Notes to Consolidated Financial Statements
Note 1 – Organization and Significant Accounting Policies
Organization – We are a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We also provide a broad range of management, engineering, technical, scientific, logistics, system integration and cybersecurity services. We serve both U.S. and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S. Government. As described in “Note 3 – Information on Business Segments”, we operate in four business segments: Aeronautics, MFC, RMS and Space.
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.
Basis of presentation – These consolidated financial statements include the accounts of subsidiaries we control and variable interest entities if we are the primary beneficiary. We eliminate intercompany balances and transactions in consolidation. We classify certain assets and liabilities as current utilizing the duration of the related contract or program as our operating cycle, which is generally longer than one year. This primarily impacts receivables, contract assets, inventories, and contract liabilities. We classify all other assets and liabilities based on whether the asset will be realized or the liability will be paid within one year.
Use of estimates – We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP). In doing so, we are required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates. Significant estimates inherent in the preparation of our consolidated financial statements include, but are not limited to, accounting for sales and cost recognition; postretirement benefit plans; environmental liabilities and assets for the portion of environmental costs that are probable of future recovery; evaluation of goodwill, intangible assets, investments and other assets for impairment; income taxes including deferred income taxes; fair value measurements; and contingencies.
Revenue Recognition – The majority of our net sales are generated from long-term contracts with the U.S. Government and international customers (including foreign military sales (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., 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 the Federal Acquisition Regulations (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.
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.
Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. It is converted into sales in future periods as work is performed or deliveries are made. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and is continuously reviewed throughout the contract period. In determining the estimated consideration, we consider the risks related to the technical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers may be reduced, resulting in a reduction of backlog without a corresponding recognition of sales. As of December 31, 2022, our ending backlog was $150.0 billion. We expect to recognize approximately 37% of our backlog over the next 12 months and approximately 61% over the next 24 months as revenue, with the remainder recognized thereafter.
For arrangements with the U.S. Government and FMS contracts, we generally do not begin work on contracts until funding is appropriated by the customer. Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type. Typical payment terms under fixed-price contracts with the U.S. Government provide that the customer pays either performance-based payments (PBPs) based on the achievement of contract milestones or progress payments based on a percentage of costs we incur. Typical payment terms under cost-reimbursable contracts with the U.S Government provide for billing of allowable costs incurred plus applicable fee on a monthly or semi-monthly basis. For the majority of our international direct commercial contracts to deliver complex systems, we typically receive advance payments prior to commencement of work, as well as milestone payments that are paid in accordance with the terms of our contract as we perform. We recognize a liability for payments in excess of revenue recognized, which is presented as a contract liability on the balance sheet. The portion of payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer from our failure to adequately complete some or all of the obligations under the contract. Payments received from customers in advance of revenue recognition are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract.
For fixed-price and cost-reimbursable contracts, we present revenues recognized in excess of billings as contract assets on the balance sheet. Amounts billed and due from our customers under both contract types are classified as receivables on the balance sheet.
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.
Our consolidated net profit booking rate adjustments increased segment operating profit by approximately $1.8 billion in 2022, $2.0 billion in 2021 and $1.8 billion in 2020. These adjustments increased net earnings by approximately $1.4 billion ($5.40 per share) in 2022 and $1.6 billion ($5.81 per share) in 2021 and $1.5 billion ($5.33 per share) in 2020. We recognized net sales from performance obligations satisfied in prior periods of approximately $2.0 billion in both 2022 and 2020, and $2.2 billion in 2021, which primarily relate to changes in profit booking rates that impacted revenue.
We have various development programs for new and upgraded products, services, and related technologies which have complex design and technical challenges. This development work is inherently uncertain and subject to significant variability in estimates of the cost and time required to complete the work by us and our suppliers. Many of these programs have cost-type contracting arrangements (e.g. cost-reimbursable or cost-plus-fee). In such cases, the associated financial risks are primarily in reduced fees, lower profit rates, or program cancellation if cost, schedule, or technical performance issues arise.
However, some of our existing development programs are contracted on a fixed-price basis or include cost-type contracting for the development phase with fixed-price production options and our customers are increasingly implementing procurement policies such as these that shift risk to contractors. Competitively bid programs with fixed-price development work or fixed-price production options increase the risk of a reach-forward loss upon contract award and during the period of contract performance. Due to the complex and often experimental nature of development programs, we may experience (and have experienced in the past) technical and quality issues during the development of new products or technologies for a variety of reasons. Our development programs are ongoing, and while we believe the cost and fee estimates incorporated in the financial statements are appropriate, the technical complexity of these programs and fixed-price contract structure creates financial risk as estimated completion costs may exceed the current contract value, which could trigger earnings charges, termination provisions, or other financially significant exposures. These programs have risk for reach-forward losses if our estimated costs exceed our estimated contract revenues, and such losses could be significant to our financial results, cash flows, or financial condition. Any such losses are recorded in the period in which the loss is evident.
We have experienced performance issues on a classified fixed-price incentive fee contract that involves highly complex design and systems integration at our Aeronautics business segment and have periodically recognized reach-forward losses. We continue to monitor the technical requirements, remaining work, schedule, and estimated costs to complete the program. During the fourth quarter of 2022, we revised our estimated costs to complete the program by reviewing the design and system integration requirements, remaining work, and schedule and recorded an additional charge of approximately $20 million. Based on this and the revised schedule, which was agreed to in 2021, cumulative losses were approximately $270 million as of December 31, 2022. We will continue to monitor our performance, any future changes in scope, and estimated costs to complete the program and may have to record additional losses in future periods if we experience further performance issues, increases in scope, or cost growth, which could be material to our financial results. In addition, we and our industry team will incur advanced procurement costs (also referred to as pre-contract costs) in order to enhance our ability to achieve the revised schedule and certain milestones. We will monitor the recoverability of pre-contract costs, which could be impacted by the customer’s decision regarding future phases of the program.
We are responsible for a program to design, develop and construct a ground-based radar at our RMS business segment. The program has experienced performance issues for which we have periodically recognized reach-forward losses. As of December 31, 2022, cumulative losses remained at approximately $280 million. We will continue to monitor our performance, any future changes in scope, and estimated costs to complete the program and may have to record additional losses in future
periods if we experience further performance issues, increases in scope, or cost growth. However, based on the losses previously recorded and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional losses, if any, would be material to our financial results or financial condition.
Research and development and similar costs – We conduct research and development (R&D) activities using our own funds (referred to as company-funded R&D or independent research and development (IR&D)) and under contractual arrangements with our customers (referred to as customer-funded R&D) to enhance existing products and services and to develop future technologies. R&D costs include basic research, applied research, concept formulation studies, design, development, and related test activities. Company-funded R&D costs are allocated to customer contracts as part of the general and administrative overhead costs and are generally recoverable to the extent allocable to our cost-reimbursable customer contracts with the U.S. Government. These costs also may be recoverable to the extent allocable to certain fixed-price incentive contracts with the U.S. Government. Customer-funded R&D costs are charged directly to the related customer contracts. Substantially all R&D costs are charged to cost of sales as incurred. Company-funded R&D costs charged to cost of sales totaled $1.7 billion, $1.5 billion and $1.3 billion in 2022, 2021 and 2020.
Stock-based compensation – We issue stock-based compensation awards in the form of restricted stock units (RSUs) and performance stock units (PSUs) that generally vest three years from the grant date and are settled in shares. Compensation cost related to all stock-based awards is measured at the grant date based on the estimated fair value of the award. The grant date fair value of RSUs is equal to the closing market price of our common stock on the grant date less a discount to reflect the delay in payment of dividend-equivalent cash payments that are made only upon vesting. The grant date fair value of PSUs is measured in a manner similar to RSUs for awards that vest based on service and performance conditions or using a Monte Carlo model for awards that vest based on service and market conditions.
For all RSUs, we recognize the grant date fair value, less estimated forfeitures, as compensation expense ratably over the requisite service period, which is shorter than the vesting period if the employee is retirement eligible on the date of grant or will become retirement eligible before the end of the vesting period. For PSUs that vest based on service and performance conditions, we recognize the grant date fair value, less estimated forfeitures, as compensation expense ratably over the vesting period based on the number of awards expected to ultimately vest. For PSUs that vest based on service and market conditions, we recognize the grant date fair value, less estimated forfeitures, as compensation expense ratably over the vesting period. At each reporting date, estimated forfeitures for all stock-based compensation awards and the number of PSUs expected to vest based on service and performance conditions is adjusted.
Income taxes – We calculate our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying amount of assets and liabilities and their respective tax bases, as well as from operating loss and tax credit carry-forwards. The provision for income taxes differs from the amounts currently receivable or payable because certain items of income and expense are recognized in different periods for financial reporting purposes than for income tax purposes. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.
We periodically assess our tax exposures related to periods that are open to examination. Based on the latest available information, we evaluate our tax positions to determine whether the position will more likely than not be sustained upon examination by the Internal Revenue Service (IRS) or other taxing authorities. If we cannot reach a more-likely-than-not determination, no benefit is recorded. If we determine that the tax position is more likely than not to be sustained, we record the largest amount of benefit that is more likely than not to be realized when the tax position is settled. We record interest and penalties related to income taxes as a component of income tax expense on our consolidated statements of earnings. Interest and penalties were not material during 2022, 2021 or 2020.
In accordance with the regulations that govern cost accounting requirements for government contracts, current state and local income and franchise taxes are generally considered allowable and allocable costs and, consistent with industry practice, are recorded in operating costs and expenses. We generally recognize changes in deferred state taxes and unrecognized state tax benefits in unallocated corporate expenses.
Cash and cash equivalents – Cash equivalents include highly liquid instruments with original maturities of 90 days or less.
Receivables – Receivables, net represent our unconditional right to consideration under the contract and include amounts billed and currently due from customers. Receivables, net are recorded at the net amount expected to be collected. There were no significant impairment losses related to our receivables in 2022, 2021 or 2020.
Contract assets – Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract assets are recorded at the net amount expected to be billed and collected. Contract assets are classified as current based on our contract operating cycle, and include amounts that may be billed and collected beyond one year due to the long-cycle nature of our contracts.
Inventories – We record inventories at the lower of cost or estimated net realizable value. The majority of our inventory represents work-in-process for contracts where control has not yet passed to the customer. Work-in-process primarily consists of labor, material, subcontractor, and overhead costs. In addition, costs incurred to fulfill a contract in advance of the contract being awarded are recorded in inventories as work-in-process if we determine that those costs relate directly to a contract or to an anticipated contract that we can specifically identify and contract award is probable, the costs generate or enhance resources that will be used in satisfying performance obligations, and the costs are recoverable (referred to as pre-contract costs). Pre-contract costs that are initially capitalized in inventory are generally recognized as cost of sales consistent with the transfer of products and services to the customer upon the receipt of the anticipated contract. All other pre-contract costs, including start-up costs, are expensed as incurred. We determine the costs of other inventories such as materials, spares and supplies by using the first-in first-out or average cost methods. If events or changes in circumstances indicate that pre-contract costs are no longer recoverable or the utility of our inventories have diminished through damage, deterioration, obsolescence, changes in price or other causes, a loss is recognized in the period in which it occurs.
Contract liabilities – Contract liabilities include advance payments and billings in excess of revenue recognized. Contract liabilities are classified as current based on our contract operating cycle and reported on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.
Property, plant and equipment – Property, plant and equipment are initially recorded at cost. The cost of plant and equipment are depreciated generally using accelerated methods during the first half of the estimated useful lives of the assets and the straight-line method thereafter. The estimated useful lives of our plant and equipment generally range from 10 to 40 years for buildings and five to 15 years for machinery and equipment. No depreciation expense is recorded on construction in progress until such assets are placed into operation.
We review the carrying amounts of long-lived assets for impairment if events or changes in the facts and circumstances indicate that their carrying amounts may not be recoverable. We assess impairment by comparing the estimated undiscounted future cash flows of the related asset grouping to its carrying amount. If an asset is determined to be impaired, we recognize an impairment charge in the current period for the difference between the fair value of the asset and its carrying amount.
Capitalized software – We capitalize certain costs associated with the development or purchase of internal-use software. The amounts capitalized are included in other noncurrent assets on our consolidated balance sheets and are amortized on a straight-line basis over the estimated useful life of the resulting software, which ranges from two to 15 years. As of December 31, 2022 and 2021, capitalized software totaled $919 million and $777 million, net of accumulated amortization of $2.6 billion and $2.3 billion. No amortization expense is recorded until the software is ready for its intended use. Amortization expense related to capitalized software was $253 million in 2022, $175 million in 2021 and $166 million in 2020.
Fair value of financial instruments – We measure the fair value of our financial instruments using observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. The following hierarchy classifies the inputs used to determine fair value into three levels:
Level 1 – quoted prices in active markets for identical assets or liabilities.
