Other	9 Months Ended
Sep. 30, 2012
Other	NOTE 8 – OTHER Stockholders’ Equity Share Repurchases During the nine months ended September 30, 2012, we repurchased 8.2 million shares of our common stock for $722 million, of which 0.2 million shares purchased for $14 million were settled and paid for in the fourth quarter of 2012. As of September 30, 2012, we had repurchased a total of 51.2 million shares of our common stock under our share repurchase program for $3.9 billion, and had remaining authorization of $2.6 billion for future share repurchases. As we repurchase our common shares, we reduce common stock for the $1 of par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in capital. If additional paid-in capital is reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings. Stock Option and Restricted Stock Unit Grants In January 2012, we granted certain employees 3.4 million options to purchase our common stock with an estimated grant date fair value of $10.57 per option, which was estimated using the Black-Scholes option pricing model. Stock options are granted with an exercise price equal to the closing market price of our common stock on the date of grant, which was $82.01. In January 2012, we also granted certain employees 2.0 million restricted stock units (RSUs) with a grant date fair value of $81.93 per RSU. The grant date fair value of RSUs is equal to the closing market price of our common stock on the date of grant less a discount to reflect the delay in payment of cash dividend-equivalents that are made only upon vesting. We recognize the fair value of the awards as compensation expense for substantially all awards ratably over the vesting period, which is typically three years. Dividends During the quarter and nine months ended September 30, 2012, we declared cash dividends totaling $706 million ($2.15 per share) and $1.4 billion ($4.15 per share). The 2012 dividend amounts include the declaration of our 2012 fourth quarter dividend of $1.15 per share, a 15% increase over our 2012 third quarter dividend, which totaled $378 million. During the quarter and nine months ended September 25, 2011, we declared cash dividends totaling $323 million ($1.00 per share) and $1.1 billion ($3.25 per share), which included the declaration of our 2011 fourth quarter dividend. Our 2011 third quarter dividend was declared in the second quarter of 2011. Income Taxes Our effective income tax rates from continuing operations were 30.5% and 30.1% during the quarter and nine months ended September 30, 2012, and 29.9% and 26.1% during the quarter and nine months ended September 25, 2011. The rates for all periods benefited from tax deductions for U.S. manufacturing activities and dividends paid to certain defined contribution plans with an employee stock ownership plan feature. The effective income tax rates for the quarter and nine months ended September 25, 2011 also included the U.S. research and development tax credit that expired on December 31, 2011. In addition, the effective income tax rates for the nine months ended September 25, 2011 included a reduction to income tax expense of $89 million, or $.26 per diluted share, through the elimination of liabilities for unrecognized tax benefits as a result of the U.S. Congressional Joint Committee on Taxation completing its review of the Internal Revenue Service (IRS) Appeals Division’s resolution of adjustments related to tax years 2003 through 2008. We made net federal and foreign income tax payments of $892 million and $562 million during the nine months ended September 30, 2012 and September 25, 2011. Net federal and foreign income tax payments made during the nine months ended September 25, 2011 included a refund of $250 million from the IRS related to estimated taxes paid for the 2010 calendar year. Long-term Debt During the quarter ended September 25, 2011, we issued $2.0 billion of long-term notes in a registered public offering consisting of $500 million due in 2016 with a fixed coupon interest rate of 2.13%, $900 million due in 2021 with a fixed coupon interest rate of 3.35%, and $600 million due in 2041 with a fixed coupon interest rate of 4.85%. Severance Activities In connection with the reorganization of our Electronic Systems business segment, which will be effective December 31, 2012 (Note 3), we recorded a severance charge totaling $23 million, net of state tax benefits, during the quarter and nine months ended September 30, 2012. The severance charge reduced our net earnings by $15 million ($.05 per share) and consisted of severance costs associated with the planned elimination of certain positions through either voluntary or involuntary actions. Upon separation, terminated employees will receive lump-sum severance payments primarily based on years of service, which are expected to be paid through the first quarter of 2013. During the quarter and nine months ended September 25, 2011, we recorded severance charges totaling $39 million and $136 million, net of state tax benefits. The severance charges recorded in the third quarter of 2011 related to our IS&GS business segment and Corporate Headquarters. In the second quarter of 2011, we recorded severance charges totaling $97 million, net of state tax benefits, of which $49 million and $48 million related to our Aeronautics and Space Systems business segments. These charges reduced our net earnings by $25 million ($.07 per share) and $88 million ($.25 per share) for the quarter and nine months ended September 25, 2011. Employees received lump-sum severance payments based on years of service. During the nine months ended September 30, 2012, we made severance payments of approximately $70 million related to these severance actions. As of September 30, 2012, all amounts related to these severance actions have been paid. Discontinued Operations Discontinued operations for 2011 include the operating results of Savi Technology, Inc. (Savi), a logistics business formerly within our Electronic Systems business segment sold on September 18, 2012, and Pacific Architects and Engineers, Inc. (PAE), a business formerly within our IS&GS business segment sold on April 4, 2011. Amounts related to discontinued operations during 2012 were not significant and, accordingly, were included in operating profit. Net sales and operating loss from discontinued operations were not significant for all periods presented in this Form 10-Q, except for the nine months ended September 25, 2011, which were $184 million and $24 million (net of $11 million of income tax benefit). Additionally, net earnings from discontinued operations include the recognition of deferred tax assets of $66 million and $81 million, which we were required to record during the quarter and nine months ended September 25, 2011 to reflect the tax benefit that we expect to realize or realized on the sale of those businesses because our tax basis was higher than our book basis. The assets and liabilities of Savi have not been classified as held for sale on our 2011 Balance Sheet as the amounts were not material. Changes in Estimates Accounting for contracts using the percentage-of-completion (POC) method requires judgment relative to assessing risks, estimating contract revenues and costs (including estimating award and incentive fees and penalties related to performance), and making assumptions for schedule and technical issues. Due to the scope and nature of the work required to be performed on many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables and, accordingly, is subject to change. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized in the current period for the inception-to-date effect of such changes. When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined. At the outset of each contract, we estimate the initial profit booking rate. The initial profit booking rate of each contract is based on the initial estimated costs at completion considering risks surrounding the ability to achieve 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). 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, or may decrease if we are not successful in retiring risks and, as a result, our estimated costs at completion increase. In any particular period, due to the nature of inception-to-date adjustments and other changes in estimates that can occur, such as the resolution of contractual matters, reserves for disputes, asset impairments and insurance recoveries, among others, the comparability of our operating profit and return on sales percentages may be affected. Our consolidated net adjustments not related to volume, including net profit rate adjustments and other matters, increased operating profit, net of state income taxes, by approximately $430 million and $410 million for the quarters ended September 30, 2012 and September 25, 2011, and approximately $1.5 billion and $1.2 billion for the nine months ended September 30, 2012 and September 25, 2011. These adjustments increased net earnings by approximately $280 million ($.85 per share) and $270 million ($.81 per share) for the quarters ended September 30, 2012 and September 25, 2011, and approximately $980 million ($2.98 per share) and $755 million ($2.19 per share) for the nine months ended September 30, 2012 and September 25, 2011. Recent Accounting Pronouncements Effective January 1, 2012, we retrospectively adopted new guidance issued by the Financial Accounting Standards Board by presenting total comprehensive income and the components of net income and other comprehensive income in two separate but consecutive statements. The adoption of this guidance resulted only in a change in how we present other comprehensive income in our consolidated financial statements and did not have any impact on our results of operations, financial position, or cash flows.

