10-Q 1 lmtq2201810q.htm 10-Q Document

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q 
 
 
 
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 24, 2018
Commission file number: 1-11437 
 
LOCKHEED MARTIN CORPORATION
(Exact name of registrant as specified in its charter) 
Maryland
 
52-1893632
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
6801 Rockledge Drive, Bethesda, Maryland
 
20817
(Address of principal executive offices)
 
(Zip Code)
(301) 897-6000
(Registrant’s telephone number, including area code) 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES   NO 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES   NO 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
Large accelerated filer Accelerated filer Non–accelerated filer Smaller reporting company Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO
There were 284,781,066 shares of our common stock, $1 par value per share, outstanding as of June 24, 2018.

 
 



Lockheed Martin Corporation
Form 10-Q
For the Quarterly Period Ended June 24, 2018
Table of Contents 
 
 
 
Page
 
 
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
 
 
ITEM 3.
 
 
 
 
 
ITEM 4.
 
 
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
ITEM 1A.
 
 
 
 
 
ITEM 2.
 
 
 
 
 
ITEM 6.
 
 
 




PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Lockheed Martin Corporation
Consolidated Statements of Earnings
(unaudited; in millions, except per share data)
 
 
Quarters Ended
 
Six Months Ended
 
 
June 24,
2018
 
June 25,
2017
 
June 24,
2018
 
June 25,
2017
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
$
11,150

 
 
$
10,622

 
 
$
20,912

 
 
$
20,235

 
Services
 
2,248

 
 
1,941

 
 
4,121

 
 
3,540

 
Total net sales
 
13,398

 
 
12,563

 
 
25,033

 
 
23,775

 
Cost of sales
 
 
 
 

 
 
 
 
 
 
 
Products
 
(9,993
)
 
 
(9,562
)
 
 
(18,690
)
 
 
(18,306
)
 
Services
 
(1,967
)
 
 
(1,706
)
 
 
(3,656
)
 
 
(3,140
)
 
Severance and restructuring charges
 
(96
)
 
 

 
 
(96
)
 
 

 
Other unallocated, net
 
411

 
 
361

 
 
820

 
 
733

 
Total cost of sales
 
(11,645
)
 
 
(10,907
)
 
 
(21,622
)
 
 
(20,713
)
 
Gross profit
 
1,753

 
 
1,656

 
 
3,411

 
 
3,062

 
Other income, net
 
42

 
 
60

 
 
109

 
 
56

 
Operating profit
 
1,795

 
 
1,716

 
 
3,520

 
 
3,118

 
Interest expense
 
(165
)
 
 
(160
)
 
 
(320
)
 
 
(315
)
 
Other non-operating expense, net
 
(210
)
 
 
(214
)
 
 
(420
)
 
 
(426
)
 
Earnings before income taxes
 
1,420

 
 
1,342

 
 
2,780

 
 
2,377

 
Income tax expense
 
(257
)
 
 
(387
)
 
 
(460
)
 
 
(633
)
 
Net earnings
 
$
1,163

 
 
$
955

 
 
$
2,320

 
 
$
1,744

 
 
 
 
 
 

 
 
 
 
 
 
 
Earnings per common share
 
 
 
 

 
 
 
 
 
 
 
Basic
 
$
4.08

 
 
$
3.31

 
 
$
8.13

 
 
$
6.03

 
Diluted
 
$
4.05

 
 
$
3.28

 
 
$
8.07

 
 
$
5.97

 
Cash dividends paid per common share
 
$
2.00

 
 
$
1.82

 
 
$
4.00

 
 
$
3.64

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.


3


Lockheed Martin Corporation
Consolidated Statements of Comprehensive Income
(unaudited; in millions)
 
 
Quarters Ended
 
Six Months Ended
 
 
June 24,
2018
 
June 25,
2017
 
June 24,
2018
 
June 25,
2017
Net earnings
 
$
1,163

 
 
$
955

 
 
$
2,320

 
 
$
1,744

 
Other comprehensive income, net of tax
 
 
 
 

 
 
 
 
 
 
 
Postretirement benefit plans
 
 
 
 

 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss
 
300

 
 
200

 
 
600

 
 
402

 
Other comprehensive gain recognized during the period
 

 
 

 
 

 
 
3

 
Other, net
 
(106
)
 
 
55

 
 
(48
)
 
 
60

 
Other comprehensive income, net of tax
 
194

 
 
255

 
 
552

 
 
465

 
Comprehensive income
 
$
1,357

 
 
$
1,210

 
 
$
2,872

 
 
$
2,209

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.


4


Lockheed Martin Corporation
Consolidated Balance Sheets
(unaudited; in millions, except par value)
 
 
June 24,
2018
 
December 31,
2017
Assets
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,181

 
 
$
2,861

 
Receivables, net
 
2,482

 
 
2,265

 
Contract assets
 
9,281

 
 
7,992

 
Inventories
 
3,038

 
 
2,878

 
Other current assets
 
522

 
 
1,509

 
Total current assets
 
16,504

 
 
17,505

 
Property, plant and equipment, net
 
5,786

 
 
5,775

 
Goodwill
 
10,781

 
 
10,807

 
Intangible assets, net
 
3,646

 
 
3,797

 
Deferred income taxes
 
3,051

 
 
3,156

 
Other noncurrent assets
 
5,357

 
 
5,580

 
Total assets
 
$
45,125

 
 
$
46,620

 
Liabilities and equity
 
 
 
 

 
Current liabilities
 
 
 
 

 
Accounts payable
 
$
2,675

 
 
$
1,467

 
Contract liabilities
 
6,413

 
 
7,028

 
Salaries, benefits and payroll taxes
 
2,051

 
 
