BUSINESS SEGMENT INFORMATION

6 Months Ended

Jun. 29, 2014

BUSINESS SEGMENT INFORMATION

NOTE 3 – BUSINESS SEGMENT INFORMATION

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

Net sales of our business segments exclude intersegment sales as these activities are eliminated in consolidation. Intercompany transactions are generally negotiated under terms and conditions that share many similar characteristics (e.g., contract structures, funding profiles, target cost values, contract progress reports) with our third-party contracts, primarily the U.S. Government.

Operating profit of our business segments includes our share of earnings or losses from equity method investees because 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 8, under the caption “Restructuring Charges”) 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, net” between operating profit from our business segments and our consolidated operating profit. See Note 8 (under the caption “Changes in 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 cost. We recover CAS cost through the pricing of our products and services on U.S. Government contracts and, therefore, the CAS 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 expense recorded in our business segments’ results of operations to equal the FAS pension expense. As a result, to the extent that CAS cost exceeds FAS pension expense, which occurred for the quarter and six months ended June 29, 2014, we have FAS/CAS pension income and, conversely, to the extent FAS pension expense exceeds CAS cost, which occurred for the quarter and six months ended June 30, 2013, we have FAS/CAS pension expense.

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

	Quarters Ended				Six Months Ended
	June 29, 2014		June 30, 2013		June 29, 2014		June 30, 2013
Net sales
Aeronautics	$	3,855	$	3,407	$	7,241	$	6,593
Information Systems & Global Solutions		1,941		2,101		3,851		4,207
Missiles and Fire Control		1,891		2,043		3,758		4,031
Mission Systems and Training		1,771		1,770		3,399		3,600
Space Systems		1,848		2,087		3,707		4,047
Total net sales	$	11,306	$	11,408	$	21,956	$	22,478
Operating profit
Aeronautics	$	453	$	407	$	846	$	786
Information Systems & Global Solutions		175		194		349		383
Missiles and Fire Control		345		381		703		725
Mission Systems and Training		185		275		435		476
Space Systems		248		276		502		506
Total business segment operating profit		1,406		1,533		2,835		2,876
Unallocated, net
FAS/CAS pension adjustment
FAS pension expense		(314)		(487)		(627)		(974)
Less: CAS cost		399		367		798		733
FAS/CAS pension income (expense) (a)		85		(120)		171		(241)
Severance charges (b)		—		—		—		(30)
Stock-based compensation		(49)		(59)		(97)		(112)
Other, net		(16)		(56)		(51)		(76)
Total unallocated, net		20		(235)		23		(459)
Total consolidated operating profit	$	1,426	$	1,298	$	2,858	$	2,417
Intersegment sales
Aeronautics	$	30	$	49	$	57	$	99
Information Systems & Global Solutions		172		173		348		363
Missiles and Fire Control		76		71		163		124
Mission Systems and Training		298		252		613		479
Space Systems		26		26		53		49
Total intersegment sales	$	602	$	571	$	1,234	$	1,114

(a)

The change in the FAS/CAS pension adjustment from expense to income between the periods was due to lower FAS pension expense in 2014 primarily as a result of the increase in the discount rate to 4.75% used in the measurement of our GAAP postretirement benefit plan obligations at the end of 2013 compared to 4.00% used at the end of 2012, and incrementally higher CAS costs in 2014 as a result of phasing in the CAS Harmonization rules as disclosed in our 2013 Form 10-K. The re-measurements of the assets and benefit obligations related to substantially all of our defined benefit pension plans in the quarter ended June 29, 2014 (Note 5) did not impact the FAS/CAS pension adjustment in any of the periods reflected above.

(b)

Severance charges during the six months ended June 30, 2013 consisted of amounts, net of state tax benefits, associated with the elimination of certain positions at our IS&GS business segment (Note 8, under the caption “Restructuring Charges”). Severance charges for initiatives that are not significant are included in business segment operating profit.

Total assets for each of our business segments were as follows (in millions):

	June 29, 2014	December 31, 2013
Assets
Aeronautics	$    5,979	$       5,821
Information Systems & Global Solutions	5,973	5,798
Missiles and Fire Control	4,165	4,159
Mission Systems and Training	6,351	6,512
Space Systems	3,536	3,522
Total business segment assets	26,004	25,812
Corporate assets (a)	11,246	10,376
Total assets	$  37,250	$     36,188

^(a)  Corporate assets primarily include cash and cash equivalents, deferred income taxes, environmental receivables, and investments held in a separate trust to fund certain of our non-qualified deferred compensation plans.

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 18% and 17% of our total consolidated net sales for the quarter and six months ended June 29, 2014 and 15% for both the quarter and six months ended June 30, 2013.