NOTE 8 – OTHER

Stockholders’ Equity

Share Repurchases

During the nine months ended September 30, 2012, we repurchased 8.2 million shares of our common stock for $722 million, of which 0.2 million shares purchased for $14 million were settled and paid for in the fourth quarter of 2012. As of September 30, 2012, we had repurchased a total of 51.2 million shares of our common stock under our share repurchase program for $3.9 billion, and had remaining authorization of $2.6 billion for future share repurchases. As we repurchase our common shares, we reduce common stock for the $1 of par value of the shares repurchased, with the excess purchase price over par value recorded as a reduction of additional paid-in capital. If additional paid-in capital is reduced to zero, we record the remainder of the excess purchase price over par value as a reduction of retained earnings.

Stock Option and Restricted Stock Unit Grants

In January 2012, we granted certain employees 3.4 million options to purchase our common stock with an estimated grant date fair value of $10.57 per option, which was estimated using the Black-Scholes option pricing model. Stock options are granted with an exercise price equal to the closing market price of our common stock on the date of grant, which was $82.01. In January 2012, we also granted certain employees 2.0 million restricted stock units (RSUs) with a grant date fair value of $81.93 per RSU. The grant date fair value of RSUs is equal to the closing market price of our common stock on the date of grant less a discount to reflect the delay in payment of cash dividend-equivalents that are made only upon vesting. We recognize the fair value of the awards as compensation expense for substantially all awards ratably over the vesting period, which is typically three years.

Dividends

During the quarter and nine months ended September 30, 2012, we declared cash dividends totaling $706 million ($2.15 per share) and $1.4 billion ($4.15 per share). The 2012 dividend amounts include the declaration of our 2012 fourth quarter dividend of $1.15 per share, a 15% increase over our 2012 third quarter dividend, which totaled $378 million. During the quarter and nine months ended September 25, 2011, we declared cash dividends totaling $323 million ($1.00 per share) and $1.1 billion ($3.25 per share), which included the declaration of our 2011 fourth quarter dividend. Our 2011 third quarter dividend was declared in the second quarter of 2011.

Income Taxes

Our effective income tax rates from continuing operations were 30.5% and 30.1% during the quarter and nine months ended September 30, 2012, and 29.9% and 26.1% during the quarter and nine months ended September 25, 2011. The rates for all periods benefited from tax deductions for U.S. manufacturing activities and dividends paid to certain defined contribution plans with an employee stock ownership plan feature. The effective income tax rates for the quarter and nine months ended September 25, 2011 also included the U.S. research and development tax credit that expired on December 31, 2011. In addition, the effective income tax rates for the nine months ended September 25, 2011 included a reduction to income tax expense of $89 million, or $.26 per diluted share, through the elimination of liabilities for unrecognized tax benefits as a result of the U.S. Congressional Joint Committee on Taxation completing its review of the Internal Revenue Service (IRS) Appeals Division’s resolution of adjustments related to tax years 2003 through 2008.