1,785

 
Current maturities of long-term debt
 
750

 
 
750

 
Other current liabilities
 
1,992

 
 
1,883

 
Total current liabilities
 
13,881

 
 
12,913

 
Long-term debt, net
 
13,479

 
 
13,513

 
Accrued pension liabilities
 
12,196

 
 
15,703

 
Other postretirement benefit liabilities
 
706

 
 
719

 
Other noncurrent liabilities
 
4,384

 
 
4,548

 
Total liabilities
 
44,646

 
 
47,396

 
Stockholders’ equity
 
 
 
 

 
Common stock, $1 par value per share
 
283

 
 
284

 
Additional paid-in capital
 

 
 

 
Retained earnings
 
14,528

 
 
11,405

 
Accumulated other comprehensive loss
 
(14,395
)
 
 
(12,539
)
 
Total stockholders’ equity (deficit)
 
416

 
 
(850
)
 
Noncontrolling interests in subsidiary
 
63

 
 
74

 
Total equity (deficit)
 
479

 
 
(776
)
 
Total liabilities and equity
 
$
45,125

 
 
$
46,620

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.


5


Lockheed Martin Corporation
Consolidated Statements of Cash Flows
(unaudited; in millions)
 
 
Six Months Ended
 
 
June 24,
2018
 
June 25,
2017
Operating activities
 
 
 
 
 
 
Net earnings
 
$
2,320

 
 
$
1,744

 
Adjustments to reconcile net earnings to net cash provided by operating activities
 
 
 
 

 
Depreciation and amortization
 
566

 
 
581

 
Stock-based compensation
 
98

 
 
101

 
Severance and restructuring charges
 
96

 
 

 
Changes in assets and liabilities
 
 
 
 

 
Receivables, net
 
(217
)
 
 
(619
)
 
Contract assets
 
(1,289
)
 
 
(170
)
 
Inventories
 
(160
)
 
 
(38
)
 
Accounts payable
 
1,224

 
 
940

 
Contract liabilities
 
(615
)
 
 
(388
)
 
Postretirement benefit plans
 
(2,790
)
 
 
685

 
Income taxes
 
928

 
 
3

 
Other, net
 
399

 
 
371

 
Net cash provided by operating activities
 
560

 
 
3,210

 
Investing activities
 
 
 
 

 
Capital expenditures
 
(480
)
 
 
(448
)
 
Other, net
 
151

 
 
9

 
Net cash used for investing activities
 
(329
)
 
 
(439
)
 
Financing activities
 
 
 
 

 
Dividends paid
 
(1,156
)
 
 
(1,069
)
 
Repurchases of common stock
 
(610
)
 
 
(1,000
)
 
Other, net
 
(145
)
 
 
(87
)
 
Net cash used for financing activities
 
(1,911
)
 
 
(2,156
)
 
Net change in cash and cash equivalents
 
(1,680
)
 
 
615

 
Cash and cash equivalents at beginning of period
 
2,861

 
 
1,837

 
Cash and cash equivalents at end of period
 
$
1,181

 
 
$
2,452

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.


6


Lockheed Martin Corporation
Consolidated Statements of Equity
(unaudited; in millions)
 
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
Noncontrolling
Interests in
Subsidiary
Total
Equity
Balance at December 31, 2017
$
284

$

$
11,405

$
(12,539
)
 
$
(850
)
 
$
74

 
$
(776
)
Net earnings


2,320


 
2,320

 

 
2,320

Other comprehensive income, net of tax



552

 
552

 

 
552

Repurchases of common stock
(2
)
(161
)
(460
)

 
(623
)
 

 
(623
)
Dividends declared


(1,145
)

 
(1,145
)
 

 
(1,145
)
Stock-based awards, ESOP activity and other
1

161



 
162

 

 
162

Reclassification of income tax effects from tax reform


2,408

(2,408
)
 

 

 

Net decrease in noncontrolling interests in subsidiary




 

 
(11
)
 
(11
)
Balance at June 24, 2018
$
283

$

$
14,528

$
(14,395
)
 
$
416

 
$
63

 
$
479

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
289

$

$
13,195

$
(12,102
)
 
$
1,382

 
$
95

 
$
1,477

Net earnings


1,744


 
1,744

 

 
1,744

Other comprehensive income, net of tax



465

 
465

 

 
465

Repurchases of common stock
(4
)
(168
)
(828
)

 
(1,000
)
 

 
(1,000
)
Dividends declared


(1,585
)

 
(1,585
)
 

 
(1,585
)
Stock-based awards, ESOP activity and other
1

168



 
169

 

 
169

Net decrease in noncontrolling interests in subsidiary




 

 
(11
)
 
(11
)
Balance at June 25, 2017
$
286

$

$
12,526

$
(11,637
)
 
$
1,175

 
$
84

 
$
1,259

The accompanying notes are an integral part of these unaudited consolidated financial statements.


