Note 5 – Information on Business Segments

We operate in four business segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space Systems. 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 – 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, RMS supports the needs of customers in cybersecurity and delivers communications and command and control capability through complex mission solutions for defense applications. The 2015 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 space and ground-based 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. The results of AWE have been included in our consolidated results of operations from August 24, 2016, when we obtained controlling interest through December 31, 2016. Accordingly, the consolidated results of operations for the year ended December 31, 2016 do not reflect a full year of AWE operations. Operating profit for our Space Systems business segment also 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 (see “Note 3 – Acquisitions and Divestitures”) from their respective dates of acquisition. The business segment operating results in the following tables exclude businesses included in discontinued operations (see “Note 3 – Acquisitions and Divestitures”) 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 (see “Note 15 – 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 items” between operating profit from our business segments and our consolidated operating profit. See “Note 1 – 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.

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):


	2016			2015			2014
Net sales
Aeronautics	$	17,769		$	15,570		$	14,920
Missiles and Fire Control		6,608			6,770			7,092
Rotary and Mission Systems		13,462			9,091			8,732
Space Systems		9,409			9,105			9,202
Total net sales	$	47,248		$	40,536		$	39,946
Operating profit
Aeronautics	$	1,887		$	1,681		$	1,649
Missiles and Fire Control		1,018			1,282			1,344
Rotary and Mission Systems		906			844			936
Space Systems		1,289			1,171			1,187
Total business segment operating profit		5,100			4,978			5,116
Unallocated items
FAS/CAS pension adjustment
FAS pension expense ^(a)		(1,019	)		(1,127	)		(1,099)
Less: CAS pension cost ^{(a) (b)}		1,921			1,527			1,416
FAS/CAS pension adjustment		902			400			317
Severance charges ^{(a) (c)}		(80	)		(82	)		—
Stock-based compensation		(149	)		(133	)		(154)
Other, net ^{(d), (e)}		(224	)		(451	)		(267)
Total unallocated items		449			(266	)		(104)
Total consolidated operating profit	$	5,549		$	4,712		$	5,012

^(a)	FAS pension expense, CAS pension costs and severance charges reflect the reclassification for discontinued operations presentation of benefits related to former IS&GS salaried employees (see “Note 11 – Postretirement Plans”).

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

^(c)	See “Note 15 – Restructuring Charges” 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.

^(d)

Other, net in 2015 includes a non-cash asset impairment charge of approximately $90 million related to our decision in 2015 to divest our LMCFT business (see “Note 3 – Acquisitions and Divestitures”). 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.

^(e)	Other, net in 2015 includes approximately $38 million of non-recoverable transaction costs associated with the acquisition of Sikorsky.


	2016		2015		2014
Intersegment sales
Aeronautics	$	137	$	102	$	103
Missiles and Fire Control		305		315		256
Rotary and Mission Systems		1,816		1,533		1,245
Space Systems		110		146		137
Total intersegment sales	$	2,368	$	2,096	$	1,741

Depreciation and amortization
Aeronautics	$	299	$	317	$	322
Missiles and Fire Control		105		99		99
Rotary and Mission Systems		476		211		167
Space Systems		212		220		232
Total business segment depreciation and amortization		1,092		847		820
Corporate activities		75		98		107
Total depreciation and amortization ^(a)	$	1,167	$	945	$	927

Capital expenditures
Aeronautics	$	358	$	387	$	283
Missiles and Fire Control		167		120		142
Rotary and Mission Systems		271		169		164
Space Systems		183		172		172
Total business segment capital expenditures		979		848		761
Corporate activities		75		60		66
Total capital expenditures ^(b)	$	1,054	$	908	$	827

^(a)

Total depreciation and amortization in the table above excludes $48 million, $81 million and $67 million for the years ended December 31, 2016, 2015 and 2014 related to the former IS&GS business segment. These amounts are included in depreciation and amortization in our consolidated statements of cash flows as we did not reclassify our cash flows to exclude the IS&GS business segment. See “Note 3 – Acquisitions and Divestitures” for more information.

^(b)

Total capital expenditures in the table above excludes $9 million, $31 million and $18 million for the years ended December 31, 2016, 2015 and 2014 related to the former IS&GS business segment. These amounts are included in capital expenditures in our consolidated statements of cash flows as we did not reclassify our cash flows to exclude the IS&GS business segment. See “Note 3 – Acquisitions and Divestitures” for more information.

Net Sales by Customer Category

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


	2016		2015		2014
U.S. Government
Aeronautics	$	11,714	$	11,195	$	10,704
Missiles and Fire Control		4,026		4,150		4,509
Rotary and Mission Systems		9,187		6,961		6,752
Space Systems		8,543		8,845		8,921
Total U.S. Government net sales	$	33,470	$	31,151	$	30,886
International ^(a)
Aeronautics	$	5,973	$	4,328	$	4,183
Missiles and Fire Control		2,444		2,449		2,421
Rotary and Mission Systems		3,798		2,016		1,921
Space Systems		488		218		89
Total international net sales	$	12,703	$	9,011	$	8,614
U.S. Commercial and Other
Aeronautics	$	82	$	47	$	33
Missiles and Fire Control		138		171		162
Rotary and Mission Systems		477		114		59
Space Systems		378		42		192
Total U.S. commercial and other net sales	$	1,075	$	374	$	446
Total net sales	$	47,248	$	40,536	$	39,946

^(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 23% of our total consolidated net sales during each of 2016 and 2015, and 20% during 2014.

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


	2016		2015
Assets ^(a)
Aeronautics	$	7,896	$	6,618
Missiles and Fire Control		4,000		4,027
Rotary and Mission Systems		18,367		19,187
Space Systems		5,250		4,861
Total business segment assets		35,513		34,693
Assets of discontinued operations		—		4,130
Corporate assets ^(b)		12,293		10,481
Total assets	$	47,806	$	49,304

Customer advances and amounts in excess of costs incurred
Aeronautics	$	2,133	$	2,045
Missiles and Fire Control		1,517		1,766
Rotary and Mission Systems		2,590		2,415
Space Systems		536		477
Total customer advances and amounts in excess of costs incurred	$	6,776	$	6,703

^(a)	We have no long-lived assets with material carrying values 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.