Lockheed Martin 2007 Annual Report Download - page 57

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on both government and commercial satellite programs. There were five commercial satellite deliveries in 2006 compared to
no deliveries in 2005. Higher volume in both strategic missile programs accounted for the $114 million sales increase at
S&DMS. In Space Transportation, sales declined $102 million primarily due to lower volume in government space
transportation activities on the Titan and External Tank programs. Increased sales on the Atlas Evolved Expendable Launch
Vehicle Launch capabilities (ELC) contract partially offset the lower government space transportation sales.
Operating profit for the segment increased 15% in 2007 compared to 2006. During the year, operating profit growth in
Satellites and S&DMS more than offset declines at Space Transportation. Satellites’ operating profit increased $90 million
due to improved performance in commercial and government satellite activities. Increased operating profit of $33 million at
S&DMS was due to higher volume and improved performance on strategic missile programs. In Space Transportation, the
decline of $18 million in 2007 operating profit from 2006 was mainly due to a charge recognized by ULA in the third quarter
of 2007 for an asset impairment on Delta II medium lift launch vehicles. The decline also reflects benefits recognized in 2006
from risk reduction activities, including the definitization of the ELC contract, and other performance improvements on the
Atlas program, with no similar items recognized in the comparable period in 2007.
Operating profit for the segment increased 23% in 2006 compared to 2005. Operating profit increased in Satellites,
Space Transportation and S&DMS. The $69 million growth in Satellites operating profit was primarily driven by the volume
and performance on government satellite programs and commercial satellite deliveries. In Space Transportation the $44
million growth in operating profit was attributable to improved performance on the Atlas program resulting from risk
reduction activities, including the first quarter definitization of the ELC contract. In S&DMS, the $26 million increase was
attributable to higher volume on strategic missile programs.
Under the agreement to sell our ownership interests in LKEI and ILS in the fourth quarter of 2006, we continued to be
responsible to refund customer advances to certain customers if launch services are not provided and ILS does not refund the
advance. We expect to recognize the $67 million deferred net gain on the transaction when our responsibility to refund the
advances expires, which we generally believe will be in 2008 based on the expected Proton launch schedule, which is subject
to change. Our ability to realize the deferred net gain is dependent upon Khrunichev State Research and Production Space
Center (Khrunichev) providing the contracted launch services or, in the event the launch services are not provided, ILS’
ability to refund the advance.
Our Balance Sheet at December 31, 2007 included current assets relating to LKEI and ILS totaling $132 million and
current liabilities totaling $189 million, both of which will be reduced as the launch services are provided. The assets
primarily relate to advances we have made to Khrunichev, the manufacturer of the launch vehicles and provider of the launch
services, for future launches, and the liabilities relate primarily to advances we have received from customers for future
launches. Any potential earnings impact resulting from our inability to realize the assets related to LKEI and ILS would be
partially mitigated by our not recognizing the $67 million deferred net gain on the transaction.
The decrease in backlog during 2007 as compared to 2006 was mainly due to sales volume related to government and
commercial satellite programs, which more than offset increased orders on strategic missile programs.
Unallocated Corporate Income (Expense), Net
The following table shows the components of Unallocated Corporate income (expense), net.
(In millions) 2007 2006 2005
FAS/CAS pension adjustment $ (58) $(275) $(626)
Items not considered in segment operating performance 71 230 173
Stock compensation expense (149) (111) —
Other, net (28) (105) (115)
$(164) $(261) $(568)
The FAS/CAS pension adjustment represents the difference between pension expense calculated in accordance with
FAS 87 and pension costs calculated and funded in accordance with CAS. Because the CAS expense is recovered through the
pricing of our products and services on U.S. Government contracts, and therefore recognized in a particular segment’s Net
sales and Cost of sales, the results of operations of our segments only include pension expense as determined and funded in
accordance with CAS rules. Accordingly, the FAS/CAS adjustment is not included in segment operating results and therefore
is included in the reconciliation of total segment Operating profit to consolidated Operating profit under GAAP.
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