7

Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited)



NOTE 1 – BASIS OF PRESENTATION
We prepared these consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of U.S. Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of management, these consolidated financial statements reflect all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations, financial condition and cash flows for the interim periods presented. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates. Significant estimates inherent in the preparation of our consolidated financial statements include, but are not limited to, accounting for sales and cost recognition, postretirement benefit plans, environmental receivables and liabilities, evaluation of goodwill and other assets for impairment, income taxes including deferred tax assets, fair value measurements and contingencies. The consolidated financial statements include the accounts of subsidiaries we control and variable interest entities if we are the primary beneficiary. We eliminate intercompany balances and transactions in consolidation.
We close our books and records on the last Sunday of the calendar quarter, which was on June 24 for the second quarter of 2018 and June 25 for the second quarter of 2017, to align our financial closing with our business processes. The consolidated financial statements and tables of financial information included herein are labeled based on that convention. This practice only affects interim periods as our fiscal year ends on December 31.
Effective January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended (Topic 606) (commonly referred to as ASC 606), which changed the way we recognize revenue for certain contracts and significantly expanded disclosures about revenue recognition. In addition, effective January 1, 2018, we adopted ASU 2017-07, Compensation-Retirement Benefits, which changed the statement of earnings presentation of certain components of pension and other postretirement benefit plan expense. The amounts for all periods presented in this Form 10-Q have been adjusted to reflect the new methods of accounting. See “Note 12 – Recent Accounting Pronouncements for more information regarding the adoption of these standards.
Other than the changes in our accounting policies related to revenue recognition and the classification of certain components of FAS pension and other postretirement benefit plan expense, we followed the accounting policies disclosed in the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K) filed with the SEC.
The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the full year or future periods. Unless otherwise noted, we present all per share amounts cited in these consolidated financial statements on a “per diluted share” basis. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2017 Form 10-K.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICY UPDATES
As described in “Note 1 – Basis of Presentation” and “Note 12 – Recent Accounting Pronouncements,” effective January 1, 2018, we adopted ASC 606, which changed the way we recognize revenue for certain contracts. Accounting policies that were significantly affected by the adoption of ASC 606 are discussed below.
Revenue Recognition
The majority of our net sales are generated from long-term contracts with the U.S. Government and international customers (including foreign military sales (FMS) contracted through the U.S. Government) for the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. We provide our products and services under fixed-price and cost-reimbursable contracts.

8


Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

Under fixed-price contracts we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss. Some fixed-price contracts have a performance-based component under which we may earn incentive payments or incur financial penalties based on our performance.
Cost-reimbursable contracts provide for the payment of allowable costs incurred during performance of the contract plus a fee up to a ceiling based on the amount that has been funded. Typically, we enter into three types of cost-reimbursable contracts: cost-plus-award-fee, cost-plus-incentive-fee, and cost-plus-fixed-fee. Cost-plus-award-fee contracts provide for an award fee that varies within specified limits based on the customer’s assessment of our performance against a predetermined set of criteria, such as targets based on cost, quality, technical and schedule criteria. Cost-plus-incentive-fee contracts provide for reimbursement of costs plus a fee, which is adjusted by a formula based on the relationship of total allowable costs to total target costs (i.e., incentive based on cost) or reimbursement of costs plus an incentive to exceed stated performance targets (i.e., incentive based on performance). The fixed-fee in a cost-plus-fixed-fee contract is negotiated at the inception of the contract and that fixed-fee does not vary with actual costs.
We account for a contract after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time or were negotiated with an overall profit objective. If combined, we treat the combined contracts as a single contract for revenue recognition purposes.
We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. The products and services in our contracts are typically not distinct from one another due to their complex relationships and the significant contract management functions required to perform under the contract. Accordingly, our contracts are typically accounted for as one performance obligation. In limited cases, our contracts have more than one distinct performance obligation, which occurs when we perform activities that are not highly complex or interrelated or involve different product lifecycles. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit recorded in a given period. We classify net sales as products or services on our consolidated statements of earnings based on the predominant attributes of the performance obligations.
We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. For contracts where a portion of the price may vary we estimate variable consideration at the most likely amount, which is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. We analyze the risk of a significant revenue reversal and if necessary constrain the amount of variable consideration recognized in order to mitigate this risk.
At the inception of a contract we estimate the transaction price based on our current rights and do not contemplate future modifications (including unexercised options) or follow-on contracts until they become legally enforceable. Contracts are often subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, modifications to our contracts are not distinct from the existing contract due to the significant integration and interrelated tasks provided in the context of the contract. Therefore, such modifications are accounted for as if they were part of the existing contract and recognized as a cumulative adjustment to revenue.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the product or service underlying each performance obligation. The standalone selling price represents the amount we would sell the product or service to a customer on a standalone basis (i.e., not bundled with any other products or services). Our contracts with the U.S. Government, including FMS contracts, are subject to the Federal Acquisition Regulations (FAR) and the price is typically based on estimated or actual costs plus a reasonable profit margin. As a result of these regulations, the standalone selling price of products or services in our contracts with the U.S. Government and FMS contracts are typically equal to the selling price stated in the contract. Therefore, we typically do not need to allocate (or reallocate) the transaction price to multiple performance obligations.

