Lockheed Martin Reports Third Quarter 2016 Results

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Cash Deployment Activities

The Corporation’s cash deployment activities in the third quarter of 2016 consisted of the following:

• repurchasing 1.2 million shares for $278 million, compared to 4.1 million shares for $823 million in the third quarter of 2015;
• paying cash dividends of $484 million, compared to $462 million in the third quarter of 2015;
• repaying $500 million of long-term debt upon scheduled maturity, compared to no repayments in the third quarter of 2015; and
• making capital expenditures of $241 million, compared to $191 million in the third quarter of 2015.

Segment Results

The Corporation operates in four business segments organized based on the nature of products and services offered: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space Systems.

The discussion and presentation of the operating results of the Corporation’s business segments in this news release have been impacted by the following recent events:

The Corporation completed the previously announced divestiture of its IS&GS business segment on Aug. 16, 2016, which merged with Leidos. The discussion and presentation of the Corporation’s segment results for all periods presented in this news release exclude the results of the IS&GS business segment.

The Corporation’s ownership interest in the AWE venture increased by 18% on Aug. 24, 2016. As a result of the increase in ownership interest, the Corporation now holds a 51% controlling interest in AWE and is required to consolidate the AWE venture. AWE has been aligned under the Corporation’s Space Systems business segment. Accordingly, the discussion and presentation of net sales, operating profit and operating margin of the Corporation’s Space Systems business segment include the operating results of AWE since Aug. 24, 2016. Previously, the Corporation accounted for its investment in AWE using the equity method of accounting. Under the equity method, only 33% of AWE’s net earnings was included in operating profit and operating margin of the Space Systems business segment.

During the third quarter of 2016, the business segment formerly known as Mission Systems and Training was renamed Rotary and Missions Systems (RMS) to better reflect a broader range of products and capabilities subsequent to the acquisition of Sikorsky Aircraft Corporation (Sikorsky) on Nov. 6, 2015. The portfolio also reflects the realignment of certain programs from the former IS&GS business segment to RMS in the fourth quarter of 2015. While RMS was renamed to more accurately reflect the expanded portfolio, there was no additional change to the composition of the portfolio in connection with the name change. The information for this segment for all periods included in this news release has been labeled using the new name. Additionally, the discussion and presentation of the operating results of the RMS business segment include the operating results of Sikorsky since its Nov. 6, 2015 acquisition date and alignment under the RMS business segment.

During the fourth quarter of 2015, the Corporation realigned certain programs among its business segments in connection with the strategic review of its government IT and technical services businesses. The discussion and presentation of the Corporation’s segment results for all periods presented in this news release reflect the program realignment.

Operating profit of the business segments includes the Corporation’s share of earnings or losses from equity method investees as the operating activities of the equity method investees are closely aligned with the operations of the Corporation’s business segments. United Launch Alliance (ULA), which is part of the Space Systems business segment, is the Corporation’s primary equity method investee. Operating profit of the Corporation’s business segments excludes the FAS/CAS pension adjustment, which represents the difference between total pension expense recorded in accordance with U.S. generally accepted accounting principles (FAS) and pension costs recoverable on U.S. Government contracts as determined in accordance with U.S. Government Cost Accounting Standards (CAS); expense for stock-based compensation; the effects of items not considered part of management’s evaluation of segment operating performance, such as charges related to significant severance actions and certain asset impairments; gains or losses from divestitures; the effects of certain legal settlements; corporate costs not allocated to the Corporation’s business segments; and other miscellaneous corporate activities.

Changes in net sales and operating profit generally are expressed in terms of volume. Changes in volume refer to increases or decreases in sales or operating profit resulting from varying production activity levels, deliveries or service levels on individual contracts. Volume changes in segment operating profit are typically based on the current profit booking rate for a particular contract.

In addition, comparability of the Corporation’s segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on the Corporation’s contracts accounted for using the percentage-of-completion method of accounting. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs that reflect improved conditions on a particular contract. Conversely, conditions on a particular contract may deteriorate resulting in an increase in the estimated total costs to complete and a reduction in the profit booking rate. Increases or decreases in profit booking rates are recognized in the current period and reflect the inception-to-date effect of such changes. Segment operating profit and margin may also be impacted favorably or unfavorably by other items. Favorable items may include the positive resolution of contractual matters, cost recoveries on restructuring charges, insurance recoveries and gains on sales of assets. Unfavorable items may include the adverse resolution of contractual matters; restructuring charges, except for significant severance actions which are excluded from segment operating results; reserves for disputes; certain asset impairments; and losses on sales of assets.

About Lockheed Martin

Headquartered in Bethesda, Maryland, Lockheed Martin is a global security and aerospace company that employs approximately 98,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services.

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