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, and contract progress reports) with our third-party contracts, primarily with 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 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. As a result, to the extent that CAS pension cost exceeds FAS pension expense, which occurred for the quarter and nine months ended September 28, 2014, we have FAS/CAS pension income and, conversely, to the extent FAS pension expense exceeds CAS pension cost, which occurred for the quarter and nine months ended September 29, 2013, we have FAS/CAS pension expense.

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


	Quarters Ended				Nine Months Ended
	September 28, 2014		September 29, 2013		September 28, 2014		September 29, 2013
Net sales
Aeronautics	$	3,544	$	3,632	$	10,785	$	10,225
Information Systems & Global Solutions		1,949		2,059		5,800		6,266
Missiles and Fire Control		1,908		2,003		5,666		6,034
Mission Systems and Training		1,679		1,698		5,078		5,298
Space Systems		2,034		1,955		5,741		6,002
Total net sales	$	11,114	$	11,347	$	33,070	$	33,825

Operating profit
Aeronautics	$	362	$	412	$	1,208	$	1,198
Information Systems & Global Solutions		175		187		524		570
Missiles and Fire Control		335		356		1,038		1,081
Mission Systems and Training		193		216		628		692
Space Systems		281		284		783		790
Total business segment operating profit		1,346		1,455		4,181		4,331
Unallocated, net
FAS/CAS pension adjustment
FAS pension expense^(a)		(258)		(487)		(885)		(1,461)
Less: CAS pension cost^(b)		342		366		1,140		1,099
FAS/CAS pension income (expense)		84		(121)		255		(362)
Severance charges ^(c)		—		—		—		(30)
Stock-based compensation		(31)		(38)		(128)		(150)
Other, net		(7)		(42)		(58)		(118)
Total unallocated, net		46		(201)		69		(660)
Total consolidated operating profit	$	1,392	$	1,254	$	4,250	$	3,671

Intersegment sales
Aeronautics	$	21	$	53	$	78	$	152
Information Systems & Global Solutions		159		160		507		523
Missiles and Fire Control		81		72		244		196
Mission Systems and Training		331		249		944		728
Space Systems		25		25		78		74
Total intersegment sales	$	617	$	559	$	1,851	$	1,673

^(a)

FAS pension expense for the quarter and nine months ended September 28, 2014 was less than in the quarter and nine months ended September 29, 2013 due to higher discount rates used to calculate our qualified defined benefit obligations and net periodic benefit cost. Additionally, the June 2014 plan amendments to certain of our defined benefit pension plans to freeze future retirement benefits reduced FAS pension expense beginning in the quarter ended September 28, 2014 (Note 5, under the caption “Plan Amendments and Re-measurements”).

^(b)

CAS pension cost for the quarter ended September 28, 2014 was less than in the quarter ended September 29, 2013 due to the effect of using a higher interest rate required by the Highway and Transportation Funding Act of 2014 (HATFA), which was enacted on August 8, 2014. The higher CAS pension cost during the nine months ended September 28, 2014 reflects the impact of phasing in CAS Harmonization, partially offset by the effect of higher interest rates required by the HATFA. The effect of adopting the HATFA reduced our CAS pension cost by $55 million (including $35 million related to the first six months of 2014) in the quarter and nine months ended September 28, 2014. See “Critical Accounting Policies – Postretirement Benefit Plans” for a discussion of HATFA and CAS Harmonization and the impact on our CAS pension cost.

^(c)

Severance charges during the nine months ended September 29, 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):


	September 28, 2014		December 31, 2013
Assets
Aeronautics	$	6,082	$	5,821
Information Systems & Global Solutions		5,909		5,798
Missiles and Fire Control		4,178		4,159
Mission Systems and Training		6,216		6,512
Space Systems		3,958		3,522
Total business segment assets		26,343		25,812
Corporate assets ^(a)		10,590		10,376
Total assets	$	36,933	$	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 17% of our total consolidated net sales for both the quarter and nine months ended September 28, 2014 and 16% and 15% for the quarter and nine months ended September 29, 2013.