9


Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

For non-U.S. Government contracts with multiple performance obligations, we evaluate whether the stated selling prices for the products or services represent their standalone selling prices. We primarily sell customized solutions unique to a customer’s specifications. When it is necessary to allocate the transaction price to multiple performance obligations, we typically use the expected cost plus a reasonable profit margin to estimate the standalone selling price of each product or service. We occasionally sell standard products or services with observable standalone sales transactions. In these situations, the observable standalone sales transactions are used to determine the standalone selling price.
We recognize revenue as performance obligations are satisfied and the customer obtains control of the products and services. In determining when performance obligations are satisfied, we consider factors such as contract terms, payment terms and whether there is an alternative future use of the product or service. Substantially all of our revenue is recognized over a period of time as we perform under the contract because control of the work in process transfers continuously to the customer. For contracts with the U.S. Government and FMS contracts, this continuous transfer of control of the work in process to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit, and take control of any work in process. Our non-U.S. Government contracts, primarily international direct commercial contracts, typically do not include termination for convenience provisions. However, continuous transfer of control to our customer is supported as, if our customer were to terminate the contract for reasons other than our non-performance, we would have the right to recover damages which would include, among other potential damages, the right to payment for our work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to us.
For performance obligations to deliver products with continuous transfer of control to the customer, revenue is recognized based on the extent of progress towards completion of the performance obligation, generally using the percentage-of-completion cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer as we incur costs on our contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation(s). For performance obligations to provide services to the customer, revenue is recognized over a period of time based on costs incurred or the right to invoice method (in situations where the value transferred matches our billing rights) as our customer receives and consumes the benefits.
For performance obligations in which control does not continuously transfer to the customer, we recognize revenue at the point in time in which each performance obligation is fully satisfied. This coincides with the point in time the customer obtains control of the product or service, which typically occurs upon customer acceptance or receipt of the product or service, given that we maintain control of the product or service until that point.
Backlog (i.e., unfulfilled or remaining performance obligations) represents the sales we expect to recognize for our products and services for which control has not yet transferred to the customer. For our cost-reimbursable and fixed-priced-incentive contracts, the estimated consideration we expect to receive pursuant to the terms of the contract may exceed the contractual award amount. The estimated consideration is determined at the outset of the contract and is continuously reviewed throughout the contract period. In determining the estimated consideration, we consider the risks related to the technical, schedule and cost impacts to complete the contract and an estimate of any variable consideration. Periodically, we review these risks and may increase or decrease backlog accordingly. As the risks on such contracts are successfully retired, the estimated consideration from customers may be reduced, resulting in a reduction of backlog without a corresponding recognition of sales. As of June 24, 2018, our ending backlog was $105 billion. We expect to recognize approximately 40% over the next 12 months and approximately 65% over the next 24 months as revenue, with the remainder recognized thereafter.
For arrangements with the U.S. Government and FMS contracts, we generally do not begin work on contracts until funding is appropriated by the customer. Billing timetables and payment terms on our contracts vary based on a number of factors, including the contract type. Typical payment terms under fixed-price contracts with the U.S. Government provide that the customer pays either performance-based payments (PBPs) based on the achievement of contract milestones or progress payments based on a percentage of costs we incur. For the majority of our international direct commercial contracts to deliver complex systems, we typically receive advance payments prior to commencement of work, as well as milestone payments that are paid in accordance with the terms of our contract as we perform. We recognize a liability for payments in excess of revenue recognized, which is presented as a contract liability on the balance sheet. The portion of payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer from our failure to adequately complete some or all of the obligations under the contract. Payments received from customers in advance of revenue recognition

10


Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

are not considered to be significant financing components because they are used to meet working capital demands that can be higher in the early stages of a contract.
For fixed-price and cost-reimbursable contracts, we present revenues recognized in excess of billings as contract assets on the balance sheet. Amounts billed and due from our customers under both contract types are classified as receivables on the balance sheet.
Significant estimates and assumptions are made in estimating contract sales and costs, including the profit booking rate. At the outset of a long-term contract, we identify and monitor risks to the achievement of the technical, schedule and cost aspects of the contract, as well as variable consideration, and assess the effects of those risks on our estimates of sales and total costs to complete the contract. The estimates consider the technical requirements (e.g., a newly-developed product versus a mature product), the schedule and associated tasks (e.g., the number and type of milestone events) and costs (e.g., material, labor, subcontractor, overhead, general and administrative and the estimated costs to fulfill our industrial cooperation agreements, sometimes referred to as offset or localization agreements, required under certain contracts with international customers). 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 total costs to complete the contract. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract, which decreases the estimated total costs to complete the contract or may increase the variable consideration we expect to receive on the contract. Conversely, our profit booking rates may decrease if the estimated total costs to complete the contract increase or our estimates of variable consideration we expect to receive decrease. All of the estimates are subject to change during the performance of the contract and may affect the profit booking rate. When estimates of total costs to be incurred on a contract exceed total estimates of the transaction price, a provision for the entire loss is determined at the contract level and is recorded in the period in which the loss is determined.
Comparability of our segment sales, operating profit and operating margin may be impacted favorably or unfavorably by changes in profit booking rates on our contracts for which we recognize revenue over a period of time using the percentage-of-completion cost-to-cost method to measure progress towards completion. Increases in the profit booking rates, typically referred to as risk retirements, usually relate to revisions in the estimated total costs to fulfill the performance obligations 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 fulfill the performance obligations 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, which may or may not impact sales. Favorable items may include the positive resolution of contractual matters, cost recoveries on severance and 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 certain assets.
Our consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, increased segment operating profit by approximately $465 million and $885 million during the quarter and six months ended June 24, 2018 and $515 million and $810 million during the quarter and six months ended June 25, 2017. These adjustments increased net earnings by approximately $367 million ($1.28 per share) and $699 million ($2.43 per share) during the quarter and six months ended June 24, 2018 and $335 million ($1.15 per share) and $527 million ($1.80 per share) during the quarter and six months ended June 25, 2017. We recognized net sales from performance obligations satisfied in prior periods of approximately $540 million and $955 million during the quarter and six months ended June 24, 2018 and $540 million and $920 million during the quarter and six months ended June 25, 2017, which primarily relate to changes in profit booking rates that impacted revenue.
We have a program, EADGE-T, to design, integrate, and install an air missile defense command, control, communications, computers – intelligence (C4I) system for an international customer that has experienced performance matters and for which we have periodically accrued reserves. During the first quarter of 2017, we revised our estimated costs to complete the EADGE-T contract as a consequence of ongoing performance matters and recorded an additional charge of $120 million ($74 million or $0.25 per share, after tax) at our Rotary and Mission Systems (RMS) business segment, which resulted in cumulative losses of approximately $260 million on this program. As of June 24, 2018, cumulative losses remained at approximately $260 million. We continue to monitor program requirements and our