Level 2 – inputs, other than quoted prices, observable by a marketplace participant either directly or indirectly.
Level 3 – unobservable inputs significant to the fair value measurement.
Investments – We hold a portfolio of marketable securities to fund our non-qualified employee benefit plans. A portion of these securities are held in common/collective trust funds and are measured at fair value using Net Asset Value (NAV) per share as a practical expedient. Marketable securities accounted for as trading are recorded at fair value on a recurring basis and are included in other noncurrent assets on our consolidated balance sheets. Gains and losses on these investments are included in other unallocated, net within cost of sales on our consolidated statements of earnings.
We make investments in certain companies that we believe are advancing or developing new technologies applicable to our business. These investments may be in the form of common or preferred stock, warrants, convertible debt securities or investments in funds. Most of the investments are in equity securities without readily determinable fair values, which are measured initially at cost and are then adjusted to fair value only if there is an observable price change or reduced for impairment, if applicable. Investments with quoted market prices in active markets (Level 1) are recorded at fair value at the
end of each reporting period. The carrying amounts of these were $589 million and $577 million at December 31, 2022 and December 31, 2021 and are included on our consolidated balance sheets within other assets, both current and noncurrent. During 2022, we recorded $114 million ($86 million, or $0.33 per share, after-tax) of net losses, compared to net gains of $265 million ($199 million, or $0.72 per share, after-tax) during 2021, due to changes in fair value and/or sales of investments which are reflected in the other non-operating income, net account on our consolidated statements of earnings.
Equity method investments – Investments where we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other noncurrent assets on our consolidated balance sheets. Significant influence typically exists if we have a 20% to 50% ownership interest in the investee. Under this method of accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on our consolidated statements of earnings since the activities of the investee are closely aligned with the operations of the business segment holding the investment. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. As of December 31, 2022 and December 31, 2021, our equity method investments totaled $685 million and $689 million, which was primarily composed of our investment in the United Launch Alliance (ULA) joint venture. Our share of net earnings related to our equity method investees was $114 million in 2022, $97 million in 2021 and $163 million in 2020, of which approximately $100 million, $65 million and $135 million was included in our Space business segment operating profit.
In July 2020, we entered into an agreement to sell our ownership interest in Advanced Military Maintenance, Repair and Overhaul Center (AMMROC) to our joint venture partner for $307 million. As a result, we adjusted the carrying value of our investment to the selling price of $307 million, which resulted in the recognition of a noncash impairment charge of $128 million ($96 million, or $0.34 per share, after-tax) in our results of operations disclosed in 2020.
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.
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 typically a level below our business segments. 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 either a qualitative or quantitative approach when testing a reporting unit’s 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.
For 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 certain assets and liabilities held at the business segment and corporate levels.
During the fourth quarters of 2022, 2021 and 2020, we performed our annual goodwill impairment test for each of our reporting units. The results of our annual impairment tests of goodwill indicated that no impairment existed.
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. Finite-lived intangibles are amortized to expense over the 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.
Leases – We evaluate whether our contractual arrangements contain leases at the inception of such arrangements. Specifically, we consider whether we can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset. Substantially all of our leases are long-term operating leases with fixed payment terms. We do not have significant financing leases. Our right-of-use (ROU) operating lease assets represent our right to use an underlying asset for the lease term, and our operating lease liabilities represent our obligation to make lease payments. ROU operating lease assets are recorded in other noncurrent assets in our consolidated balance sheet. Operating lease liabilities are recorded in other current liabilities or other noncurrent liabilities in our consolidated balance sheet based on their contractual due dates.
Both the ROU operating lease asset and liability are recognized as of the lease commencement date at the present value of the lease payments over the lease term. Most of our leases do not provide an implicit rate that can readily be determined. Therefore, we use a discount rate based on our incremental borrowing rate, which is determined using our credit rating and information available as of the commencement date. ROU operating lease assets include lease payments made at or before the lease commencement date, net of any lease incentives.
Our operating lease agreements may include options to extend the lease term or terminate it early. We include options to extend or terminate leases in the ROU operating lease asset and liability when it is reasonably certain we will exercise these options. Operating lease expense is recognized on a straight-line basis over the lease term and is included in cost of sales on our consolidated statement of earnings.
We have operating lease arrangements with lease and non-lease components. The non-lease components in our arrangements are not significant when compared to the lease components. For all operating leases, we account for the lease and non-lease components as a single component. Additionally, for certain equipment leases, we apply a portfolio approach to recognize operating lease ROU assets and liabilities. We evaluate ROU assets for impairment consistent with our property, plant and equipment policy.
Postretirement benefit plans – Many of our employees and retirees participate in defined benefit pension plans, retiree medical and life insurance plans, and other postemployment plans (collectively, postretirement benefit plans). Obligation amounts we record related to our postretirement benefit plans are computed based on service to date, using actuarial valuations that are based in part on certain key economic assumptions we make, including the discount rate, the expected long-term rate of return on plan assets and other actuarial assumptions including participant longevity (also known as mortality) and health care cost trend rates, each as appropriate based on the nature of the plans.
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 asset gains or losses, along with those resulting from adjustments to our benefit obligation, will be amortized to expense using the corridor method, where gains and losses are recognized over a period of years to the extent they exceed 10% of the greater of plan assets or benefit obligations.
We recognize on a plan-by-plan basis the funded status of our postretirement benefit plans as either an asset recorded within other noncurrent assets or a liability recorded within noncurrent liabilities on our consolidated balance sheets. The GAAP funded status is measured as the difference between the fair value of the plan’s assets and the benefit obligation of the plan. The funded status under the Employee Retirement Income Security Act of 1974 (ERISA), as amended, is calculated on a different basis than under GAAP.
Postemployment plans – We record a liability for postemployment benefits, such as severance or job training, typically when payment is probable, the amount is reasonably estimable, and the obligation relates to rights that have vested or accumulated.
Environmental matters – We record a liability for environmental matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. The amount of liability recorded is based on our estimate of the costs to be incurred for remediation at a particular 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. Our environmental liabilities are recorded on our consolidated balance sheets within other liabilities, both current and noncurrent. We expect to include a substantial portion of environmental costs in our net sales and cost of sales in future periods pursuant to U.S. Government regulation. At the time a liability is recorded for future environmental costs, we record assets for estimated future recovery considered probable through the pricing of products and services to agencies of the U.S. Government, 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. We include the portions of those environmental costs expected to be allocated to our non-U.S. Government contracts, or determined not to be recoverable under U.S. Government contracts, in our cost of sales at the time the liability is established or adjusted. Our assets for the portion of environmental costs that are probable of future recovery are recorded on our consolidated balance sheets within other assets, both current and noncurrent. We project costs and recovery of costs over approximately 20 years.
Derivative financial instruments – Derivatives are recorded at their fair value and included in other current and noncurrent assets and liabilities on our consolidated balance sheets. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on our intended use of the derivative and its resulting designation. Adjustments to reflect changes in fair values of derivatives attributable to highly effective hedges are either reflected in earnings and largely offset by corresponding adjustments to the hedged items or reflected net of income taxes in accumulated other comprehensive loss until the hedged transaction is recognized in earnings. Changes in the fair value of the derivatives that are not highly effective, if any, are immediately recognized in earnings.
Note 2 – Earnings Per Share
The weighted average number of shares outstanding used to compute earnings per common share were as follows (in millions): | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Weighted average common shares outstanding for basic computations | | 263.7 | | | 276.4 | | | 280.0 | |
| Weighted average dilutive effect of equity awards | | 0.9 | | | 1.0 | | | 1.2 | |
| Weighted average common shares outstanding for diluted computations | | 264.6 | | | 277.4 | | | 281.2 | |
We compute basic and diluted earnings per common share by dividing net earnings by the respective weighted average number of common shares outstanding for the periods presented. Our calculation of diluted earnings per common share also includes the dilutive effects for the assumed vesting of outstanding restricted stock units (RSUs) and performance stock units (PSUs) based on the treasury stock method. There were no significant anti-dilutive equity awards for the years ended December 31, 2022, 2021 and 2020. Basic and diluted weighted average common shares outstanding decreased in 2022 compared to 2021 due to share repurchases.
Note 3 – Information on Business Segments
Overview
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. Following is a brief description of the activities of our business segments:
•Aeronautics – 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.
•Missiles and Fire Control – 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.
•Rotary and Mission Systems – 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.
•Space – 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. Operating profit for our Space business segment also includes our share of earnings for our 50% ownership interest in ULA, which provides expendable launch services to the U.S. Government and commercial customers. Our investment in ULA totaled $571 million and $585 million at December 31, 2022 and 2021.
Selected Financial Data by Business Segment
Net sales of our business segments in the following tables exclude intersegment sales as these activities are eliminated in consolidation and thus are not included in management’s evaluation of performance of each segment. Business segment operating profit includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments.
Summary Operating Results
Sales and operating profit for each of our business segments were as follows (in millions):
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| | 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 | |
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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)Severance and other charges in 2022 include $100 million ($79 million, or $0.31 per share, after-tax) charge related to actions at our RMS business segment, which include severance costs for reduction of positions and asset impairment charges; $36 million ($28 million, or $0.10 per share, after-tax) charge during 2021 associated with plans to close and consolidate certain facilities and reduce total workforce within our RMS business segment; and $27 million ($21 million, or $0.08 per share, after-tax) charge during 2020 related to the planned elimination of certain positions primarily at our corporate functions.
(b)Other, net in 2020 includes a noncash impairment charge of $128 million ($96 million, or $0.34 per share, after-tax) for our investment in the international equity method investee, AMMROC. (See “Note 1 – Organization and Significant Accounting Policies”).
Unallocated Items
Business segment operating profit excludes the FAS/CAS pension operating adjustment described below, a portion of corporate costs not considered allowable or allocable to contracts with the U.S. Government under the applicable U.S. Government cost accounting standards (CAS) or federal acquisition regulations (FAR), and other items not considered part of management’s evaluation of segment operating performance such as a portion of management and administration costs, legal fees and settlements, environmental costs, stock-based compensation expense, changes in the fair value of investments held in a
trust for deferred compensation plans, retiree benefits, significant severance actions, significant asset impairments, gains or losses from divestitures, and other miscellaneous corporate activities. Excluded items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See “Note 1 – Organization and Significant Accounting Policies” (under the caption “Use of Estimates”) for a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.
FAS/CAS Pension Operating Adjustment
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.
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):
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| | 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 | |
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| 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) 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.
