NOTE 4 – 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 the products and services offered.

The financial information in the following tables excludes businesses included in discontinued operations for all periods presented and includes the results of businesses we have acquired from their respective acquisition dates (see “Note 1 – Basis of Presentation”). 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 goodwill impairments and significant severance actions; gains or losses from significant 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 10 – Other” (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.

 

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

 

		Quarters Ended								Six Months Ended
		June 25,  2017				June 26,  2016				June 25,  2017				June 26,  2016
Net sales
Aeronautics		$	5,225			$	4,375			$	9,331			$	8,174
Missiles and Fire Control			1,637				1,680				3,126				3,114
Rotary and Mission Systems			3,410				3,303				6,511				6,307
Space Systems			2,413				2,219				4,774				4,350
Total net sales		$	12,685			$	11,577			$	23,742			$	21,945
Operating profit
Aeronautics		$	550			$	478			$	986			$	898
Missiles and Fire Control			268				253				487				474
Rotary and Mission Systems			254				202				362				431
Space Systems			256				340				544				584
Total business segment operating profit			1,328				1,273				2,379				2,387
Unallocated items
FAS/CAS pension adjustment
FAS pension expense			(343)				(251)				(688)				(502)
Less: CAS pension cost			562				473				1,124				948
FAS/CAS pension adjustment			219				222				436				446
Stock-based compensation			(57)				(52)				(101)				(96)
Severance charges			—				—				—				(80)
Other, net (a) (b)			(5)				(68)				(80)				(124)
Total unallocated items			157				102				255				146
Total consolidated operating profit		$	1,485			$	1,375			$	2,634			$	2,533
Intersegment sales
Aeronautics		$	33			$	39			$	65			$	75
Missiles and Fire Control			85				69				149				144
Rotary and Mission Systems			547				466				986				913
Space Systems			19				36				45				69
Total intersegment sales		$	684			$	610			$	1,245			$	1,201

 

(a)

During the six months ended June 25, 2017, we recognized a $64 million charge, which represents our portion of a noncash asset impairment charge recorded by our equity method investee, Advanced Military Maintenance, Repair and Overhaul Center LLC. See “Note 10 – Other” (under the caption “Equity Method Investee Impairment”) for more information.

 

(b)	Includes $30 million and $65 million of corporate overhead costs incurred during the quarter and six months ended June 26, 2016 that were previously allocated to our former IS&GS business. See “Note 3 – Divestiture” for more information.

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

 

		June 25, 2017				December 31,   2016
Assets
Aeronautics		$	7,631			$	7,896
Missiles and Fire Control			4,463				4,000
Rotary and Mission Systems			18,496				18,367
Space Systems			5,529				5,250
Total business segment assets			36,119				35,513
Corporate assets (a)			12,592				12,293
Total assets		$	48,711			$	47,806

 

(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 25% of our total consolidated net sales for both the quarter and six months ended June 25, 2017 and 23% of our total consolidated net sales for both the quarter and six months ended June 26, 2016.