11


Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

performance. At this time, we do not anticipate additional charges that would be material to our operating results or financial condition.
We have two commercial satellite programs at our Space business segment, for which we have experienced performance issues related to the development and integration of a modernized LM 2100 satellite platform. These commercial programs require the development of new satellite technology to enhance the LM 2100’s power, propulsion and electronics, among other items. The enhanced LM 2100 satellite platform is expected to benefit other commercial and government satellite programs. We have periodically revised our estimated costs to complete these developmental commercial programs. We have recorded cumulative losses of approximately $380 million through June 24, 2018. During the quarter and six months ended June 24, 2018, we recorded losses of approximately $40 million ($30 million, or $0.10 per share, after tax) and $75 million ($56 million, or $0.20 per share, after tax). While these losses reflect our estimated total losses on the programs, we will continue to incur unrecoverable general and administrative costs each period until we complete these programs. These programs remain developmental and further challenges in the delivery and integration of new satellite technology, anomalies discovered during system testing requiring repair or rework, further schedule delays and potential penalties could require that we record additional loss reserves which could be material to our operating results. As we did not meet the July 2018 delivery requirement on one of the programs, the customer could seek to exercise a termination right, but we think that the probability that this will occur is remote as the customer has an immediate need for the satellites. Were the customer to seek to exercise a termination right and be successful in this effort, we would have to refund the payments we have received and pay certain penalties. On the other program, we currently anticipate delivering the satellite before the date upon which the customer could seek to exercise a termination right although we may have to pay certain penalties and have sought to address this possibility in our reserves.
We are responsible for designing, developing and installing an upgraded turret for the Warrior Capability Sustainment Program. During the six months ended June 24, 2018, as a consequence of performance issues, we revised our estimated costs to complete the program and recorded a reserve of $85 million ($64 million, or $0.22 per share, after tax) at our Missiles and Fire Control (MFC) business segment. As of June 24, 2018, we have recorded cumulative losses of approximately $140 million on this program. We may continue to experience issues related to customer requirements and our performance under this contract and have to record additional reserves. However, based on the losses already recorded and our current estimate of the sales and costs to complete the program, at this time we do not anticipate that additional losses, if any, would be material.
Receivables, Net
Receivables, net represent our unconditional right to consideration under the contract and include amounts billed and currently due from customers. The amounts are stated at their net estimated realizable value. There were no significant impairment losses related to our receivables during the quarters and six months ended June 24, 2018 and June 25, 2017.
On occasion, our customers may seek deferred payment terms to purchase our products. In connection with these transactions, we may, at our customer’s request, enter into arrangements for the non-recourse sale of customer receivables to unrelated third–party financial institutions. For accounting purposes, these transactions are not discounted and are treated as a sale of receivables as we have no continuing involvement. The sale proceeds from the financial institutions are reflected in our operating cash flows on the statement of cash flows. We sold customer receivables of $124 million and $227 million during the quarter and six months ended June 24, 2018 and $365 million during both the quarter and six months ended June 25, 2017. There were no gains or losses related to sales of these receivables.
Contract Assets
Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. The amounts may not exceed their estimated net realizable value. Contract assets are classified as current based on our contract operating cycle.
Inventories
We record inventories at the lower of cost or estimated net realizable value. If events or changes in circumstances indicate that the utility of our inventories have diminished through damage, deterioration, obsolescence, changes in price

12


Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

or other causes, a loss is recognized in the period in which it occurs. We capitalize labor, material, subcontractor and overhead costs as work-in-process for contracts where control has not yet passed to the customer. In addition, we capitalize costs incurred to fulfill a contract in advance of contract award in inventories as work-in-process if we determine that contract award is probable. We determine the costs of other product and supply inventories by using the first-in first-out or average cost methods.
Contract Liabilities
Contract liabilities (formerly referred to as customer advances and amounts in excess of costs incurred) include advance payments and billings in excess of revenue recognized. Contract liabilities are classified as current based on our contract operating cycle and reported on a contract-by-contract basis, net of revenue recognized, at the end of each reporting period.
NOTE 3 – EARNINGS PER COMMON SHARE
The weighted average number of shares outstanding used to compute earnings per common share were as follows (in millions):
 
 
Quarters Ended
 
Six Months Ended
 
 
June 24,
2018
 
June 25,
2017
 
June 24,
2018
 
June 25,
2017
Weighted average common shares outstanding for basic computations
 
285.0

 
 
288.5

 
 
285.2

 
 
289.2

 
Weighted average dilutive effect of equity awards
 
2.1

 
 
2.7

 
 
2.3

 
 
2.8

 
Weighted average common shares outstanding for diluted computations
 
287.1

 
 
291.2

 
 
287.5

 
 
292.0

 
We compute basic and diluted earnings per common share by dividing net earnings by the respective weighted average number of common shares outstanding for the periods presented. Our calculation of diluted earnings per common share also includes the dilutive effects for the assumed vesting of outstanding restricted stock units (RSUs) and performance stock units (PSUs) and exercise of outstanding stock options based on the treasury stock method. There were no significant anti-dilutive equity awards during the quarters and six months ended June 24, 2018 or June 25, 2017.
NOTE 4 – INFORMATION ON BUSINESS SEGMENTS
We operate in four business segments: Aeronautics, MFC, RMS and Space. We organize our business segments based on the nature of the products and services offered.
Net sales of our business segments exclude intersegment sales as these activities are eliminated in consolidation. Operating profit of our business segments includes our 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 our business segments. In addition, operating profit of our business segments includes total pension costs recoverable on U.S. Government contracts as determined in accordance with U.S. Government cost accounting standards (CAS). Operating profit of the business segments excludes the FAS/CAS operating adjustment; the U.S. GAAP financial accounting standards (FAS) non-service cost component for all postretirement benefit plans; 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 significant divestitures; the effects of certain legal settlements; corporate costs not allocated to our business segments; and other miscellaneous corporate activities. These items are included in the reconciling item “Unallocated items” between operating profit from our business segments and our consolidated operating profit. See “Note 2 – Significant Accounting Policy Updatesfor a discussion related to certain factors that may impact the comparability of net sales and operating profit of our business segments.