Intersegment Sales
Sales between our business segments are excluded from our consolidated and segment operating results as these activities are eliminated in consolidation. Intersegment sales for each of our business segments were as follows (in millions):
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| | 2022 | | 2021 | | 2020 |
| Intersegment sales | | | | | | |
| Aeronautics | | $ | 249 | | | $ | 219 | | | $ | 243 | |
| Missiles and Fire Control | | 627 | | | 618 | | | 562 | |
| Rotary and Mission Systems | | 1,930 | | | 1,895 | | | 1,903 | |
| Space | | 381 | | | 360 | | | 377 | |
| Total intersegment sales | | $ | 3,187 | | | $ | 3,092 | | | $ | 3,085 | |
Disaggregation of Net Sales
Net sales by products and services, contract type, customer category and geographic region for each of our business segments were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 |
| | Aeronautics | | MFC | | RMS | | Space | | Total |
| Net sales | | | | | | | | | | |
| Products | | $ | 22,870 | | | $ | 10,048 | | | $ | 12,811 | | | $ | 9,737 | | | $ | 55,466 | |
| Services | | 4,117 | | | 1,269 | | | 3,337 | | | 1,795 | | | 10,518 | |
| Total net sales | | $ | 26,987 | | | $ | 11,317 | | | $ | 16,148 | | | $ | 11,532 | | | $ | 65,984 | |
| Net sales by contract type | | | | | | | | | | |
| Fixed-price | | $ | 19,431 | | | $ | 8,014 | | | $ | 10,460 | | | $ | 3,064 | | | $ | 40,969 | |
| Cost-reimbursable | | 7,556 | | | 3,303 | | | 5,688 | | | 8,468 | | | 25,015 | |
| Total net sales | | $ | 26,987 | | | $ | 11,317 | | | $ | 16,148 | | | $ | 11,532 | | | $ | 65,984 | |
| Net sales by customer | | | | | | | | | | |
| U.S. Government | | $ | 18,026 | | | $ | 7,814 | | | $ | 11,331 | | | $ | 11,344 | | | $ | 48,515 | |
International (a) | | 8,811 | | | 3,496 | | | 4,470 | | | 154 | | | 16,931 | |
| U.S. commercial and other | | 150 | | | 7 | | | 347 | | | 34 | | | 538 | |
| Total net sales | | $ | 26,987 | | | $ | 11,317 | | | $ | 16,148 | | | $ | 11,532 | | | $ | 65,984 | |
| Net sales by geographic region | | | | | | | | | | |
| United States | | $ | 18,176 | | | $ | 7,821 | | | $ | 11,678 | | | $ | 11,378 | | | $ | 49,053 | |
| Europe | | 4,303 | | | 1,020 | | | 857 | | | 87 | | | 6,267 | |
| Asia Pacific | | 2,970 | | | 461 | | | 1,994 | | | 54 | | | 5,479 | |
| Middle East | | 1,103 | | | 1,858 | | | 823 | | | 12 | | | 3,796 | |
| Other | | 435 | | | 157 | | | 796 | | | 1 | | | 1,389 | |
| Total net sales | | $ | 26,987 | | | $ | 11,317 | | | $ | 16,148 | | | $ | 11,532 | | | $ | 65,984 | |
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| | 2021 |
| | Aeronautics | | MFC | | RMS | | Space | | Total |
| Net sales | | | | | | | | | | |
| Products | | $ | 22,631 | | | $ | 10,269 | | | $ | 13,483 | | | $ | 10,052 | | | $ | 56,435 | |
| Services | | 4,117 | | | 1,424 | | | 3,306 | | | 1,762 | | | 10,609 | |
| Total net sales | | $ | 26,748 | | | $ | 11,693 | | | $ | 16,789 | | | $ | 11,814 | | | $ | 67,044 | |
| Net sales by contract type | | | | | | | | | | |
| Fixed-price | | $ | 19,734 | | | $ | 8,079 | | | $ | 11,125 | | | $ | 2,671 | | | $ | 41,609 | |
| Cost-reimbursable | | 7,014 | | | 3,614 | | | 5,664 | | | 9,143 | | | 25,435 | |
| Total net sales | | $ | 26,748 | | | $ | 11,693 | | | $ | 16,789 | | | $ | 11,814 | | | $ | 67,044 | |
| Net sales by customer | | | | | | | | | | |
| U.S. Government | | $ | 17,262 | | | $ | 8,341 | | | $ | 11,736 | | | $ | 10,811 | | | $ | 48,150 | |
International (a) | | 9,403 | | | 3,346 | | | 4,719 | | | 971 | | | 18,439 | |
| U.S. commercial and other | | 83 | | | 6 | | | 334 | | | 32 | | | 455 | |
| Total net sales | | $ | 26,748 | | | $ | 11,693 | | | $ | 16,789 | | | $ | 11,814 | | | $ | 67,044 | |
| Net sales by geographic region | | | | | | | | | | |
| United States | | $ | 17,345 | | | $ | 8,347 | | | $ | 12,070 | | | $ | 10,843 | | | $ | 48,605 | |
| Europe | | 3,973 | | | 910 | | | 909 | | | 968 | | | 6,760 | |
| Asia Pacific | | 3,644 | | | 292 | | | 2,178 | | | (6) | | | 6,108 | |
| Middle East | | 1,351 | | | 2,066 | | | 827 | | | 9 | | | 4,253 | |
| Other | | 435 | | | 78 | | | 805 | | | — | | | 1,318 | |
| Total net sales | | $ | 26,748 | | | $ | 11,693 | | | $ | 16,789 | | | $ | 11,814 | | | $ | 67,044 | |
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| | 2020 |
| | Aeronautics | | MFC | | RMS | | Space | | Total |
| Net sales | | | | | | | | | | |
| Products | | $ | 22,327 | | | $ | 9,804 | | | $ | 12,748 | | | $ | 10,049 | | | $ | 54,928 | |
| Services | | 3,939 | | | 1,453 | | | 3,247 | | | 1,831 | | | 10,470 | |
| Total net sales | | $ | 26,266 | | | $ | 11,257 | | | $ | 15,995 | | | $ | 11,880 | | | $ | 65,398 | |
| Net sales by contract type | | | | | | | | | | |
| Fixed-price | | $ | 18,477 | | | $ | 7,587 | | | $ | 10,795 | | | $ | 2,247 | | | $ | 39,106 | |
| Cost-reimbursable | | 7,789 | | | 3,670 | | | 5,200 | | | 9,633 | | | 26,292 | |
| Total net sales | | $ | 26,266 | | | $ | 11,257 | | | $ | 15,995 | | | $ | 11,880 | | | $ | 65,398 | |
| Net sales by customer | | | | | | | | | | |
| U.S. Government | | $ | 18,175 | | | $ | 8,404 | | | $ | 11,596 | | | $ | 10,293 | | | $ | 48,468 | |
International (a) | | 8,012 | | | 2,842 | | | 3,986 | | | 1,546 | | | 16,386 | |
| U.S. commercial and other | | 79 | | | 11 | | | 413 | | | 41 | | | 544 | |
| Total net sales | | $ | 26,266 | | | $ | 11,257 | | | $ | 15,995 | | | $ | 11,880 | | | $ | 65,398 | |
| Net sales by geographic region | | | | | | | | | | |
| United States | | $ | 18,254 | | | $ | 8,415 | | | $ | 12,009 | | | $ | 10,334 | | | $ | 49,012 | |
| Europe | | 3,283 | | | 767 | | | 806 | | | 1,478 | | | 6,334 | |
| Asia Pacific | | 3,162 | | | 280 | | | 1,666 | | | 68 | | | 5,176 | |
| Middle East | | 1,344 | | | 1,749 | | | 847 | | | — | | | 3,940 | |
| Other | | 223 | | | 46 | | | 667 | | | — | | | 936 | |
| Total net sales | | $ | 26,266 | | | $ | 11,257 | | | $ | 15,995 | | | $ | 11,880 | | | $ | 65,398 | |
(a)International sales include FMS contracted through the U.S. Government, direct commercial sales with international governments and commercial and other sales to international customers.
Our Aeronautics business segment includes our largest program, the F-35 Lightning II Joint Strike Fighter, an international multi-role, multi-variant, stealth fighter aircraft. Net sales for the F-35 program represented approximately 27% of our consolidated net sales during both 2022 and 2021 and 28% during 2020.
Capital Expenditures, PP&E Depreciation and Software Amortization, and Amortization of Purchased Intangibles
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| | 2022 | | 2021 | | 2020 |
| Capital expenditures | | | | | | |
| Aeronautics | | $ | 461 | | | $ | 477 | | | $ | 534 | |
| Missiles and Fire Control | | 253 | | | 304 | | | 391 | |
| Rotary and Mission Systems | | 266 | | | 279 | | | 311 | |
| Space | | 391 | | | 305 | | | 403 | |
| Total business segment capital expenditures | | 1,371 | | | 1,365 | | | 1,639 | |
| Corporate activities | | 299 | | | 157 | | | 127 | |
| Total capital expenditures | | $ | 1,670 | | | $ | 1,522 | | | $ | 1,766 | |
PP&E depreciation and software amortization (a) | | | | | | |
| Aeronautics | | $ | 383 | | | $ | 348 | | | $ | 348 | |
| Missiles and Fire Control | | 160 | | | 153 | | | 136 | |
| Rotary and Mission Systems | | 245 | | | 250 | | | 244 | |
| Space | | 201 | | | 205 | | | 182 | |
| Total business segment depreciation and amortization | | 989 | | | 956 | | | 910 | |
| Corporate activities | | 167 | | | 123 | | | 109 | |
| Total depreciation and amortization | | $ | 1,156 | | | $ | 1,079 | | | $ | 1,019 | |
| Amortization of purchased intangibles | | | | | | |
| Aeronautics | | $ | 1 | | | $ | 1 | | | $ | — | |
| Missiles and Fire Control | | 2 | | | 2 | | | 2 | |
| Rotary and Mission Systems | | 233 | | | 232 | | | 232 | |
| Space | | 12 | | | 50 | | | 37 | |
| Total amortization of purchased intangibles | | $ | 248 | | | $ | 285 | | | $ | 271 | |
(a)Excludes amortization of purchased intangibles.
Assets
Total assets for each of our business segments were as follows (in millions): | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Assets | | | | |
| Aeronautics | | $ | 12,055 | | | $ | 10,756 | |
| Missiles and Fire Control | | 5,788 | | | 5,243 | |
| Rotary and Mission Systems | | 17,988 | | | 17,664 | |
| Space | | 6,351 | | | 6,199 | |
| Total business segment assets | | 42,182 | | | 39,862 | |
Corporate assets (a) | | 10,698 | | | 11,011 | |
| Total assets | | $ | 52,880 | | | $ | 50,873 | |
(a)Corporate assets primarily include cash and cash equivalents, deferred income taxes, assets for the portion of environmental costs that are probable of future recovery, property, plant and equipment, investments held in a separate trust for deferred compensation plans and other marketable investments.
Note 4 – Receivables, net, Contract Assets and Contract Liabilities
Receivables, net, contract assets and contract liabilities were as follows (in millions): | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Receivables, net | | $ | 2,505 | | | $ | 1,963 | |
| Contract assets | | 12,318 | | | 10,579 | |
| Contract liabilities | | 8,488 | | | 8,107 | |
Receivables, net consist of approximately $1.8 billion from the U.S. Government and $732 million from other governments and commercial customers as of December 31, 2022. Substantially all accounts receivable at December 31, 2022 are expected to be collected in 2023. We do not believe we have significant exposure to credit risk as the majority of our accounts receivable are due from the U.S. Government either as the ultimate customer or in connection with foreign military sales.
Contract assets are net of progress payments and performance based payments from our customers as well as advance payments from non-U.S. Government customers totaling approximately $47.0 billion and $43.9 billion as of December 31, 2022 and 2021. Contract assets increased $1.7 billion during 2022, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during 2022 for which we have not yet billed our customers (primarily on the F-35 program at Aeronautics). There were no significant credit or impairment losses related to our contract assets during 2022 and 2021. We expect to bill our customers for the majority of the December 31, 2022 contract assets during 2023.
Contract liabilities increased $381 million during 2022, primarily due to payments received in excess of revenue recognized on these performance obligations. During 2022, we recognized $4.8 billion of our contract liabilities at December 31, 2021 as revenue. During 2021, we recognized $4.5 billion of our contract liabilities at December 31, 2020 as revenue. During 2020, we recognized $4.0 billion of our contract liabilities at December 31, 2019 as revenue.
Note 5 – Inventories
Inventories consisted of the following (in millions): | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Materials, spares and supplies | | $ | 599 | | | $ | 624 | |
| Work-in-process | | 2,297 | | | 2,163 | |
| Finished goods | | 192 | | | 194 | |
| Total inventories | | $ | 3,088 | | | $ | 2,981 | |
Costs incurred to fulfill a contract in advance of the contract being awarded are included in inventories as work-in-process if we determine that those costs relate directly to a contract or to an anticipated contract that we can specifically identify and determine that contract award is probable, the costs generate or enhance resources that will be used in satisfying performance obligations, and the costs are recoverable (referred to as pre-contract costs). Pre-contract costs that are initially capitalized in inventory are generally recognized as cost of sales consistent with the transfer of products and services to the customer upon the
receipt of the anticipated contract. All other pre-contract costs, including start-up costs, are expensed as incurred. As of December 31, 2022 and 2021, $791 million and $634 million of pre-contract costs were included in inventories.
Note 6 – Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following (in millions): | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Land | | $ | 147 | | | $ | 144 | |
| Buildings | | 8,555 | | | 8,003 | |
| Machinery and equipment | | 9,400 | | | 9,053 | |
| Construction in progress | | 2,036 | | | 1,900 | |
| Total property, plant and equipment | | 20,138 | | | 19,100 | |
| Less: accumulated depreciation | | (12,163) | | | (11,503) | |
| Total property, plant and equipment, net | | $ | 7,975 | | | $ | 7,597 | |
Depreciation expense related to plant and equipment was $903 million in 2022, $904 million in 2021 and $853 million in 2020.
