Lockheed Martin 2015 Annual Report Download - page 43

Cost of Sales
Cost of sales, for both products and services, consist of materials, labor, subcontracting costs, an allocation of indirect
costs (overhead and general and administrative), as well as the costs to fulfill our industrial cooperation agreements,
sometimes referred to as offset agreements, required under certain contracts with international customers. For each of our
contracts, we monitor the nature and amount of costs at the contract level, which form the basis for estimating our total costs
to complete the contract. Our consolidated cost of sales were as follows (in millions):
2015 2014 2013
Cost of sales – products $(32,006) $(31,965) $(31,346)
% of product sales 89.2% 88.6% 87.8%
Cost of sales – services (9,011) (8,393) (8,588)
% of service sales 87.9% 88.3% 88.8%
Goodwill impairment charges —(119) (195)
Severance charges (102) — (201)
Other unallocated, net 187 132 (841)
Total cost of sales $(40,932) $(40,345) $(41,171)
Due to the nature of percentage-of-completion accounting, changes in our cost of sales for both products and services are
typically accompanied by changes in our net sales. The following discussion of material changes in our consolidated cost of
sales for products and services should be read in tandem with the preceding discussion of changes in our consolidated net
sales and our business segment results of operations. We have not identified any developing trends in cost of sales for
products and services that would have a material impact on our future operations.
Product Costs
Product costs increased approximately $41 million, or less than 1%, in 2015 as compared to 2014. Increased product
costs of approximately $445 million at MST and about $180 million at Aeronautics, were offset by decreases in product costs
of approximately $325 million at Space Systems, $195 million at MFC and $65 million at IS&GS. Increases in product costs
at MST were due primarily to the Sikorsky acquisition, including costs of Sikorsky products, intangible amortization and
adjustments required to account for the acquisition in the fourth quarter of 2015. Higher product costs at Aeronautics were
attributable to the reasons stated above for higher product sales, as well as decreased risk retirements (primarily F-22). The
changes in product costs at Space Systems, MFC and IS&GS were attributable to the reasons stated above for higher product
sales.
Product costs increased $619 million, or 2%, in 2014 as compared to 2013. Product costs increased approximately
$815 million at Aeronautics and approximately $325 million at MFC. Increases in product costs at Aeronautics and MFC
were primarily due to the reasons described above for higher product sales at each respective business segment and net
warranty reserve adjustments recorded in 2014 at MFC (including Joint Air-to-Surface Standoff Missile (JASSM), and
Guided Multiple Launcher Rocker Systems (GMLRS)). These increases in product costs were partially offset by decreases of
about $195 million at IS&GS, $255 million at Space Systems and $70 million at MST, primarily due to the reasons described
above for lower product sales at each respective business segment. Additionally, lower product costs at MST were partially
offset by costs related to the settlements of contract cost matters on certain programs in the prior year (including a portion of
the terminated presidential helicopter program) that were not repeated in 2014 and higher reserves recorded on certain
training and logistics solutions programs during 2014. The 0.8% increase in product costs as a percentage of product sales in
2014 compared to 2013 was primarily due to the reasons described above for increasing product costs at MFC, and decreased
risk retirements at Aeronautics (primarily F-16).
Service Costs
Service costs increased $618 million, or 7%, in 2015 compared to 2014. Higher service costs of approximately
$450 million at Aeronautics and about $230 million at Space Systems were due to the reasons stated above for higher service
sales. These increases in service costs were partially offset by a decrease in service costs of about $80 million at MFC due
primarily to lower service costs on various air and missile defense programs.
Service costs decreased $195 million, or 2%, in 2014 as compared to 2013. Lower service costs of about $230 million at
IS&GS, approximately $100 million at MST, and approximately $40 million at Aeronautics were partially offset by an
increase in service costs of approximately $160 million at Space Systems. The decline at IS&GS was primarily attributable to
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