13


Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

Summary operating results for each of our business segments were as follows (in millions):
 
 
Quarters Ended
 
Six Months Ended
 
 
June 24,
2018
 
June 25,
2017
 
June 24,
2018
 
June 25,
2017
Net sales
 
 
 
 
 
 
 
 
 
Aeronautics
 
$
5,321

 
 
$
4,922

 
 
$
9,719

 
 
$
9,042

 
Missiles and Fire Control
 
2,085

 
 
1,784

 
 
3,762

 
 
3,333

 
Rotary and Mission Systems
 
3,566

 
 
3,414

 
 
6,789

 
 
6,541

 
Space
 
2,426

 
 
2,443

 
 
4,763

 
 
4,859

 
Total net sales
 
$
13,398

 
 
$
12,563

 
 
$
25,033

 
 
$
23,775

 
Operating profit
 
 
 
 
 
 
 
 
 
Aeronautics
 
$
572

 
 
$
567

 
 
$
1,046

 
 
$
1,006

 
Missiles and Fire Control
 
279

 
 
253

 
 
540

 
 
487

 
Rotary and Mission Systems (a)
 
341

 
 
271

 
 
652

 
 
399

 
Space
 
274

 
 
256

 
 
538

 
 
546

 
Total business segment operating profit
 
1,466

 
 
1,347

 
 
2,776

 
 
2,438

 
Unallocated items
 
 
 
 
 
 
 
 
 
FAS/CAS operating adjustment (b)
 
451

 
 
404

 
 
902

 
 
807

 
Stock-based compensation
 
(60
)
 
 
(57
)
 
 
(98
)
 
 
(101
)
 
Severance and restructuring charges (c)
 
(96
)
 
 

 
 
(96
)
 
 

 
Other, net (d)
 
34

 
 
22

 
 
36

 
 
(26
)
 
Total unallocated items
 
329

 
 
369

 
 
744

 
 
680

 
Total consolidated operating profit
 
$
1,795

 
 
$
1,716

 
 
$
3,520

 
 
$
3,118

 
Intersegment sales
 
 
 
 
 
 
 
 
 
Aeronautics
 
$
27

 
 
$
40

 
 
$
52

 
 
$
65

 
Missiles and Fire Control
 
113

 
 
66

 
 
208

 
 
139

 
Rotary and Mission Systems
 
504

 
 
548

 
 
965

 
 
993

 
Space
 
48

 
 
19

 
 
93

 
 
45

 
Total intersegment sales
 
$
692

 
 
$
673

 
 
$
1,318

 
 
$
1,242

 
 
(a) 
Operating profit at our RMS business segment for the six months ended June 25, 2017 includes a charge of $120 million ($74 million, or $0.25 per share, after tax) recognized in the first quarter of 2017 for performance matters on the EADGE-T contract. See “Note 2 – Significant Accounting Policy Updates” (under the caption “Revenue Recognition”) for more information.
(b) 
The FAS/CAS operating adjustment represents the difference between the service cost component of FAS pension expense and total pension costs recoverable on U.S. Government contracts as determined in accordance with U.S. Government CAS. For a detail of the FAS/CAS operating adjustment and the total net FAS/CAS pension adjustment, see the table below.  
(c) 
Unallocated items for the quarter and six months ended June 24, 2018 include severance and restructuring charges totaling $96 million ($76 million, or $0.26 per share, after tax) associated with planned workforce reductions and the consolidation of certain operations at our RMS business segment. See “Note 11 – Other” (under the caption “Severance and Restructuring Charges”) for more information.
(d) 
Other, net for the six months ended June 25, 2017 includes a $64 million charge ($40 million, or $0.14 per share, after tax) recognized in the first quarter of 2017, which represents our portion of a non-cash asset impairment charge recorded by our equity method investee, Advanced Military Maintenance, Repair and Overhaul Center LLC (AMMROC). See “Note 11 – Other” (under the caption “Equity Method Investee Impairment”) for more information.

14


Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

Our total net FAS/CAS pension adjustments for the quarters and six months ended June 24, 2018 and June 25, 2017, including the service and non-service cost components of FAS pension expense, were as follows (in millions):
 
 
Quarters Ended
 
Six Months Ended
 
 
June 24,
2018
 
June 25,
2017
 
June 24,
2018
 
June 25,
2017
Total FAS expense and CAS costs
 
 
 
 
 
 
 
 
 
 
 
 
FAS pension expense
 
$
(357
)
 
 
$
(343
)
 
 
$
(713
)
 
 
$
(688
)
 
Less: CAS pension cost
 
609

 
 
562

 
 
1,217

 
 
1,124

 
Net FAS/CAS pension adjustment
 
$
252

 
 
$
219

 
 
$
504

 
 
$
436

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service and non-service cost reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
FAS pension service cost
 
$
(158
)
 
 
$
(158
)
 
 
$
(315
)
 
 
$
(317
)
 
Less: CAS pension cost
 
609

 
 
562

 
 
1,217

 
 
1,124

 
FAS/CAS operating adjustment
 
451

 
 
404

 
 
902

 
 
807

 
Non-operating FAS pension expense
 
(199
)
 
 
(185
)
 
 
(398
)
 
 
(371
)
 
Net FAS/CAS pension adjustment
 
$
252

 
 
$
219

 
 
$
504

 
 
$
436

 
We recover CAS pension cost through the pricing of our products and services on U.S. Government contracts and, therefore, recognize CAS pension cost in each of our business segment’s net sales and cost of sales. Our consolidated financial statements must present FAS pension and other postretirement benefit plan expense calculated in accordance with FAS requirements under U.S. GAAP. The operating portion of the net FAS/CAS pension adjustment represents the difference between the service cost component of FAS pension expense and CAS pension cost. The non-service FAS pension cost component is included in other non-operating expense, net on our consolidated statements of earnings. The net FAS/CAS pension adjustment increases or decreases CAS pension cost to equal total FAS pension cost (both service and non-service).