Note 7 – Goodwill and Acquired Intangibles
Changes in the carrying amount of goodwill by business segment were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Aeronautics | | MFC | | RMS | | Space | | Total |
| Balance at December 31, 2020 | | $ | 187 | | | $ | 2,091 | | | $ | 6,768 | | | $ | 1,760 | | | $ | 10,806 | |
| Acquisitions | | — | | | — | | | — | | | 17 | | | 17 | |
| Other | | — | | | (1) | | | (9) | | | — | | | (10) | |
| Balance at December 31, 2021 | | 187 | | | 2,090 | | | 6,759 | | | 1,777 | | | 10,813 | |
| Acquisitions | | — | | | — | | | 3 | | | — | | | 3 | |
| Other | | 9 | | | (7) | | | (36) | | | (2) | | | (36) | |
| Balance at December 31, 2022 | | $ | 196 | | | $ | 2,083 | | | $ | 6,726 | | | $ | 1,775 | | | $ | 10,780 | |
The gross carrying amounts and accumulated amortization of our acquired intangible assets consisted of the following (useful life in years, $ in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2022 | | | 2021 |
| Estimated Useful Lives | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Finite-Lived: | | | | | | | | | | | | | | | | |
| Customer programs | 9 - 20 | | $ | 3,186 | | | $ | (1,664) | | | | $ | 1,522 | | | | $ | 3,184 | | | $ | (1,431) | | | | $ | 1,753 | |
| Customer relationships | 4 - 10 | | 94 | | | (78) | | | | 16 | | | | 120 | | | (96) | | | | 24 | |
| Other | 3 - 10 | | 72 | | | (38) | | | | 34 | | | | 76 | | | (34) | | | | 42 | |
| Total finite-lived intangibles | | | 3,352 | | | (1,780) | | | | 1,572 | | | | 3,380 | | | (1,561) | | | | 1,819 | |
| Indefinite-Lived: | | | | | | | | | | | | | | | | |
| Trademark | | | 887 | | | — | | | | 887 | | | | 887 | | | — | | | | 887 | |
| Total acquired intangibles | | | $ | 4,239 | | | $ | (1,780) | | | | $ | 2,459 | | | | $ | 4,267 | | | $ | (1,561) | | | | $ | 2,706 | |
Acquired finite-lived intangible assets are amortized to expense primarily on a straight-line basis over their estimated useful lives.
Amortization expense for acquired finite-lived intangible assets was $248 million, $285 million and $271 million in 2022, 2021 and 2020. Estimated future amortization expense is as follows: $248 million in 2023; $244 million in 2024; $220 million in 2025; $154 million in 2026; and $153 million in 2027.
Note 8 – Leases
We generally enter into operating lease agreements for facilities, land and equipment. Our ROU operating lease assets were $1.1 billion at December 31, 2022. Operating lease liabilities were $1.2 billion, of which $916 million were classified as noncurrent, at December 31, 2022. New ROU operating lease assets and liabilities entered into during 2022 were $25 million. The weighted average remaining lease term and discount rate for our operating leases were approximately 7.4 years and 2.4% at December 31, 2022.
We recognized operating lease expense of $275 million in both 2022 and 2021 and $223 million in 2020. In addition, we made cash payments of $269 million for operating leases during 2022, which are included in cash flows from operating activities in our consolidated statement of cash flows.
Future minimum lease commitments at December 31, 2022 were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter |
| Operating leases | $ | 1,342 | | | $ | 327 | | | $ | 226 | | | $ | 178 | | | $ | 131 | | | $ | 101 | | | $ | 379 | | |
| Less: imputed interest | 125 | | | | | | | | | | | | | | |
| Total | $ | 1,217 | | | | | | | | | | | | | | |
Note 9 – Income Taxes
Income Tax Provisions
Federal and foreign income tax expense for continuing operations consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Federal income tax expense (benefit): | | | | | | |
| Current | | $ | 1,618 | | | $ | 1,325 | | | $ | 1,292 | |
| | | | | | |
| Deferred | | (776) | | | (194) | | | 21 | |
| Total federal income tax expense | | 842 | | | 1,131 | | | 1,313 | |
| Foreign income tax expense (benefit): | | | | | | |
| Current | | 87 | | | 93 | | | 50 | |
| Deferred | | 19 | | | 11 | | | (16) | |
| Total foreign income tax expense | | 106 | | | 104 | | | 34 | |
| Total federal and foreign income tax expense | | $ | 948 | | | $ | 1,235 | | | $ | 1,347 | |
Our total net state income tax expense was $124 million for 2022, $195 million for 2021, and $197 million for 2020. State income taxes are allowable costs in establishing prices for the products and services we sell to the U.S. Government. Therefore, state income tax expenses are included in our cost of sales, as general and administrative costs. As a result, the impact of certain transactions on our operating profit and of other matters presented in these consolidated financial statements is disclosed net of state income taxes.
A reconciliation of the U.S. federal statutory income tax expense to actual income tax expense for continuing operations is as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2022 | | 2021 | | 2020 |
| | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
Income tax expense at the U.S. federal statutory tax rate | | $ | 1,403 | | | 21.0 | % | | $ | 1,585 | | | 21.0 | % | | $ | 1,729 | | | 21.0 | % |
| Research and development tax credit | | (178) | | | (2.7) | | | (118) | | | (1.6) | | | (97) | | | (1.2) | |
| Foreign derived intangible income deduction | | (176) | | | (2.6) | | | (170) | | | (2.3) | | | (170) | | | (2.1) | |
| Tax deductible dividends | | (67) | | | (1.0) | | | (65) | | | (0.9) | | | (64) | | | (0.8) | |
| Excess tax benefits for stock-based payment awards | | (42) | | | (0.6) | | | (28) | | | (0.4) | | | (52) | | | (0.6) | |
| Other, net | | 8 | | | 0.1 | | | 31 | | | 0.6 | | | 1 | | | 0.1 | |
| Income tax expense | | $ | 948 | | | 14.2 | % | | $ | 1,235 | | | 16.4 | % | | $ | 1,347 | | | 16.4 | % |
The rate for 2022 was lower than the rate for 2021 primarily due to increased research and development tax credits. The rate for all years benefited from tax deductions for foreign derived intangible income, dividends paid to our defined contribution plans with an employee stock ownership plan feature, and employee equity awards.
Uncertain Tax Positions
The change in unrecognized tax benefits were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Balance at January 1 | | $ | 69 | | | $ | 50 | | | $ | 56 | |
| Additions based on tax positions related to the current year | | 1,572 | | | 23 | | | 14 | |
| Additions for tax positions of prior years | | 5 | | | 30 | | | 1 | |
| Reductions for tax positions of prior years | | (2) | | | (19) | | | (20) | |
| Settlements with tax authorities | | (23) | | | (14) | | | — | |
| Other, net | | 1 | | | (1) | | | (1) | |
| Balance at December 31 | | $ | 1,622 | | | $ | 69 | | | $ | 50 | |
As of December 31, 2021, our liabilities associated with uncertain tax positions were not material. For the year ended 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 resulting from the Tax Cuts and Jobs Act of 2017’s elimination of the option for taxpayers to deduct research and development expenditures immediately in the year incurred and instead requiring taxpayers to amortize such expenditures over five years. It is reasonably possible that within the next twelve months, our liabilities associated with uncertain tax positions may increase by approximately $1.3 billion related to this provision.
This uncertain tax position will have an immaterial impact to our effective tax rate if recognized.
We recognize accrued interest and penalties related to unrecognized tax benefits as part of our income tax expense. As of December 31, 2022 and 2021, our accrued interest and penalties related to unrecognized tax benefits were not material.
Deferred Income Taxes
The primary components of our federal and foreign deferred income tax assets and liabilities at December 31 were as follows (in millions): | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Deferred tax assets related to: | | | | |
| Pensions | | $ | 1,340 | | | $ | 1,985 | |
| Accrued compensation and benefits | | 718 | | | 957 | |
| Contract accounting methods | | 510 | | | 470 | |
| Research and development expenditures | | 2,268 | | | — | |
| Foreign company operating losses and credits | | 20 | | | 40 | |
Other (a) | | 471 | | | 473 | |
| Valuation allowance | | (31) | | | (15) | |
| Deferred tax assets, net | | 5,296 | | | 3,910 | |
| Deferred tax liabilities related to: | | | | |
| Goodwill and intangible assets | | 449 | | | 401 | |
| Property, plant and equipment | | 503 | | | 518 | |
Exchanged debt securities and other (a) | | 605 | | | 709 | |
| Deferred tax liabilities | | 1,557 | | | 1,628 | |
| Net deferred tax assets | | $ | 3,739 | | | $ | 2,282 | |
(a)Includes deferred tax assets and liabilities related to lease liability and ROU asset.
We and our subsidiaries file federal income tax returns in the U.S. and income tax returns in various foreign jurisdictions. With few exceptions, the statute of limitations for these jurisdictions is no longer open for audit or examination for the years before 2015 with respect to various foreign jurisdictions and before 2018 for federal income taxes in the U.S.
We withdrew from the IRS Compliance Assurance Process (CAP) program in 2022 starting with our 2021 tax return. Examinations of the years 2018 to 2020 remain under IRS review under the CAP program. We are also subject to taxation in various states and foreign jurisdictions including Australia, Canada, India, Italy, Japan, Poland, and the United Kingdom. We are under, or may be subject to, audit or examination and additional assessments by the relevant authorities.
Our federal and foreign income tax payments, net of refunds, were $1.6 billion in 2022 and $1.4 billion in 2021 and 2020.
Note 10 – Debt
Our total debt consisted of the following (in millions): | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Notes | | | | |
3.10% due 2023 | | $ | — | | | $ | 500 | |
2.90% due 2025 | | — | | | 750 | |
4.95% due 2025 | | 500 | | | — | |
3.55% due 2026 | | 1,000 | | | 2,000 | |
5.10% due 2027 | | 750 | | | — | |
1.85% due 2030 | | 400 | | | 400 | |
3.90% due 2032 | | 800 | | | — | |
5.25% due 2033 | | 1,000 | | | — | |
3.60% due 2035 | | 500 | | | 500 | |
4.50% and 6.15% due 2036 | | 1,054 | | | 1,054 | |
4.07% due 2042 | | 1,336 | | | 1,336 | |
3.80% due 2045 | | 1,000 | | | 1,000 | |
4.70% due 2046 | | 1,326 | | | 1,326 | |
2.80% due 2050 | | 750 | | | 750 | |
4.09% due 2052 | | 1,578 | | | 1,578 | |
4.15% due 2053 | | 850 | | | — | |
5.70% due 2054 | | 1,000 | | | — | |
4.30% due 2062 | | 650 | | | — | |
5.90% due 2063 | | 750 | | | — | |
Other notes with rates from 4.85% to 8.5%, due 2023 to 2029 | | 1,598 | | | 1,605 | |
| Total debt | | 16,842 | | | 12,799 | |
| Less: unamortized discounts and issuance costs | | (1,295) | | | (1,123) | |
| Total debt, net | | 15,547 | | | 11,676 | |
| Less: current portion | | (118) | | | (6) | |
| Long-term debt, net | | $ | 15,429 | | | $ | 11,670 | |
Revolving Credit Facility
On August 24, 2022, we entered into a new Revolving Credit Agreement (the “Revolving Credit Agreement”) with various banks. The Revolving Credit Agreement consists of a $3.0 billion five-year unsecured revolving credit facility, with the option to increase the commitments under the credit facility by an additional amount of up to $500 million (for an aggregate amount of up to $3.5 billion), subject to the agreement of one or more new or existing lenders to provide such additional amounts and certain other customary conditions. The Revolving Credit Agreement matures on August 24, 2027. However, we may request that commitments be renewed for additional one-year periods under certain circumstances as set forth in the Revolving Credit Agreement. The Revolving Credit Agreement is available for any of our lawful corporate purposes, including supporting commercial paper borrowings. Borrowings under the Revolving Credit Agreement are unsecured and bear interest at rates set forth in the Revolving Credit Agreement. The Revolving Credit Agreement contains customary representations, warranties and covenants, including covenants restricting ours and certain of our subsidiaries’ ability to encumber assets and our ability to merge or consolidate with another entity. The Revolving Credit Agreement replaces our revolving credit agreement (the “Former Credit Agreement”), which had been scheduled to mature on August 24, 2026. The Former Credit Agreement, which had a total capacity of $3.0 billion and was undrawn, was terminated effective August 24, 2022. There were no borrowings under the Revolving Credit Agreement or the Former Credit Agreement at December 31, 2022 and 2021. As of December 31, 2022 and 2021, we were in compliance with all covenants contained in the Revolving Credit Agreement and Former Credit Agreement, as well as in our debt agreements.
Commercial Paper
We have agreements in place with financial institutions to provide for the issuance of commercial paper. The outstanding balance of commercial paper can fluctuate daily and the amount outstanding during the period may be greater or less than the
amount reported at the end of the period. There were no commercial paper borrowings outstanding as of December 31, 2022 and we did not issue or repay any during 2022. We may, as conditions warrant, issue commercial paper backed by our revolving credit agreement to manage the timing of cash flows.
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”) in a registered public offering. 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 October 2022 Notes to be redeemed or an applicable “make-whole” amount, plus accrued and unpaid interest to the date of redemption. We used the net proceeds from this offering to enter into an accelerated share repurchase (ASR) agreement to repurchase $4.0 billion of our common stock.
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 the remaining balance of the net proceeds to redeem $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.
In September 2021, we repaid $500 million of long-term notes with a fixed interest rate of 3.35% according to their scheduled maturities.
We made interest payments of approximately $573 million, $543 million and $567 million during the years ended December 31, 2022, 2021 and 2020.
