Lockheed Martin 2011 Annual Report Download - page 41

Changes in volume refer to increases or decreases in net sales resulting from varying production activity levels,
deliveries, or service levels on individual contracts. Volume changes typically include a corresponding change in segment
operating profit based on the current profit booking rate 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
also will be increased or decreased.
Changes in performance refer to increases or decreases in the estimated profit booking rates on our POC contracts and
usually relate to revisions in the total estimated costs at completion that reflect improved or deteriorated conditions on a
particular contract. For example, improved conditions typically result from the retirement of risks on contracts. 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
profit booking rate on both current period costs as well as previously incurred costs.
Many of our contracts are multi-billion dollar contracts that span several years and include highly complex technical
requirements. At the outset of a contract, we identify and monitor risks to the achievement of the technical, schedule, and
costs aspects of the contract, and assess the effects of those risks on our estimates of total costs to complete the contract. The
estimates consider the technical requirements (for example, a newly-developed product versus a mature product), the
schedule and associated tasks (for example, the number and type of milestone events), and costs (for example, material,
labor, subcontractor and overhead). The initial profit booking rate of each contract considers risks surrounding the ability to
achieve the technical requirements, schedule, and costs in the initial estimated costs at completion. Profit booking rates may
increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and costs
aspects of the contract. All of the estimates are subject to change during the performance of the contract and may affect the
profit booking rate.
We have a number of programs that are designated as classified by the U.S. Government and cannot be specifically
described. The operating results of these classified programs are included in our consolidated and business segment results,
and are subjected to the same oversight and internal controls as our other programs.
Aeronautics
Our Aeronautics business segment is 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. Aeronautics also provides logistics support, sustainment, and upgrade modification
services for its aircraft. Aeronautics’ major programs include the F-35 Lightning II Joint Strike Fighter, F-16 Fighting
Falcon, F-22 Raptor, C-130J Hercules, and the C-5M Super Galaxy. Aeronautics’ operating results included the following:
(In millions) 2011 2010 2009
Net sales $14,362 $13,109 $11,988
Operating profit 1,630 1,498 1,567
Operating margin 11.3% 11.4% 13.1%
Backlog at year-end 30,500 27,500 26,800
Net sales for the Aeronautics segment increased $1.3 billion, or 10%, in 2011 compared to 2010. The growth in net sales
primarily was due to higher volume of about $850 million for work performed on the F-35 LRIP contracts as production
increased, higher volume of about $745 million for C-130 programs due to an increase in deliveries (33 C-130J aircraft
delivered in 2011 compared to 25 during 2010) and support activities, about $425 million for F-16 support activities and an
increase in aircraft deliveries (22 F-16 aircraft delivered in 2011 compared to 20 during 2010), and approximately
$90 million for higher volume on C-5 programs (two C-5M aircraft delivered in 2011 compared to one during 2010). These
increases partially were offset by a decline in net sales of approximately $675 million due to lower volume on the F-22
program, which will continue to decline as production winds down with final deliveries expected to be completed in 2012,
and lower net sales of about $155 million for the F-35 SDD contract as development work decreased.
Net sales for the Aeronautics segment increased by $1.1 billion, or 9%, in 2010 compared to 2009. The increase
primarily was due to additional volume from work performed on the F-35 LRIP contracts of approximately $1.6 billion,
higher volume of about $690 million for C-130 programs due to an increase in deliveries (25 C-130J aircraft delivered in
2010 as compared to 16 in 2009) and support activities, and higher volume on C-5 programs of about $115 million, including
33