRPs, are allowable in
establishing prices of our products and services. As a result, most of the
expenditures we incur are included in our net sales and cost of sales according
to U.S. Government agreement or regulation, regardless of the contract form
(e.g. cost-reimbursable, fixed-price). We continually evaluate the
recoverability of our assets for the portion of environmental costs that are
probable of future recovery by assessing, among other factors, U.S. Government
regulations, our U.S. Government business base and contract mix, our history of
receiving reimbursement of such costs, and efforts by some U.S. Government
representatives to limit such reimbursement.

As disclosed above, we may record changes in the amount of environmental
remediation liabilities as a result of our quarterly reviews of the status of
our environmental remediation sites, which would result in a change to the
corresponding amount that is probable of future recovery and a charge to
earnings. For example, if we were to determine that the liabilities should be
increased by $100 million, the corresponding amount that is probable of future
recovery would be increased by approximately $89 million, with the remainder
recorded as a charge to earnings. This allocation is determined annually, based
upon our existing and projected business activities with the U.S. Government.

We cannot reasonably determine the extent of our financial exposure at all
environmental remediation sites with which we are involved. There are a number
of former operating facilities we are monitoring or investigating for potential
future environmental remediation. In some cases, although a loss may be
probable, it is not possible at this time to reasonably estimate the amount of
any obligation for remediation activities because of uncertainties (e.g.,
assessing the extent of the contamination). During any particular quarter, such
uncertainties may be resolved, allowing us to estimate and recognize the initial
liability to

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remediate a particular former operating site. The amount of the liability could
be material. Upon recognition of the liability, a portion will be recognized as
a receivable with the remainder charged to earnings, which may have a material
effect in any particular interim reporting period.

If we are ultimately found to have liability at those sites where we have been
designated a PRP, we expect that the actual costs of environmental remediation
will be shared with other liable PRPs. Generally, PRPs that are ultimately
determined to be responsible parties are strictly liable for site remediation
and usually agree among themselves to share, on an allocated basis, the costs
and expenses for environmental investigation and remediation. Under existing
environmental laws, responsible parties are jointly and severally liable and,
therefore, we are potentially liable for the full cost of funding such
remediation. In the unlikely event that we were required to fund the entire cost
of such remediation, the statutory framework provides that we may pursue rights
of cost recovery or contribution from the other PRPs. The amounts we record do
not reflect the fact that we may recover some of the environmental costs we have
incurred through insurance or from other PRPs, which we are required to pursue
by agreement and U.S. Government regulation.

Goodwill and Intangible Assets

The assets and liabilities of acquired businesses are recorded under the
acquisition method of accounting at their estimated fair values at the date of
acquisition. Goodwill represents costs in excess of fair values assigned to the
underlying identifiable net assets of acquired businesses. Intangible assets
from acquired businesses are recognized at fair value on the acquisition date
and consist of customer programs, trademarks, customer relationships, technology
and other intangible assets. Customer programs include values assigned to major
programs of acquired businesses and represent the aggregate value associated
with the customer relationships, contracts, technology and trademarks underlying
the associated program. Intangible assets are amortized over a period of
expected cash flows used to measure fair value, which typically ranges from five
to 20 years.

Our goodwill balance was $10.8 billion at both December 31, 2022 and 2021. We
perform an impairment test of our goodwill at least annually in the fourth
quarter or more frequently whenever events or changes in circumstances indicate
the carrying value of goodwill may be impaired. Such events or changes in
circumstances may include a significant deterioration in overall economic
conditions, changes in the business climate of our industry, a decline in our
market capitalization, operating performance indicators, competition,
reorganizations of our business, U.S. Government budget restrictions or the
disposal of all or a portion of a reporting unit. Our goodwill has been
allocated to and is tested for impairment at a level referred to as the
reporting unit, which is our business segment level or a level below the
business segment. The level at which we test goodwill for impairment requires us
to determine whether the operations below the business segment constitute a
self-sustaining business for which discrete financial information is available
and segment management regularly reviews the operating results.