Note 11 – Postretirement Benefit Plans
Plan Descriptions
Many of our employees and retirees participate in various postretirement benefit plans including defined benefit pension plans, retiree medical and life insurance plans, defined contribution retirement savings plans, and other postemployment plans. Substantially all of our postretirement benefit obligations relate to U.S. based defined benefit pension plans and retiree medical and life insurance plans. The majority of our U.S. defined benefit pension plans provide for benefits within limits imposed by federal tax law (referred to as qualified plans). However, certain of our U.S. defined benefit pension plans provide for benefits in excess of qualified plan limits imposed by federal tax law (referred to as nonqualified plans).
Salaried employees hired after December 31, 2005 are not eligible to participate in our qualified defined benefit pension plans, but are eligible to participate in a qualified defined contribution plan in addition to our other retirement savings plans. They also have the ability to participate in our retiree medical plans, but we do not subsidize the cost of their participation in those plans as we do with employees hired before January 1, 2006. Over the last few years, we have negotiated similar changes with various labor organizations such that new union represented employees do not participate in our defined benefit pension
plans. Our defined benefit pension plans for salaried employees were fully frozen effective January 1, 2020, at which time such employees no longer earn additional benefits under the defined benefit pension plans and were transitioned to an enhanced defined contribution retirement savings plan.
During the second quarter of 2022, we purchased group annuity contracts to transfer $4.3 billion of gross defined benefit pension obligations and related plan assets to an insurance company for approximately 13,600 U.S. retirees and beneficiaries. 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 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 (AOCL) account within stockholders’ equity. During the third quarter of 2021, we purchased group annuity contracts to transfer $4.9 billion of gross defined benefit pension obligations and related plan assets to an insurance company for approximately 18,000 U.S. retirees and beneficiaries, and in connection recognized a noncash pension settlement charge of $1.7 billion ($1.3 billion, or $4.72 per share, after tax) in 2021. These group annuity contracts were purchased using assets from Lockheed Martin’s master retirement trust and no additional funding contributions were required. These transactions had no impact on the amount, timing, or form of the monthly retirement benefit payments to the affected retirees and beneficiaries; and as a result of these transactions, we were relieved of all responsibility for the pension obligations and the insurance company is now required to pay and administer the retirement benefits.
Qualified Defined Benefit Pension Plans and Retiree Medical and Life Insurance Plans
FAS (Expense) Income
The pretax FAS (expense) income related to our qualified defined benefit pension plans and retiree medical and life insurance plans included the following (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Qualified Defined
Benefit Pension Plans | | | Retiree Medical and
Life Insurance Plans |
| | 2022 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2020 |
| Operating: | | | | | | | | | | | | | |
| Service cost | | $ | (87) | | | $ | (106) | | | $ | (101) | | | | $ | (9) | | | $ | (13) | | | $ | (13) | |
| Non-operating: | | | | | | | | | | | | | |
| Interest cost | | (1,289) | | | (1,220) | | | (1,538) | | | | (49) | | | (53) | | | (70) | |
| Expected return on plan assets | | 1,854 | | | 2,146 | | | 2,264 | | | | 136 | | | 141 | | | 127 | |
| Recognized net actuarial (losses) gains | | (425) | | | (902) | | | (849) | | | | 46 | | | — | | | 4 | |
| Amortization of prior service credits (costs) | | 359 | | | 349 | | | 342 | | | | (27) | | | (37) | | | (39) | |
| Settlement charge | | (1,470) | | | (1,665) | | | — | | | | — | | | — | | | — | |
| Non-service FAS (expense) income | | (971) | | | (1,292) | | | 219 | | | | 106 | | | 51 | | | 22 | |
| Total FAS (expense) income | | $ | (1,058) | | | $ | (1,398) | | | $ | 118 | | | | $ | 97 | | | $ | 38 | | | $ | 9 | |
We record the service cost component of FAS (expense) income for our qualified defined benefit plans and retiree medical and life insurance plans in the cost of sales accounts; the non-service components of our FAS (expense) income for our qualified defined benefit pension plans in the non-service FAS pension (expense) income account; and the non-service components of our FAS income for our retiree medical and life insurance plans as part of the other non-operating (expense) income, net account on our consolidated statements of earnings.
Funded Status
The following table provides a reconciliation of benefit obligations, plan assets and net (unfunded) funded status of our qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | Qualified Defined
Benefit Pension Plans | | | Retiree Medical and
Life Insurance Plans |
| | 2022 | | 2021 | | | 2022 | | 2021 |
| Change in benefit obligation | | | | | | | | | |
Beginning balance (a) | | $ | 43,447 | | | $ | 51,352 | | | | $ | 1,839 | | | $ | 2,271 | |
| Service cost | | 87 | | | 106 | | | | 9 | | | 13 | |
| Interest cost | | 1,289 | | | 1,220 | | | | 49 | | | 53 | |
Actuarial (gains) losses (b) | | (10,270) | | | (2,045) | | | | (396) | | | (352) | |
Settlements (c) | | (4,309) | | | (4,885) | | | | — | | | — | |
| Plan amendments | | 186 | | | 2 | | | | 1 | | | — | |
| Benefits paid | | (1,732) | | | (2,303) | | | | (207) | | | (217) | |
| Medicare Part D subsidy | | — | | | — | | | | 3 | | | 4 | |
| | | | | | | | | |
| Participants’ contributions | | — | | | — | | | | 61 | | | 67 | |
Ending balance (a) | | $ | 28,698 | | | $ | 43,447 | | | | $ | 1,359 | | | $ | 1,839 | |
| Change in plan assets | | | | | | | | | |
| Beginning balance at fair value | | $ | 35,192 | | | $ | 38,481 | | | | $ | 2,169 | | | $ | 2,085 | |
Actual return on plan assets (d) | | (5,923) | | | 3,899 | | | | (381) | | | 224 | |
Settlements (c) | | (4,309) | | | (4,885) | | | | — | | | — | |
| Benefits paid | | (1,732) | | | (2,303) | | | | (207) | | | (217) | |
| Company contributions | | — | | | — | | | | 11 | | | 6 | |
| Medicare Part D subsidy | | — | | | — | | | | 3 | | | 4 | |
| Participants’ contributions | | — | | | — | | | | 61 | | | 67 | |
| Ending balance at fair value | | $ | 23,228 | | | $ | 35,192 | | | | $ | 1,656 | | | $ | 2,169 | |
| (Unfunded) funded status of the plans | | $ | (5,470) | | | $ | (8,255) | | | | $ | 297 | | | $ | 330 | |
(a)Benefit obligation balances represent the projected benefit obligation for our qualified defined benefit pension plans and the accumulated benefit obligation for our retiree medical and life insurance plans.
(b)Actuarial gains for our qualified defined benefit pension plans in 2022 primarily reflect an increase in the discount rate from 2.875% at December 31, 2021 to 5.25% at December 31, 2022, which decreased benefit obligations by $10.2 billion. Actuarial gains for our retiree medical and life insurance plans in 2022 reflect an increase in the discount rate from 2.750% at December 31, 2021 to 5.25% at December 31, 2022, which decreased benefit obligations by $335 million. Actuarial gains for our qualified defined benefit pension plans in 2021 primarily reflect an increase in the discount rate from 2.50% at December 31, 2020 to 2.875% at December 31, 2021, which decreased benefit obligations by $2.3 billion, partially offset by an increase of approximately $250 million due to changes in longevity assumptions and participant data. Actuarial gains for our retiree medical and life insurance plans in 2021 reflect an increase in the discount rate from 2.375% at December 31, 2020 to 2.75% at December 31, 2021, which decreased benefit obligations by $70 million, and $282 million due to changes in plan participation assumptions and claims data.
(c)Qualified defined benefit pension plan settlements in 2022 and 2021 represent the transfer of gross defined benefit pension obligations and related plan assets to insurance companies pursuant to group annuity contracts purchased in the second quarter of 2022 and third quarter of 2021 as described above.
(d)Actual return on plan assets for our qualified defined benefit pension plans and retiree medical and life insurance plans was approximately (18)% in 2022 and 10.5% in 2021.
We are required to recognize the net funded status of each postretirement benefit plan on a standalone basis as either an asset or a liability on our consolidated balance sheet. The funded status is measured as the difference between the fair value of each plan’s assets and the benefit obligation. Each year we measure the fair value of each plan’s assets and benefit obligation on December 31, consistent with our fiscal year end. The fair value of each plan’s benefit obligation reflects assumptions in effect as of the measurement date as described below. For certain of our qualified defined benefit pension plans and retiree medical and life insurance plans the plan assets may exceed the benefit obligation, for which we recognize the net amount as an asset on our consolidated balance sheet. Conversely, for most of our qualified defined benefit pension plans the benefit obligation exceeds plan assets, for which we recognize the net amount as a liability on our consolidated balance sheet.
The following table provides amounts recognized on our consolidated balance sheets related to our qualified defined benefit pension plans and our retiree medical and life insurance plans (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Qualified Defined
Benefit Pension Plans | | | Retiree Medical and
Life Insurance Plans |
| | 2022 | | 2021 | | | 2022 | | 2021 |
| Other noncurrent assets | | $ | 2 | | | $ | 64 | | | | $ | 297 | | | $ | 330 | |
| Accrued pension liabilities | | (5,472) | | | (8,319) | | | | — | | | — | |
| | | | | | | | | |
| Net (unfunded) funded status of the plans | | $ | (5,470) | | | $ | (8,255) | | | | $ | 297 | | | $ | 330 | |
The accumulated benefit obligation (ABO) for all qualified defined benefit pension plans was $28.6 billion and $43.4 billion at December 31, 2022 and 2021. The ABO represents benefits accrued without assuming future compensation increases to plan participants and is approximately equal to our projected benefit obligation. Plans where the benefit obligation was less than plan assets represent prepaid pension assets, which are included on our consolidated balance sheets in other noncurrent assets. Plans where the obligation was in excess of plan assets represent accrued pension liabilities, which are included on our consolidated balance sheets.
Differences between the actual return and expected return on plan assets during the year and changes in the benefit obligation for our qualified defined benefit pension plans and retiree medical and life insurance plans due to changes in the annual valuation assumptions generate actuarial gains or losses. Additionally, the benefit obligation for our qualified defined benefit pension plans and retiree medical and life insurance plans may increase or decrease as a result of plan amendments that affect the benefits to plan participants related to service for periods prior to the effective date of the amendment, which generates prior service costs or credits. Actuarial gains or losses, and prior service costs or credits, are initially deferred in accumulated other comprehensive loss and subsequently amortized for each plan into (expense) or income on a straight-line basis either over the average remaining life expectancy of plan participants or over the average remaining service period of plan participants, subject to certain thresholds.
The following table provides the amount of actuarial gains or losses and prior service costs or credits recognized in accumulated other comprehensive loss related to qualified defined benefit pension plans and retiree medical and life insurance plans at December 31 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Qualified Defined
Benefit Pension Plans | | | Retiree Medical and
Life Insurance Plans |
| | 2022 | | 2021 | | | 2022 | | 2021 |
| Accumulated other comprehensive (loss) pre-tax related to: | | | | | | | | | |
| Net actuarial (losses) | | $ | (10,287) | | | $ | (14,675) | | | | $ | 387 | | | $ | 554 | |
| Prior service credit (cost) | | 339 | | | 884 | | | | (10) | | | (36) | |
Total | | $ | (9,948) | | | $ | (13,791) | | | | $ | 377 | | | $ | 518 | |
| Estimated tax | | 2,117 | | | 2,947 | | | | (79) | | | (110) | |
| Net amount recognized in accumulated other comprehensive (loss) | | $ | (7,831) | | | $ | (10,844) | | | | $ | 298 | | | $ | 408 | |
The following table provides the changes recognized in accumulated other comprehensive loss, net of tax, for actuarial gains or losses and prior service costs or credits due to differences between the actual return and expected return on plan assets and changes in the fair value of the benefit obligation recognized in connection with our annual remeasurement and the amortization during the year for our qualified defined benefit pension plans, retiree medical and life insurance plans, and certain other plans (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Incurred but Not Yet
Recognized in
FAS Expense | | | Recognition of
Previously
Deferred Amounts |
| | 2022 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2020 |
| Actuarial gains and (losses) | | | | | | | | | | | |
| Qualified defined benefit pension plans | | $ | 1,952 | | | $ | 2,987 | | | $ | (1,005) | | | | $ | (1,490) | | | $ | (2,019) | | | $ | (668) | |
| Retiree medical and life insurance plans | | (95) | | | 342 | | | 43 | | | | 36 | | | — | | | 3 | |
| Other plans | | 165 | | | 76 | | | (104) | | | | (39) | | | (24) | | | (24) | |
| | | 2,022 | | | 3,405 | | | (1,066) | | | | (1,493) | | | (2,043) | | | (689) | |
| Net prior service credit and (cost) | | | | | | | | | | | |
| Qualified defined benefit pension plans | | (146) | | | (1) | | | (7) | | | | 283 | | | 274 | | | 269 | |
| Retiree medical and life insurance plans | | (1) | | | — | | | 6 | | | | (22) | | | (29) | | | (30) | |
| Other plans | | (2) | | | — | | | — | | | | 7 | | | 11 | | | 10 | |
| | | (149) | | | (1) | | | (1) | | | | 268 | | | 256 | | | 249 | |
| Total | | $ | 1,873 | | | $ | 3,404 | | | $ | (1,067) | | | | $ | (1,225) | | | $ | (1,787) | | | $ | (440) | |
Assumptions Used to Determine Benefit Obligations and FAS (Expense) Income
We measure the fair value of each plan’s assets and benefit obligation on December 31, consistent with our fiscal year end. Benefit obligations as of the end of each year reflect assumptions in effect as of those dates. Expense is based on assumptions in effect at the end of the preceding year or from the most recent interim remeasurement. The assumptions used to determine the benefit obligations at December 31 of each year and FAS expense for each subsequent year were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Qualified Defined Benefit
Pension Plans | | | Retiree Medical and
Life Insurance Plans |
| | 2022 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2020 |
Weighted average discount rate (a) | | 5.250 | % | | 2.875 | % | | 2.500 | % | | | 5.250 | % | | 2.750 | % | | 2.375 | % |
Expected long-term rate of return on assets (a) | | 6.50 | % | | 6.50 | % | | 7.00 | % | | | 6.50 | % | | 6.50 | % | | 7.00 | % |
| Health care trend rate assumed for next year | | | | | | | | | 7.25 | % | | 7.50 | % | | 7.75 | % |
| Ultimate health care trend rate | | | | | | | | | 4.50 | % | | 4.50 | % | | 4.50 | % |
| Year ultimate health care trend rate is reached | | | | | | | | | 2034 | | 2034 | | 2034 |
(a)A pension discount rate of 4.75%, and 2.75%, was used for the applicable plans following the transaction and remeasurement recognized in the second quarter of 2022, and third quarter of 2021, respectively. We lowered our expected long-term rate of return on plan assets from 7.00% to 6.50% in connection with the third quarter of 2021 remeasurement, applicable to all qualified defined benefit pension and retiree medical and life insurance plans as of the December 31, 2021 remeasurement.
