Lockheed Martin 2013 Annual Report Download - page 38

Cost of Products Sales
Cost of products sales decreased $2.1 billion, or 6%, in 2013 compared to 2012 primarily due to lower volume and
deliveries. Cost of products sales decreased about $770 million at Aeronautics due to fewer aircraft deliveries (primarily F-16
and C-130) and lower volume (primarily F-22), partially offset by increased volume for F-35 production contracts, increased
aircraft deliveries and the impact of reducing the profit booking rate in the third quarter of 2013 for the C-5 program and
lower risk retirements on various programs (primarily C-130); about $685 million at IS&GS for various programs primarily
due to decreased volume; about $570 million at MST primarily due to fewer deliveries and net increased risk retirements for
the PTDS program and various integrated warfare systems and sensors programs and for the favorable resolution of certain
contract cost matters (including the terminated presidential helicopter program); and about $315 million at Space Systems
due to lower volume (primarily commercial satellites and Orion). The decreases were partially offset by higher cost of
products sales of about $190 million at MFC due to increased volume (primarily THAAD and deliveries of PAC-3), partially
offset by various other programs due increased risk retirements (primarily fire control programs). The 0.8% decrease in the
percentage of cost of products sales relative to products sales in 2013 compared to 2012 primarily was due to higher risk
retirements (primarily at MFC and MST) and the favorable resolution of contractual matters at MST.
Cost of products sales increased $527 million, or 2%, in 2012 compared to 2011 primarily due to higher volume and
deliveries. Cost of products sales increased about $520 million at Aeronautics due to increased volume (primarily F-35
production contracts) and increased deliveries (primarily F-16 and C-5); about $485 million at MST due to increased
deliveries (primarily PTDS) and volume (primarily LCS), partially offset by reserves of about $55 million for contract cost
matters on certain contracts recorded in the fourth quarter of 2011 (including the terminated presidential helicopter program);
and about $180 million at Space Systems due to increased volume (primarily commercial satellites programs, Orion and
various strategic and defensive missile programs). The increases were partially offset by lower cost of products sales of about
$530 million at IS&GS primarily due to the substantial completion of various programs during 2011 and lower volume on
various other programs; and about $70 million at MFC due to higher risk retirements (primarily tactical missile and fire
control programs) and the favorable resolution of contractual matters, partially offset by increased deliveries (PAC-3) and
volume (THAAD). The 0.7% decrease in the percentage of cost of products sales relative to products sales in 2012 compared
to 2011 primarily was due to higher risk retirements (primarily at MFC) as well as the favorable resolution of contractual
matters at MFC and higher risk retirements and lower reserves on ship and aviation system programs at MST.
Cost of Services Sales
Our cost of services sales increased $205 million, or 2%, in 2013 compared to 2012. Most of our cost of services sales
are in the IS&GS and MFC business segments. The increase in cost of services sales was primarily attributable to higher cost
of services sales at our IS&GS and Aeronautics business segments partially offset by lower cost of services sales at our MFC
business segment. Cost of services sales increased about $245 million at IS&GS primarily due to the start-up of various
programs. Cost of services sales increased about $40 million at Aeronautics primarily due to increased sustainment activities
(primarily F-16). Cost of services sales decreased about $75 million at MFC primarily due to lower volume of various
technical services programs, partially offset by higher volume from various fire control programs (primarily SOF CLSS).
The 0.7% decrease in the percentage of cost of services sales relative to services sales in 2013 compared to 2012 was
primarily due to higher risk retirements on sustainment contracts at Aeronautics.
Our cost of services sales decreased $131 million, or 2%, in 2012 compared to 2011. The decrease in cost of services
sales primarily was attributable to lower cost of services sales at our MFC and MST business segments, partially offset by
higher cost of services sales at our IS&GS business segment. Cost of services sales decreased approximately $105 million at
MFC primarily due to lower volume on various technical services programs. Cost of services sales decreased approximately
$90 million at MST primarily due to lower volume on various training services programs. Cost of services sales increased
approximately $80 million at IS&GS primarily due to higher net sales from QTC, which was acquired in the fourth quarter of
2011, and various other services programs partially offset by lower costs from the substantial completion of ODIN in 2011
and lower volume on the Hanford contract. The 0.6% increase in the percentage of cost of services sales relative to services
sales in 2012 compared to 2011 was primarily due to risk retirements on the ODIN and Hanford contracts in 2011.
Goodwill Impairment Charge
In the fourth quarter of 2013, we recorded a non-cash goodwill impairment charge of $195 million, net of state tax
benefits, which reduced our net earnings by $176 million ($.54 per share). The charge related to the Technical Services
reporting unit within our MFC business segment and was due to the continuing impact of defense budget reductions and
related competitive pressures on the Technical Services business, which typically has smaller customer contracts of a shorter
duration. For additional information, see the “Critical Accounting Policies – Goodwill” section below and
“Note 1 –Significant Accounting Policies” of our consolidated financial statements.
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