We made net federal and foreign income tax payments of $892 million and $562 million during the nine months ended September 30, 2012 and September 25, 2011. Net federal and foreign income tax payments made during the nine months ended September 25, 2011 included a refund of $250 million from the IRS related to estimated taxes paid for the 2010 calendar year.

Long-term Debt

During the quarter ended September 25, 2011, we issued $2.0 billion of long-term notes in a registered public offering consisting of $500 million due in 2016 with a fixed coupon interest rate of 2.13%, $900 million due in 2021 with a fixed coupon interest rate of 3.35%, and $600 million due in 2041 with a fixed coupon interest rate of 4.85%.

Severance Activities

In connection with the reorganization of our Electronic Systems business segment, which will be effective December 31, 2012 (Note 3), we recorded a severance charge totaling $23 million, net of state tax benefits, during the quarter and nine months ended September 30, 2012. The severance charge reduced our net earnings by $15 million ($.05 per share) and consisted of severance costs associated with the planned elimination of certain positions through either voluntary or involuntary actions. Upon separation, terminated employees will receive lump-sum severance payments primarily based on years of service, which are expected to be paid through the first quarter of 2013.

During the quarter and nine months ended September 25, 2011, we recorded severance charges totaling $39 million and $136 million, net of state tax benefits. The severance charges recorded in the third quarter of 2011 related to our IS&GS business segment and Corporate Headquarters. In the second quarter of 2011, we recorded severance charges totaling $97 million, net of state tax benefits, of which $49 million and $48 million related to our Aeronautics and Space Systems business segments. These charges reduced our net earnings by $25 million ($.07 per share) and $88 million ($.25 per share) for the quarter and nine months ended September 25, 2011. Employees received lump-sum severance payments based on years of service. During the nine months ended September 30, 2012, we made severance payments of approximately $70 million related to these severance actions. As of September 30, 2012, all amounts related to these severance actions have been paid.

Discontinued Operations

Discontinued operations for 2011 include the operating results of Savi Technology, Inc. (Savi), a logistics business formerly within our Electronic Systems business segment sold on September 18, 2012, and Pacific Architects and Engineers, Inc. (PAE), a business formerly within our IS&GS business segment sold on April 4, 2011. Amounts related to discontinued operations during 2012 were not significant and, accordingly, were included in operating profit.

Net sales and operating loss from discontinued operations were not significant for all periods presented in this Form 10-Q, except for the nine months ended September 25, 2011, which were $184 million and $24 million (net of $11 million of income tax benefit). Additionally, net earnings from discontinued operations include the recognition of deferred tax assets of $66 million and $81 million, which we were required to record during the quarter and nine months ended September 25, 2011 to reflect the tax benefit that we expect to realize or realized on the sale of those businesses because our tax basis was higher than our book basis. The assets and liabilities of Savi have not been classified as held for sale on our 2011 Balance Sheet as the amounts were not material.

Changes in Estimates

Accounting for contracts using the percentage-of-completion (POC) method requires judgment relative to assessing risks, estimating contract revenues and costs (including estimating award and incentive fees and penalties related to performance), and making assumptions for schedule and technical issues. Due to the scope and nature of the work required to be performed on many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables and, accordingly, is subject to change. When adjustments in estimated contract revenues or estimated costs at completion are required, any changes from prior estimates are recognized in the current period for the inception-to-date effect of such changes. When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.

At the outset of each contract, we estimate the initial profit booking rate. The initial profit booking rate of each contract is based on the initial estimated costs at completion considering risks surrounding the ability to achieve 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). 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, or may decrease if we are not successful in retiring risks and, as a result, our estimated costs at completion increase.

In any particular period, due to the nature of inception-to-date adjustments and other changes in estimates that can occur, such as the resolution of contractual matters, reserves for disputes, asset impairments and insurance recoveries, among others, the comparability of our operating profit and return on sales percentages may be affected. Our consolidated net adjustments not related to volume, including net profit rate adjustments and other matters, increased operating profit, net of state income taxes, by approximately $430 million and $410 million for the quarters ended September 30, 2012 and September 25, 2011, and approximately $1.5 billion and $1.2 billion for the nine months ended September 30, 2012 and September 25, 2011. These adjustments increased net earnings by approximately $280 million ($.85 per share) and $270 million ($.81 per share) for the quarters ended September 30, 2012 and September 25, 2011, and approximately $980 million ($2.98 per share) and $755 million ($2.19 per share) for the nine months ended September 30, 2012 and September 25, 2011.

Recent Accounting Pronouncements

Effective January 1, 2012, we retrospectively adopted new guidance issued by the Financial Accounting Standards Board by presenting total comprehensive income and the components of net income and other comprehensive income in two separate but consecutive statements. The adoption of this guidance resulted only in a change in how we present other comprehensive income in our consolidated financial statements and did not have any impact on our results of operations, financial position, or cash flows.