15


Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

Net sales by total products and services, contract type, customer category and geographic region for each of our business segments were as follows (in millions):
 
 
Quarter Ended June 24, 2018
 
 
Aeronautics
 
MFC
 
RMS
 
Space
 
Total
Net sales
 
 
 
 
 
 
 
 
 
 
Products
 
$
4,511

 
$
1,709

 
$
2,904

 
$
2,026

 
$
11,150

Services
 
810

 
376

 
662

 
400

 
2,248

Total net sales
 
$
5,321

 
$
2,085

 
$
3,566

 
$
2,426

 
$
13,398

Net sales by contract type
 
 
 
 
 
 
 
 
 
 
Fixed-price
 
$
3,906

 
$
1,395

 
$
2,450

 
$
460

 
$
8,211

Cost-reimbursable
 
1,415

 
690

 
1,116

 
1,966

 
5,187

Total net sales
 
$
5,321

 
$
2,085

 
$
3,566

 
$
2,426

 
$
13,398

Net sales by customer
 
 
 
 
 
 
 
 
 
 
U.S. Government
 
$
3,444

 
$
1,502

 
$
2,608

 
$
2,070

 
$
9,624

International (a)
 
1,835

 
542

 
822

 
344

 
3,543

U.S. commercial and other
 
42

 
41

 
136

 
12

 
231

Total net sales
 
$
5,321

 
$
2,085

 
$
3,566

 
$
2,426

 
$
13,398

Net sales by geographic region
 
 
 
 
 
 
 
 
 
 
United States
 
$
3,486

 
$
1,543

 
$
2,744

 
$
2,082

 
$
9,855

Asia Pacific
 
786

 
125

 
301

 
31

 
1,243

Europe
 
678

 
46

 
224

 
332

 
1,280

Middle East
 
320

 
364

 
143

 
(19
)
 
808

Other
 
51

 
7

 
154

 

 
212

Total net sales
 
$
5,321

 
$
2,085

 
$
3,566

 
$
2,426

 
$
13,398

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 24, 2018
 
 
Aeronautics
 
MFC
 
RMS
 
Space
 
Total
Net sales
 
 
 
 
 
 
 
 
 
 
Products
 
$
8,281

 
$
3,062

 
$
5,621

 
$
3,948

 
$
20,912

Services
 
1,438

 
700

 
1,168

 
815

 
4,121

Total net sales
 
$
9,719

 
$
3,762

 
$
6,789

 
$
4,763

 
$
25,033

Net sales by contract type
 
 
 
 
 
 
 
 
 
 
Fixed-price
 
$
7,121

 
$
2,507

 
$
4,658

 
$
860

 
$
15,146

Cost-reimbursable
 
2,598

 
1,255

 
2,131

 
3,903

 
9,887

Total net sales
 
$
9,719

 
$
3,762

 
$
6,789

 
$
4,763

 
$
25,033

Net sales by customer
 
 
 
 
 
 
 
 
 
 
U.S. Government
 
$
6,209

 
$
2,590

 
$
4,964

 
$
3,940

 
$
17,703

International (a)
 
3,412

 
1,096

 
1,603

 
800

 
6,911

U.S. commercial and other
 
98

 
76

 
222

 
23

 
419

Total net sales
 
$
9,719

 
$
3,762

 
$
6,789

 
$
4,763

 
$
25,033

Net sales by geographic region
 
 
 
 
 
 
 
 
 
 
United States
 
$
6,307

 
$
2,666

 
$
5,186

 
$
3,963

 
$
18,122

Asia Pacific
 
1,540

 
223

 
625

 
54

 
2,442

Europe
 
1,186

 
115

 
379

 
758

 
2,438

Middle East
 
577

 
744

 
314

 
(12
)
 
1,623

Other
 
109

 
14

 
285

 

 
408

Total net sales
 
$
9,719

 
$
3,762

 
$
6,789

 
$
4,763

 
$
25,033

(a) 
International sales include FMS contracted through the U.S. Government and direct commercial sales to international governments and other international customers.

16


Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

 
 
Quarter Ended June 25, 2017
 
 
Aeronautics
 
MFC
 
RMS
 
Space
 
Total
Net sales
 
 
 
 
 
 
 
 
 
 
Products
 
$
4,206

 
$
1,452

 
$
2,863

 
$
2,101

 
$
10,622

Services
 
716

 
332

 
551

 
342

 
1,941

Total net sales
 
$
4,922

 
$
1,784

 
$
3,414

 
$
2,443

 
$
12,563

Net sales by contract type
 
 
 
 
 
 
 
 
 
 
Fixed-price
 
$
3,312

 
$
1,258

 
$
2,492

 
$
592

 
$
7,654

Cost-reimbursable
 
1,610

 
526

 
922

 
1,851

 
4,909

Total net sales
 
$
4,922

 
$
1,784

 
$
3,414

 
$
2,443

 
$
12,563

Net sales by customer
 
 
 
 
 
 
 
 
 
