Note 5 – Information on Business Segments

We operate in five business segments: Aeronautics, Information Systems & Global Solutions (IS&GS), Missiles and Fire Control (MFC), Mission Systems and Training (MST) and Space Systems. We organize our business segments based on the nature of products and services offered.

During the fourth quarter of 2015, we realigned certain programs among our business segments in connection with the strategic review of our government IT and technical services businesses. As part of the realignment, command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) and government cyber programs were transferred from the IS&GS business segment to the MST business segment, energy solutions programs were transferred from the IS&GS business segment to the MFC business segment, space ground station programs were transferred from the IS&GS business segment to Space Systems business segment, and substantially all technical services programs were transferred from the MFC business segment to the IS&GS business segment. Subsequent to the program realignment, our IS&GS business segment which we plan to divest in the third or fourth quarter of 2016 represents the government IT and technical services businesses that were under strategic review.

The amounts, discussion and presentation of our business segments as set forth in our consolidated financial statements have been reclassified from prior year presentation to reflect the program realignment described above for all years presented. The realignment did not impact the Corporation’s previously reported consolidated financial statements.

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.

•

Information Systems & Global Solutions – Provides advanced technology systems and expertise, integrated information technology solutions and management services across a broad spectrum of applications for civil, defense, intelligence and other government customers. IS&GS’ technical services business provides a comprehensive portfolio of technical and sustainment services.

•

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.

•

Mission Systems and Training – Provides design, manufacture, service and support for a variety of military and civil helicopters; ship and submarine mission and combat systems; mission systems and sensors for rotary and fixed-wing aircraft; sea and land-based missile defense systems; radar systems; the Littoral Combat Ship; simulation and training services; and unmanned systems and technologies. In addition, MST supports the needs of customers in cybersecurity and delivers communications and command and control capability through complex mission solutions for defense applications. The results of the acquired Sikorsky business have been included in our consolidated results of operations from the November 6, 2015 acquisition date through December 31, 2015. Accordingly, the consolidated results of operations for the year ended December 31, 2015 do not reflect a full year of Sikorsky operations.

•

Space Systems – Engaged in the research and development, design, engineering and production of satellites, strategic and defensive missile systems and space transportation systems. Space systems provides network-enabled situational awareness and integrates complex global systems to help our customers gather, analyze and securely distribute critical intelligence data. Space Systems is also responsible for various classified systems and services in support of vital national security systems. Operating profit for our Space Systems business segment includes our share of earnings for our investment in ULA, which provides expendable launch services to the U.S. Government.

The financial information in the following tables includes the results of businesses we have acquired during the past three years (Note 3) from their respective dates of acquisition. The business segment operating results in the following tables exclude businesses included in discontinued operations (Note 3) for all years presented. Net sales of our business segments exclude intersegment sales as these activities are eliminated in consolidation.

Operating profit of our business segments includes our share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of our business segments. United Launch Alliance (ULA), which is part of our Space Systems business segment, is our primary equity method investee. Operating profit of our business segments excludes the FAS/CAS pension adjustment described below; expense for stock-based compensation; the effects of items not considered part of management’s evaluation of segment operating performance, such as charges related to significant severance actions (Note 15) and goodwill impairments; gains or losses from divestitures; the effects of certain legal settlements; corporate costs not allocated to our business segments; and other miscellaneous corporate activities. These items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See Note 1 (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.

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 cost through the pricing of our products and services on U.S. Government contracts and, therefore, the CAS pension cost is recognized in each of our business segments’ net sales and cost of sales. Since our consolidated financial statements must present pension expense calculated in accordance with the financial accounting standards (FAS) requirements under GAAP, which we refer to as FAS pension expense, the FAS/CAS pension adjustment increases or decreases the CAS pension cost recorded in our business segments’ results of operations to equal the FAS pension expense.

Selected Financial Data by Business Segment

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


	2015			2014			2013
Net sales
Aeronautics	$	15,570		$	14,920		$	14,123
Information Systems & Global Solutions		5,596			5,654			6,115
Missiles and Fire Control		6,770			7,092			6,795
Mission Systems and Training		9,091			8,732			9,037
Space Systems		9,105			9,202			9,288
Total net sales	$	46,132		$	45,600		$	45,358
Operating profit
Aeronautics	$	1,681		$	1,649		$	1,612
Information Systems & Global Solutions		508			472			498
Missiles and Fire Control		1,282			1,344			1,379
Mission Systems and Training		844			936			1,065
Space Systems		1,171			1,187			1,198
Total business segment operating profit		5,486			5,588			5,752
Unallocated items
FAS/CAS pension adjustment
FAS pension expense ^(a)		(1,142	)		(1,144	)		(1,948)
Less: CAS pension cost ^(b)		1,613			1,520			1,466
FAS/CAS pension income (expense)		471			376			(482)
Goodwill impairment charges ^(c)		—			(119	)		(195)
Severance charges ^(d)		(102	)		—			(201)
Stock-based compensation		(138	)		(164	)		(189)
Other, net ^{(e), (f)}		(281	)		(89	)		(180)
Total unallocated items		(50	)		4			(1,247)
Total consolidated operating profit	$	5,436		$	5,592		$	4,505

^(a)	FAS pension expense in 2015 and 2014 was less than in 2013 primarily due to the June 2014 plan amendments to certain of our defined benefit pension plans to freeze future retirement benefits, partially offset by the impact of using new longevity assumptions (Note 11).