The long-term rate of return assumption represents the expected long-term rate of earnings on the funds invested, or to be invested, to provide for the benefits included in the benefit obligations. That 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 actual investment losses for our qualified defined benefit plans during 2022 of $(5.9) billion based on an actual rate of return of approximately (18)% reduced plan assets more than the $1.9 billion expected return based on our long-term rate of return assumption.
Plan Assets
Our wholly-owned subsidiary, Lockheed Martin Investment Management Company (LMIMCo), has the fiduciary responsibility for making investment decisions related to the assets of our postretirement benefit plans. LMIMCo’s investment objectives for the assets of these plans are (1) to minimize the net present value of expected funding contributions; (2) to ensure there is a high probability that each plan meets or exceeds our actuarial long-term rate of return assumptions; and (3) to diversify assets to minimize the risk of large losses. The nature and duration of benefit obligations, along with assumptions concerning asset class returns and return correlations, are considered when determining an appropriate asset allocation to achieve the investment objectives. Investment policies and strategies governing the assets of the plans are designed to achieve investment objectives within prudent risk parameters. Risk management practices include the use of external investment managers; the maintenance of a portfolio diversified by asset class, investment approach and security holdings; and the maintenance of sufficient liquidity to meet benefit obligations as they come due.
LMIMCo’s investment policies require that asset allocations of postretirement benefit plans be maintained within the following approximate ranges: | | | | | |
| Asset Class | Asset Allocation
Ranges |
| Cash and cash equivalents | 0-20% |
| Global Equity | 15-65% |
| Fixed income | 10-60% |
| Alternative investments: | |
| Private equity funds | 5-25% |
| Real estate funds | 5-15% |
| Hedge funds | 0-20% |
| Commodities | 0-10% |
The following table presents the fair value of the assets of our qualified defined benefit pension plans and retiree medical and life insurance plans by asset category and their level within the fair value hierarchy (see “Note 1 – Organization and Significant Accounting Policies - Investments” for definition of these levels), which we are required to disclose even though these assets are not separately recorded on our consolidated balance sheet. Certain investments are measured at their Net Asset Value (NAV) per share because such investments do not have readily determinable fair values and, therefore, are not required to be categorized in the fair value hierarchy. Assets measured at NAV have been included in the table below to permit reconciliation of the fair value hierarchy to amounts presented in the funded status table above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | | December 31, 2021 |
(in millions) | Total | | Level 1 | | Level 2 | | Level 3 | | | Total | | Level 1 | | Level 2 | | Level 3 |
Investments measured at fair value | | | | | | | | | | | | | | | | |
Cash and cash equivalents (a) | $ | 1,952 | | | $ | 1,952 | | | $ | — | | | $ | — | | | | $ | 991 | | | $ | 991 | | | $ | — | | | $ | — | |
Equity (a): | | | | | | | | | | | | | | | | |
| U.S. equity securities | 3,162 | | | 3,060 | | | 6 | | | 96 | | | | 6,479 | | | 6,444 | | | 5 | | | 30 | |
| International equity securities | 2,298 | | | 2,245 | | | 17 | | | 36 | | | | 4,882 | | | 4,880 | | | — | | | 2 | |
| Commingled equity funds | 459 | | | 183 | | | 276 | | | — | | | | 869 | | | 36 | | | 833 | | | — | |
Fixed income (a): | | | | | | | | | | | | | | | | |
| Corporate debt securities | 4,491 | | | — | | | 4,272 | | | 219 | | | | 6,397 | | | — | | | 6,295 | | | 102 | |
| U.S. Government securities | 2,219 | | | — | | | 2,219 | | | — | | | | 2,864 | | | — | | | 2,864 | | | — | |
U.S. Government-sponsored enterprise securities | 572 | | | — | | | 572 | | | — | | | | 228 | | | — | | | 228 | | | — | |
| Interest rate swaps, net | (1,165) | | | — | | | (1,165) | | | — | | | | 636 | | | — | | | 636 | | | — | |
Other fixed income investments (b) | 1,980 | | | 81 | | | 680 | | | 1,219 | | | | 4,100 | | | 49 | | | 2,435 | | | 1,616 | |
| Total | $ | 15,968 | | | $ | 7,521 | | | $ | 6,877 | | | $ | 1,570 | | | | $ | 27,446 | | | $ | 12,400 | | | $ | 13,296 | | | $ | 1,750 | |
| Investments measured at NAV | | | | | | | | | | | | | | | | |
| Commingled equity funds | — | | | | | | | | | | 130 | | | | | | | |
| Other fixed income investments | 730 | | | | | | | | | | 701 | | | | | | | |
| Private equity funds | 4,703 | | | | | | | | | | 5,386 | | | | | | | |
| Real estate funds | 3,383 | | | | | | | | | | 3,059 | | | | | | | |
| Hedge funds | 689 | | | | | | | | | | 556 | | | | | | | |
Total investments measured at NAV | 9,505 | | | | | | | | | | 9,832 | | | | | | | |
Loan, net (c) | (497) | | | | | | | | | | — | | | | | | | |
| (Payables) Receivables, net | (92) | | | | | | | | | | 83 | | | | | | | |
| Total | $ | 24,884 | | | | | | | | | | $ | 37,361 | | | | | | | |
(a)Cash and cash equivalents, equity securities and fixed income securities included derivative assets and liabilities with fair values that were not material as of December 31, 2022 and 2021. LMIMCo’s investment policies restrict the use of derivatives to either establish long or short exposures for purposes consistent with applicable investment mandate guidelines or to hedge risks to the extent of a plan’s current exposure to such risks. Most derivative transactions are settled on a daily basis.
(b)Level 3 investments include $1.1 billion at December 31, 2022 and $1.5 billion at December 31, 2021 related to buy-in contracts.
(c)The Lockheed Martin Corporation Master Retirement Trust (MRT) obtained a loan from a third party financial institution, collateralized by private equity investments, to invest in fixed income securities.
Changes in the fair value of plan assets categorized as Level 3 during 2022 and 2021 were not significant.
Cash equivalents are mostly comprised of short-term money-market instruments and are valued at cost, which approximates fair value.
U.S. equity securities and international equity securities categorized as Level 1 are traded on active national and international exchanges and are valued at their closing prices on the last trading day of the year. For U.S. equity securities and international equity securities not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment manager. These securities are categorized as Level 2 if the custodian obtains corroborated quotes from a pricing vendor or categorized as Level 3 if the custodian obtains uncorroborated quotes from a broker or investment manager.
Commingled equity funds categorized as Level 1 are traded on active national and international exchanges and are valued at their closing prices on the last trading day of the year. For commingled equity funds not traded on an active exchange, or if the closing price is not available, the trustee obtains indicative quotes from a pricing vendor, broker or investment manager. These securities are categorized as Level 2 if the custodian obtains corroborated quotes from a pricing vendor.
Fixed income investments categorized as Level 1 are publicly exchange-traded. Fixed income investments, including interest rate swaps, categorized as Level 2 are valued by the trustee using pricing models that use verifiable observable market data (e.g., interest rates and yield curves observable at commonly quoted intervals and credit spreads), bids provided by brokers or dealers or quoted prices of securities with similar characteristics. Fixed income investments are categorized as Level 3 when valuations using observable inputs are unavailable. The trustee typically obtains pricing based on indicative quotes or bid evaluations from vendors, brokers or the investment manager. In addition, certain other fixed income investments categorized as Level 3 are valued using a discounted cash flow approach. Significant inputs include projected annuity payments and the discount rate applied to those payments.
Certain commingled equity and fixed income funds, consisting of underlying equity and fixed income securities, respectively, are valued using the NAV practical expedient. The NAV valuations are based on the underlying investments and typically redeemable within 90 days. The NAV is the total value of the fund divided by the number of the fund’s shares outstanding.
Private equity funds consist of partnerships and similar vehicles. The NAV is based on valuation models of the underlying securities, which includes unobservable inputs that cannot be corroborated using verifiable observable market data. These funds typically have terms between eight and 12 years.
Real estate funds consist of partnerships and similar vehicles, for which the NAV is based on valuation models and periodic appraisals. These funds typically have redemption periods between eight and 10 years.
Hedge funds consist of separate accounts and commingled funds, for which the NAV is generally based on the valuation of the underlying investments. Redemptions in hedge funds generally range from a minimum of one month to several months.
Contributions and Expected Benefit Payments
The required funding of our qualified defined benefit pension plans is determined in accordance with ERISA, as amended, and in a manner consistent with CAS and Internal Revenue Code rules. We made no contributions to our qualified defined benefit pension plans in 2022 and do not plan to make contributions to our qualified defined benefit pension plans in 2023.
The following table presents estimated future benefit payments as of December 31, 2022 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 – 2032 |
| Qualified defined benefit pension plans | | $ | 1,720 | | | $ | 1,810 | | | $ | 1,890 | | | $ | 1,950 | | | $ | 2,000 | | | $ | 10,150 | |
| Retiree medical and life insurance plans | | 140 | | | 130 | | | 130 | | | 120 | | | 120 | | | 530 | |
| | | | | | | | | | | | |
We maintain various trusts to fund the obligations of our qualified defined benefit pension plans and retiree medical and life insurance plans. We expect the estimated future benefit payments will be paid using assets in the trusts established for the plans.
Nonqualified Defined Benefit Pension Plans and Other Postemployment Plans
We sponsor nonqualified defined benefit pension plans to provide benefits in excess of qualified plan limits imposed by federal tax law. The gross benefit obligation for these plans was $1.0 billion and $1.3 billion as of December 31, 2022 and 2021, most of which was recorded in the other noncurrent liabilities account on our consolidated balance sheet. We have set aside certain assets totaling $595 million and $872 million as of December 31, 2022 and 2021 in a separate trust that we expect to use to pay the benefit obligations under our nonqualified defined benefit pension plans, most of which were recorded in the other noncurrent assets account on our consolidated balance sheet. We record the gross assets on our consolidated balance sheet, rather than netting such assets with the benefit obligation for our nonqualified defined benefit pension plans, because the assets held are diversified and legally the assets may be used to settle other obligations or claims (although that is not our intent). Actuarial losses and unrecognized prior service credits related to our nonqualified defined benefit pension plans that were recorded in accumulated other comprehensive loss, pretax, totaled $331 million and $625 million at December 31, 2022 and 2021. We recognized pretax pension expense of $81 million in 2022, $56 million in 2021 and $59 million in 2020 related to our nonqualified defined benefit pension plans. The assumptions used to determine the benefit obligations and FAS expense for
our nonqualified defined benefit pension plans are similar to the assumptions for our qualified defined benefit pension plans described above.
