Lockheed Martin 2010 Annual Report Download - page 35

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27
Operating profit of the business segments excludes the FAS/CAS pension adjustment discussed under the caption
“Postretirement Benefit Plans” in the section on Critical Accounting Policies; expense for certain stock-based compensation programs
including costs for stock options and restricted stock units; the effects of items not considered part of management’s evaluation of
segment operating performance, such as the charges related to the VESP in 2010 and the MS2 consolidation plan announced in 2010
(see Note 3); gains or losses from divestitures; the effects of legal settlements; Corporate costs not allocated to the business segments;
and other miscellaneous Corporate activities. The items other than the charges related to the VESP and the MS2 consolidation plan are
included in “Other unallocated Corporate income (expense), net” in the following table which reconciles operating profit from the
business segments to operating profit in our Statements of Earnings. The charges related to the VESP and MS2 consolidation plan are
presented together as a separate reconciling item.
(In millions)
2010
2009
2008
Net Sales
Aeronautics
$ 13,235
$ 12,201
$ 11,473
Electronic Systems
14,363
13,532
12,803
Information Systems & Global Solutions
9,959
9,608
9,069
Space Systems
8,246
8,654
8,027
Total
$ 45,803
$ 43,995
$ 41,372
Operating Profit
Aeronautics
$ 1,502
$ 1,577
$ 1,433
Electronic Systems
1,712
1,660
1,583
Information Systems & Global Solutions
890
895
919
Space Systems
972
972
953
Total business segments
$ 5,076
$ 5,104
4,888
VESP and other charges
(220)
—
—
Other unallocated Corporate income (expense), net
(759)
(689)
161
Total
$ 4,097
$ 4,415
$ 5,049
The following segment discussions also include information relating to negotiated backlog for each segment. Total negotiated
backlog was approximately $78.2 billion, $77.2 billion, and $80.1 billion at December 31, 2010, 2009, and 2008. These amounts
included both funded backlog (unfilled firm orders for which funding has been both authorized and appropriated by the customer –
Congress in the case of U.S. Government agencies) and unfunded backlog (firm orders for which funding has not yet been
appropriated). Negotiated backlog does not include unexercised options or task orders to be issued under indefinite-delivery,
indefinite-quantity (IDIQ) contracts. Funded backlog was approximately $49.7 billion at December 31, 2010.
We use the percentage-of-completion method of accounting for our long-term design, development and production contracts,
which we refer to as products in our Statements of Earnings. Under this method of accounting, we record sales on contracts based
upon our progress towards completion on a particular contract as well as our estimate of the profit to be earned at completion.
Changes in volume refer to increases or decreases in sales resulting from varying production activity levels, deliveries, or
service levels on individual contracts. Volume changes typically include a corresponding change in operating profit based on the
estimate of profit at completion for a particular contract. For example, if the cost volume on a cost-reimbursement-type contract
increased or decreased compared with a prior period, sales and operating profit for that contract will also be increased or decreased.
Changes in performance refer to increases or decreases in the estimated profit booking rates on our contracts for products.
Performance changes usually relate to revisions in the total estimated costs at completion that reflect improved or deteriorated
operating or award fee performance on a particular contract. Such changes in estimated profit booking rates are recognized in the
current period and reflect the inception-to-date effect of such changes. For example, if we increase the estimated profit booking rate on
a cost reimbursable contract, the increase in sales and operating profit for that contract will reflect a higher return on sales in the
current period due to the recognition of the higher booking rate on both current period costs as well as previously incurred costs.
Accordingly, such changes in the estimated profit booking rates may affect the comparison of segment operating results.
For our services contracts, changes in volume are reflective of increases or decreases in the level of services being provided
under each contract. Performance refers to changes in the levels of operating profit. Sales are recognized as the services are
performed, typically on a straight-line basis. Award and incentive fees related to the performance on these contracts are recognized
when communicated to us by the customer. Costs associated with these contracts are expensed as incurred. Accordingly, the timing for
recognizing the effect of costs and award and incentive fees on our services contracts may affect the comparison of segment operating
results.