 
U.S. Government
 
$
3,233

 
$
1,059

 
$
2,379

 
$
2,105

 
$
8,776

International (a)
 
1,655

 
687

 
929

 
325

 
3,596

U.S. commercial and other
 
34

 
38

 
106

 
13

 
191

Total net sales
 
$
4,922

 
$
1,784

 
$
3,414

 
$
2,443

 
$
12,563

Net sales by geographic region
 
 
 
 
 
 
 
 
 
 
United States
 
$
3,267

 
$
1,097

 
$
2,485

 
$
2,118

 
$
8,967

Asia Pacific
 
694

 
114

 
343

 
36

 
1,187

Europe
 
599

 
82

 
245

 
288

 
1,214

Middle East
 
300

 
482

 
126

 
1

 
909

Other
 
62

 
9

 
215

 

 
286

Total net sales
 
$
4,922

 
$
1,784

 
$
3,414

 
$
2,443

 
$
12,563

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 25, 2017
 
 
Aeronautics
 
MFC
 
RMS
 
Space
 
Total
Net sales
 
 
 
 
 
 
 
 
 
 
Products
 
$
7,840

 
$
2,709

 
$
5,511

 
$
4,175

 
$
20,235

Services
 
1,202

 
624

 
1,030

 
684

 
3,540

Total net sales
 
$
9,042

 
$
3,333

 
$
6,541

 
$
4,859

 
$
23,775

Net sales by contract type
 
 
 
 
 
 
 
 
 
 
Fixed-price
 
$
6,228

 
$
2,343

 
$
4,728

 
$
1,102

 
$
14,401

Cost-reimbursable
 
2,814

 
990

 
1,813

 
3,757

 
9,374

Total net sales
 
$
9,042

 
$
3,333

 
$
6,541

 
$
4,859

 
$
23,775

Net sales by customer
 
 
 
 
 
 
 
 
 
 
U.S. Government
 
$
5,916

 
$
2,136

 
$
4,674

 
$
4,117

 
$
16,843

International (a)
 
3,058

 
1,132

 
1,700

 
715

 
6,605

U.S. commercial and other
 
68

 
65

 
167

 
27

 
327

Total net sales
 
$
9,042

 
$
3,333

 
$
6,541

 
$
4,859

 
$
23,775

Net sales by geographic region
 
 
 
 
 
 
 
 
 
 
United States
 
$
5,984

 
$
2,201

 
$
4,841

 
$
4,144

 
$
17,170

Asia Pacific
 
1,225

 
206

 
617

 
40

 
2,088

Europe
 
1,102

 
157

 
447

 
622

 
2,328

Middle East
 
635

 
752

 
236

 
53

 
1,676

Other
 
96

 
17

 
400

 

 
513

Total net sales
 
$
9,042

 
$
3,333

 
$
6,541

 
$
4,859

 
$
23,775

(a) 
International sales include FMS contracted through the U.S. Government and direct commercial sales to international governments and other international customers.

17


Lockheed Martin Corporation
Notes to Consolidated Financial Statements (unaudited) (continued)

Total assets for each of our business segments were as follows (in millions):
 
 
June 24,
2018
 
December 31,
2017
Assets
 
 
 
 
 
 
Aeronautics
 
$
8,283

 
 
$
7,713

 
Missiles and Fire Control
 
4,812

 
 
4,577

 
Rotary and Mission Systems
 
18,495

 
 
18,292

 
Space
 
5,502

 
 
5,240

 
Total business segment assets
 
37,092

 
 
35,822

 
Corporate assets (a)
 
8,033

 
 
10,798

 
Total assets
 
$
45,125

 
 
$
46,620

 
(a) 
Corporate assets primarily include cash and cash equivalents, deferred income taxes, environmental receivables, and investments held in a separate trust to fund certain of our non-qualified deferred compensation plans.
Our Aeronautics business segment includes our largest program, the F-35 Lightning II Joint Strike Fighter, an international multi-role, multi-variant, stealth fighter aircraft. Net sales for the F-35 program represented approximately 27% and 26% of our total consolidated net sales for the quarter and six months ended June 24, 2018 and 26% and 25% of our total consolidated net sales for the quarter and six months ended June 25, 2017.
NOTE 5 – CONTRACT ASSETS AND LIABILITIES
Contract assets include unbilled amounts typically resulting from sales under contracts when the percentage-of-completion cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract liabilities (formerly referred to as customer advances and amounts in excess of costs incurred) include advance payments and billings in excess of revenue recognized. Contract assets and contract liabilities were as follows (in millions):
 
 
June 24,
2018
 
December 31,
2017
Contract assets
 
$
9,281

 
 
$
7,992

 
Contract liabilities
 
$
6,413

 
 
$
7,028

 
Contract assets increased $1.3 billion during the six months ended June 24, 2018, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the six months ended June 24, 2018 for which we have not yet billed. There were no significant impairment losses related to our contract assets during the quarters and six months ended June 24, 2018 and June 25, 2017.
Contract liabilities decreased $615 million during the six months ended June 24, 2018, primarily due to revenue recognized in excess of payments received on these performance obligations. During the quarter and six months ended June 24, 2018, we recognized $731 million and $2.6 billion of our contract liabilities at December 31, 2017 as revenue. During the quarter and six months ended June 25, 2017, we recognized $789 million and $2.4 billion of our contract liabilities at December 31, 2016 as revenue.
NOTE 6 – INVENTORIES
Inventories consisted of the following (in millions):
 
 
June 24,
2018

December 31,
2017
Materials, spares and supplies
 
$
446

 
 
$
563

 
Work-in-process
 
2,074

 
 
1,823

 
Finished goods
 
518

 
 
492

 
Total inventories
 
$
3,038

 
 
$
2,878

 

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