We may use both qualitative and quantitative approaches when testing goodwill
for impairment. For selected reporting units where we use the qualitative
approach, we perform a qualitative evaluation of events and circumstances
impacting the reporting unit to determine the likelihood of goodwill impairment.
Based on that qualitative evaluation, if we determine it is more likely than not
that the fair value of a reporting unit exceeds its carrying amount, no further
evaluation is necessary. Otherwise, we perform a quantitative impairment test.
We perform quantitative tests for most reporting units at least once every three
years. However, for certain reporting units we may perform a quantitative
impairment test every year.

To perform the quantitative impairment test, we compare the fair value of a
reporting unit to its carrying value, including goodwill. If the fair value of a
reporting unit exceeds its carrying value, goodwill of the reporting unit is not
impaired. If the carrying value of the reporting unit, including goodwill,
exceeds its fair value, a goodwill impairment loss is recognized in an amount
equal to that excess. We generally estimate the fair value of each reporting
unit using a combination of a discounted cash flow (DCF) analysis and
market-based valuation methodologies such as comparable public company trading
values and values observed in recent business acquisitions. Determining fair
value requires the exercise of significant judgments, including the amount and
timing of expected future cash flows, long-term growth rates, discount rates and
relevant comparable public company earnings multiples and relevant transaction
multiples. The cash flows employed in the DCF analysis are based on our best
estimate of future sales, earnings and cash flows after considering factors such
as general market conditions, U.S. Government budgets, existing firm orders,
expected future orders, contracts with suppliers, labor agreements, changes in
working capital, long term business plans and recent operating performance. The
discount rates utilized in the DCF analysis are based on the respective
reporting unit's weighted average cost of capital, which takes into account the
relative weights of each component of capital structure (equity and debt) and
represents the expected cost of new capital, adjusted as appropriate to consider
the risk inherent in future cash flows of the respective reporting unit. The
carrying value of each reporting unit includes the assets and liabilities
employed in its operations, goodwill and allocations of amounts held at the
business segment and corporate levels.

In the fourth quarter of 2022, we performed our annual goodwill impairment test
for each of our reporting units. The results of that test indicated that for
each of our reporting units no impairment existed, including Sikorsky. Based on
this, the fair value

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of our Sikorsky reporting unit exceeded its carrying value, which included
goodwill of $2.7 billion, by a margin of approximately 40%. The fair value of
both our Sikorsky reporting unit and the indefinite-lived trademark intangible
asset can be significantly impacted by its performance, the amount and timing of
expected future cash flows, contract terminations, changes in expected future
orders, general market pressures, including U.S. Government budgetary
constraints, discount rates, long term growth rates, and changes in U.S.
(federal or state) or foreign tax laws and regulations, or their interpretation
and application, including those with retroactive effect, along with other
significant judgments. Based on our assessment of these circumstances, we have
determined that goodwill at our Sikorsky reporting unit and the indefinite-lived
trademark intangible asset at our Sikorsky reporting unit are at risk for
impairment should there be a significant 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.

Impairment assessments inherently involve management judgments regarding a
number of assumptions such as those described above. Due to the many variables
inherent in the estimation of a reporting unit's fair value and the relative
size of our recorded goodwill, differences in assumptions could have a material
effect on the estimated fair value of one or more of our reporting units and
could result in a goodwill impairment charge in a future period.

Acquired intangible assets deemed to have indefinite lives are not amortized,
but are subject to annual impairment testing or more frequently if events or
change in circumstance indicate that it is more likely than not that the asset
is impaired. This testing compares carrying value to fair value and, when
appropriate, the carrying value of these assets is reduced to fair value. In the
fourth quarter of 2022, we performed our annual impairment test, and the results
of that test indicated no impairment existed. Intangibles are amortized to
expense over their applicable useful lives, ranging from five to 20 years, based
on the nature of the asset and the underlying pattern of economic benefit as
reflected by future net cash inflows. We perform an impairment test of
finite-lived intangibles whenever events or changes in circumstances indicate
their carrying value may be impaired. If events or changes in circumstances
indicate the carrying value of a finite-lived intangible may be impaired, the
sum of the undiscounted future cash flows expected to result from the use of the
asset group would be compared to the asset group's carrying value. If the asset
group's carrying amount exceed the sum of the undiscounted future cash flows, we
would determine the fair value of the asset group and record an impairment loss
in net earnings.

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