We also sponsor other postemployment plans and foreign benefit plans, which are accounted for similar to defined benefit pension plans. The benefit obligations, assets, expense, and amounts recorded in accumulated other comprehensive loss for other postemployment plans and foreign benefit plans were not material to our results of operations, financial position or cash flows.
Defined Contribution Retirement Savings Plans
We maintain a number of defined contribution retirement savings plans, most with 401(k) features, that cover substantially all of our employees. Under the provisions of these plans, employees can make contributions on a before-tax and after-tax basis to investment funds to save for retirement. For most plans, we make employer contributions to the employee accounts that comprise of a company non-elective contribution and a matching contribution. Company contributions are automatically invested in an Employee Stock Ownership Plan (ESOP) fund, which primarily invests in shares of our common stock. Plan participants can transfer from the ESOP fund into any investment option provided by the respective plan. Our contributions to defined contribution retirement savings plans were $1.1 billion in 2022 and 2021 and $984 million in 2020. Our defined contribution retirement savings plans held 27.4 million and 28.9 million shares of our common stock at December 31, 2022 and 2021.
Note 12 – Stockholders’ Equity
At December 31, 2022 and 2021, our authorized capital was composed of 1.5 billion shares of common stock and 50 million shares of series preferred stock. Of the 255 million and 272 million shares of common stock issued and outstanding as of December 31, 2022 and December 31, 2021, 254 million and 271 million shares were considered outstanding for consolidated balance sheet presentation purposes; the remaining shares were held in a separate trust. No shares of preferred stock were issued and outstanding at December 31, 2022 or 2021.
Repurchases of Common Stock
During 2022, we repurchased 18.3 million shares of our common stock for $7.9 billion, including 13.9 million shares of our common stock repurchased pursuant to ASR agreements and the remainder in open market purchases. During the fourth quarter of 2022, under the terms of an ASR agreement, we paid $4.0 billion and received an initial delivery of 7.0 million shares of our common stock. We expect to receive additional shares upon final settlement, which is expected in March or April 2023. In addition, we repurchased 4.7 million shares for $2.0 billion under an ASR agreement that we entered into in the first quarter of 2022. As previously disclosed, in January 2022, we received 2.2 million shares of our common stock for no additional consideration upon final settlement of the ASR we entered into in the fourth quarter of 2021. During 2021, we paid $4.1 billion to repurchase 9.4 million shares of our common stock, including 9.2 million shares of our common stock repurchased for $4.0 billion under an ASR agreement.
The total remaining authorization for future common share repurchases under our share repurchase program was $10.0 billion as of December 31, 2022, including a $14 billion increase to the program authorized by our Board of Directors on October 17, 2022. As we repurchase our common shares, we reduce common stock for the $1 of par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in capital. If additional paid-in capital is reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings.
Dividends
We paid dividends totaling $3.0 billion ($11.40 per share) in 2022, $2.9 billion ($10.60 per share) in 2021 and $2.8 billion ($9.80 per share) in 2020. 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; $2.60 per share during each of the first three quarters of 2021 and $2.80 per share during the fourth quarter of 2021; and $2.40 per share during each of the first three quarters of 2020 and $2.60 per share during the fourth quarter of 2020.
Accumulated Other Comprehensive Loss
Changes in the balance of AOCL, net of taxes, consisted of the following (in millions): | | | | | | | | | | | | | | | | | | | | |
| | Postretirement Benefit Plans (a) | | Other, net | | AOCL |
| Balance at December 31, 2019 | | $ | (15,528) | | | $ | (26) | | | $ | (15,554) | |
| Other comprehensive (loss) income before reclassifications | | (1,067) | | | 56 | | | (1,011) | |
| Amounts reclassified from AOCL | | | | | | |
| Recognition of net actuarial losses | | 689 | | | — | | | 689 | |
| Amortization of net prior service credits | | (249) | | | — | | | (249) | |
| Other | | — | | | 4 | | | 4 | |
| Total reclassified from AOCL | | 440 | | | 4 | | | 444 | |
| Total other comprehensive (loss) income | | (627) | | | 60 | | | (567) | |
| | | | | | |
| Balance at December 31, 2020 | | (16,155) | | | 34 | | | (16,121) | |
| Other comprehensive income (loss) before reclassifications | | 3,404 | | | (85) | | | 3,319 | |
| Amounts reclassified from AOCL | | | | | | |
Pension settlement charge (b) | | 1,310 | | | | | 1,310 | |
| Recognition of net actuarial losses | | 733 | | | — | | | 733 | |
| Amortization of net prior service credits | | (256) | | | — | | | (256) | |
| Other | | — | | | 9 | | | 9 | |
| Total reclassified from AOCL | | 1,787 | | | 9 | | | 1,796 | |
| Total other comprehensive income (loss) | | 5,191 | | | (76) | | | 5,115 | |
| Balance at December 31, 2021 | | (10,964) | | | (42) | | | (11,006) | |
Other comprehensive income (loss) before reclassifications | | 1,873 | | | (159) | | | 1,714 | |
| Amounts reclassified from AOCL | | | | | | |
Pension settlement charge (b) | | 1,156 | | | — | | | 1,156 | |
Recognition of net actuarial losses | | 337 | | | — | | | 337 | |
Amortization of net prior service credits | | (268) | | | — | | | (268) | |
| Other | | — | | | 44 | | | 44 | |
| Total reclassified from AOCL | | 1,225 | | | 44 | | | 1,269 | |
| Total other comprehensive income (loss) | | 3,098 | | | (115) | | | 2,983 | |
| Balance at December 31, 2022 | | $ | (7,866) | | | $ | (157) | | | $ | (8,023) | |
| | | | | | |
(a)AOCL related to postretirement benefit plans is shown net of tax benefits of $2.1 billion at December 31, 2022, $3.0 billion at December 31, 2021 and $4.4 billion at December 31, 2020. These tax benefits include amounts recognized on our income tax returns as current deductions and deferred income taxes, which will be recognized on our tax returns in future years. See “Note 9 – Income Taxes” and “Note 11 – Postretirement Benefit Plans” for more information on our income taxes and postretirement benefit plans.
(b)During 2022 and 2021, we recognized a noncash, non-operating pension settlement charge of $1.5 billion ($1.2 billion, or $4.33 per share, after-tax) and $1.7 billion ($1.3 billion, $4.72 per share, after-tax) related to the accelerated recognition of actuarial losses included in AOCL for certain defined benefit pension plans that purchased a group annuity contract from an insurance company (see “Note 11 – Postretirement Benefit Plans”).
Note 13 – Stock-Based Compensation
Stock-Based Compensation Plans
Under plans approved by our stockholders, we are authorized to grant key employees stock-based incentive awards, including options to purchase common stock, stock appreciation rights, RSUs, PSUs or other stock units.
At December 31, 2022, inclusive of the shares reserved for outstanding RSUs and PSUs, we had approximately 9.1 million shares reserved for issuance under the plans. At December 31, 2022, approximately 6.8 million of the shares reserved for issuance remained available for grant under our stock-based compensation plans. We issue new shares upon the exercise of stock options or when restrictions on RSUs and PSUs have been satisfied. The exercise price of options to purchase common stock may not be less than the fair market value of our stock on the date of grant. The minimum vesting period for restricted stock or stock units payable in stock is generally three years. Award agreements may provide for shorter or pro-rated vesting periods or vesting following termination of employment in the case of death, disability, divestiture, retirement, change of control or layoff. The maximum term of a stock option or any other award is 10 years.
During 2022, 2021 and 2020, we recorded noncash stock-based compensation expense totaling $238 million, $227 million and $221 million, which is included as a component of other unallocated, net on our consolidated statements of earnings. The net impact to earnings for the respective years was $188 million, $179 million and $175 million.
As of December 31, 2022, we had $181 million of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 1.7 years. We received cash from the exercise of stock options totaling $8 million, $28 million and $41 million during 2022, 2021 and 2020. In addition, our income tax liabilities for 2022, 2021 and 2020 were reduced by $124 million, $67 million and $63 million due to recognized tax benefits on stock-based compensation arrangements.
Restricted Stock Units
The following table summarizes activity related to nonvested RSUs: | | | | | | | | | | | | | | | | | | | | |
| | Number
of RSUs
(In thousands) | | Weighted Average
Grant-Date Fair
Value Per Share |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Nonvested at December 31, 2021 | | 810 | | | | $ | 345.37 | | |
| Granted | | 562 | | | | 388.82 | | |
| Vested | | (461) | | | | 347.37 | | |
| Forfeited | | (34) | | | | 371.01 | | |
| Nonvested at December 31, 2022 | | 877 | | | | $ | 371.17 | | |
| | | | | | |
In 2022, we granted certain employees approximately 0.6 million RSUs with a weighted average grant-date fair value of $388.82 per RSU. The grant-date fair value of these RSUs is equal to the closing market price of our common stock on the grant date less a discount to reflect the delay in payment of dividend-equivalent cash payments that are made only upon vesting, which occurs at least one year from the grant date and most often occurs three years from the grant date.
Performance Stock Units
In 2022, we granted certain employees PSUs with an aggregate target award of approximately 0.1 million shares of our common stock. The PSUs generally vest three years from the grant date based on continuous service, with the number of shares earned (0% to 200% of the target award) depending upon the extent to which we achieve certain financial and market performance targets measured over the period from January 1, 2022 through December 31, 2024. About half of the PSUs were valued at a weighted average grant-date fair value of $388.07 per PSU in a manner similar to RSUs mentioned above as the financial targets are based on our operating results. The remaining PSUs were valued at a weighted-average grant-date fair value of $537.32 per PSU using a Monte Carlo model as the performance target is related to our total shareholder return relative to our peer group. We recognize the grant-date fair value of these awards, less estimated forfeitures, as compensation expense ratably over the vesting period.
Note 14 – Legal Proceedings, Commitments and Contingencies
We are a party to litigation and other proceedings that arise in the ordinary course of our business, including matters arising under provisions relating to the protection of the environment, and are subject to contingencies related to certain businesses we
previously owned. These types of matters could result in fines, penalties, cost reimbursements or contributions, compensatory or treble damages or non-monetary sanctions or relief. We believe the probability is remote that the outcome of each of these matters, including the legal proceedings described below, will have a material adverse effect on the corporation as a whole, notwithstanding that the unfavorable resolution of any matter may have a material effect on our net earnings and cash flows in any particular interim reporting period. Among the factors that we consider in this assessment are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if estimable), the progress of the case, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar cases and the experience of other companies, the facts available to us at the time of assessment and how we intend to respond to the proceeding or claim. Our assessment of these factors may change over time as individual proceedings or claims progress.
As a U.S. Government contractor, we are subject to various audits and investigations by the U.S. Government to determine whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil, or criminal liabilities, including repayments, fines or penalties being imposed upon us, suspension, proposed debarment, debarment from eligibility for future U.S. Government contracting, or suspension of export privileges. Suspension or debarment could have a material adverse effect on us because of our dependence on contracts with the U.S. Government. U.S. Government investigations often take years to complete and many result in no adverse action against us. We also provide products and services to customers outside of the U.S., which are subject to U.S. and foreign laws and regulations and foreign procurement policies and practices. Our compliance with local regulations or applicable U.S. Government regulations also may be audited or investigated.
In the normal course of business, we provide warranties to our customers associated with certain product sales. We record estimated warranty costs in the period in which the related products are delivered. The warranty liability is generally based on the number of months of warranty coverage remaining for the products delivered and the average historical monthly warranty payments. Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion.
Although we cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may have been incurred, GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. We follow a thorough process in which we seek to estimate the reasonably possible loss or range of loss, and only if we are unable to make such an estimate do we conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion of legal proceedings, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.
Legal Proceedings
United States of America, ex rel. Patzer; Cimma v. Sikorsky Aircraft Corp., et al.
As a result of our acquisition of Sikorsky Aircraft Corporation (Sikorsky), we assumed the defense of and any potential liability for two civil False Claims Act lawsuits pending in the U.S. District Court for the Eastern District of Wisconsin. In October 2014, the U.S. Government filed a complaint in intervention in the first suit, which was brought by qui tam relator Mary Patzer, a former Derco Aerospace (Derco) employee. In May 2017, the U.S. Government filed a complaint in intervention in a second suit, which was brought by qui tam relator Peter Cimma, a former Sikorsky Support Services, Inc. (SSSI) employee. In November 2017, the Court consolidated the cases into a single action for discovery and trial.