^(b)	The higher CAS pension cost primarily reflects the impact of phasing in CAS Harmonization.

^(c)	We recognized non-cash goodwill impairment charges related to the Technical Services reporting unit within our MFC business segment in 2014 and 2013. See Note 1 for more information.

^(d)	See Note 15 for information on charges related to certain severance actions at our business segments. Severance charges for initiatives that are not significant are included in business segment operating profit.

^(e)

Other, net in 2015 includes a non-cash asset impairment charge of approximately $90 million related to our decision to divest Lockheed Martin Commercial Flight Training (LMCFT) in 2016. This charge was partially offset by a net deferred tax benefit of about $80 million, which is recorded in income tax expense. The net impact reduced net earnings by about $10 million.

^(f)	Other, net in 2015 includes approximately $45 million of non-recoverable transaction costs associated with the acquisition of Sikorsky and the strategic review of our government IT and technical services businesses.

Selected Financial Data by Business Segment (continued)


	2015		2014		2013
Intersegment sales
Aeronautics	$	102	$	104	$	203
Information Systems & Global Solutions		53		12		14
Missiles and Fire Control		313		255		220
Mission Systems and Training		1,529		1,243		1,030
Space Systems		145		136		119
Total intersegment sales	$	2,142	$	1,750	$	1,586

Depreciation and amortization
Aeronautics	$	317	$	322	$	318
Information Systems & Global Solutions		101		47		48
Missiles and Fire Control		99		99		98
Mission Systems and Training		203		175		194
Space Systems		208		244		225
Total business segment depreciation and amortization		928		887		883
Corporate activities		98		107		107
Total depreciation and amortization	$	1,026	$	994	$	990

Capital expenditures
Aeronautics	$	387	$	283	$	271
Information Systems & Global Solutions		31		18		33
Missiles and Fire Control		120		142		128
Mission Systems and Training		169		164		146
Space Systems		172		172		187
Total business segment capital expenditures		879		779		765
Corporate activities		60		66		71
Total capital expenditures	$	939	$	845	$	836

Selected Financial Data by Business Segment (continued)

Net Sales by Customer Category

Net sales by customer category were as follows (in millions):


	2015		2014		2013
U.S. Government
Aeronautics	$	11,195	$	10,704	$	11,025
Information Systems & Global Solutions		4,990		5,204		5,823
Missiles and Fire Control		4,150		4,509		4,069
Mission Systems and Training		6,961		6,752		7,132
Space Systems		8,845		8,921		9,124
Total U.S. Government net sales	$	36,141	$	36,090	$	37,173
International ^(a)
Aeronautics	$	4,328	$	4,183	$	3,078
Information Systems & Global Solutions		520		401		262
Missiles and Fire Control		2,449		2,421		2,535
Mission Systems and Training		2,016		1,921		1,792
Space Systems		218		89		101
Total international net sales	$	9,531	$	9,015	$	7,768
U.S. Commercial and Other
Aeronautics	$	47	$	33	$	20
Information Systems & Global Solutions		86		49		30
Missiles and Fire Control		171		162		191
Mission Systems and Training		114		59		113
Space Systems		42		192		63
Total U.S. commercial and other net sales	$	460	$	495	$	417
Total net sales	$	46,132	$	45,600	$	45,358

^(a)	International sales include foreign military sales 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 20%, 17% and 16% of our total consolidated net sales during 2015, 2014 and 2013.

Selected Financial Data by Business Segment (continued)

Total assets and customer advances and amounts in excess of costs incurred for each of our business segments were as follows (in millions):


	2015		2014
Assets ^(a)
Aeronautics	$	6,618	$	6,042
Information Systems & Global Solutions		4,206		4,268
Missiles and Fire Control		4,027		3,977
Mission Systems and Training		19,187		7,465
Space Systems		4,861		4,732
Total business segment assets		38,899		26,484
Corporate assets ^(b)		10,229		10,562
Total assets	$	49,128	$	37,046

Customer advances and amounts in excess of costs incurred
Aeronautics	$	2,045	$	2,191
Information Systems & Global Solutions		285		227
Missiles and Fire Control		1,766		1,803
Mission Systems and Training		2,415		1,148
Space Systems		477		406
Total customer advances and amounts in excess of costs incurred	$	6,988	$	5,775

^(a)	We have no significant long-lived assets located in foreign countries.

^(b)	Corporate assets primarily include cash and cash equivalents, deferred income taxes, environmental receivables and investments held in a separate trust.