The U.S. Government alleges that Sikorsky and two of its wholly-owned subsidiaries, Derco and SSSI, violated the civil False Claims Act and the Truth in Negotiations Act in connection with a contract the U.S. Navy awarded to SSSI in June 2006 to support the Navy’s T-34 and T-44 fixed-wing turboprop training aircraft. SSSI subcontracted with Derco, primarily to procure and manage spare parts for the training aircraft. The U.S. Government contends that SSSI overbilled the Navy on the contract as the result of Derco’s use of prohibited cost-plus-percentage-of-cost (CPPC) pricing to add profit and overhead costs as a percentage of the price of the spare parts that Derco procured and then sold to SSSI. The U.S. Government also alleges that Derco’s claims to SSSI, SSSI’s claims to the Navy, and SSSI’s yearly Certificates of Final Indirect Costs from 2006 through 2012 were false and that SSSI submitted inaccurate cost or pricing data in violation of the Truth in Negotiations Act for a sole-sourced, follow-on “bridge” contract. The U.S. Government’s complaints assert common law claims for breach of contract and unjust enrichment. On November 29, 2021, the District Court granted the U.S. Government’s motion for partial summary judgment, finding that the Derco-SSSI agreement was a CPPC contract.
We believe that we have legal and factual defenses to the U.S. Government’s remaining claims. The U.S. Government seeks damages of approximately $52 million, subject to trebling, plus statutory penalties. Although we continue to evaluate our liability and exposure, we do not currently believe that it is probable that we will incur a material loss. If, contrary to our
expectations, the U.S. Government prevails on the remaining issues in this matter and proves damages at or near $52 million and is successful in having such damages trebled, the outcome could have an adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.
Lockheed Martin v. Metropolitan Transportation Authority
On April 24, 2009, we filed a declaratory judgment action against the New York Metropolitan Transportation Authority and its Capital Construction Company (collectively, the MTA) asking the U.S. District Court for the Southern District of New York to find that the MTA is in material breach of our agreement based on the MTA’s failure to provide access to sites where work must be performed and the customer-furnished equipment necessary to complete the contract. The MTA filed an answer and counterclaim alleging that we breached the contract and subsequently terminated the contract for alleged default. The primary damages sought by the MTA are the costs to complete the contract and potential re-procurement costs. While we are unable to estimate the cost of another contractor to complete the contract and the costs of re-procurement, we note that our contract with the MTA had a total value of $323 million, of which $241 million was paid to us, and that the MTA is seeking damages of approximately $190 million. We dispute the MTA’s allegations and are defending against them. Additionally, following an investigation, our sureties on a performance bond related to this matter, who were represented by independent counsel, concluded that the MTA’s termination of the contract was improper. Finally, our declaratory judgment action was later amended to include claims for monetary damages against the MTA of approximately $95 million. This matter was taken under submission by the District Court in December 2014, after a five-week bench trial and the filing of post-trial pleadings by the parties. We continue to await a decision from the District Court. Although this matter relates to our former Information Systems & Global Solutions (IS&GS) business, we retained responsibility for the litigation when we divested IS&GS in 2016.
Environmental Matters
We are involved in proceedings and potential proceedings relating to soil, sediment, surface water, and groundwater contamination, disposal of hazardous substances, and other environmental matters at several of our current or former facilities, facilities for which we may have contractual responsibility, and at third-party sites where we have been designated as a potentially responsible party (PRP).
At December 31, 2022 and 2021, the aggregate amount of liabilities recorded relative to environmental matters was $696 million and $742 million, most of which are recorded in other noncurrent liabilities on our consolidated balance sheets. We have recorded assets for the portion of environmental costs that are probable of future recovery totaling $618 million and $645 million at December 31, 2022 and 2021, most of which are recorded in other noncurrent assets on our consolidated balance sheets. See “Note 1 – Organization and Significant Accounting Policies” for more information.
Environmental remediation activities usually span many years, which makes estimating liabilities a matter of judgment because of uncertainties with respect to assessing the extent of the contamination as well as such factors as changing remediation technologies and changing regulatory environmental standards. We are monitoring or investigating a number of former and present operating facilities for potential future remediation. We perform quarterly reviews of the status of our environmental remediation sites and the related liabilities and receivables. Additionally, in our quarterly reviews, we consider these and other factors in estimating the timing and amount of any future costs that may be required for remediation activities, and we record a liability when it is probable that a loss has occurred or will occur for a particular site and the loss can be reasonably estimated. The amount of liability recorded is based on our estimate of the costs to be incurred for remediation for that 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. We cannot reasonably determine the extent of our financial exposure in all cases as, although a loss may be probable or reasonably possible, in some cases it is not possible at this time to estimate the reasonably possible loss or range of loss. We project costs and recovery of costs over approximately 20 years.
We also pursue claims for recovery of costs incurred or for contribution to site remediation costs against other PRPs, including the U.S. Government, and are conducting remediation activities under various consent decrees, orders, and agreements relating to soil, groundwater, sediment, or surface water contamination at certain sites of former or current operations. Under agreements related to certain sites in California, New York, United States Virgin Islands and Washington, the U.S. Government and/or a private party reimburses us an amount equal to a percentage, specific to each site, of expenditures for certain remediation activities in their capacity as PRPs under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).
In addition to the proceedings and potential proceedings discussed above, potential new regulations of perchlorate and hexavalent chromium at the federal and state level could adversely affect us. In particular, the U.S. Environmental Protection
Agency (EPA) is considering whether to regulate hexavalent chromium at the federal level and the California State Water Resources Control Board continues to reevaluate its existing drinking water standard of 6 ppb for perchlorate.
If substantially lower standards are adopted for perchlorate in California or for hexavalent chromium at the federal level, we expect a material increase in our estimates for environmental liabilities and the related assets for the portion of the increased costs that are probable of future recovery in the pricing of our products and services for the U.S. Government. The amount that would be allocable to our non-U.S. Government contracts or that is determined not to be recoverable under U.S. Government contracts would be expensed, which may have a material effect on our earnings in any particular interim reporting period.
We also are evaluating the potential impact of existing and contemplated legal requirements addressing a class of chemicals known generally as per- and polyfluoroalkyl substances (PFAS). PFAS have been used ubiquitously, such as in fire-fighting foams, manufacturing processes, and stain- and stick-resistant products (e.g., Teflon, stain-resistant fabrics). Because we have used products and processes over the years containing some of those compounds, they likely exist as contaminants at many of our environmental remediation sites. Governmental authorities have announced plans, and in some instances have begun, to regulate certain of these compounds at extremely low concentrations in drinking water, which could lead to increased cleanup costs at many of our environmental remediation sites.
Letters of Credit, Surety Bonds and Third-Party Guarantees
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. We had total outstanding letters of credit, surety bonds and third-party guarantees aggregating $3.8 billion and $3.6 billion at December 31, 2022 and December 31, 2021. Third-party guarantees do not include guarantees issued on behalf of subsidiaries and other consolidated entities.
At December 31, 2022 and 2021, third-party guarantees totaled $904 million and $838 million, of which approximately 71% and 69% 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.
Note 15 – Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | December 31, 2021 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | Level 2 | Level 3 |
| Assets | | | | | | | | | | | | | | |
| Mutual funds | | $ | 897 | | | $ | 897 | | | $ | — | | | $ | — | | | $ | 1,434 | | | $ | 1,434 | | | $ | — | | | $ | — | |
| U.S. Government securities | | 118 | | | — | | | 118 | | | — | | | 121 | | | — | | | 121 | | | — | |
| Other securities | | 660 | | | 333 | | | 264 | | | 63 | | | 684 | | | 492 | | | 192 | | | — | |
| Derivatives | | 18 | | | — | | | 18 | | | — | | | 15 | | | — | | | 15 | | | — | |
| Liabilities | | | | | | | | | | | | | | | | |
| Derivatives | | 196 | | | — | | | 196 | | | — | | | 60 | | | — | | | 60 | | | — | |
| Assets measured at NAV | | | | | | | | | | | | | | | | |
| Other commingled funds | | — | | | | | | | | | 20 | | | | | | | |
| | | | | | | | | | | | | | | | |
Substantially all assets measured at fair value, other than derivatives, represent investments held in a separate trust to fund certain of our non-qualified deferred compensation plan liabilities. As of December 31, 2022 and 2021, the fair value of our investments held in trust totaled $1.6 billion and $2.1 billion and was included in other noncurrent assets on our
consolidated balance sheets. Net losses on these securities were $323 million in 2022 and net gains of $205 million and $231 million in 2021 and 2020. Gains and losses on these investments are included in other unallocated, net within cost of sales on our consolidated statements of earnings in order to align the classification of changes in the market value of investments held for the plan with changes in the value of the corresponding plan liabilities.
The fair values of mutual funds and certain other securities are determined by reference to the quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs. The fair values of U.S. Government and certain other securities are determined using pricing models that use observable inputs (e.g., interest rates and yield curves observable at commonly quoted intervals), bids provided by brokers or dealers or quoted prices of securities with similar characteristics. The fair values of derivative instruments, which consist of foreign currency forward contracts, including embedded derivatives, and interest rate swap contracts, are primarily determined based on the present value of future cash flows using model-derived valuations that use observable inputs such as interest rates, credit spreads and foreign currency exchange rates.
We use derivative instruments principally to reduce our exposure to market risks from changes in foreign currency exchange rates and interest rates. We do not enter into or hold derivative instruments for speculative trading purposes. We transact business globally and are subject to risks associated with changing foreign currency exchange rates. We enter into foreign currency hedges such as forward and option contracts that change in value as foreign currency exchange rates change. Our most significant foreign currency exposures relate to the British pound sterling, the euro, the Canadian dollar, the Australian dollar, the Norwegian kroner and the Polish zloty. These contracts hedge forecasted foreign currency transactions in order to minimize fluctuations in our earnings and cash flows associated with changes in foreign currency exchange rates. We designate foreign currency hedges as cash flow hedges. We also are exposed to the impact of interest rate changes primarily through our borrowing activities. For fixed rate borrowings, we may use variable interest rate swaps, effectively converting fixed rate borrowings to variable rate borrowings in order to hedge changes in the fair value of the debt. These swaps are designated as fair value hedges. For variable rate borrowings, we may use fixed interest rate swaps, effectively converting variable rate borrowings to fixed rate borrowings in order to minimize the impact of interest rate changes on earnings. These swaps are designated as cash flow hedges. We also may enter into derivative instruments that are not designated as hedges and do not qualify for hedge accounting, which are intended to minimize certain economic exposures.
The aggregate notional amount of our outstanding interest rate swaps at December 31, 2022 and 2021 was $1.3 billion and $500 million and the increase from 2021 was due to interest rate swaps being designated on the additional debt we issued during the fourth quarter. The aggregate notional amount of our outstanding foreign currency hedges at December 31, 2022 and 2021 was $7.3 billion and $4.0 billion and the increase from 2021 is due to the timing of contract awards denominated in foreign currencies. The fair values of our outstanding interest rate swaps and foreign currency hedges at December 31, 2022 and 2021 were not significant. Derivative instruments did not have a material impact on net earnings and comprehensive income during the years ended December 31, 2022 and 2021. The impact of derivative instruments on our consolidated statements of cash flows is included in net cash provided by operating activities. Substantially all of our derivatives are designated for hedge accounting. See “Note 1 – Organization and Significant Accounting Policies - Derivative financial instruments”.
In addition to the financial instruments listed in the table above, we hold other financial instruments, including cash and cash equivalents, receivables, accounts payable and debt. The carrying amounts for cash and cash equivalents, receivables and accounts payable approximated their fair values. The estimated fair value of our outstanding debt was $16.0 billion and $15.4 billion at December 31, 2022 and 2021. The outstanding principal amount was $16.8 billion and $12.8 billion at December 31, 2022 and 2021, excluding $1.3 billion and $1.1 billion of unamortized discounts and issuance costs at December 31, 2022 and 2021. The estimated fair values of our outstanding debt were determined based on the present value of future cash flows using model-derived valuations that use observable inputs such as interest rates and credit spreads (Level 2). We also hold investments in early stage companies. Most of these investments are in equity securities without readily determinable fair values. Investments with quoted market prices in active markets (Level 1) are recorded at fair value at the end of each reporting period and reflected in other securities in the table above. See “Note 1 – Organization and Significant Accounting Policies - Investments”.
Note 16 – Severance and Other Charges
During the fourth quarter of 2022, we recorded severance and other charges totaling $100 million ($79 million, or $0.31 per share, after-tax) related 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 recognized severance charges totaling $36 million ($28 million, or $0.10 per share, after-tax) related to workforce reductions and facility exit costs within our RMS business segment. These actions were taken to consolidate certain operations in order to improve the efficiency of RMS’ manufacturing operations and the affordability of its products and services. Employees terminated as part of these actions will receive lump-sum severance payments upon separation primarily based on years of service.
During 2020, we recognized severance charges totaling $27 million ($21 million, or $0.08 per share, after-tax) related to workforce reductions primarily within our corporate functions. These actions were taken to keep our cost structure aligned with our customers’ need to improve efficiency and deliver cost savings. Employees terminated as part of these actions received lump-sum severance payments upon separation primarily based on years of service.